UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark One)





[X]
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended May 30, 2009





[   ]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from __________ to __________





Commission
file no. 1-11107









FRANKLIN
COVEY CO.


(Exact
name of registrant as specified in its charter)








Utah
                    (State
      of incorporation)
                  87-0401551
                    (I.R.S.
      employer identification number)2200
      West Parkway Boulevard
                    Salt
      Lake City, Utah
                    (Address
      of principal executive offices)
                  84119-2099
                    (Zip
      Code)Registrant’s
      telephone number,
                    Including
      area code
                  (801)
      817-1776








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   TNo   £





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes£No£





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):





Large
      accelerated filer
                    £
                    
                    Accelerated
      filer
                    T





Non-accelerated
      filer
              £
              (Do
      not check if a smaller reporting company)
              Smaller
      reporting company
              £





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes£No   T





Indicate
the number of shares outstanding of each of the issuer’s classes of Common Stock
as of the latest practicable date:




16,947,609
shares of Common Stock as of July 1, 2009





PART
I.  FINANCIAL INFORMATION


ITEM
1.  FINANCIAL STATEMENTS








FRANKLIN COVEY
CO.





CONDENSED CONSOLIDATED
BALANCE SHEETS


(in
thousands, except per share amounts)





May
      30,
                  2009
                
                
                August
      31,
                  2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                1,216
                
                
                $
                15,904Accounts receivable, less
      allowance for doubtful accounts of $885 and $1,066
                
                
                19,880
                
                
                
                27,114Inventories
                
                
                7,454
                
                
                
                8,397Deferred
      income taxes
                
                
                2,545
                
                
                
                2,472Receivable
      from equity method investee
                
                
                2,550
                
                
                
                7,672Prepaid
      expenses and other assets
                
                
                4,268
                
                
                
                5,102Assets
      held for sale
                
                
                1,990
                
                
                
                -Total
      current assets
                
                
                39,903
                
                
                
                66,661Property
      and equipment, net
                
                
                23,992
                
                
                
                26,928Intangible
      assets, net
                
                
                69,955
                
                
                
                72,320Goodwill
                
                
                505
                
                
                
                -Receivable
      from equity method investee
                
                
                3,637
                
                
                
                -Other
      assets
                
                
                11,395
                
                
                
                11,768$
                149,387
                
                
                $
                177,677LIABILITIES AND SHAREHOLDERS’
      EQUITYCurrent
      liabilities:Current
      portion of long-term debt and financing obligation
                
                $
                598
                
                
                $
                670Line
      of credit
                
                
                16,050
                
                
                
                -Accounts
      payable
                
                
                7,418
                
                
                
                8,713Income
      taxes payable
                
                
                167
                
                
                
                384Tender
      offer obligation
                
                
                -
                
                
                
                28,222Accrued
      liabilities
                
                
                18,369
                
                
                
                23,419Liabilities
      held for sale
                
                
                583
                
                
                
                -Total
      current liabilities
                
                
                43,185
                
                
                
                61,408Long-term
      debt and financing obligation, less current portion
                
                
                31,265
                
                
                
                32,291Other
      liabilities
                
                
                943
                
                
                
                1,229Deferred
      income tax liabilities
                
                
                1,217
                
                
                
                4,572Total
      liabilities
                
                
                76,610
                
                
                
                99,500Shareholders’
      equity:Common stock – $0.05 par value;
      40,000 shares authorized, 27,056 shares issued and
    outstanding
                
                
                1,353
                
                
                
                1,353Additional paid-in
      capital
                
                
                183,424
                
                
                
                184,313Common stock
    warrants
                
                
                7,597
                
                
                
                7,597Retained earnings
                
                
                18,556
                
                
                
                24,811Accumulated other comprehensive
      income
                
                
                1,352
                
                
                
                1,007Treasury stock at cost, 10,093
      and 10,203 shares
                
                
                (139,505
                )
                
                
                (140,904
                )Total shareholders’
      equity
                
                
                72,777
                
                
                
                78,177$
                149,387
                
                
                $
                177,677




















See notes
to condensed consolidated financial statements.


2


FRANKLIN COVEY
CO.





CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
thousands, except per share amounts)





Quarter
      Ended
                
                
                Three
      Quarters EndedMay
      30,
                  2009
                
                
                May
      31,
                  2008
                
                
                May
      30,
                  2009
                
                
                May
      31,
                  2008(unaudited)
                
                
                (unaudited)Net
      sales:Training
      and consulting services
                
                $
                27,767
                
                
                $
                33,864
                
                
                $
                83,814
                
                
                $
                101,891Products
                
                
                1,958
                
                
                
                24,654
                
                
                
                9,070
                
                
                
                104,159Leasing
                
                
                920
                
                
                
                543
                
                
                
                2,745
                
                
                
                1,71330,645
                
                
                
                59,061
                
                
                
                95,629
                
                
                
                207,763Cost
      of sales:Training
      and consulting services
                
                
                9,928
                
                
                
                11,421
                
                
                
                29,755
                
                
                
                32,807Products
                
                
                1,335
                
                
                
                11,358
                
                
                
                5,189
                
                
                
                45,178Leasing
                
                
                447
                
                
                
                314
                
                
                
                1,370
                
                
                
                1,01611,710
                
                
                
                23,093
                
                
                
                36,314
                
                
                
                79,001Gross profit
                
                
                18,935
                
                
                
                35,968
                
                
                
                59,315
                
                
                
                128,762Selling,
      general, and administrative
                
                
                18,179
                
                
                
                34,210
                
                
                
                59,043
                
                
                
                110,634Depreciation
                
                
                994
                
                
                
                1,679
                
                
                
                2,804
                
                
                
                4,590Amortization
                
                
                995
                
                
                
                902
                
                
                
                2,799
                
                
                
                2,702Income
      (loss) from operations
                
                
                (1,233
                )
                
                
                (823
                )
                
                
                (5,331
                )
                
                
                10,836Loss
      from an equity method investee
                
                
                (224
                )
                
                
                -
                
                
                
                -
                
                
                
                -Interest
      income
                
                
                20
                
                
                
                55
                
                
                
                94
                
                
                
                78Interest
      expense
                
                
                (741
                )
                
                
                (725
                )
                
                
                (2,333
                )
                
                
                (2,396
                )Income
      (loss) before income taxes
                
                
                (2,178
                )
                
                
                (1,493
                )
                
                
                (7,570
                )
                
                
                8,518Benefit
      (provision) for income taxes
                
                
                (2,875
                )
                
                
                11
                
                
                
                1,315
                
                
                
                (4,961
                )Net
      income (loss)
                
                $
                (5,053
                )
                
                $
                (1,482
                )
                
                $
                (6,255
                )
                
                $
                3,557Net
      income (loss) available to commonshareholders
      per share:Basic
                
                $
                (.38
                )
                
                $
                (.09
                )
                
                $
                (.47
                )
                
                $
                .18Diluted
                
                $
                (.38
                )
                
                $
                (.09
                )
                
                $
                (.47
                )
                
                $
                .18Weighted
      average number of common shares:Basic
                
                
                13,420
                
                
                
                16,132
                
                
                
                13,394
                
                
                
                19,542Diluted
                
                
                13,420
                
                
                
                16,132
                
                
                
                13,394
                
                
                
                19,815







































































See notes
to condensed consolidated financial statements.


3


FRANKLIN COVEY
CO.





CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)





Three
      Quarters EndedMay
      30,
                  2009
                
                
                May
      31,
                  2008(unaudited)Cash
      flows from operating activities:Net
      income (loss)
                
                $
                (6,255
                )
                
                $
                3,557Adjustments to reconcile net
      income (loss) to net cash provided by operating
activities:Depreciation
      and amortization
                
                
                5,603
                
                
                
                7,699Deferred
      income taxes
                
                
                (3,363
                )
                
                
                3,130Loss
      on disposals of property and equipment
                
                
                25
                
                
                
                274Share-based
      compensation expense (benefit)
                
                
                334
                
                
                
                (936
                )Changes
      in assets and liabilities, net of effect of acquired
    business:Decrease
      (increase) in accounts receivable, net
                
                
                8,082
                
                
                
                (2,031
                )Decrease
      in receivable from equity method investee
                
                
                1,485
                
                
                
                -Decrease
      in inventories
                
                
                1,392
                
                
                
                3,266Decrease
      in other assets
                
                
                2,861
                
                
                
                747Decrease
      in accounts payable and accrued liabilities
                
                
                (6,723
                )
                
                
                (2,884
                )Decrease
      in other long-term liabilities
                
                
                (264
                )
                
                
                (81
                )Decrease
      in income taxes payable
                
                
                (337
                )
                
                
                (877
                )Net
      cash provided by operating activities
                
                
                2,840
                
                
                
                11,864Cash
      flows from investing activities:Proceeds
      on notes receivable from disposals of subsidiaries
                
                
                105
                
                
                
                1,110Purchases
      of property and equipment
                
                
                (2,122
                )
                
                
                (2,784
                )Curriculum
      development costs
                
                
                (1,462
                )
                
                
                (2,860
                )Acquisition
      of business, net of cash acquired
                
                
                (1,157
                )
                
                
                -Proceeds
      from sales of property and equipment
                
                
                -
                
                
                
                60Net
      cash used for investing activities
                
                
                (4,636
                )
                
                
                (4,474
                )Cash
      flows from financing activities:Proceeds
      from line-of-credit borrowing
                
                
                63,347
                
                
                
                61,689Payments
      on line-of-credit borrowing
                
                
                (47,297
                )
                
                
                (69,465
                )Principal
      payments on long-term debt and financing obligation
                
                
                (515
                )
                
                
                (478
                )Proceeds
      from sales of common stock from treasury
                
                
                224
                
                
                
                311Purchase
      of treasury shares through tender offer
                
                
                (28,270
                )
                
                
                -Net
      cash used for financing activities
                
                
                (12,511
                )
                
                
                (7,943
                )Effect
      of foreign exchange rates on cash and cash equivalents
                
                
                (381
                )
                
                
                (720
                )Net
      decrease in cash and cash equivalents
                
                
                (14,688
                )
                
                
                (1,273
                )Cash
      and cash equivalents at beginning of the period
                
                
                15,904
                
                
                
                6,126Cash
      and cash equivalents at end of the period
                
                $
                1,216
                
                
                $
                4,853Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                
                $
                2,311
                
                
                $
                2,475Cash
      paid for income taxes
                
                $
                2,571
                
                
                $
                3,117Non-cash
      investing and financing activities:Acquisition
      of property and equipment through accounts payable
                
                $
                62
                
                
                $
                1,060
































See notes
to condensed consolidated financial statements.


4


FRANKLIN COVEY
CO.





NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)











NOTE
1 – BASIS OF PRESENTATION





Franklin
Covey Co. (hereafter referred to as us, we, our, or the Company) believes that
great organizations consist of great people who form great teams that in turn
produce great results.  To enable organizations and individuals to
achieve great results, we provide integrated consulting, training, and
performance solutions focused on leadership, strategy execution, productivity,
sales force effectiveness, effective communication, and other
areas.  Our services and products have historically been available
through professional consulting services, public workshops, retail stores,
catalogs, and the Internet at www.franklincovey.com.  Our
best-known offerings in the marketplace have included the Franklin Planner®, and a
suite of individual-effectiveness and leadership-development training products
based on the best-selling book, The 7 Habits of Highly Effective
People®.





During
the fourth quarter of the fiscal year ended August 31, 2008, we completed the
sale of substantially all of the assets of our Consumer Solutions Business Unit
(CSBU) to a newly formed entity, Franklin Covey Products, LLC (Note
3).  The CSBU was primarily responsible for the sale of our products,
including the Franklin Planner®, to
consumers through retail stores, catalogs, and our Internet
site.  Following the sale of the CSBU, our business primarily consists
of training, consulting, assessment services, and related products to help
organizations achieve superior results by focusing on and executing on top
priorities, building the capability of knowledge workers, and aligning business
processes.  Our training, consulting, and assessment offerings include
services based upon the popular workshops The 7 Habits of Highly Effective
People®; Leadership: Great
Leaders—Great  Teams—Great ResultsTM; The 4 Disciplines of
Execution®; FOCUS: Achieving Your Highest
PrioritiesTM;Building
Business Acumen®Championing DiversityTM;Leading at the Speed of
TrustTM;Writing
Advantage®,
andPresentation
Advantage®.  Through
interaction with our clients and assessment of marketplace needs, we seek to
create, develop, and introduce new services and products that will help our
clients achieve greatness.





