Product
Sales - Product
sales, which primarily consist of planners, binders, software, and handheld
electronic planning devices, which are primarily sold through our Consumer and
Small Business Unit (CSBU) channels, declined $1.8 million, or three percent,
compared to the quarter ended February 28, 2004. The decline in product sales
was primarily due to sales performance in our retail store channel, which
declined $4.6 million, or 14 percent, compared to the prior year. The following
is a description of significant sales fluctuations in our CSBU
channels:
| · |
Retail
Sales -
The decline in retail sales was primarily due to the impact of fewer
stores, which totaled $3.0 million, and reduced technology and specialty
product sales, which totaled $2.2 million. Declining technology and
specialty product sales were partially offset by increased “core” product
sales. Overall product sales trends were reflected by a five percent
decline in comparable store (stores which were open during the comparable
periods) sales. During fiscal 2004, we closed 18 retail store locations
and we have closed 14 additional stores during the second quarter of
fiscal 2005. At February 26, 2005, we were operating 121 retail stores
compared to 144 stores at February 28,
2004. |
| · |
Consumer
Direct -
Sales through our consumer direct channels (catalog and eCommerce) were
generally consistent with the prior year and improved primarily due to
increased “core” product sales compared to the prior
year. |
| · |
Wholesale
Sales - Sales
through our wholesale channel, which includes sales to office superstores
and other retail chains, increased primarily due to the timing of product
sales to these entities. |
Training
and Consulting Services Sales - We offer
a variety of training solutions, training related products, and consulting
services focused on productivity, leadership, strategy execution, sales force
performance, and effective communications training programs that are provided
both domestically and internationally through the Organizational Solutions
Business Unit (OSBU). Our overall training and related service sales increased
by $5.6 million, or 26 percent, compared to the same period of the prior year.
The improvement in training sales was reflected in increased domestic training
program sales, which are delivered through our Organizational Sales Group (OSG),
as well as through our international operations. OSG sales performance improved
in nearly all of our domestic sales regions and was primarily attributable to
increased sales of “Helping Clients Succeed,” “The 4 Disciplines of
Leadership,” and
The 7
Habits of Highly Effective People training
courses. We currently expect our domestic training and services sales to
continue to strengthen as our seminar booking pace continues to exceed prior
year levels. International sales improved primarily due to increased sales in
Japan, increased licensee royalty revenues, and the translation of foreign sales
amounts as foreign currencies strengthened against the United States dollar. The
favorable impact of currency translation on reported international revenues
totaled $0.4 million for the quarter ended February 26, 2005.
Gross
Margin
Gross
margin consists of net sales less the cost of goods sold or services provided.
Our overall gross margin for the quarter improved to 60.7 percent of sales,
compared to 56.7 percent in the comparable quarter of fiscal 2004. This overall
gross margin improvement is consistent with gross margin performance during our
first quarter of fiscal 2005 and was primarily due to increased training and
consulting sales as a percent of total sales, favorable product mix changes, and
improved margins on our training and consulting service sales. Training and
consulting service sales, which typically have higher gross margins than our
product sales, increased to 33 percent of total sales during the quarter ended
February 26, 2005 compared to 28 percent in the prior year. Our gross margin on
product sales improved to 55.2 percent compared to 52.8 percent in fiscal 2004
and was primarily due to a favorable shift in our product mix as sales of
higher-margin paper products and binders increased as a percent of total sales,
while sales of lower-margin technology and specialty products continue to
decline. Additionally, the overall margin on paper and binder sales has improved
through focused cost reduction efforts and improved inventory
management.
Training
and related consulting services gross margin, as a percent of sales of
these services, improved to 71.8 percent compared to 66.9 percent in the
corresponding quarter of fiscal 2004. The improvement in our training and
consulting services gross margin was primarily due to a shift in training sales
mix toward higher-margin courses,
reduced costs for training materials, such as participant manuals and related
items, and overall lower costs associated with training sales.
Operating
Expenses
Selling,
General and Administrative - Our
selling, general, and administrative expenses decreased $0.6 million, or two
percent, compared to the corresponding quarter of the prior year. Total SG&A
expenses as a percent of sales decreased to 47.0 percent compared to 50.0
percent in fiscal 2004. We continue to implement cost-cutting strategies that
have been successful in reducing our operating costs, including retail store
closures, headcount reductions, consolidation of corporate office space, and
other measures designed to focus our resources on critical activities and
projects. However, during the quarter ended February 26, 2005 our cost reduction
efforts were partially offset by expenses related to changes in the CEO’s
compensation, additional costs associated with the preferred stock
recapitalization, and increased commission expenses related to increased
training sales. We also recognized $0.4 million of expense related to the
closure of retail store locations during the quarter. In addition, we
will record $1.2 million of expense related to the severance agreement with a
former executive officer during the quarter ended May 28, 2005.
