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Franklin Covey Co. Reports Operating Results for Fiscal Quarter Ended on 2008-11-29

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Jan 14, 2009
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Franklin Covey Co. (FC, Financial) filed Quarterly Report for the period ended 2008-11-29.

Franklin Covey Co. is an international learning and performance solutions company dedicated to increasing the effectiveness of individuals and organizations. They provide consulting services training and education programs educational materials publications assessment and measurement tools implementation processes application tools and products designed to empower individuals and organizations to become more effective. Franklin Covey Co. has a market cap of $90.47 million; its shares were traded at around $5.45 with a P/E ratio of 54.5 and P/S ratio of 0.35.

Highlight of Business Operations:

Our financial results for the first quarter of fiscal 2009 are difficult to compare to the first quarter of fiscal 2008 due to the sale of substantially all of the assets of our Consumer Solutions Business Unit (CSBU) to Franklin Covey Products, LLC, during the fourth quarter of fiscal 2008. The CSBU was primarily responsible for sales of the Company s consumer products, including the popular FranklinCovey Planner, binders, and related accessories, to consumers and small businesses through retail, wholesale, Internet, and call center channels. Due to our ownership interest in and continuing involvement with Franklin Covey Products, LLC, we were unable to present the financial operations of the CSBU in a discontinued operations format for the quarter ending December 1, 2007. Our first fiscal quarter includes the months of September, October, and November and in prior years, our first quarter operating results were favorably impacted by product sales made during the beginning of the traditionally busy holiday shopping season that generally extends from November through January. For our first quarter of fiscal 2009, which ended on November 29, 2008, we recognized a loss from operations of $0.7 million compared to $4.9 million of income from operations in the first quarter of fiscal 2008. Including the impact of a $0.9 million benefit for income taxes, we recognized a net loss of $0.6 million in the first quarter of fiscal 2009 compared to net income (after income tax expense) of $2.0 million in the same quarter of the prior year.

Selling, General and Administrative – Our selling, general, and administrative (SG&A) expenses decreased $18.2 million compared to the prior year. The decrease in SG&A expenses was primarily due to 1) the sale of the CSBU, which reduced consolidated SG&A by approximately $16.9 million compared to the prior year; 2) reduced advertising expense, primarily due to a reduction in the number of planned public program events; 3) decreased conference costs, primarily due to the cancelation of our annual sales and delivery conference; and 4) the favorable impact of our restructuring plan that was announced in August 2008. Following the sale of our CSBU in the fourth quarter of fiscal 2008, we initiated a restructuring plan that reduced the number of our domestic regional sales offices, decentralized certain sales support functions, and significantly changed the operations of our Canadian subsidiary. The restructuring plan is intended to strengthen the remaining domestic sales offices and reduce our overall operating costs. We believe that this restructuring effort will further reduce SG&A expenses in future periods and improve our operating results. These reductions in SG&A were partially offset by a $0.8 million increase in share-based compensation expense and a $0.8 million increase in foreign exchange losses resulting from transactions that were denominated in foreign currencies and the volatility of foreign exchange rates during the quarter. Our share-based compensation expense increased due to changes in the estimated number of shares expected to vest from our long-term incentive plan (LTIP) awards in the first quarter of fiscal 2008. As a result of these revisions, we made a cumulative adjustment to our financial statements during the first quarter of the prior year, which included a reversal of $0.8 million of compensation expense recognized in prior periods.

At November 29, 2008 we had $3.5 million of cash and cash equivalents compared to $15.9 million at August 31, 2008 and our net working capital (current assets less current liabilities) totaled $5.5 million at November 29, 2008 compared to $5.3 million at August 31, 2008. During the first quarter of fiscal 2009, we used substantially all of the net cash proceeds from the sale of CSBU to purchase approximately 3.0 million shares of our common stock in a modified “Dutch Auction” tender offer. The tender offer closed, fully subscribed, prior to August 31, 2008 and we recorded a $28.2 million liability for the shares on our consolidated balance sheet with a corresponding increase to treasury stock in shareholders equity. We paid the tender offer obligation during the quarter ended November 29, 2008, which reduced our available cash at the end of the quarter.

Our primary sources of liquidity are cash flows from the sale of services in the normal course of business and proceeds from our $25.0 million revolving line of credit. In connection with the sale of the CSBU assets during the fourth quarter of fiscal 2008, our line of credit agreements with our previous lenders were modified (the Modified Credit Agreement). The Modified Credit Agreement removed one lender from the credit facility, but continues to provide a total of $25.0 million of borrowing capacity until June 30, 2009, when the borrowing capacity will be reduced to $15.0 million. In addition, the interest rate on the credit facility increased from LIBOR plus 1.10 percent to LIBOR plus 1.50 percent (5.5 percent at November 29, 2008), which was effective on the date of the modification agreement. The line of credit obligation was classified as a component of current liabilities primarily due to our intention to repay amounts outstanding before the agreement expires. The Modified Credit Agreement expires on March 14, 2010 (no change) and we may draw on the credit facilities, repay, and draw again, on a revolving basis, up to the maximum loan amount available so long as no event of default has occurred and is continuing. We may use the line of credit facility for general corporate purposes as well as for other transactions, unless prohibited by the terms of the Modified Credit Agreement. The working capital line of credit also contains customary representations and guarantees as well as provisions for repayment and liens.

Net cash used for investing activities totaled $1.0 million for the quarter ended November 29, 2008. Our primary uses of cash for investing activities were the purchase of property and equipment and additional spending on curriculum development. Our purchases of property and equipment, which totaled $0.6 million, consisted primarily of computer software, computer hardware, and office furniture and equipment. During the first quarter of fiscal 2008, we spent $0.4 million for further investment in curriculum development.

Net cash used for financing activities during the quarter ended November 29, 2008 totaled $9.5 million, which consisted primarily of the payment of our $28.2 million tender offer obligation (described above) that was partially offset by $18.8 million of net proceeds from our line of credit facility.

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