The
accompanying unaudited condensed consolidated financial statements reflect, in
the opinion of management, all adjustments (which include only normal recurring
adjustments, except for the correction of errors in prior periods as described
in Note 2) necessary to present fairly the financial position and results of
operations of the Company as of the dates and for the periods
indicated.  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules
and regulations.  The information included in this quarterly report on
Form 10-Q should be read in conjunction with the consolidated financial
statements and related notes included in our Annual Report on Form 10-K for the
fiscal year ended August 31, 2008.





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements, and the reported amounts of revenues and expenses
during the reporting periods.  Actual results could differ from those
estimates.





The
Company utilizes a modified 52/53-week fiscal year that ends on August 31 of
each year.  Corresponding quarterly periods generally consist of
13-week periods that ended on November 29, 2008, February 28, 2009, and May 30,
2009 during fiscal 2009.  Under the modified 52/53-week fiscal year,
the quarter ended May 30, 2009 had the same number of business days as the
quarter ended May 31, 2008 and the three quarters ended May 30, 2009 had one
less business day than the


5


three
quarters ended May 31, 2008.  Unless otherwise noted, references to
fiscal years apply to the 12 months ended August 31 of the specified
year.





Certain
reclassifications have been made to prior period financial statements to conform
to the current period presentation.  These reclassifications included
a change in the classification of leasing income, corresponding leasing cost of
sales, and building depreciation costs related to sub-leased office space from
product cost of sales to depreciation expense.  The leasing revenues
reclassed from product sales totaled $0.5 million and $1.7 million for the
quarter and three quarters ended May 31, 2008 and the depreciation expense
reclassified from product cost of sales totaled $0.2 million and $0.5 million
for the quarter and three quarters ended May 31, 2008.





The
results of operations for the quarter and three quarters ended May 30, 2009 are
not necessarily indicative of results expected for the entire fiscal year ending
August 31, 2009.








NOTE
2 – CORRECTION OF IMMATERIAL ERRORS





While
closing the first quarter of fiscal 2009, we identified errors due to improper
accounting for certain product sales in the fourth quarter of fiscal 2008, and
the improper calculation of inventory reserves from late fiscal 2006 through the
fourth quarter of fiscal 2008 in the financial statements of our directly owned
subsidiary in Japan.





During
the fourth quarter of fiscal 2008, certain product sales were recorded at our
Japanese subsidiary where delivery had not occurred resulting in an
overstatement of revenues.  In addition, we determined that our
Japanese subsidiary’s inventory reserve calculation did not appropriately
capture all considerations of old and outdated material resulting in an
overstatement in the value of our inventory.





The
revenue recognition error resulted in a $0.9 million overstatement of sales,
which had a $0.6 million impact on gross profit in the fourth quarter of fiscal
2008.  The inventory reserve calculation errors from the fourth
quarter of fiscal 2006 through August 31, 2008 cumulatively totaled $0.7 million
and were immaterial overall to previously reported quarterly and annual
periods.





We
previously assessed the materiality of these errors in accordance with Staff
Accounting Bulletin (SAB) No. 108 and determined that the errors were immaterial
to previously reported amounts contained in our periodic reports and we intend
to correct these errors through subsequent periodic filings.  For
further information on the impact of these adjustments to all periods affected,
refer to Note 2 in our quarterly report on Form 10-Q for the period ended
November 29, 2008.  The effects of recording these immaterial
corrections in the consolidated statements of operations for the periods
presented in this report were as follows (in thousands):





For
      the Quarter Ended
                      May
      31, 2008As
      Reported
                    
                    
                    As
      RevisedGross
      profit
                    
                    $
                    35,757
                    
                    
                    $
                    35,786Operating
      loss
                    
                    
                    (852
                    )
                    
                    
                    (823
                    )Net
      loss
                    
                    
                    (1,511
                    )
                    
                    
                    (1,482
                    )For
      the Three Quarters Ended
                      May
      31, 2008As
      Reported
                    
                    
                    As
      RevisedGross
      profit
                    
                    $
                    128,391
                    
                    
                    $
                    128,216Operating
      income
                    
                    
                    11,011
                    
                    
                    
                    10,836Net
      income
                    
                    
                    3,630
                    
                    
                    
                    3,557





6


NOTE
3 – SALE OF THE CONSUMER SOLUTIONS BUSINESS UNIT





During
the fourth quarter of fiscal 2008, we joined with Peterson Partners to create a
new company, Franklin Covey Products, LLC (Franklin Covey
Products).  This new company purchased substantially all of the assets
of our CSBU with the objective of expanding worldwide product sales as governed
by a comprehensive license agreement between us and Franklin Covey
Products.  On the closing date of the sale, the Company invested
approximately $1.8 million to purchase a 19.5 percent voting interest in
Franklin Covey Products, made a $1.0 million priority capital contribution with
a 10 percent return, and will have the opportunity to earn contingent license
fees if Franklin Covey Products achieves specified performance
objectives.  We recognized a gain totaling $9.1 million on the sale of
the CSBU assets and according to guidance found in Emerging Issues Task Force
(EITF) Issue No. 01-2, Interpretations of APB Opinion No.
29, we deferred a portion of the gain equal to our investment in Franklin
Covey Products.  We will recognize the deferred gain over the life of
the long-term assets acquired by Franklin Covey Products or when cash is
received for payment of the priority contribution.





Based
upon the guidance found in Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, EITF Issue No. 03-13, Applying the Conditions in Paragraph
42 of FASB Statement No. 144 in Determining Whether to Report Discontinued
Operations, and SAB No. 103, Topic 5Z4, Disposal of Operation with
Significant Interest Retained, we determined that the operations of CSBU
should not be reported as discontinued operations because we continue to have
significant influence over the operations of Franklin Covey Products and may
participate in future cash flows.  As a result of this determination,
we have not presented the financial results of the CSBU as discontinued
operations in the accompanying condensed consolidated statements of operations
for the quarter or three quarters ended May 31, 2008.





The
following unaudited pro forma condensed consolidated statements of operations
for the fiscal quarter and three quarters ended May 31, 2008 give effect to the
sale of the CSBU assets as if the sale transaction occurred at the beginning of
the periods presented.  The pro forma information is not necessarily
indicative of the results of operations or indicative of results that would have
actually occurred had the transaction been completed as of the beginning of the
period presented.  The pro forma adjustments, which primarily consist
of entries to dispose of the CSBU for the period presented, are based upon
available information and certain assumptions we believe are
reasonable.  The pro forma financial information should be read in
conjunction with the consolidated financial statements and notes to the
consolidated financial statements included in our report on Form 10-K for the
fiscal year ended August 31, 2008 and our quarterly report on Form 10-Q for the
period ended May 31, 2008 (in thousands).





Pro
      Forma Quarter Ended May 31, 2008
                
                
                Pro
      Forma
                  Three
      Quarters Ended
                  May
      31, 2008Sales
                
                $
                37,315
                
                
                $
                112,843Cost
      of sales
                
                
                13,225
                
                
                
                38,865Gross
      profit
                
                
                24,090
                
                
                
                73,978Selling,
      general, and administrative
                
                
                20,419
                
                
                
                63,415Depreciation
                
                
                1,349
                
                
                
                3,426Amortization
                
                
                902
                
                
                
                2,702Income
      from operations
                
                
                1,420
                
                
                
                4,435Interest
      income
                
                
                55
                
                
                
                78Interest
      expense
                
                
                (725
                )
                
                
                (2,396
                )Income
      before provision for income taxes
                
                
                750
                
                
                
                2,117Provision
      for income taxes
                
                
                (1,087
                )
                
                
                (1,766
                )Net
      income (loss)
                
                $
                (337
                )
                
                $
                351Diluted
      earnings (loss) per common share
                
                $
                (.02
                )
                
                $
                .02





7


Following
the sale of the CSBU assets, we do not have any obligation to fund the losses of
Franklin Covey Products.  Under the terms of the agreements associated
with the sale of the CSBU assets, we are entitled to receive reimbursement for
certain operating costs, such as warehousing and distribution costs, which are
billed to the Company by third-party providers.  At May 30, 2009 we
had a $6.2 million receivable from Franklin Covey Products, which is disclosed
on our consolidated balance sheets as a receivable from an equity method
investee and consisted of $3.6 million resulting from the working capital
settlement and reimbursable costs associated with the sale transaction and $2.6
million of reimbursable operating costs.  We also have a $0.9 million
liability to Franklin Covey Products at May 30, 2009 for purchases of inventory
items in the ordinary course of business that is included as a component of our
accounts payable in the accompanying condensed consolidated balance
sheet.  The working capital settlement payment was originally due in
January 2009.  However, the Company extended the due date of the
working capital settlement, which will continue to accrue interest until the
amount is repaid.  As a result of this extension, we have classified
the working capital settlement and accrued interest as long-term assets on our
May 30, 2009 balance sheet.  At May 30, 2009, we believe that we will
collect the balance due on the working capital settlement, including accrued
interest.








NOTE
4 – ASSETS HELD FOR SALE





During
the quarter ended August 31, 2008, we initiated a restructuring plan that
included significant changes to the operation of our wholly owned Canadian
subsidiary.  This restructuring plan included reassigning the Canadian
sales force to domestic regions and eliminating the administrative functions at
our Canadian headquarters office located in Cambridge,
Ontario.  Subsequent to the initiation of the restructuring plan, the
Company decided to sell its Canadian headquarters building.  During
fiscal 2009 the Company formalized its plan to sell the Canadian building and
the premises became available for immediate sale as defined by SFAS No.
144.  Accordingly, the Canadian building assets and corresponding
mortgage liability have been classified as held for sale in the accompanying
consolidated balance sheet for May 30, 2009.  The Canadian building
was sold subsequent to the quarter ended May 30, 2009 for an amount (including
expected closing costs) that approximated its carrying value.








NOTE
5 – ACQUISITION OF COVEYLINK





Effective
December 31, 2008, we acquired the assets of CoveyLink Worldwide, LLC
(CoveyLink).  CoveyLink conducts seminars and training courses and
provides consulting based upon the book, The Speed of Trust by Stephen
M.R. Covey, who is the son of our Vice Chairman of the Board of
Directors.





Based
primarily upon the guidance found in EITF Issue 98-3, Determining Whether a Nonmonetary
Transaction Involves Receipt of Production Assets or of a Business, we
determined that the CoveyLink operation constituted a business and we accounted
for the acquisition of CoveyLink using the guidance found in SFAS No. 141, Business
Combinations.  The purchase price was $1.0 million in cash plus
or minus an adjustment for specified working capital and the costs necessary to
complete the transaction, which resulted in a total purchase price of $1.2
million.  The previous owners of CoveyLink, which includes Stephen
M.R. Covey, are also entitled to earn annual contingent payments based upon
earnings growth over the next five years.  Based upon the preliminary
purchase price allocation and evaluation of the assets acquired and liabilities
assumed, we recorded a $0.4 million increase in our intangible assets, for the
fair value of customer relationships and the practice leader agreement, and $0.5
million of goodwill.  The intangible assets will be amortized on an
accelerated basis that is based on their expected cash flows over the estimated
useful lives of the assets, which is approximately three years.  We
also acquired $0.6 million of net accounts receivable, $0.2 million of other
assets, and $0.5 million of accounts payable and current accrued liabilities on
the acquisition date.