We
regularly assess the operating performance of our retail stores, including
previous operating performance trends and projected future profitability. During
this assessment process, judgments are made as to whether under-performing or
unprofitable stores should be closed. As a result of this evaluation process, we
closed 14 stores during the quarter ended February 26, 2005, have closed 7 more
stores subsequent to February 26, 2005, and currently plan to close 8 additional
retail locations during the remainder fiscal 2005. The number of retail stores
that we plan to close may increase if further analysis indicates that the
Company’s operating results may be improved through additional closures, due to
the higher costs associated with operating our retail store channel. Retail
locations that are currently scheduled to be closed primarily consist of under
performing stores or stores in markets where we have multiple retail locations.
In addition, nearly all of the planned retail store closures are in locations
where the underlying leases expire during fiscal 2005. The costs associated with
closing retail stores are typically comprised of charges related to vacating the
premises, which may include a provision for the remaining term on the lease, and
severance and other personnel costs. These store closure costs totaled $0.4
million in the quarter ended February 26, 2005 and were included as a component
of SG&A expenses. Based upon our continuing analyses of retail store
performance, we may close additional retail stores and will continue to incur
costs associated with closing these stores in future periods.
Depreciation
and Amortization - Depreciation
expense decreased $0.9 million, or 28 percent, compared to the second quarter of
fiscal 2004 primarily due to the full depreciation or disposal of certain
property and equipment balances and the effects of significantly reduced capital
expenditures during preceding fiscal years. Based upon these events and current
capital spending trends, we expect that depreciation expense will continue to
decline compared to prior periods during the remainder of fiscal
2005.
Amortization
expense on definite-lived intangible assets totaled $1.0 million for the
quarters ended February 26, 2005 and February 28, 2004. We expect intangible
asset amortization expense to total $4.2 million during fiscal
2005.
Income
Taxes
The
provision for income taxes increased to $1.0 million compared to $0.8 million in
the prior year. The increase was primarily due to fluctuations in our income tax
expense in foreign tax jurisdictions. As of February 26, 2005, given
our history of significant operating losses, we had provided a valuation
allowance against substantially all of our domestic deferred income tax
assets.
Two
Quarters Ended February 26, 2005 Compared to the Two Quarters Ended February 28,
2004
Sales
Product
sales, which primarily consist of planners, binders, software, and handheld
electronic planning devices, which are primarily sold through our CSBU channels,
declined $9.6 million, or nine percent, compared to the prior year. The decline
in product sales was primarily due to decreased sales in our retail and
wholesale delivery channels. The majority of the decline in product sales
occurred during our first quarter as overall product sales declined only $1.8
million during our second quarter, when compared to the prior year. The
following is a description of sales fluctuations in our CSBU channels for the
two quarters ended February 26, 2005:
| · |
Retail
Sales -
The decline in retail sales was primarily due to reduced technology and
specialty product sales, which totaled $5.4 million, and the impact of
fewer stores, which totaled $5.0 million. Declining technology and
specialty product sales were partially offset by increased “core” product
sales, which totaled $1.0 million. Overall product sales trends were
reflected by an eight percent decline in year-to-date comparable store
sales. |
| · |
Consumer
Direct -
Sales through our consumer direct channels (catalog and eCommerce) were
generally consistent with the prior year and the slight decline was
primarily due to decreased technology and specialty product sales compared
to the prior year. |
| · |
Wholesale
Sales - Sales
through our wholesale channel, which includes sales to office superstores
and other retail chains, decreased primarily due to the timing of product
sales to these entities. In the previous fiscal year, we recognized
significant wholesale sales as we opened new wholesale channels and sold
product to fill these new venues. We expect wholesale sales will improve
during the remainder of fiscal 2005 and that total wholesale sales will be
consistent with fiscal 2004 sales
performance. |
| · |
Other
CSBU Sales -
Other CSBU sales primarily consist of external printing and publishing
sales and building lease revenues. We have leased a substantial portion of
our corporate campus in Salt Lake City, Utah and have recognized $0.4
million of lease revenue during fiscal 2005, which has been classified as
other CSBU sales. During fiscal 2005, we have also made an effort to
increase external printing sales in order to increase the utilization of
our printing and publishing assets, which has improved printing and
publishing sales compared to the prior
year. |
Product
sales were also favorably affected by increased international catalog sales and
increased retail sales in Japan, which totaled $1.6 million compared to the
prior year. Although sales from these channels are recorded in the international
segment of OSBU, sales from these OSBU channels are classified as product sales,
in our condensed consolidated statements of operations.
We offer
a variety of training solutions, training related products, and consulting
services focused on productivity, leadership, strategy execution, sales force
performance, and effective communications training programs that are provided
both domestically and internationally through the OSBU. Our overall training and
related consulting services sales increased by $7.4 million, or 17 percent,
compared to the same period of fiscal 2004. The improvement in training sales
was reflected in increased domestic program sales, which are delivered through
the OSG, as well as through our international operations. OSG sales performance
has improved in nearly all of our domestic sales regions and in our sales
performance group. We currently expect our domestic training and consulting
services sales to continue to strengthen in fiscal 2005. International sales
improved primarily due to increased sales in Japan and Mexico, increased
licensee royalty revenues, and the translation of foreign sales amounts as
foreign currencies strengthened against the United States dollar. These
increases were partially offset by decreased sales performance in Canada and
Brazil.
Gross
Margin
Our
overall gross margin for the two quarters ended February 26, 2005 improved to
60.2 percent of sales, compared to 56.7 percent in the comparable period of
fiscal 2004. The improvement in our overall gross margin was primarily due to
increased training and consulting sales as a percent of total sales, favorable
product mix changes, and improved margins on our training and consulting service
sales. Training and consulting service sales, which typically have higher gross
margins than the majority of our product sales, increased to 35 percent of total
sales during the two quarters ended February 26, 2005 compared to 29 percent in
the prior year. Our gross margin on product sales improved to 54.8 percent
compared to 52.6 percent in fiscal 2004 and was primarily due to a favorable
shift in our product mix as sales of higher-margin paper products and binders
increased as a percent of total sales, while sales of lower-margin technology
and specialty products continue to decline. Additionally, the overall margin on
paper and binder sales has improved through focused cost reduction efforts, and
improved inventory management.
Training
and related consulting services gross margin, as a percent of sales of these
services, improved to 70.3 percent compared to 66.6 percent in the corresponding
period of fiscal 2004. The improvement in our training and services gross margin
was primarily due to a shift in training sales mix toward higher-margin
7
Habits courses,
reduced costs for training materials, such as participant manuals and related
items, and overall lower costs associated with training sales.
Operating
Expenses
Selling,
General and Administrative - Our SG&A
expenses decreased $5.0 million, or six percent, compared to the prior year.
Total SG&A expenses as a percent of sales decreased to 49.1 percent compared
to 51.7 percent in the first two quarters of fiscal 2004. Declining SG&A
expenses were the direct result of initiatives specifically designed to reduce
our overall operating costs and is consistent with operating expense trends
during the previous two fiscal years. Our cost-reduction efforts have included
retail store closures, headcount reductions, consolidation of corporate office
space, and other measures designed to focus our resources on critical activities
and projects. These efforts were partially offset by SG&A expenses in our
quarter ended February 26, 2005 resulting from expenses related to changes in
the CEO’s compensation, additional costs associated with the preferred stock
recapitalization, and increased commission expenses related to increased
training sales. The primary effects of our cost-cutting initiatives were
reflected in associate expense reductions totaling $2.2 million, reduced rent
and utilities expenses of $1.5 million, reduced computer and office supply
charges totaling $0.7 million, and reductions in other SG&A expenses, such
as outsourcing and development costs, that totaled $0.3 million compared to the
prior year. In addition, we will record $1.2 million of expense related to the
severance agreement with a former executive officer during the quarter ended May
28, 2005.
We
regularly assess the operating performance of our retail stores, including
previous operating performance trends and projected future profitability. During
this assessment process, judgments are made as to whether under-performing or
unprofitable stores should be closed. As a result of this evaluation process, we
closed 14 stores during the two quarters ended February 26, 2005, have closed 7
more stores subsequent to February 26, 2005, and currently plan to close 8
additional retail locations during the remainder fiscal 2005. The costs
associated with closing retail stores are typically comprised of charges related
to vacating the premises, which may include a provision for the remaining term
on the lease, and severance and other personnel costs. These store closure costs
totaled $0.6 million for the two quarters ended February 26, 2005 and were
included as a component of SG&A expenses. Based upon our continuing analyses
of retail store performance, we may close additional retail stores and will
continue to incur costs associated with closing these stores in future
periods.
Restructuring
Cost Reversal - During
fiscal 1999, our Board of Directors approved a plan to restructure our
operations, which included an initiative to formally exit leased office space
located in Provo, Utah. We recorded a $16.3 million restructuring charge during
fiscal 1999 to record the expected costs of this restructuring plan, which was
substantially completed during fiscal 2000. Subsequent to fiscal 2000, the
remaining accrued restructuring costs were primarily comprised of the estimated
remaining costs necessary to exit the leased office space. During the quarter
ended November 27, 2004, we exercised an option, available under our master
lease agreement, to purchase, and simultaneously sell, the office facility to
the current tenant, an unrelated party. The negotiated purchase price with the
landlord, a partnership in which the majority of the interests were owned by a
Vice-Chairman of the Board of Directors and certain other employees and former
employees of the Company, was $14.0 million and the tenant agreed to purchase
the property for $12.5 million. These prices were within the range of estimated
fair values of the buildings as determined by an independent appraisal obtained
by the Company. We paid the difference between the sale and purchase prices,
plus other closing costs, which were included as a component of the
restructuring plan accrual. After accounting for the sale transaction, the
remaining fiscal 1999 restructuring costs, which totaled $0.3 million, were
credited to operating expenses in the Company’s condensed consolidated statement
of operations.
Depreciation
and Amortization - Depreciation
expense decreased $2.3 million, or 34 percent, compared to fiscal 2004 primarily
due to the full depreciation or disposal of certain property and equipment
balances and the effects of significantly reduced capital expenditures during
preceding fiscal years. Based upon these events and current capital spending
trends, we expect that depreciation expense will continue to decline compared to
prior periods during the remainder of fiscal 2005.