The
accompanying consolidated financial statements include the financial results of
CoveyLink from January 1, 2009 through May 30, 2009.  The CoveyLink
results of operations had an


8


immaterial
impact on our consolidated financial statements and we recognized $1.8 million
of additional net sales as a result of the CoveyLink acquisition through May 30,
2009.





Prior to
the acquisition date, CoveyLink had granted a non-exclusive license to the
Company related to The Speed
of Trust book and related training courses for which we paid CoveyLink
specified royalties.  As part of the CoveyLink acquisition, an amended
and restated license of intellectual property was signed that granted us an
exclusive, perpetual, worldwide, transferable, royalty-bearing license to use,
reproduce, display, distribute, sell, prepare derivative works of, and perform
the licensed material in any format or medium and through any market or
distribution channel.  We will continue to pay the former owners of
CoveyLink a royalty based upon the amended royalty agreement.








NOTE
6 – INVENTORIES





Inventories
are stated at the lower of cost or market, cost being determined using the
first-in, first-out method, and were comprised of the following (in
thousands):





May
      30,
                    2009
                  
                  
                  August
      31,
                    2008Finished
      goods
                  
                  $
                  7,094
                  
                  
                  $
                  7,984Raw
      materials
                  
                  
                  360
                  
                  
                  
                  413$
                  7,454
                  
                  
                  $
                  8,397








NOTE
7 – SHARE-BASED COMPENSATION





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
long-term performance awards, unvested stock awards, employee stock purchase
plan (ESPP) shares, and stock options.  In addition, our Board of
Directors and shareholders may, from time to time, approve fully vested stock
awards.  The compensation cost of our share-based compensation plans
was included in selling, general, and administrative expenses in the
accompanying condensed consolidated statements of operations and no share-based
compensation was capitalized during the quarter or three quarters ended May 30,
2009.  We generally issue shares of common stock for our share-based
compensation plans from shares held in treasury.  The following is a
description of recent developments in our share-based compensation
plans.





Long-Term
Performance Awards





The
Company has a performance based long-term incentive plan (the LTIP) that
provides for annual grants of share-based performance awards to certain
managerial personnel and executive management as directed by the Organization
and Compensation Committee (the Compensation Committee) of the Board of
Directors.  The LTIP performance awards cliff vest at the completion
of a three-year performance period that begins on September 1 in the fiscal year
of the grant.  The number of common shares that are finally awarded to
LTIP participants is variable and is based entirely upon the achievement of
specified financial performance objectives during the three-year performance
period.  Due to the variable number of common shares that may be
issued under the LTIP, we reevaluate our LTIP grants on a quarterly basis and
adjust the number of shares expected to be awarded based upon actual and
estimated financial results of the Company compared to the performance goals set
for the award.  Adjustments to the number of shares awarded, and to
the corresponding compensation expense, are made on a cumulative basis at the
adjustment date based upon the estimated probable number of common shares to be
awarded.





During
the quarter ended November 29, 2008, the Compensation Committee approved LTIP
awards for 205,700 shares of common stock (the target award) to be awarded if we
achieve the


9


specified
financial results of grant, which were primarily based on cumulative operating
income growth over the performance period ending August 31, 2011.  The
fair value of our common stock was $4.60 per share on the grant date of the
fiscal 2009 LTIP award.  However, due to ongoing organizational
changes following the sale of the CSBU, the Company’s structure evolved to the
extent that the fiscal 2009 LTIP award criteria were no longer consistent with
the Company’s organization and performance goals and, in some cases, the
approved measurement criteria were no longer measurable.  As a result
of these changes, combined with financial performance during the first two
quarters of the measurement period, the Company determined that no shares would
be awarded to participants under the terms of the fiscal 2009 LTIP
award.  Accordingly, no compensation expense was recognized for the
fiscal 2009 LTIP award during the three quarters ended May 30,
2009.





During
the quarter ended May 30, 2009, the Compensation Committee formally terminated
the fiscal 2009 and fiscal 2007 LTIP awards because no shares were expected to
be awarded to participants under the terms of these awards.  The
Company does not currently anticipate another LTIP award to be granted during
fiscal 2009.





Unvested
Stock Awards





The fair
value of our unvested stock awards is calculated based on the number of shares
issued and the closing market price of our common stock on the date of the
grant.  The corresponding compensation cost of unvested stock awards
is amortized to selling, general, and administrative expense on a straight-line
basis over the vesting period of the award.





Based
upon a report from its external compensation consultant regarding competitive
compensation practices for Boards of Directors of similar sized public
companies, and to provide closer alignment with current and emerging market
practices which support the Board’s stewardship role, the Compensation Committee
approved changes in future awards under the Non-Employee Directors’
Plan.  These changes included: 1) a change from an annual grant of
4,500 shares to a whole-share grant equal to $40,000; 2) a change in the vesting
period from three years to one year; 3) a change in the grant date from March 31
of each year to January (following the Annual Shareholders’ Meeting) of each
year; and 4) a minimum stock ownership requirement for directors.  No
previously granted awards were subject to these approved changes.  The
following information applies to our unvested stock awards granted to members of
the Board of Directors under the Directors’ Plan through the three quarters
ended May 30, 2009:





Number
      of Shares
                
                
                Weighted-Average
      Grant-Date Fair Value Per ShareUnvested
      stock awards at August 31, 2008
                
                
                94,500
                
                
                $
                7.73Granted
                
                
                66,112
                
                
                
                4.84Forfeited
                
                
                -
                
                
                
                -Vested
                
                
                (27,000
                )
                
                
                7.84Unvested
      stock awards at  May 30, 2009
                
                
                133,612
                
                
                $
                6.28





Employee
Stock Purchase Plan





We have
an employee stock purchase plan (ESPP) that offers qualified employees the
opportunity to purchase shares of our common stock at a price equal to 85
percent of the average fair market value of the Company’s common stock on the
last trading day of the calendar month in each fiscal quarter.  During
the quarter and three quarters ended May 30, 2009, a total of 17,820 shares and
42,541 shares were issued to participants in the ESPP.





10


Stock
Options





The
Company has an incentive stock option plan whereby options to purchase shares of
our common stock are issued to key employees at an exercise price not less than
the fair market value of the Company’s common stock on the date of
grant.  The term, not to exceed ten years, and exercise period of each
incentive stock option awarded under the plan are determined by the Compensation
Committee of our Board of Directors.  Information related to stock
option activity during the three quarters ended May 30, 2009 is presented
below:





Number
      of Stock Options
                
                
                Weighted
      Avg. Exercise Price Per ShareOutstanding
      at August 31, 2008
                
                
                2,027,800
                
                
                $
                12.82Granted
                
                
                -
                
                
                
                -Exercised
                
                
                (1,000
                )
                
                
                6.56Forfeited
                
                
                (199,500
                )
                
                
                9.89Outstanding
      at May 30, 2009
                
                
                1,827,300
                
                
                $
                13.14Options
      vested and exercisable at May 30, 2009
                
                
                1,827,300
                
                
                $
                13.14








NOTE
8 – INCOME TAXES





During
the first two quarters of fiscal 2009, we applied an estimated annual effective
income tax rate to our year-to-date pre-tax loss to calculate the applicable
income tax benefit.  During the quarter ended May 30, 2009, we used
the actual effective income tax rate applicable to our pre-tax loss for the
three quarters ended May 30, 2009 to determine our income tax
benefit.  We utilized this approach during the current quarter due to
uncertainties regarding expected fiscal 2009 pre-tax financial results and the
magnified effect of certain items on our effective income tax rate in periods of
near breakeven operations.





Our
effective tax benefit rate for the three quarters ended May 30, 2009 of
approximately 17 percent was lower than statutory combined rates primarily due
to foreign withholding taxes for which we cannot utilize a foreign tax credit,
the accrual of taxable interest income on the management stock loan program, and
actual and deemed dividends from foreign subsidiaries for which we also cannot
utilize foreign tax credits.  Included in the income tax benefit for
the quarter ended May 30, 2009 is a benefit of $0.2 million resulting from the
expiration of the statute of limitations on uncertain tax
positions.  We expect that our unrecognized tax benefits may decrease
by approximately $0.2 million over the next twelve months.








NOTE
9 – COMPREHENSIVE INCOME (LOSS)





Comprehensive
income (loss) is based on net income and includes charges and credits to equity
accounts that were not the result of transactions with
shareholders.  Our comprehensive income (loss) was calculated as
follows for the periods presented in this report (in thousands):





Quarter
      Ended
                  
                  
                  Three
      Quarters EndedMay
      30,
                    2009
                  
                  
                  May
      31,
                    2008
                  
                  
                  May
      30,
                    2009
                  
                  
                  May
      31,
                    2008Net
      income (loss)
                  
                  $
                  (5,053
                  )
                  
                  $
                  (1,482
                  )
                  
                  $
                  (6,255
                  )
                  
                  $
                  3,557Other
      comprehensive income (loss) items, net of tax:Foreign
      currency translation adjustments
                  
                  
                  434
                  
                  
                  
                  (111
                  )
                  
                  
                  345
                  
                  
                  
                  362Comprehensive
      income (loss)
                  
                  $
                  (4,619
                  )
                  
                  $
                  (1,593
                  )
                  
                  $
                  (5,910
                  )
                  
                  $
                  3,919


11


NOTE
10 – EARNINGS PER SHARE





Basic
earnings per common share (EPS) is calculated by dividing net income (loss)
available to common shareholders by the weighted-average number of common shares
outstanding for the period.  Diluted EPS is calculated by dividing net
income (loss) available to common shareholders by the weighted-average number of
common shares outstanding plus the assumed exercise of all dilutive securities
using the treasury stock method or the “as converted” method, as
appropriate.  Due to modifications to our management stock loan
program, we determined that the shares of management stock loan participants
that were placed in the escrow account are participating securities as defined
by EITF Issue No. 03-6, Participating Securities and the
Two-Class Method under FASB Statement No. 128, because they continue to
have equivalent common stock dividend rights.  Accordingly, these
management stock loan shares are included in our basic EPS calculation during
periods of net income and excluded from the basic EPS calculation in periods of
net loss.





During
the quarter ended May 30, 2009, we adopted the provisions of Financial
Accounting Standards Board (FASB) Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities
(FSP EITF 03-6-1).  This pronouncement requires unvested share-based
compensation instruments that have participation rights in dividends or
undistributed earnings to be considered participating securities for purposes of
determining EPS.  Our unvested share awards granted to members of our
board of directors (and employees in previous periods) have participation rights
as described in FSP EITF 03-6-1 on the same basis as outstanding shares of
common stock and were determined to be participating
securities.  However, these unvested shares are not obligated to
participate in undistributed losses and are thus excluded from the EPS
calculation in periods of net loss.  The provisions of FSP EITF 03-6-1
require all prior period EPS data to be adjusted retrospectively.  Due
to the relatively small number of unvested share-based compensation instruments
outstanding during periods of net income presented below, the adoption of FSP
EITF 03-6-1 had no impact on our reported EPS.  The Company
anticipates that the provisions of FSP EITF 03-6-1 will also be immaterial in
future periods based on expected grants of unvested share awards.





The
following table presents the computation of our EPS for the periods indicated
(in thousands, except per share amounts):





Quarter
      Ended
                  
                  
                  Three
      Quarters EndedMay
      30,
                    2009
                  
                  
                  May
      31,
                    2008
                  
                  
                  May
      30,
                    2009
                  
                  
                  May
      31,
                    2008Numerator
      for basic and diluted earnings per share:Net
      income (loss) attributable to common shareholders
                  
                  $
                  (5,053
                  )
                  
                  $
                  (1,482
                  )
                  
                  $
                  (6,255
                  )
                  
                  $
                  3,557Denominator
      for basic and diluted earnings per share:Basic
      weighted average shares outstanding(1)
                  
                  
                  13,420
                  
                  
                  
                  16,132
                  
                  
                  
                  13,394
                  
                  
                  
                  19,542Effect
      of dilutive securities:Stock
      options and other share-based awards
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  273Common
      stock warrants(2)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted
      weighted average shares outstanding
                  
                  
                  13,420
                  
                  
                  
                  16,132
                  
                  
                  
                  13,394
                  
                  
                  
                  19,815Basic
      and diluted EPS:Basic
      EPS
                  
                  $
                  (.38
                  )
                  
                  $
                  (.09
                  )
                  
                  $
                  (.47
                  )
                  
                  $
                  .18Diluted
      EPS
                  
                  $
                  (.38
                  )
                  
                  $
                  (.09
                  )
                  
                  $
                  (.47
                  )
                  
                  $
                  .18





(1)
            Since
      the Company recognized net income for the three quarters ended May 31,
      2008, basic weighted average shares for that period includes 3.5 million
      shares of common


12


stock
held by management stock loan participants that were placed in
escrow.  These shares were excluded from basic weighted-average shares
for the other periods presented.





(2)
            For
      the periods presented, the conversion of 6.2 million common stock warrants
      is not assumed because such conversion would be
    anti-dilutive.





At May
30, 2009 and May 31, 2008, we had approximately 1.8 million and 1.9 million
stock options outstanding which were not included in the computation of diluted
EPS because the Company reported a net loss in the period presented or the
options’ exercise prices were greater than the average market price of the
Company’s common shares.  Although these shares were not included in
our calculation of diluted EPS, these stock options, and other dilutive
securities, may have a dilutive effect on our EPS calculation in future periods
if the price of our common stock increases.








NOTE
11 – SEGMENT INFORMATION





Prior to
the sale of the CSBU (Note 3), which closed during the fourth quarter of fiscal
2008, the Company had two operating segments:  the Organizational
Solutions Business Unit (OSBU) and the CSBU.  The following is a
description of these segments, their primary operating components, and their
significant business activities:





Organizational
Solutions Business Unit – The OSBU is primarily responsible for the
development, marketing, sale, and delivery of strategic execution, productivity,
leadership, sales force performance, and communication training and consulting
solutions directly to organizational clients, including other companies, the
government, and educational institutions.  The OSBU includes the
financial results of our domestic sales force, public programs, and certain
international operations.  The domestic sales force is responsible for
the sale and delivery of our training and consulting services in the United
States and Canada.  Our international sales group includes the
financial results of our directly owned foreign offices and royalty revenues
from licensees.





Consumer
Solutions Business Unit – This business unit was primarily focused on
sales to individual customers and small business organizations and included the
results of our domestic retail stores, consumer direct operations (primarily
Internet sales and call center), wholesale operations, international product
channels in certain countries, and other related distribution channels,
including government product sales and domestic printing and publishing
sales.  The CSBU results of operations also included the financial
results of our paper planner manufacturing operations.  Although CSBU
sales primarily consisted of products such as planners, binders, software,
totes, and related accessories, virtually any component of our leadership,
productivity, and strategy execution solutions may have been purchased through
the CSBU channels.





The
Company’s chief operating decision maker is the Chief Executive Officer (CEO),
and the primary measurement tool used in business unit performance analysis is
earnings before interest, taxes, depreciation, and amortization (EBITDA), which
may not be calculated as similarly titled amounts calculated by other
companies.  For segment reporting purposes, our consolidated EBITDA
can be calculated as our income or loss from operations excluding depreciation
and amortization charges.





In the
normal course of business, we may make structural and cost allocation revisions
to our segment information to reflect new reporting responsibilities within the
organization.  During fiscal 2009, we closed our directly owned
Canadian office and assigned our Canadian sales and support personnel to various
domestic sales regions.  Accordingly, the results of our Canadian
operations are now included in the domestic segment of the OSBU.  We
also made other less significant organizational changes during fiscal
2009.  All prior period segment information has been
revised


13


to
conform to the most recent classifications and organizational changes and we
account for our segment information on the same basis as the accompanying
condensed consolidated financial statements.





SEGMENT
INFORMATION


(in
      thousands)Quarter
      Ended
                  May
      30, 2009
                
                Sales
      to External Customers
                
                
                Gross
      Profit
                
                
                EBITDA
                
                
                Depreciation
                
                
                AmortizationOrganizational
      Solutions Business Unit:Domestic
                
                $
                20,627
                
                
                $
                11,901
                
                
                $
                (459
                )
                
                $
                431
                
                
                $
                992International
                
                
                9,098
                
                
                
                6,561
                
                
                
                2,236
                
                
                
                85
                
                
                
                3Total
      OSBU
                
                
                29,725
                
                
                
                18,462
                
                
                
                1,777
                
                
                
                516
                
                
                
                995Consumer
      Solutions Business Unit:Retail
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
      direct
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Wholesale
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -CSBU
      International
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      CSBU
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total CSBU
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      operating segments
                
                
                29,725
                
                
                
                18,462
                
                
                
                1,777
                
                
                
                516
                
                
                
                995Corporate
      and eliminations
                
                
                920
                
                
                
                473
                
                
                
                (1,021
                )
                
                
                478
                
                
                
                -Consolidated
                
                $
                30,645
                
                
                $
                18,935
                
                
                $
                756
                
                
                $
                994
                
                
                $
                995Quarter
      Ended
                  May
      31, 2008Organizational
      Solutions Business Unit:Domestic
                
                $
                25,365
                
                
                $
                15,604
                
                
                $
                843
                
                
                $
                288
                
                
                $
                899International
                
                
                11,406
                
                
                
                8,258
                
                
                
                3,506
                
                
                
                157
                
                
                
                3Total
      OSBU
                
                
                36,771
                
                
                
                23,862
                
                
                
                4,349
                
                
                
                445
                
                
                
                902Consumer
      Solutions Business Unit:Retail
                
                
                7,896
                
                
                
                4,626
                
                
                
                (1,737
                )
                
                
                218
                
                
                
                -Consumer
      direct
                
                
                6,949
                
                
                
                4,127
                
                
                
                2,107
                
                
                
                85
                
                
                
                -Wholesale
                
                
                5,046
                
                
                
                2,698
                
                
                
                2,569
                
                
                
                -
                
                
                
                -CSBU
      International
                
                
                1,119
                
                
                
                471
                
                
                
                (62
                )
                
                
                6
                
                
                
                -Other
      CSBU
                
                
                737
                
                
                
                (45
                )
                
                
                (5,185
                )
                
                
                97
                
                
                
                -Total
      CSBU
                
                
                21,747
                
                
                
                11,877
                
                
                
                (2,308
                )
                
                
                406
                
                
                
                -Total
      operating segments
                
                
                58,518
                
                
                
                35,739
                
                
                
                2,041
                
                
                
                851
                
                
                
                902Corporate
      and eliminations
                
                
                543
                
                
                
                229
                
                
                
                (283
                )
                
                
                828
                
                
                
                -Consolidated
                
                $
                59,061
                
                
                $
                35,968
                
                
                $
                1,758
                
                
                $
                1,679
                
                
                $
                902Three
      Quarters Ended
                  May
      30, 2009
                
                Sales
      to External Customers
                
                
                Gross
      Profit
                
                
                EBITDA
                
                
                Depreciation
                
                
                AmortizationOrganizational
      Solutions Business Unit:Domestic
                
                $
                59,726
                
                
                $
                34,675
                
                
                $
                (5,215
                )
                
                $
                1,022
                
                
                $
                2,791International
                
                
                33,158
                
                
                
                23,265
                
                
                
                8,895
                
                
                
                283
                
                
                
                8Total
      OSBU
                
                
                92,884
                
                
                
                57,940
                
                
                
                3,680
                
                
                
                1,305
                
                
                
                2,799Consumer
      Solutions Business Unit:Retail
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
      direct
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Wholesale
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -CSBU
      International
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      CSBU
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total CSBU
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      operating segments
                
                
                92,884
                
                
                
                57,940
                
                
                
                3,680
                
                
                
                1,305
                
                
                
                2,799Corporate
      and eliminations
                
                
                2,745
                
                
                
                1,375
                
                
                
                (3,408
                )
                
                
                1,499
                
                
                
                -Consolidated
                
                $
                95,629
                
                
                $
                59,315
                
                
                $
                272
                
                
                $
                2,804
                
                
                $
                2,799


14





Three
      Quarters Ended
                  May
      31, 2008Organizational
      Solutions Business Unit:Domestic
                
                $
                72,759
                
                
                $
                45,802
                
                
                $
                2,568
                
                
                $
                1,090
                
                
                $
                2,697International
                
                
                38,370
                
                
                
                27,481
                
                
                
                11,993
                
                
                
                474
                
                
                
                5Total
      OSBU
                
                
                111,129
                
                
                
                73,283
                
                
                
                14,561
                
                
                
                1,564
                
                
                
                2,702Consumer
      Solutions Business Unit:Retail
                
                
                38,659
                
                
                
                23,416
                
                
                
                2,930
                
                
                
                697
                
                
                
                -Consumer
      direct
                
                
                35,335
                
                
                
                20,836
                
                
                
                13,588
                
                
                
                233
                
                
                
                -Wholesale
                
                
                12,227
                
                
                
                6,707
                
                
                
                6,282
                
                
                
                -
                
                
                
                -CSBU
      International
                
                
                6,692
                
                
                
                3,543
                
                
                
                1,223
                
                
                
                39
                
                
                
                -Other
      CSBU
                
                
                2,008
                
                
                
                281
                
                
                
                (17,283
                )
                
                
                390
                
                
                
                -Total CSBU
                
                
                94,921
                
                
                
                54,783
                
                
                
                6,740
                
                
                
                1,359
                
                
                
                -Total
      operating segments
                
                
                206,050
                
                
                
                128,066
                
                
                
                21,301
                
                
                
                2,923
                
                
                
                2,702Corporate
      and eliminations
                
                
                1,713
                
                
                
                696
                
                
                
                (3,173
                )
                
                
                1,667
                
                
                
                -Consolidated
                
                $
                207,763
                
                
                $
                128,762
                
                
                $
                18,128
                
                
                $
                4,590
                
                
                $
                2,702


A
reconciliation of operating segment EBITDA to consolidated income before taxes
is provided below (in thousands):





Quarter
      Ended
                  
                  
                  Three
      Quarters EndedMay
      30,
                    2009
                  
                  
                  May
      31,
                    2008
                  
                  
                  May
      30,
                    2009
                  
                  
                  May
      31,
                    2008Reportable
      segment EBITDA
                  
                  $
                  1,777
                  
                  
                  $
                  2,041
                  
                  
                  $
                  3,680
                  
                  
                  $
                  21,301Corporate
      expenses
                  
                  
                  (1,021
                  )
                  
                  
                  (283
                  )
                  
                  
                  (3,408
                  )
                  
                  
                  (3,173
                  )Consolidated
      EBITDA
                  
                  
                  756
                  
                  
                  
                  1,758
                  
                  
                  
                  272
                  
                  
                  
                  18,128Depreciation
                  
                  
                  (994
                  )
                  
                  
                  (1,679
                  )
                  
                  
                  (2,804
                  )
                  
                  
                  (4,590
                  )Amortization
                  
                  
                  (995
                  )
                  
                  
                  (902
                  )
                  
                  
                  (2,799
                  )
                  
                  
                  (2,702
                  )Income
      (loss) from operations
                  
                  
                  (1,233
                  )
                  
                  
                  (823
                  )
                  
                  
                  (5,331
                  )
                  
                  
                  10,836Loss
      from an equity method investee
                  
                  
                  (224
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Interest
      income
                  
                  
                  20
                  
                  
                  
                  55
                  
                  
                  
                  94
                  
                  
                  
                  78Interest
      expense
                  
                  
                  (741
                  )
                  
                  
                  (725
                  )
                  
                  
                  (2,333
                  )
                  
                  
                  (2,396
                  )Income
      (loss) before income taxes
                  
                  $
                  (2,178
                  )
                  
                  $
                  (1,493
                  )
                  
                  $
                  (7,570
                  )
                  
                  $
                  8,518








NOTE
12 – SUBSEQUENT EVENT





Modification
of Line of Credit Agreement





Subsequent
to the quarter ended May 30, 2009, we entered into a second modification
agreement with the lender on our line of credit facility (the Second
Modification Agreement).  Under terms of the Second Modification
Agreement, our borrowing capacity will be reduced as follows (dollars in
thousands):





Effective
      Date
                
                Borrowing
      CapacityJune
      30, 2009
                
                $
                20,000August
      31, 2009
                
                
                18,000November
      30, 2009
                
                
                13,500





In
addition, any payments made to us by Franklin Covey Products from the working
capital settlement and reimbursable costs associated with the sale transaction
note receivable are required to be paid on the line of credit and will reduce
the available borrowing capacity by the amount of the payments.  The
Second Modification Agreement also increases the effective interest rate on our
line of credit from LIBOR plus 1.50 percent to LIBOR plus 2.0 percent, effective
on the date of the agreement.