Amortization
expense on definite-lived intangible assets totaled $2.1 million for the two
quarters ended February 26, 2005 and February 28, 2004. We currently expect
intangible asset amortization expense to total $4.2 million in fiscal
2005.
Income
Taxes
The
provision for income taxes was $1.8 million for each of the two quarters ended
February 26, 2005 and February 28, 2004. Our income tax provision during these
periods was primarily due to taxable income in certain foreign tax jurisdictions
for which we were unable to offset the tax liabilities in these jurisdictions
with our domestic operating loss. At February 26, 2005, given our history
of significant operating losses, we had provided a valuation allowance against
substantially all of our domestic deferred income tax assets.
Historically,
our primary sources of capital have been net cash provided by operating
activities, line-of-credit financing, long-term borrowings, asset sales, and the
issuance of preferred and common stock. We currently rely primarily upon cash
flows from operating activities and cash on hand to maintain adequate liquidity
and working capital levels. Following the completion of our seasonally strong
second fiscal quarter, at February 26, 2005 we had $47.3 million of cash, cash
equivalents, and short-term investments compared to $41.9 million at August 31,
2004. Our net working capital (current assets less current liabilities) was
$43.9 million at February 26, 2005 compared to $33.8 million at August 31, 2004.
The following discussion is a description of the primary factors affecting our
cash flows and their effects upon our liquidity and capital resources during the
two quarters ended February 26, 2005.
Cash
Flows From Operating Activities
During
the two quarters ended February 26, 2005, our net cash provided by operating
activities increased to $11.0 million compared to $3.3 million for the same
period of the prior year. Our primary source of cash from operating activities
was the sale of goods and services to our customers in the normal course of
business. As previously mentioned, our second fiscal quarter has historically
realized seasonally strong sales as many of our clients renew their planners on
a calendar basis and purchase gift items during the holiday season. Our primary
uses of cash for operating activities are payments to suppliers for materials
used in products sold, payments for direct costs necessary to conduct training
programs, and payments for selling, general, and administrative expenses. During
the two quarters ended February 26, 2005, one of our significant uses of cash
for operating activities consisted of payments made to vendors and suppliers
related to inventory purchases for our seasonally busy months of November,
December, and January, which was reflected by a significant reduction in our
accounts payable balance. Our overall cash flows from operating activities
improved due to increased sales, improved margins on sales, and lower operating
costs than in the previous year.
Our third
fiscal quarter, which consists of March, April, and May has historically had
reduced sales and correspondingly decreased cash provided by operating
activities, compared to our first and second quarters of our fiscal year. We
believe that efforts to optimize working capital balances combined with existing
and planned cost-cutting initiatives, and sales stabilization efforts, including
sales of new products and services, will improve our cash flows from operating
activities in future periods. However, the success of these efforts is dependent
upon numerous factors, many of which are not within our control.
Cash
Flows From Investing Activities and Capital
Expenditures
Net cash
used for investing activities totaled $2.8 million for the two quarters ended
February 26, 2005. Our primary uses of cash for investing activities were the
purchase of short-term investments totaling $1.7 million and the purchase of
property and equipment, which consisted primarily of computer hardware,
software, and leasehold improvements in retail stores.
During
the quarter ended February 26, 2005, we entered into a
preliminary agreement to sell and leaseback our corporate headquarters
facility, located in Salt Lake City, Utah. In connection with the sale, we will
enter into a 20-year master lease agreement with the purchaser, a non-related
private investment group. Under the preliminary terms of the agreement, we will
have six five-year options to renew the master lease agreement and we could
therefore maintain our operations at the current location for the next 50 years.
We currently expect that our net proceeds from the sale, after transaction
costs, will be approximately $32 million. A corresponding financing obligation
will be recognized in our consolidated financial statements for the sale price
of the headquarters facility. The completion of the sale is subject to customary
conditions, including a due diligence review, survey, and other related closing
conditions.
Cash
Flows From Financing Activities
Net cash
used for financing activities during the quarter ended February 26, 2005 totaled
$4.4 million. Our primary use of cash for financing activities was the payment
of accrued Series A preferred stock dividends, which totaled $4.4 million during
fiscal 2005.
Contractual
Obligations
The
Company has not structured any special purpose or variable interest entities, or
participated in any commodity trading activities, which would expose us to
potential undisclosed liabilities or create adverse consequences to our
liquidity. Required contractual payments primarily consist of payments to EDS
for outsourcing services related to information systems, warehousing and
distribution, and call center operations; minimum rent payments for retail store
and sales office space; cash payments for Series A preferred stock dividends;
monitoring fees paid to a Series A preferred stock investor; and mortgage
payments on certain buildings and property. There have been no significant
changes to our expected required contractual obligations from those disclosed at
August 31, 2004. However, if the Company completes the expected sale of
its corporate headquarters facility, it would incur a substantial ongoing lease
obligation.