In
addition to customary non-financial terms and conditions, our line of credit
requires us to be in compliance with specified financial covenants, including:
(i) a funded debt to earnings ratio; (ii) a fixed charge coverage ratio; (iii) a
limitation on annual capital expenditures; and (iv) a defined amount of minimum
net worth.  In the event of noncompliance with these financial
covenants and other defined events of default, the lenders are entitled to
certain remedies, including acceleration of the repayment of amounts outstanding
on the line of credit.  The Second Modification Agreement also
modified the funded debt to earnings ratio and fixed charged coverage ratio over
the quarterly periods ended August 2009 and November 2009.


15


ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS








Management’s
discussion and analysis contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995.  These
statements are based upon management’s current expectations and are subject to
various uncertainties and changes in circumstances.  Important factors
that could cause actual results to differ materially from those described in
forward-looking statements are set forth below under the heading “Safe Harbor
Statement Under the Private Securities Litigation Reform Act of
1995.”





The
Company suggests that the following discussion and analysis be read in
conjunction with the Consolidated Financial Statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the year ended August 31,
2008.








RESULTS
OF OPERATIONS





Overview





Our
financial results for the quarter and three quarters ended May 30, 2009 are
difficult to compare to the corresponding periods of the prior fiscal year
primarily 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 and three quarters ended May
31, 2008.





In
general, our financial results for the quarter ended May 30, 2009 were adversely
affected by poor economic conditions in both the United States and in our
worldwide operations.  In light of the current economic conditions, we
have taken steps to control our costs and improve our cash flows from operating
activities, which we believe produced favorable results during the quarter and
we expect will produce improved operations in future periods.  For the
quarter ended May 30, 2009, we recognized a loss from operations of $1.2 million
compared to a $0.8 million loss from operations in the third quarter of fiscal
2008.  Our pre-tax loss totaled $2.2 million compared to a $1.5
million pre-tax loss for the same quarter of fiscal 2008.  Due to the
impact of a $2.9 million provision for income taxes, we recognized a net loss of
$5.1 million in the third quarter of fiscal 2009 compared to a net loss of $1.5
million in the quarter ending May 31, 2008.





The
primary factors that influenced our operating results for the quarter ended May
30, 2009 were as follows:





·
            Sales–Our consolidated
      sales declined to $30.6 million compared to $59.1 million in the quarter
      ended May 31, 2008.  The vast majority of the decline was
      attributable to the sale of our CSBU operations and the corresponding
      reduction in product sales.  Of the $28.5 million decline, $21.7
      million, or 77 percent, was attributable to product sales from the
      CSBU.  Sales delivered through the Organizational Solutions
      Business Unit (OSBU), which are comparable to the prior year and consist
      primarily of training and consulting service sales, decreased $7.0 million
      due to sales declines in both our domestic and international
      operations.  Decreased sales through these channels were
      partially offset by a $0.4 million increase in lease
    revenues.


16





·
            Gross
      Profit – Our gross profit was primarily affected by the sale of
      CSBU and the corresponding decrease in consolidated product
      sales.  Our consolidated gross margin, which is gross profit in
      terms of a percentage of sales, was 61.8 percent of sales compared to 60.9
      percent in the prior year.  The fluctuation in our gross margin
      was primarily due to the overall change in the mix of items sold and a
      decreased gross margin on training and consulting sales during the
      quarter.





·
            Operating
      Costs – Our operating expenses decreased by $16.6 million compared
      to the same quarter of the prior fiscal year, which was primarily due to
      the sale of CSBU.  Decreased operating expenses consisted
      primarily of a $16.0 million decrease in selling, general, and
      administrative expenses, a $0.7 million decrease in depreciation expense,
      and a $0.1 million increase in amortization
  expense.





·
            Income
      Taxes– Although we recognized a pre-tax loss for the quarter ended
      May 30, 2009, we recorded a $2.9 million income tax
      provision.  The income tax provision was primarily the result of
      our decision to use the actual effective income tax rate applicable to our
      pre-tax loss for the three quarters ended May 30, 2009 rather than the
      application of an estimated annual effective income tax rate to our
      year-to-date pre-tax loss as was done during the first two quarters of
      fiscal 2009.  We changed our approach due to uncertainties
      regarding expected fiscal 2009 pre-tax financial results and the magnified
      effect of certain items on our effective income tax rate in periods of
      near breakeven operations.  Accordingly, we recorded an income
      tax provision to offset previously recorded income tax benefits from the
      first two quarters of fiscal 2009.  Our effective tax benefit
      rate for the three quarters ended May 30, 2009 of approximately 17 percent
      was lower than statutory combined rates primarily due to foreign
      withholding taxes for which we cannot utilize a foreign tax credit, the
      accrual of taxable interest income on the management stock loan program,
      and actual and deemed dividends from foreign subsidiaries for which we
      also cannot utilize foreign tax
credits.





Further
details regarding these factors and their impact on our operating results and
liquidity are provided throughout the following management’s discussion and
analysis.





The
following table sets forth sales data by category and for our operating segments
(in thousands):





Quarter
      Ended
                
                
                Three
      Quarters EndedMay
      30,
                  2009
                
                
                May
      31,
                  2008
                
                
                Percent
      Change
                
                
                May
      30,
                  2009
                
                
                May
      31,
                  2008
                
                
                Percent
      ChangeSales
      by Category:Training
      and consulting services
                
                $
                27,767
                
                
                $
                33,864
                
                
                
                (18
                )
                
                $
                83,814
                
                
                $
                101,891
                
                
                
                (18
                )Products
                
                
                1,958
                
                
                
                24,654
                
                
                
                (92
                )
                
                
                9,070
                
                
                
                104,159
                
                
                
                (91
                )Leasing
                
                
                920
                
                
                
                543
                
                
                
                69
                
                
                
                2,745
                
                
                
                1,713
                
                
                
                60$
                30,645
                
                
                $
                59,061
                
                
                
                (48
                )
                
                $
                95,629
                
                
                $
                207,763
                
                
                
                (54
                )Organizational
      Solutions Business Unit:Domestic
                
                $
                20,627
                
                
                $
                25,365
                
                
                
                (19
                )
                
                $
                59,726
                
                
                $
                72,759
                
                
                
                (18
                )International
                
                
                9,098
                
                
                
                11,406
                
                
                
                (20
                )
                
                
                33,158
                
                
                
                38,370
                
                
                
                (14
                )29,725
                
                
                
                36,771
                
                
                
                (19
                )
                
                
                92,884
                
                
                
                111,129
                
                
                
                (16
                )Consumer
      Solutions Business Unit:Retail Stores
                
                
                -
                
                
                
                7,896
                
                
                
                (100
                )
                
                
                -
                
                
                
                38,659
                
                
                
                (100
                )Consumer Direct
                
                
                -
                
                
                
                6,949
                
                
                
                (100
                )
                
                
                -
                
                
                
                35,335
                
                
                
                (100
                )Wholesale
                
                
                -
                
                
                
                5,046
                
                
                
                (100
                )
                
                
                -
                
                
                
                12,227
                
                
                
                (100
                )CSBU
    International
                
                
                -
                
                
                
                1,119
                
                
                
                (100
                )
                
                
                -
                
                
                
                6,692
                
                
                
                (100
                )Other CSBU
                
                
                -
                
                
                
                737
                
                
                
                (100
                )
                
                
                -
                
                
                
                2,008
                
                
                
                (100
                )-
                
                
                
                21,747
                
                
                
                (100
                )
                
                
                -
                
                
                
                94,921
                
                
                
                (100
                )29,725
                
                
                
                58,518
                
                
                
                (49
                )
                
                
                92,884
                
                
                
                206,050
                
                
                
                (55
                )Leasing
                
                
                920
                
                
                
                543
                
                
                
                69
                
                
                
                2,745
                
                
                
                1,713
                
                
                
                60Total
      Sales
                
                $
                30,645
                
                
                $
                59,061
                
                
                
                (48
                )
                
                $
                95,629
                
                
                $
                207,763
                
                
                
                (54
                )





17


Quarter Ended May 30, 2009
Compared to the Quarter Ended May 31, 2008





Sales





Training and
Consulting Services–We offer a variety of training courses, training related products, and
consulting services focused on leadership, productivity, strategy execution,
sales force performance, and effective communications that are provided both
domestically and internationally through our sales force or through
international licensee operations.  Our consolidated training and
consulting service sales decreased by $6.1 million compared to the prior year,
which was attributable to unfavorable performance in both the domestic and
international divisions.  During the first quarter of fiscal 2009 we
closed our directly owned Canadian office and transferred all remaining sales
and support personnel to one of our domestic regions, depending on the location
of the sales associate.  Sales information presented for the periods
ended May 31, 2008 in the table above was adjusted to reflect the transition of
Canadian sales from the international division to the domestic
division.  The following is a description of the sales activity in our
domestic and international divisions for the quarter ended May 30,
2009:





·
            Domestic–Our domestic training, consulting, and related sales decreased by
      $4.7 million compared to the prior year.  The decrease in
      domestic sales was primarily due to: 1) reduced public seminar sales
      resulting from the decision to reduce the number of events that were
      scheduled during the quarter and from the decision to license the delivery
      rights of certain public programs resulting in only the license fee being
      recorded as revenue; 2) a decrease in the number of on-site events given
      during the quarter, with a significant portion of the decrease occurring
      in our sales performance group; and 3) a decrease in our specialized
      seminar events.  The unfavorable translation of Canadian sales
      into the United States dollar had a $0.2 million impact on
      sales.  These decreases were partially offset by a nine percent
      increase in our training manual sales to our independent facilitator
      partners (training conducted by clients using their certified trainers)
      and increased sales of our Customer Loyalty and Speed of Trust programs
      during the quarter.  During the quarter ended February 28, 2009,
      we acquired CoveyLink Worldwide LLC, which has developed training courses
      and materials based upon the book entitled The Speed of Trust by
      Stephen M.R. Covey.





We
believe that continued economic deterioration in the United States during the
quarter ended May 30, 2009 was a significant contributing factor to decreased
training and consulting sales during the quarter.  However, our
training programs and consulting services continue to be well accepted in the
marketplace.  We believe that our training and consulting offerings
enable our clients to enhance the productivity and leadership of their
employees, develop customer loyalty, and improve the effectiveness of their
sales forces; and we believe that these services are especially relevant to our
clients in the current economic environment.





·
            International–
      International sales decreased $2.3 million compared to the prior
      year.  The decrease in international sales was primarily due to:
      1) decreased sales at our directly owned offices in Japan and the United
      Kingdom; 2) decreased international product sales in Japan; and 3)
      the unfavorable impact of translation of foreign sales to the United
      States dollar.  Decreased sales in Japan and the United Kingdom
      were primarily due to the continued weak economic conditions in those
      countries.  The translation of foreign sales to United States
      dollars had a net $0.7 million unfavorable impact on our consolidated
      sales during the quarter ended May 30,
2009.





Product
Sales–Consolidated product sales, which primarily consist of planners, binders,
totes, software, and handheld electronic planning devices that were primarily
sold through our CSBU channels, declined $22.7 million compared to the prior
year primarily due to the sale of our CSBU


18


during
the fourth quarter of fiscal 2008.  Remaining product sales primarily
consist of products and related accessories sold in Japan by our directly owned
office in that country.