Other
Items
Management
Common Stock Loan Program - The
Company is the creditor for a loan program that provided the capital to allow
certain management personnel the opportunity to purchase shares of our common
stock. In May 2004, our Board of Directors approved modifications to the terms
of the management stock loans. While these changes had significant implications
for most management stock loan program participants, the Company did not
formally amend or modify the stock loan program notes. Rather, the Company is
foregoing certain of its rights under the terms of the loans in order to
potentially improve the participant’s ability to pay, and the Company’s ability
to collect, the outstanding balances of the loans. Based upon guidance found in
EITF Issue 00-23, Issues
Related to the Accounting for Stock Compensation under APB Opinion No. 25 and
FASB Interpretation No. 44, and
EITF Issue 95-16, Accounting
for Stock Compensation Agreements with Employer Loan Features under APB Opinion
No. 25, we
determined that the management common stock loans should be accounted for as
non-recourse stock compensation instruments due to the modifications approved in
May 2004 and their effects to the Company and the loan participants. While this
accounting treatment does not alter the legal rights associated with the loans
to the employees, the modifications to the terms of the loans were deemed
significant enough to adopt the non-recourse accounting model as described in
EITF 00-23. As a result of this accounting treatment, the remaining carrying
value of the notes and interest receivable related to financing common stock
purchases by related parties, which totaled $7.6 million prior to the loan term
modifications, was reduced to zero with a corresponding reduction in additional
paid-in capital.
We
currently account for the management common stock loans as variable stock option
arrangements. Compensation expense will be recognized when the fair value of the
common stock held by the loan participants exceeds the contractual principal and
accrued interest on the loans (approximately $47.5 million at February 26, 2005)
or the Company takes action on the loans that in effect constitutes a repricing
of an option. This accounting treatment also precludes the Company from
reversing the amounts expensed as additions to the loan loss reserve, totaling
$29.7 million, which were recognized in prior periods. As a result of these loan
program modifications, the Company hopes to increase the total value received
from loan participants; however, the inability of the Company to collect all, or
a portion, of these receivables could have an adverse impact upon its financial
position and future cash flows compared to full collection of the loans.
Subsequent to February 26, 2005, the Company collected $0.8 million, which
represented payment in full, from an officer and members of the Board of
Directors that were required to repay their loans on March 30, 2005. The
Board of Directors approved loan modifications for a former executive officer
and a former director substantially similar to loan modifications previously
granted to other loan participants in the management stock loan program
described above.
Availability
of Future Capital Resources - Going
forward,
we will continue to incur costs necessary for the operation of the business. We
anticipate using cash on hand, cash provided by operating activities, on the
condition that we can continue to generate positive cash flows from operations,
and other financing alternatives, if necessary, for these expenditures. We
anticipate that our existing capital resources will be adequate to enable us to
maintain our operations for at least the upcoming twelve months. Our ability to
maintain adequate capital for future operations is dependent upon a number of
factors, including sales trends, our ability to contain costs, levels of capital
expenditures, collection of accounts receivable, and other factors. Some of the
factors that influence our operations are not within our control, such as
economic conditions and the introduction of new technology and products by our
competitors. We will continue to monitor our liquidity position and may pursue
additional financing alternatives, if required, to maintain sufficient resources
for future operating and capital requirements. However, there can be no
assurance such financing alternatives will be available to us on acceptable
terms.
Our
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America. The significant
accounting polices that we used to prepare our consolidated financial statements
are outlined in Note 1 to the consolidated financial statements, which are
presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal
year ended August 31, 2004. Some of those accounting policies require us to make
estimates and assumptions that affect the amounts reported in our consolidated
financial statements. Management regularly evaluates its estimates and
assumptions and bases those estimates and assumptions on historical experience,
factors that are believed to be reasonable under the circumstances, and
requirements under accounting principles generally accepted in the United States
of America. Actual results may differ from these estimates under different
assumptions or conditions, including changes in economic conditions and other
circumstances that are not in our control, but which may have an impact on these
estimates and our actual financial results.
The
following items require the most significant judgment and often involve complex
estimates:
Revenue
Recognition
We derive
revenues primarily from the following sources:
| · |
Products -
We sell planners, binders, planner accessories, handheld electronic
devices, and other technology related products that are primarily sold
through our CSBU channels. |
| · |
Training
and Services -
We provide training and consulting services to both organizations and
individuals in strategic execution, leadership, productivity, goal
alignment, sales force performance, and communication effectiveness
skills. These training programs and services are primarily sold through
our OSBU channels. |
The
Company recognizes revenue when: 1) persuasive evidence of an agreement exists,
2) delivery of product has occurred or services have been rendered, 3) the price
to the customer is fixed and determinable, and 4) collectibility is reasonably
assured. For product sales, these conditions are generally met upon shipment of
the product to the customer or by completion of the sale transaction in a retail
store. For training and service sales, these conditions are generally met upon
presentation of the training seminar or delivery of the consulting
services.
Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services. In accordance with EITF
Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables, sales
arrangements with multiple deliverables are divided into separate units of
accounting if the deliverables in the sales contract meet the following
criteria: 1) the delivered training or product has value to the client on a
standalone basis; 2) there is objective and reliable evidence of the fair value
of undelivered items; and 3) delivery of any undelivered item is probable. The
overall contract consideration is allocated among the separate units of
accounting based upon their fair values. If the fair value of all
undelivered elements exits, but fair value does not exist for one or more
delivered elements, the residual method is used. Under the residual method, the
amount of consideration allocated to the delivered items equals the total
contract consideration less the aggregate fair value of the undelivered items.