Leasing
Sales – Following the sale of the CSBU and its corresponding impact on
consolidated sales, we determined that it was appropriate to separately disclose
leasing sales and cost of sales on our condensed consolidated statements of
operations.  Leasing revenues are primarily derived from various
sub-lease arrangements for office space on our corporate campus located in Salt
Lake City, Utah.  The corresponding cost of sales on these leases
represents certain costs associated with the operation of the leased space and
does not include any lease expense on the underlying corporate campus since we
account for that lease as a financing arrangement.





Gross
Profit





Gross
profit consists of net sales less the cost of services provided or the cost of
products sold.  Our consolidated gross profit decreased to $18.9
million compared to $36.0 million in the corresponding quarter of the prior
year.  The decrease in gross profit was primarily attributable to
decreased product sales resulting from the sale of CSBU.  Our
consolidated gross margin, which is gross profit stated in terms of a percentage
of sales, was 61.8 percent of sales compared to 60.9 percent in fiscal
2008.  The increase in our gross margin was due to the change in our
sales mix, which is now comprised almost entirely of training and consulting
sales that typically have higher margins than the majority of our product and
leasing sales.





Our
training and consulting services gross margin was 64.2 percent compared to 66.3
percent in the prior year.  The decrease was primarily attributable to
decreased licensee royalty revenues during the quarter, which have virtually no
corresponding cost of sales, and increased royalty costs on certain
programs.





Gross
margin on product sales decreased to 31.8 percent compared to 53.9 percent in
the prior year.  The decrease was primarily due to the sale of CSBU,
which eliminated virtually all of our domestic product
sales.  Remaining product sales consist primarily of product sales
made in Japan, on which the gross margin decreased compared to the prior year
primarily due to adjustments to our inventory reserves for slower moving
products.





Operating
Expenses





Selling, General
and Administrative–Our selling, general, and administrative (SG&A) expenses decreased
$16.0 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 $14.2 million compared to fiscal 2008; 2)
reduced compensation costs totaling $1.9 million resulting from lower sales and
corresponding reductions to commissions and other variable compensation
elements; 3) a $0.9 million reduction in advertising and promotional costs
resulting from fewer public program events; and 4) the favorable impacts of our
August 2008 restructuring plan on various areas of our
operations.  These decreases were partially offset by $0.9 million of
severance costs, $0.5 million of increased warehousing costs that were
previously charged to CSBU cost centers, and $0.4 million of increased
share-based compensation costs due to reversals of share-based compensation
expense in the prior year that did not repeat in fiscal
2009.  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.  Due to the condition of the current economy, we have
initiated numerous cost savings efforts designed to reduce our overall operating
costs and improve profitability.  While we expect these efforts to
have a significant impact on our cost structure, the outcome of these efforts
may not reduce our costs as quickly or as effectively as originally
planned.


19


Depreciation–Depreciation expense
decreased $0.7 million compared to the prior year.  The decrease was
primarily due to the sale of the CSBU and an impairment charge totaling $0.3
million for payroll software that did not function as anticipated and was
written off during the quarter ended May 31, 2008.  Based upon
expected fixed asset activity in fiscal 2009, we expect depreciation expense to
total approximately $4 million for the fiscal year ended August 31,
2009.





Amortization –Amortization expense from definite-lived intangible assets increased
compared to the prior year due to the acquisition of CoveyLink, which increased
our intangible assets by $0.4 million.  Due to the acquisition of
CoveyLink, we expect that our amortization expense will increase slightly
compared to the prior year and total approximately $3.8 million for fiscal
2009.





Three Quarters Ended May 30,
2009 Compared to the Three Quarters Ended May 31, 2008





Sales





Training and
Consulting Services–Our consolidated training and consulting service sales decreased $18.1
million compared to the prior year.  Training and consulting service
sales performance during the three quarters ended May 30, 2009 was primarily
influenced by the following performance in our domestic and international
divisions:





·
            Domestic–Our domestic sales declined $13.0 million compared to the same
      period of fiscal 2008.  The decrease in domestic sales was
      primarily due to: 1) reduced public seminar sales resulting from a
      reduction in the number of events that were scheduled during the fiscal
      year; 2) a decrease in the number of on-site events during fiscal 2009
      resulting from a decrease in the number of days booked compared to the
      prior year; 3) a decrease in facilitator sales (training conducted by
      clients using their certified trainers); and 4) decreased sales force
      performance training revenues.  These decreases were partially
      offset by increased sales of our Customer Loyalty and Speed of Trust
      programs.  We believe that our domestic training and consulting
      revenues were adversely affected by the deteriorating economic conditions
      in the United States during the first three quarters of fiscal
      2009.





·
            International–
      International sales decreased $5.2 million compared to the same period of
      fiscal 2008.  The decrease in international sales was primarily
      due to: 1) decreased sales at our directly owned offices in Japan and
      Australia; 2) decreased licensee royalties; and 3) the unfavorable impact
      of translation of foreign sales to the United States dollar.  We
      believe that decreased sales at our wholly owned offices and licensees
      were primarily due to continued weak economic conditions in those
      countries.  The translation of foreign sales to United States
      dollars had a $0.4 million unfavorable impact on our consolidated sales
      during the three quarters ended May 30,
2009.





Product
Sales–Consolidated product sales, which were primarily sold through our CSBU
channels, declined $95.1 million compared to the prior year primarily due to the
sale of our CSBU during the fourth quarter of fiscal 2008.  Remaining
product sales primarily consist of products and related accessories sold in
Japan by our directly owned office in that country.





Leasing
Sales – Leasing sales increased $1.0 million primarily due to the
addition of new leasing contracts that are generated from various arrangements
to lease office space at our Salt Lake City, Utah headquarters
campus.





20


Gross
Profit





Our
consolidated gross profit decreased to $59.3 million compared to $128.8 million
for the three quarters ended May 31, 2008.  The decrease in gross
profit was primarily attributable to decreased product sales resulting from the
sale of CSBU.  Our consolidated gross margin, which is gross profit
stated in terms of a percentage of sales, was 62.0 percent of sales in both
year-to-date periods presented.





Our
training and consulting services gross margin was 64.5 percent compared to 67.8
percent in fiscal 2008.  The decrease was primarily attributable to
decreased licensee royalty revenues, which have virtually no corresponding cost
of sales, increased royalty costs on certain programs sold, and increased
amortization of capitalized curriculum development costs.





Gross
margin on product sales decreased to 42.8 percent compared to 56.6 percent in
the prior year.  The decrease was primarily due to the sale of CSBU,
which eliminated virtually all of our domestic product
sales.  Remaining product sales consist primarily of product sales
made in Japan, on which the gross margin decreased compared to the same period
of the prior year primarily due to adjustments to our inventory reserves in
Japan.





Operating
Expenses





Selling, General
and Administrative–Our SG&A expenses decreased $51.6 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 $48.0
million compared to the prior year; 2) a $3.8 million reduction in compensation
costs resulting from lower sales and corresponding reductions to commissions and
other variable compensation elements; 3) a $2.2 million decrease in advertising
costs, primarily related to a decrease in the number of public programs held; 4)
$0.3 million of reduced travel and conference costs primarily due to the
cancellation of our annual sales and delivery conference; and 5) the favorable
impacts of our August 2008 restructuring plan on various areas of our
operations.  These decreases were partially offset by $1.4 million of
increased warehousing costs that were previously charged to CSBU cost centers,
$1.0 million of severance costs resulting from headcount reductions during
fiscal 2009, and $0.6 million of increased share-based compensation costs due to
reversals of share-based compensation expense in the prior year that did not
repeat in fiscal 2009.  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.  Due to current economic conditions, we have also
initiated numerous other cost savings efforts designed to reduce our overall
operating costs and improve profitability.  While we expect these
efforts to have a significant impact on our cost structure, the outcome of these
efforts may not reduce our costs as quickly or as effectively as
planned.





Depreciation–Depreciation expense
decreased by $1.8 million compared to the prior year.  The decrease
was primarily due to the sale of the CSBU and impairment charges totaling $0.6
million for two software applications that did not function as anticipated and
were written off during the three quarters ended May 31, 2008.  We did
not have any significant property and equipment impairment charges during the
three quarters ended May 30, 2009.





Amortization –Consolidated amortization expense increased by $0.1 million compared to
the prior year due to the acquisition of CoveyLink, which was effective in
fiscal 2009.





Income
Taxes





Our
income tax benefit for the three quarters ended May 30, 2009 was $1.3 million
compared to a $5.0 million provision for the three quarters ended May 31,
2008.  The income tax benefit was primarily due to a pre-tax loss
recognized for the first three quarters of fiscal 2009 compared to pre-tax
income for the same period of the prior year.  Our effective tax
benefit rate of


21


approximately
17 percent was lower than statutory combined rates primarily due to foreign
withholding taxes for which we cannot utilize a foreign tax credit, the accrual
of taxable interest income on the management stock loan program, and actual and
deemed dividends from foreign subsidiaries for which we also cannot utilize
foreign tax credits.








LIQUIDITY
AND CAPITAL RESOURCES





At May
30, 2009 we had $1.2 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) was a $3.3 million deficit at May 30, 2009 compared to $5.3
million at August 31, 2008.  The change in working capital was
primarily due to the utilization of 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 has reduced our available cash.  Our working capital balance at
May 30, 2009 was also affected by the improved collection of accounts receivable
during the first three quarters of fiscal 2009, which favorably impacted our
cash flows from operating activities.





Our
primary sources of liquidity are cash flows from the sale of services in the
normal course of business and proceeds from our 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 continued to
provide a total of $25.0 million of borrowing capacity until June 30, 2009, when
the borrowing capacity was scheduled to 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 (1.9 percent
at May 30, 2009).  Subsequent to the quarter ended May 30, 2009, we
entered into a second modification agreement with the lender on the line of
credit facility (the Second Modification Agreement).  Under the terms
of the Second Modification Agreement, our borrowing capacity on the line of
credit will be reduced as follows (in thousands):





Effective
      Date
                
                Borrowing
      CapacityJune
      30, 2009
                
                $
                20,000August
      31, 2009
                
                
                18,000November
      30, 2009
                
                
                13,500





In
addition, any payments made to us by Franklin Covey Products from the working
capital settlement and reimbursable costs associated with the sale transaction
note are required to be paid on the line of credit and will reduce the available
borrowing capacity by the amount of the payments.  The Second
Modification Agreement increases the effective interest rate from LIBOR plus
1.50 percent to LIBOR plus 2.0 percent, effective on the date of the
agreement.





The
Modified Credit Agreement and Second Modification Agreement expire 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 or
Second Modification Agreement.  The working capital line of credit
also contains 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 earnings ratio; (ii) a fixed charge coverage ratio; (iii) a
limitation on annual capital expenditures; and (iv) a defined amount of minimum
net worth.  In the event of noncompliance with these financial
covenants and


22


other
defined events of default, the lenders are entitled to certain remedies,
including acceleration of the repayment of amounts outstanding on the line of
credit.  The Second Modification Agreement also modified the funded
debt to earnings ratio and fixed charged coverage ratio over the quarterly
periods ended August 2009 and November 2009.  During the quarter ended
May 30, 2009, we believe that we were in compliance with the terms and financial
covenants of our credit facility.  At May 30, 2009, we had $16.1
million outstanding on the line of credit.





In
addition to our revolving line of credit, we have a long-term variable rate
mortgage on our Canadian building, which was classified as held for sale at May
30, 2009, and a long-term lease on our corporate campus that is accounted for as
a long-term financing obligation.





The
following discussion is a description of the primary factors affecting our cash
flows and their effects upon our liquidity and capital resources during the
three quarters ended May 30, 2009.





Cash
Flows From Operating Activities





Our cash
provided by operating activities totaled $2.8 million for the three quarters
ended May 30, 2009 compared to $11.9 million during the same period of the prior
year.  The decrease was primarily due to the sale of CSBU and the
corresponding decrease in product sales.  Our primary source of cash
from operating activities was the sale of goods and services to our customers in
the normal course of business.  The primary uses of cash for operating
activities were 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.  Cash provided by
or used for changes in working capital during the three quarters ended May 30,
2009 was primarily related to decreased accounts receivable resulting from
improved collections of outstanding receivable balances, and payments made to
reduce accounts payable and accrued liabilities from seasonally high balances at
August 31.  We believe that our continued efforts to optimize working
capital balances, combined with existing and planned sales growth programs and
cost-reduction initiatives, will improve our cash flows from operating
activities in future periods.  However, the success of these efforts,
and their eventual contribution to our cash flows, is dependent upon numerous
factors, many of which are not within our control.





Cash Flows
From Investing Activities and Capital Expenditures





During
the three quarters ended May 30, 2009 we used $4.6 million of net cash for
investing activities.  Our primary uses of cash for investing
activities were the purchase of property and equipment, additional spending on
curriculum development, and the purchase of CoveyLink Worldwide, LLC
(CoveyLink).  Our purchases of property and equipment, which totaled
$2.1 million, consisted primarily of computer software, computer hardware, and
leasehold improvements.  During the first three quarters of fiscal
2009, we spent $1.5 million for further investment in the development of various
programs and curriculum.  During the second quarter of fiscal 2009, we
acquired the assets of CoveyLink, which conducts seminars and provides
consulting based upon the book, The Speed of Trust by Stephen
M.R. Covey.  Net cash used to acquire CoveyLink, including legal and
other professional fees, totaled $1.2 million.  Partially offsetting
these uses of cash was the receipt of $0.1 million on notes receivable from the
sales of our subsidiary in Brazil, which was completed at August 31, 2007
through the use of notes receivable financing.





Cash
Flows From Financing Activities





Net cash
used for financing activities during the three quarters ended May 30, 2009
totaled $12.5 million, which consisted primarily of the payment of our $28.3
million tender offer obligation (described above) and $0.5 million of debt
principal payments that were partially offset by $16.1 million of net proceeds
from our line of credit facility.  We also received $0.2 million of
net proceeds from the sale of common shares held in treasury to participants in
our employee stock purchase plan.


23


Sources
of Liquidity





Going
forward, we will continue to incur costs necessary for the operation and
potential growth of the business.  We anticipate using cash on hand,
cash provided by the sale of services and products to our clients on the
condition that we can continue to generate positive cash flows from operating
activities, and other financing alternatives, if necessary, for these
expenditures.  We anticipate that our existing capital resources
should be adequate to enable us to maintain our operations for at least the
upcoming 12 months.  However, our ability to maintain adequate capital
for our operations in the future is dependent upon a number of factors,
including sales trends, our ability to contain costs, levels of capital
expenditures, collection of accounts receivable, and other
factors.  Some of the factors that influence our operations are not
within our control, such as economic conditions and the introduction of new
programs or 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 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





The
Company has not structured any special purpose or variable interest entities or
participated in any commodity trading activities that would expose us to
potential undisclosed liabilities or create adverse consequences to our
liquidity.  Required contractual payments primarily consist of: 1)
lease payments resulting from the sale of our corporate campus (financing
obligation); 2) payments to EDS for outsourcing services related to information
systems, warehousing, and distribution services; 3) minimum rent payments for
office and warehouse space; 4) mortgage payments on certain buildings and
property; and 5) short-term purchase obligations for inventory items and other
products and services used in the ordinary course of business.  Except
for the payment of our tender offer obligation, which occurred in the quarter
ended November 29, 2008, there have been no significant changes to our expected
required contractual obligations from those disclosed at August 31,
2008.





Our
contractual obligations as disclosed in our Form 10-K for the year ended August
31, 2008 exclude unrecognized tax benefits under FIN 48 of $4.2 million for
which we cannot make a reasonably reliable estimate of the period of
payment.





Other
Items





The
Company is the creditor for a loan program that provided the capital to allow
certain management personnel the opportunity to purchase shares of our common
stock.  For further information regarding our management common stock
loan program, refer to Note 11 to our consolidated financial statements on Form
10-K for the fiscal year ended August 31, 2008.  The inability of the
Company to collect all, or a portion, of these receivables could have an adverse
impact upon our financial position and future cash flows compared to full
collection of the loans.








USE
OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES





Our
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America.  The
significant accounting polices used to prepare our consolidated financial
statements are outlined in Note 1 of the consolidated financial statements
presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal
year ended August 31, 2008.  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


24


differ
from these estimates under different assumptions or conditions, including
changes in economic conditions and other circumstances that are not within our
control, but which may have an impact on these estimates and our actual
financial results.





The
following items require significant judgment and often involve complex
estimates:





Revenue
Recognition





We derive
revenues primarily from the following sources:





·
            Training and Consulting
      Services – We provide training and consulting services to both
      organizations and individuals in leadership, productivity, strategic
      execution, goal alignment, sales force performance, and communication
      effectiveness skills.  These training programs and services are
      primarily sold through our OSBU
channels.





·
            Products – We sold
      planners, binders, planner accessories, handheld electronic devices, and
      other related products that were primarily delivered through our CSBU
      channels prior to the fourth quarter of fiscal 2008.  We
      continue to sell these products in certain international
      locations.





We
recognize revenue in accordance with SAB No. 101, Revenue Recognition in Financial
Statements, as amended by SAB No. 104, Revenue
Recognition.  Accordingly, we recognize revenue when: 1)
persuasive evidence of an agreement exists, 2) delivery of product has occurred
or services have been rendered, 3) the price to the customer is fixed or
determinable, and 4) collectibility is reasonably assured.  For
training and service sales, these conditions are generally met upon presentation
of the training seminar or delivery of the consulting services.  For
product sales, these conditions are generally met upon shipment of the product
to the customer or by completion of the sales transaction in a retail
store.





Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services.  For
transactions that contain more than one element, we recognize revenue in
accordance with EITF Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables.When fair value exists for all
contracted elements, the overall contract consideration is allocated among the
separate units of accounting based upon their relative fair
values.  Revenue for these units is recognized in accordance with our
general revenue policies once it has been determined that the delivered items
have standalone value to the customer.  If fair value does not exist
for all contracted elements, revenue for the delivered items is recognized using
the residual method, which generally means that revenue recognition is postponed
until the point is reached when the delivered items have standalone value and
fair value exists for the undelivered items.  Under the residual
method, the amount of revenue considered for recognition under our general
revenue policies is the total contract amount, less the aggregate fair value of
the undelivered items.  Fair value of the undelivered items is based
upon the normal pricing practices for our existing training programs, consulting
services, and other products, which are generally the prices of the items when
sold separately.





Our
international strategy includes the use of licensees in countries where we do
not have a wholly-owned operation.  Licensee companies are unrelated
entities that have been granted a license to translate our content and
curriculum, adapt the content and curriculum to the local culture, and sell our
training seminars and products in a specific country or region.  Each
licensee is required to pay us royalties based upon a percentage of the
licensee’s sales.  We recognize royalty income each period based upon
the sales information reported to the Company from the
licensee.  Royalty revenue is reported as a component of training and
consulting service sales in our consolidated statements of
operations.





Revenue
is recognized on software sales in accordance with SOP 97-2, Software Revenue Recognition
as amended by SOP 98-09.  Statement 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 on
the relative fair value of the elements based on vendor specific objective
evidence (VSOE).  The majority of our software sales have
multiple


25


elements,
including a license and post contract customer support
(PCS).  Currently we do not have VSOE for either the license or
support elements of our software sales.  Accordingly, revenue is
deferred until the only undelivered element is PCS and the total arrangement fee
is recognized over the support period.





Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.





Share-Based
Compensation





We have a
performance based long-term incentive plan (the LTIP) that provides for annual
grants of share-based performance awards to certain managerial personnel and
executive management as directed by the Compensation Committee of the Board of
Directors (the Compensation Committee).  The LTIP performance awards
cliff vest at the completion of a three-year performance period that begins on
September 1 in the fiscal year of the grant.  The number of common
shares that are finally awarded to LTIP participants is variable and is based
entirely upon the achievement of specified financial performance objectives
during the three-year performance period.  Due to the variable number
of common shares that may be issued under the LTIP, we reevaluate our LTIP
grants on a quarterly basis and adjust the number of shares expected to be
awarded based upon actual and estimated financial results of the Company
compared to the performance goals set for the award.  Adjustments to
the number of shares awarded, and to the corresponding compensation expense, are
made on a cumulative basis at the adjustment date based upon the estimated
probable number of common shares to be awarded.





The
analysis of our LTIP plans contains uncertainties because we are required to
make assumptions and judgments about the eventual 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 LTIP service periods.  The evaluation of LTIP performance
awards and the corresponding use of estimated amounts produced additional
volatility in our consolidated financial statements as we recorded cumulative
adjustments to the estimated number of common shares to be awarded under the
LTIP grants as described above.





During
the quarter ended November 29, 2008, the Compensation Committee approved LTIP
awards for 205,700 shares of common stock (the target award) to be awarded if we
achieve the specified financial results of grant, which are primarily based on
cumulative operating income growth over the performance period ending August 31,
2011.  However, due to ongoing organizational changes following the
sale of the CSBU, the Company’s structure evolved to the extent that the fiscal
2009 LTIP award criteria were no longer consistent with our organization and
performance goals and in some cases the approved measurement criteria were no
longer measurable.  As a result of these changes, combined with
financial performance during the first two quarters of the measurement period,
the Company determined that no shares would be awarded to participants under the
terms of the fiscal 2009 LTIP award.  Accordingly, no compensation
expense was recognized for the fiscal 2009 LTIP award during the three quarters
ended May 30, 2009.





During
the quarter ended May 30, 2009, the Compensation Committee formally terminated
the fiscal 2009 and fiscal 2007 LTIP awards because no shares were expected to
be awarded to participants under the terms of these awards.  The
Company does not currently anticipate another LTIP award to be granted during
fiscal 2009.





We
estimate the value of our stock option awards on the date of grant using the
Black-Scholes option pricing model.  However, we did not grant any
stock options during the three quarters ended May 30, 2009 or during the fiscal
year ended August 31, 2008, and we did not have any remaining unrecognized
compensation expense attributable to unvested stock options at May 30,
2009.





26


Accounts
Receivable Valuation





Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.  The allowance for doubtful accounts represents our best
estimate of the amount of probable credit losses in the existing accounts
receivable balance.  We determine the allowance for doubtful accounts
based upon historical write-off experience and current economic conditions and
we review the adequacy of our allowance for doubtful accounts on a regular
basis.  Receivable balances over 90 days past due, which exceed a
specified dollar amount, are reviewed individually for
collectibility.  Account balances are charged off against the
allowance after all means of collection have been exhausted and the probability
for recovery is considered remote.  We do not have any off-balance
sheet credit exposure related to our customers.





Our
allowance for doubtful accounts calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding the
collectibility of customer accounts, which may be influenced by a number of
factors that are not within our control, such as the financial health of each
customer.  We regularly review the collectibility assumptions of our
allowance for doubtful accounts calculation and compare them against historical
collections.  Adjustments to the assumptions may either increase or
decrease our total allowance for doubtful accounts.  For example, a 10
percent increase to our allowance for doubtful accounts at May 30, 2009 would
increase our reported loss from operations by approximately $0.1
million.





Inventory
Valuation





Following
the sale of CSBU, our inventories are comprised primarily of training materials
and related accessories.  Inventories are stated at the lower of cost
or market with cost determined using the first-in, first-out
method.  Inventories are reduced to their fair market value through
the use of inventory loss reserves, which are recorded during the normal course
of business.





Our
inventory loss reserve calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding a number of
factors, including future inventory demand requirements and pricing
strategies.  During the evaluation process we consider historical
sales patterns and current sales trends, but these may not be indicative of
future inventory losses.  While we have not made material changes to
our inventory reserves methodology during the past three years, our inventory
requirements may change based on projected customer demand, technological and
product life cycle changes, longer or shorter than expected usage periods, and
other factors that could affect the valuation of our inventories.  If
our estimates regarding consumer demand and other factors are inaccurate, we may
be exposed to losses that may have a materially adverse impact upon our
financial position and results of operations.  For example, a 10
percent increase to our inventory reserves at May 30, 2009 would increase our
reported loss from operations by $0.1 million.