Fair value of the undelivered items is based upon the normal pricing practices
for the Company’s existing training programs, consulting services, and other
products, which are generally the prices of the items when sold
separately.
Revenue
is recognized on software sales in accordance with Statement of Position (SOP)
97-2, Software
Revenue Recognition as
amended by SOP 98-09. SOP 97-2, as amended, generally requires revenue earned on
software arrangements involving multiple elements such as software products and
support to be allocated to each element based the relative fair value of the
elements based on vendor specific objective evidence (VSOE). The majority of the
Company’s software sales have multiple elements, including a license and post
contract customer support (PCS). Currently the Company does not have VSOE for
either the license or support elements of its software sales. Accordingly,
revenue is deferred until the only undelivered element is PCS and the total
arrangement fee is recognized ratably over the support period.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Accounts
Receivable Valuation
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our best estimate of
the amount of probable credit losses in the existing accounts receivable
balance. We determine the allowance for doubtful accounts based upon historical
write-off experience and current economic conditions and we review the adequacy
of our allowance for doubtful accounts on a regular basis. Receivable balances
past due over 90 days, which exceed a specified dollar amount, are reviewed
individually for collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and the probability
for recovery is considered remote. We do not have any off-balance sheet credit
exposure related to our customers.
Inventory
Valuation
Inventories
are stated at the lower of cost or market with cost determined using the
first-in, first-out method. Our inventories are comprised primarily of dated
calendar products and other non-dated products such as binders, handheld
electronic devices, stationery, training products, and other accessories.
Provision is made to reduce excess and obsolete inventories to their estimated
net realizable value. In assessing the realization of inventories, we make
judgments regarding future demand requirements and compare these assessments
with current and committed inventory levels. Inventory requirements may change
based on projected customer demand, technological and product life cycle
changes, longer or shorter than expected usage periods, and other factors that
could affect the valuation of our inventories.
Indefinite-Lived
Intangible Assets
Intangible
assets that are deemed to have an indefinite life are not amortized, but rather
are tested for impairment on an annual basis, or more often if events or
circumstances indicate that a potential impairment exists. The Covey trade name
intangible asset has been deemed to have an indefinite life. This intangible
asset is assigned to the Organizational Solutions Business Unit and is tested
for impairment using the present value of estimated royalties on trade name
related revenues, which consist primarily of training seminars, international
licensee royalties, and related products. If forecasts and assumptions used to
support the realizability of our indefinite-lived intangible asset change in the
future, significant impairment charges could result that would adversely affect
our results of operations and financial condition.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We use an estimate of
undiscounted future net cash flows of the assets over the remaining useful lives
in determining whether the carrying value of the assets is recoverable. If the
carrying values of the assets exceed the anticipated future cash flows of the
assets, we recognize an impairment loss equal to the difference between the
carrying values of the assets and their estimated fair values. Impairment of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent from other groups of assets. The
evaluation of long-lived assets requires us to use estimates of future cash
flows. If forecasts and assumptions used to support the realizability of our
long-lived tangible and definite-lived intangible assets change in the future,
significant impairment charges could result that would adversely affect our
results of operations and financial condition.
Income
Taxes
The
calculation of our income tax provision or benefit, as applicable, requires
estimates of future taxable income or losses. During the course of the fiscal
year, these estimates are compared to actual financial results and adjustments
may be made to our tax provision or benefit to reflect these revised
estimates.
Our history
of significant operating losses precludes us from demonstrating that it is more
likely than not that the related benefits from deferred income tax deductions
and foreign tax carryforwards will be realized. Accordingly, we recorded
valuation allowances on our deferred income tax assets. These valuation
allowances are based on estimates of future taxable income or losses that may or
may not be realized.
In
December 2004, the Financial Accounting Standards Board (FASB) approved
Statement No. 123R, Share-Based
Payment.
Statement 123R sets accounting requirements for “share-based” compensation to
employees, including employee stock purchase plans, and requires companies to
recognize in the income statement the grant-date fair value of stock options and
other equity-based compensation. The Company currently accounts for its
stock-based compensation using the intrinsic method as defined in Accounting
Principles Board (APB) Opinion No. 25 and accordingly, we have not recognized
any expense for our stock option plans or employee stock purchase plan in our
consolidated financial statements. Currently, we provide disclosures about the
pro forma compensation expense from stock based awards, which is based upon a
Black-Scholes option pricing model. Although Statement 123R does not express a
preference for a type of valuation model, we intend to reexamine our valuation
methodology and the corresponding support for the assumptions that underlie the
valuation of stock-based awards prior to our adoption of Statement 123R. This
statement is effective for interim or annual periods beginning after June 15,
2005, and will thus be effective for our first quarter of fiscal 2006. Upon
adoption, we intend to use the modified prospective transition method. Under
this method, awards that are granted, modified, or settled after the date of
adoption will be measured and accounted for in accordance with Statement 123R.
Unvested equity-classified awards that were granted prior to the effective date
will continue to be accounted for in accordance with Statement 123, except that
compensation expense amounts will be recognized in the income statement. We are
currently in the process of further analyzing this new pronouncement and have
not yet determined the impact on our financial statements.
In
November 2004, the FASB approved Statement No. 151, Inventory Costs an
Amendment of ARB No. 43, Chapter 4. Statement No. 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) and requires that those items be
recognized as a current period expense regardless of whether they meet the
criteria of “so abnormal.” This statement is effective for interim or annual
periods beginning after June 15, 2005 and will thus be effective for our first
quarter of fiscal 2006. We are currently in the process of analyzing the
accounting requirements under this new pronouncement and have not yet determined
its impact on our financial statements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
primary financial instrument risks to which the Company is exposed are
fluctuations in foreign currency exchange rates and interest rates. To manage
risks associated with foreign currency exchange and interest rates, we make
limited use of derivative financial instruments. Derivatives are financial
instruments that derive their value from one or more underlying financial
instruments. As a matter of policy, our derivative instruments are entered into
for periods consistent with the related underlying exposures and do not
constitute positions that are independent of those exposures. In addition, we do
not enter into derivative contracts for trading or speculative purposes, nor are
we party to any leveraged derivative instrument. The notional amounts of
derivatives do not represent actual amounts exchanged by the parties to the
instrument, and, thus, are not a measure of exposure to us through our use of
derivatives. Additionally, we enter into derivative agreements only with highly
rated counterparties and we do not expect to incur any losses resulting from
non-performance by other parties.
Foreign
Currency Sensitivity
Due to
the global nature of the Company’s operations, we are subject to risks
associated with transactions that are denominated in currencies other than the
United States dollar, which creates exposure to foreign currency exchange risk.
The objective of our foreign currency risk management activities is to reduce
foreign currency risk in the consolidated financial statements. In order to
manage foreign currency risks, we make limited use of foreign currency forward
contracts and other foreign currency related derivative instruments. Although we
cannot eliminate all aspects of our foreign currency risk, we believe that our
strategy, which includes the use of derivative instruments, can reduce the
impacts of foreign currency related issues on our consolidated financial
statements.
During
the quarter and two quarters ended February 26, 2005, we utilized foreign
currency forward contracts to manage the volatility of certain intercompany
financing transactions and other transactions that are denominated in foreign
currencies. Because these contracts do not meet specific hedge accounting
requirements, gains and losses on these contracts, which expire on a quarterly
basis, are recognized currently and are used to offset a portion of the gains or
losses of the related accounts. The gains and losses on these contracts were
recorded as a component of SG&A expense in the Company’s consolidated
statements of operations and resulted in the following net losses for the
periods indicated (in thousands):
As of
February 26, 2005, the Company had settled its net investment hedge contracts
and has no further exposure related to these contracts. However, the Company may
utilize net investment hedge contracts in future periods as a component of its
overall foreign currency risk strategy.
Interest
Rate Sensitivity
The
Company is exposed to fluctuations in U.S. interest rates primarily as a result
of the cash and cash equivalents that we hold. Following payment and termination
of our line of credit facility during fiscal 2002, our remaining debt balances
consist primarily of long-term mortgages on certain of our buildings and
property. As such, the Company does not have significant exposure or additional
liability due to interest rate sensitivity and we were not party to any interest
rate swap or other interest related derivative instrument during the quarter or
two quarters ended February 26, 2005 or February 28, 2004.
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and
reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure.
As
required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness and the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the
foregoing, it was determined that our internal controls over revenue recognition
for certain complex, multiple-element contracts in our OSBU were improving, but
still deficient.
This
deficiency in our internal controls related to improper recognition of revenue
from certain complex multiple element contracts and included ineffective
controls to monitor compliance with existing policies and procedures and
insufficient training of accounting personnel on complex accounting standards
related to multiple element contracts in the OSBU. The improper revenue
recognition was detected in the review process and correcting adjustments were
recorded to properly state our revenues. We are in the process of improving our
internal controls over financial reporting regarding these contracts in an
effort to remediate this deficiency including implementing personnel changes,
providing additional training on complex revenue recognition principles for our
accounting staff, and establishing additional policies and procedures related to
revenue recognition. Additional work is needed to fully remedy this deficiency
and we intend to continue our efforts to improve and strengthen our control
processes and procedures. The deficiency was disclosed to the Audit Committee
and to our auditors.
Other
than continued control improvements on the deficiency noted above, there has
been no change in our internal control over financial reporting during the
fiscal quarter ended February 26, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. In addition, other than as described above, since the most recent
evaluation date, there have been no significant changes in our internal control
structure, policies, and procedures or in other areas that could significantly
affect our internal control over financial reporting.