Goodwill
and Indefinite-Lived Intangible Assets





Goodwill
and 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.  Our goodwill was generated by the acquisition of CoveyLink
during fiscal 2009.  The Covey trade name intangible asset has been
deemed to have an indefinite life.  This intangible asset is assigned
to our domestic division 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 the carrying value of the Covey trade name exceeds the
fair value of its discounted estimated royalties on trade name related revenues,
an impairment loss is recognized for the difference.





Our
impairment evaluation calculations for goodwill and the Covey trade name contain
uncertainties because it requires us to make assumptions and apply judgment in
order to estimate future cash flows, to estimate an appropriate royalty rate,
and to select a discount rate that reflects


27


the
inherent risk of future cash flows.  Our valuation methodology for the
Covey trade name has remained materially unchanged during the past three
years.  However, if forecasts and assumptions used to support the
carrying value of our indefinite-lived intangible asset change in future
periods, significant impairment charges could result that would have an adverse
effect upon our results of operations and financial condition.  The
valuation methodology is also dependent upon on our share price and
corresponding market capitalization, which may differ from estimated royalties
used in our annual impairment testing.  Based upon the fiscal 2008
evaluation of the Covey trade name, our trade-name related revenues and licensee
royalties would have to suffer significant reductions before we would be
required to impair the Covey trade name.  However, further declines in
our share price may also trigger additional impairment testing and may result in
future impairment charges.





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.  Although we have not
made any material changes to our long-lived assets impairment assessment
methodology during the past three years, if forecasts and assumptions used to
support the carrying value of our long-lived tangible and definite-lived
intangible assets change in the future, significant impairment charges could
result that would adversely affect our results of operations and financial
condition.





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 FIN 48, 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.  Under the
provisions of FIN 48, 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 FIN 48 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.


28


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.








ACCOUNTING
PRONOUNCEMENTS ISSUED NOT YET ADOPTED





Business
Combinations – In December 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141R) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements.  These standards aim to
improve, simplify, and converge internationally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements.  The provisions of SFAS No. 141R and SFAS No.
160 are effective for our fiscal year beginning September 1, 2009.  We
do not currently anticipate that these statements will have a material impact
upon our financial condition or results of operations.





Useful Life of
Intangible Assets –In April 2008, the FASB issued FASB Staff Position
FAS 142-3, Determination of
Useful Life of Intangible Assets (FSP 142-3).  This
pronouncement amends the factors that should be considered in developing the
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets.  Staff Position 142-3 requires expanded disclosure
regarding the determination of intangible asset useful lives and is effective
for fiscal years beginning after December 15, 2008.  Earlier adoption
is not permitted.  We are currently evaluating the potential impact
that the adoption of FSP 142-3 will have on our consolidated financial
statements.








SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995





Certain
written and oral statements made by the Company in this report are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934 as amended (the Exchange Act).  Forward-looking statements
include, without limitation, any statement that may predict, forecast, indicate,
or imply future results, performance, or achievements, and may contain words
such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or
phrases of similar meaning.  In our reports and filings we may make
forward looking statements regarding future training and consulting sales
activity, our collection of outstanding accounts, the sale of certain property,
the granting of equity awards, expected acceptance of our offerings in the
marketplace, anticipated expenses, projected cost reduction and strategic
initiatives, our expectations about the effect of the sale of the CSBU on our
business, our expectations about our restructuring plan and its effect on future
expenses, expected levels of depreciation and amortization expenses,
expectations regarding tangible and intangible asset valuation expenses, the
seasonality of future sales, the seasonal fluctuations in cash used for and
provided by operating activities, expected improvements in cash flows from
operating activities, the adequacy of our existing capital resources, future
compliance with the terms and conditions of our line of credit, the ability to
borrow on our line of credit, expected repayment of our line of credit in future
periods, estimated capital expenditures, the adequacy of our existing capital
resources, 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


29


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 the report
on Form 10-K for the fiscal year ended August 31, 2008, 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; cost and
availability of financing sources; difficulties encountered by EDS in operating
and maintaining our information systems and controls, including without
limitation, the systems related to demand and supply planning, inventory
control, and order fulfillment; delays or unanticipated outcomes relating to our
strategic plans; dependence on existing products or services; the rate and
consumer acceptance of new product introductions; competition; the number and
nature of customers and their product orders, including changes in the timing or
mix of product or training orders; pricing of our products and services and
those of competitors; adverse publicity; further deterioration of domestic or
international economic conditions; 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 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 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Market
Risk of Financial Instruments





The
Company is 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 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.





30


Foreign
Currency 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 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.  The
following is a description of our use of foreign currency derivative
instruments.





During
the three quarters ended May 30, 2009 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 our
consolidated statements of operations and had the following net impact on the
periods indicated (in thousands):





Quarter
      Ended
                  
                  
                  Three
      Quarters EndedMay
      30,
                    2009
                  
                  
                  May
      31,
                    2008
                  
                  
                  May
      30,
                    2009
                  
                  
                  May
      31,
                    2008Losses
      on foreign exchange contracts
                  
                  $
                  -
                  
                  
                  $
                  (90
                  )
                  
                  $
                  (321
                  )
                  
                  $
                  (417
                  )Gains
      on foreign exchange contracts
                  
                  
                  -
                  
                  
                  
                  11
                  
                  
                  
                  105
                  
                  
                  
                  11Net
      loss on foreign exchange contracts
                  
                  $
                  -
                  
                  
                  $
                  (79
                  )
                  
                  $
                  (216
                  )
                  
                  $
                  (406
                  )





During
the quarter ended May 30, 2009, we did not enter into any foreign currency
forward contracts and during the quarter and three quarters ended May 30, 2009
we did not utilize any derivative contracts that qualified for hedge
accounting.  However, the Company may utilize net investment hedge
contracts or other foreign currency derivatives in future periods as a component
of our overall foreign currency risk strategy.





Interest
Rate Sensitivity





The
Company is exposed to fluctuations in U.S. interest rates primarily as a result
of our line of credit borrowings.  At May 30, 2009, our debt balances
consisted primarily of a fixed-rate financing obligation associated with the
sale of our corporate headquarters facility, a variable-rate line of credit
arrangement, and a variable rate long-term mortgage on certain of our buildings
and property.  Our overall interest rate sensitivity will be
influenced primarily by the amounts borrowed on the line of credit and the
prevailing interest rates, which may create additional expense if interest rates
increase in future periods.  Accordingly, at May 30, 2009 borrowing
levels, a 1 percent increase on our variable rate debt would increase our
interest expense over the next year by approximately $0.2 million.





During
the quarter and three quarters ended May 30, 2009 we were not party to any
interest rate swap or other interest related derivative instruments that would
increase our interest rate sensitivity.





31


ITEM
4.  CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company’s Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms and that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and the Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure.  In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.





We
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act, as of the end of the period covered by this
report.  Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that, due to the material weaknesses in our
internal controls over financial reporting identified in our Form 10-Q for the
quarter ended November 29, 2008 at our Japan subsidiary, our disclosure controls
and procedures were not effective as of the end of the period covered by this
Quarterly Report on Form 10-Q.  We determined that material weaknesses
existed in our Japan subsidiary that relate to: 1) the lack of controls to
ensure the approval and appropriate accounting treatment of non-standard
shipping terms on product sales and 2) the calculation of inventory reserves
which was not designed in a manner to evaluate obsolescence at the individual
product level.  As a result of these material weaknesses, errors
occurred in our financial reporting (see Note 2 to the condensed consolidated
financial statements).





As of May
30, 2009 we have designed and implemented controls to require the approval of
non-standard shipping terms on product sales and to require the approval of the
inventory reserve calculation in Japan.  We are currently in the
process of testing the remediation of the material weaknesses identified in
Japan and believe that our new processes and procedures will prove to be
effective controls to prevent future material weaknesses in these areas of our
operations.





In light
of the material weakness described in our quarterly report on Form 10-Q for the
quarter ended November 29, 2008, we performed additional procedures to ensure
that our condensed consolidated financial statements were prepared in accordance
with generally accepted accounting principles.  Accordingly,
management believes that the condensed consolidated financial statements
included in this report fairly presents, in all material respects, our financial
position, results of operations, and cash flows for the periods
presented.





Other
than described above, there were no changes in our internal control over
financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) during the most
recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.


32


PART
II.  OTHER INFORMATION





Item
1A.         RISK FACTORS





Our
results of operations and cash flows may be adversely affected if Franklin Covey
Products is unable to pay the working capital settlement and reimbursable
acquisition costs.





During
the fourth quarter of fiscal 2008, we joined with Peterson Partners to create a
new company, Franklin Covey Products.  This new company purchased
substantially all of the assets of our consumer solutions business
unit.  Under the terms of the sale agreements associated with the sale
of the CSBU assets, we are entitled to receive reimbursement for certain
operating costs, such as warehousing and distribution costs, which are billed to
the Company by third-party providers.  At May 30, 2009 we had a
$6.2 million receivable from Franklin Covey Products, which is disclosed on our
consolidated balance sheets as receivable from an equity method investee and
consisted of $3.6 million resulting from the working capital settlement and
reimbursable costs associated with the sale transaction and $2.6 million of
reimbursable operating costs.  We also have a $0.9 million liability
to Franklin Covey Products at May 30, 2009 for purchases of inventory items in
the ordinary course of business that is included as a component of our accounts
payable in the accompanying condensed consolidated balance sheet.  The
working capital settlement payment was originally due in January
2009.  However, we extended the due date of the working capital
settlement, which will continue to accrue interest until the amount is
repaid.  Although at May 30, 2009 we believe that we will collect the
amounts owed by Franklin Covey Products, the failure to collect the amounts owed
to us from Franklin Covey Products would have a significant adverse effect upon
our results of operations and cash flows.





For
further information regarding our Risk Factors, please refer to Item 1A of Part
II in our Quarterly Report on Form 10-Q for the quarter ended February 28, 2009
and Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year
ended August 31, 2008.





Item
2.            
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





The
Company acquired the following shares of its outstanding securities during the
fiscal quarter ended May 30, 2009:





Period
                    
                    Total
      Number of Shares Purchased
                    
                    
                    Average
      Price Paid Per Share
                    
                    Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
                    
                    Approximate
      Dollar Value of Shares That May Yet Be Purchased Under the Plans or
      Programs
                      (in
      thousands)Common
      Shares:March
      1, 2009 to April 4, 2009
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    none
                    
                    $
                    2,413April
      5, 2009 to May 2, 2009
                    
                    
                    -
                    
                    
                    
                    -
                    
                    none
                    
                    
                    2,413May
      3, 2009 to May 30, 2009
                    
                    
                    -
                    
                    
                    
                    -
                    
                    none
                    
                    
                    2,413
                    (1)Total
      Common Shares
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    none





(1)
            In
      January 2006, our Board of Directors approved the purchase of up to $10.0
      million of our outstanding common stock.  All previous
      authorized common stock


33


purchase
plans were canceled.  Pursuant to the terms of this stock purchase
plan, we have acquired 1,009,300 shares of our common stock for $7.6 million
through May 30, 2009.








Item
6.    EXHIBITS





(A)
                            Exhibits:31.1
                            Rule
      13a-14(a) Certifications of the Chief Executive Officer31.2
                            Rule
      13a-14(a) Certifications of the Chief Financial Officer32
                            Section
      1350 Certifications














34





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





FRANKLIN
      COVEY CO.Date:
                      July
      9, 2009
                      
                      By:
                      /s/
      Robert A. WhitmanRobert
      A. WhitmanChief
      Executive OfficerDate:
                      July
      9, 2009
                      
                      By:
                      /s/
      Stephen D. YoungStephen
      D. YoungChief
      Financial Officer