On March
2, 2005, the SEC extended the compliance dates for non-accelerated filers and
foreign private issuers pursuant to Section 404 of the Sarbanes-Oxley Act. Under
this extension, a company that is not required to file its annual and quarterly
reports on an accelerated basis (non-accelerated filer), must begin to comply
with the internal control over financial reporting requirements for its first
fiscal year ending on or after July 15, 2006. This action constitutes a one-year
extension from the previously established July 15, 2005 compliance date. We are
currently in the process of documenting our internal control structure and we
intend to use the additional time to improve the quality of our documentation
and testing.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Certain
written and oral statements made by the Company or our representatives in this
report, other reports, filings with the Securities and Exchange Commission,
press releases, conferences, Internet webcasts, or otherwise, are
“forward-looking statements” within the meaning of the Private Securities
Litigation reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements include, without limitation, any statement that
may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain words such as “believe,” “anticipate,” “expect,”
“estimate,” “project,” or words or phrases of similar meaning. Forward-looking
statements are subject to certain risks and uncertainties that may cause actual
results to differ materially from the forward-looking statements. These risks
and uncertainties are disclosed from time to time in reports filed by us with
the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks and
uncertainties include, but are not limited to, the matters discussed under
Business Environment and Risk in our annual report on Form 10-K for the fiscal
year ended August 31, 2004. In addition, such risks and uncertainties may
include unanticipated developments in any one or more of the following areas:
continuing demand for our products and services, which depends to some extent on
general economic conditions, so that we can avoid future declines in revenues;
the ability of our products and services to successfully compete with
alternative solutions and the products and services offered by others;
unanticipated costs or capital expenditures; cost savings from the outsourcing
of our information systems and controls, including without limitation, the
systems related to demand and supply planning, inventory control, and order
fulfillment; delays or unanticipated outcomes relating to the Company’s
strategic plans; dependence on existing products or services; the rate and
consumer acceptance of new product introductions; the number and nature of
customers and their product orders, including changes in the timing or mix of
product or training orders; pricing of our products and services and those of
competitors; adverse publicity; and other factors which may adversely affect our
business.
The risks
included here are not exhaustive. Other sections of this report may include
additional factors that could adversely affect our business and financial
performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors may emerge and it is not possible for our
management to predict all such risk factors, nor can we assess the impact of all
such risk factors on our business or the extent to which any single factor, or
combination of factors, may cause actual results to differ materially from those
contained in forward-looking statements. Given these risks and uncertainties,
investors should not rely on forward-looking statements as a prediction of
actual results.
The
market price of our common stock has been and may remain volatile. Factors such
as quarter-to-quarter variations in revenues and earnings or losses or our
failure to meet expectations could have a significant impact on the market price
of our common stock. In addition, the price of our common stock can change for
reasons unrelated to our performance. Due to our low market capitalization and
share price, the price of our common stock may also be affected by conditions
such as a lack of analyst coverage and fewer potential investors.
Forward-looking
statements are based on management’s expectations as of the date made, and the
Company does not undertake any responsibility to update any of these statements
in the future. Actual future performance and results will differ and may differ
materially from that contained in or suggested by forward-looking statements as
a result of the factors set forth in this Management’s Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in our filings
with the SEC.
Item
1. Legal
Proceedings:
During
fiscal 2002, the Company received a subpoena from the Securities and Exchange
Commission (SEC) seeking documents and information relating to the Company’s
management stock loan program and previously announced, and withdrawn, tender
offer. The Company has provided the documents and information requested by the
SEC, including the testimonies of its Chief Executive Officer, Chief Financial
Officer, and other key employees. The Company has cooperated, and will continue
to fully cooperate, in providing requested information to the SEC. The SEC and
the Company are currently engaged in discussions with respect to a potential
resolution of this matter.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds:
The
Company did not purchase any shares of its common stock during the quarter ended
February 26, 2005.
In
previous fiscal years, the Company’s Board of Directors had approved various
plans for the purchase of up to 8,000,000 shares of our common stock. As of
November 25, 2000, the Company had purchased 7,705,000 shares of common stock
under these board-authorized purchase plans. On December 1, 2000, the Board of
Directors approved an additional plan to acquire up to $8.0 million of our
common stock. To date, we have purchased $7.1 million of our common stock under
the terms of the December 2000 Board approved purchase plan. The maximum number
of shares that may yet be purchased under the plans, which totaled approximately
654,000, was calculated for the December 2000 plan by dividing the remaining
approved dollars by $2.55, which was the closing price of the Company’s common
stock on February 25, 2005 (last trading day of fiscal quarter). These shares
were added to the remaining shares from the Company’s other Board-approved plans
to arrive at an approximate maximum number of shares that may be purchased as of
February 26, 2005. No shares of the Company’s common stock were purchased during
the fiscal quarter ended February 26, 2005 under terms of any Board authorized
purchase plan.
Item
4. Submission
of Matters to a Vote of Security Holders
We held
our Annual Meeting of Shareholders on March 4, 2005. The following represents a
summary of each mater voted upon and the corresponding voting results for each
item considered at the Annual Meeting. Further information regarding each item
can be found in the Company’s definitive Proxy Statement dated January 26,
2005.
1. Election
of Directors - Four
directors were elected for three-year terms that expire at the Annual Meeting of
Shareholders to be held following the end of fiscal 2007, or until their
successors are elected and qualified. The number of shares voting in favor of
each director was as follows:
