Franklin Covey Co (FC) SEC Annual Report (10-K) for 2016

The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make nor endorse any predictions as to our future stock performance.

The performance graph above is being furnished solely to accompany this report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below should be read in conjunction with our consolidated financial statements and related footnotes as found in Item 8 of this report on Form 10-K.

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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management's discussion and analysis is intended to provide a summary of the principal factors affecting the results of operations, liquidity and capital resources, contractual obligations, and the critical accounting policies of Franklin Covey Co. (also referred to as we, us, our, the Company, and FranklinCovey) and subsidiaries.  This discussion and analysis should be read together with the accompanying consolidated financial statements and related notes contained in Item 8 of this Annual Report on Form 10-K (Form 10-K) and the Risk Factors discussed in Item 1A of this Form 10-K.  Forward-looking statements in this discussion are qualified by the cautionary statement under the heading "Safe Harbor Statement Under The Private Securities Litigation Reform Act Of 1995" contained later in Item 7 of this Form 10-K.

EXECUTIVE SUMMARY

General Overview

Franklin Covey Co. is a global company focused on individual and organizational performance improvement.  Our mission is to "enable greatness in people and organizations everywhere," and our 870 employees worldwide are organized to help individuals and organizations achieve sustained superior performance through changes in human behavior.  Our expertise extends to seven crucial areas:  Leadership, Execution, Productivity, Trust, Sales Performance, Customer Loyalty, and Educational improvement.  We believe that our clients are able to utilize our content to create cultures whose hallmarks are high-performing, collaborative individuals, led by effective, trust-building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.

In the training and consulting marketplace, we believe there are four important characteristics that distinguish us from our competitors.

We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training content based on the best-selling books, The 7 Habits

of Highly Effective People , The Speed of Trust , and The 4 Disciplines of Execution , and proprietary content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, and Education.  Our offerings are described in further detail at www.franklincovey.com .  The information contained in, or that can be accessed through, our website does not constitute a part of this annual report, and the descriptions found therein should not be viewed as a warranty or guarantee of results.

Business Development

All Access Pass

During fiscal 2016, we introduced the All Access Pass (AAP).  The All Access Pass provides an intellectual property license to our clients that provides them with access to our world-class content, assessments, tools, and videos through a web-based portal.  We believe that the AAP enables our clients to significantly improve their organizations through utilization of well-known established offerings or the use of specific topics and instruction from a variety of offerings to solve their specific organizational challenges.

The launch of the All Access Pass was well received by our existing and potential clients during fiscal 2016.  However, based on the nature of AAP sales and applicable accounting guidance for multiple element arrangements, we defer a portion of AAP sales and recognize the deferred portion over the life of the contract.  For instance, during fiscal 2016 we invoiced $23.2 million of AAP contracts and related services and recognized $15.9 million of this amount as sales.  Of the $8.1 million increase in deferred revenue at August 31, 2016, $7.3 million was attributable to AAP contracts invoiced during fiscal 2016.  Future periods will benefit from the recognition of these deferred revenues.

As our experience with the All Access Pass has continued to evolve, and the necessity of providing regular content updates to our clients has become more evident, subsequent to August 31, 2016, for new contracts we have determined to provide our clients with access to updated content, which requires us to account for future sales of AAP contracts as subscriptions.  Accordingly, substantially all AAP contract amounts will be deferred and recognized as revenue over the contracted period.  We anticipate that this change in revenue recognition will have a profound impact on reported revenues and operating results as AAP sales grow and the transition of other sale types, such as facilitator sales, to AAP or other intellectual property sales continues in future periods.  Accordingly, we believe that reported revenues and operating results will be significantly less during fiscal 2017 when compared with fiscal 2016 financial measures.  However, since AAP contracts are invoiced at the inception of the contract, we do not believe that our cash flows from operating activities will be adversely impacted by the increased deferral of AAP revenues.

New China Direct Offices

On September 1, 2016, we opened three new sales offices in China.  Prior to fiscal 2017, our offerings were sold in China through an independent licensee.  We were able to hire many of the previous licensee's sales and administrative personnel in the transition from a licensee to a directly owned operation.  Accordingly, we anticipate that direct office and overall consolidated sales will be favorably impacted by these new offices since we will recognize total sales in China rather than a smaller percentage of sales, which were previously recorded as royalty revenue through our international licensee division.  We currently believe that there are potential opportunities for growth and expansion of our offerings in China.

Financial Overview

Compared with fiscal 2015, our consolidated sales and overall financial results for the fiscal year ended August 31, 2016 were significantly impacted by the following items:

Including the factors noted above, our net sales in fiscal 2016 were $200.1 million compared with $209.9 million in fiscal 2015, and $205.2 million in fiscal 2014.  Our fiscal 2016 fourth-quarter sales remained strong and totaled $64.8 million, which excludes a significant deferral of invoiced AAP contracts.  For instance, we invoiced $73.1 million in the fourth quarter of fiscal 2016 compared with $70.7 million in the fourth quarter of fiscal 2015.  The following table sets forth consolidated sales data by category and by our primary delivery channels (in thousands):

Our gross profit for fiscal 2016 was $135.2 million, compared with $138.1 million in the prior year.  The decrease in gross profit was primarily due to sales activity as described above.  Our gross margin, which is gross profit as a percent of sales, increased to 67.6 percent compared with 65.8 percent in fiscal 2015.  The improvement was primarily due to a change in the mix of sales, which produced increased intellectual property sales, including All Access Pass sales, and decreased onsite presentations.

Our operating expenses increased $2.7 million compared with fiscal 2015 primarily due to a $4.8 million increase in selling, general, and administrative expenses, which was partially offset by a $1.3 million decrease in impaired asset charges, a $0.5 million decrease in depreciation expense, and a $0.5 million decrease in intangible asset amortization expense.  The increase in selling, general, and administrative expenses was primarily related to the addition of new sales and sales support personnel; a $1.5 million increase in the contingent consideration liability from a previous business acquisition; and $0.6 million of increased non-cash stock-based compensation expense.

Our income from operations for fiscal 2016 reflected the factors noted above and was $13.8 million, compared with $19.5 million in the prior year.  Pre-tax income was $11.9 million for fiscal 2016 compared with $17.4 million in fiscal 2015.  Our effective income tax rate was approximately 41 percent in fiscal 2016 compared with approximately 36 percent in fiscal 2015.  During fiscal 2015, we f inalized the calculations relating to the amendment of previously filed U.S. federal income tax returns to realize foreign tax credits previously treated as expired under the tax positions taken in the original returns.  The income tax benefit recognized from these foreign tax credits totaled $0.6 million in fiscal 2015 .  Our income tax provision was $4.9 million in fiscal 2016 compared with $6.3 million in the prior year.  Net income for fiscal 2016 was $7.0 million, or $.47 per diluted share, compared with $11.1 million, or $.66 per diluted share, in fiscal 2015.

Further details regarding these items can be found in the comparative analysis of fiscal 2016 with fiscal 2015 as discussed within this management's discussion and analysis.

Our liquidity position remained strong during fiscal 2016 and we had $10.5 million of cash and cash equivalents at August 31, 2016 compared with $16.2 million at August 31, 2015, with no borrowings on our revolving line of credit at the end of either fiscal 2016 or fiscal 2015.  Our net working capital (current assets minus current liabilities) was $35.7 million at August 31, 2016 compared with $55.8 million at the end of fiscal 2015.

Our primary source of cash is our ongoing business operations.  Cash flows from operating activities increased 25 percent to $32.7 million in fiscal 2016 compared with $26.2 million in fiscal 2015.  Historically, we have funded our operations, capital purchases, curriculum development, share repurchases, and business acquisitions from our operating activities and from our revolving line of credit facility.  Our positive cash flows in fiscal 2016 enabled us to repurchase over $43 million of our common stock during the year, including a tender offer that was completed in January 2016.  We anticipate that cash flows from our operating activities, proceeds from our line of credit facility, and term-loan borrowing will be sufficient to support our operations for the foreseeable future.  For further information regarding our cash flows and liquidity refer to the Liquidity and Capital Resources discussion found later in this management's discussion and analysis.

Key Growth Objectives

We believe that the combination of: (1) creating best-in-class content and solutions in each of our practice areas, and continuing to invest in the refinement and expansion of each of our content categories; and (2) significantly increasing the size and capabilities of our various sales and content-delivery channels are the foundation of our long-term strategic growth plan.  Each year we make significant investments in the development and enhancement of our existing content, and the development of new services, features, and products that help individuals and organizations achieve their own great purposes.  We expect to continue the introduction of new or refreshed content and delivery methods and consider them key to our long-term success.  At the same time, we continue to make substantial investments each year to expand the size and capabilities of our sales and delivery forces to take our solutions to market in a way which attracts and retains client organizations.

One of our key strategic objectives is to consistently deliver quality results to our clients.  This initiative is focused on ensuring that our content and offerings are best-in-class, and that they have a measurable, lasting impact on our clients' results.  We believe that measurable improvement in our clients' organizations is key to retaining current clients and to obtaining new sales opportunities.

Other key factors that influence our operating results include: the size and productivity of our sales force; the number and productivity of our international licensee operations; the number of organizations that are active customers; the number of people trained within those organizations; the continuation or renewal of existing services contracts, especially All Access Pass renewals; the availability of budgeted training spending at our clients and prospective clients, which, in certain content categories, can be significantly influenced by general economic conditions; and our ability to manage operating costs necessary to develop and provide meaningful training and related services and products to our clients.

Our fiscal year ends on August 31, and unless otherwise indicated, fiscal 2016, fiscal 2015, and fiscal 2014 refer to the twelve-month periods ended August 31, 2016, 2015, 2014, and so forth.

RESULTS OF OPERATIONS

The following table sets forth, for the fiscal years indicated, the percentage of total sales represented by the line items through income before income taxes in our consolidated income statements.  This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements, including the related notes to the consolidated financial statements.

FISCAL 2016 COMPARED WITH FISCAL 2015

Sales

We offer a variety of training courses, consulting services, and training-related products that are focused on solving organizational problems which require a change in human behavior.  Our training and consulting solutions are provided both domestically and internationally through the All Access Pass, our sales and delivery personnel, client facilitators, international licensees, and the internet on various web-based delivery platforms.  The following sales analysis for the fiscal year ended August 31, 2016 is based on activity through our operating segments as shown in the preceding comparative sales table.

Direct Offices – This channel includes our three regional sales offices that serve clients in the United States and Canada; our directly owned international offices in Japan, the United Kingdom, and Australia; and our public program operations.  As previously mentioned, we introduced the AAP in our domestic direct offices in late January 2016.  The AAP was well received by existing and new clients and we invoiced $19.4 million of new AAP contracts during fiscal 2016 through our direct

offices, including $10.7 million in the fourth quarter.  However, in accordance with applicable revenue recognition guidance, we deferred $6.2 million (net of amounts previously deferred and subsequently recognized during fiscal 2016) of revenue that will be recognized in fiscal 2017 over the lives of the respective contracts.  While sales of new AAP contracts grew significantly in the fourth quarter compared with previous quarters of fiscal 2016, our onsite presentation sales declined compared with the prior year.  Our international direct office sales declined by $1.7 million during the fiscal year, primarily due to decreased demand for certain programs in these offices and $0.2 million of unfavorable foreign exchange rates, primarily during the first half of fiscal 2016.

We continue to be encouraged by the initial acceptance and strengthening business pipeline for potential AAP sales.  While we expect increased AAP sales to improve overall revenue levels, a portion of AAP sales will continue to be deferred into future periods.  As previously mentioned, subsequent to August 31, 2016 we decided to allow clients to have access to content upgrades for new contracts, which generally requires us to account for future AAP contracts on a subscription basis.  Accordingly, all invoiced AAP contract amounts will be deferred and recognized as revenue over the contracted service period.  We anticipate that this change in revenue recognition will have a profound impact on reported revenues and operating results as AAP sales grow and the transition of other sale types, such as facilitator sales, to AAP or other intellectual property sales continues in future periods.  Accordingly, we believe that reported revenues and operating results will be significantly less during fiscal 2017 when compared with fiscal 2016 financial measures for the corresponding periods.  However, since AAP contracts are invoiced at the inception of the contract, we do not believe that our cash flows from operating activities will be adversely impacted by the deferral of AAP revenues.

In addition, we expect our newly opened offices in China to increase sales from our direct offices in future periods.  Our offerings were previously sold in China through an independent licensee.

Strategic Markets – This division includes our government services office, Sales Performance practice, Customer Loyalty practice, and the new "Global 50" group, which is specifically focused on sales to large, multi-national organizations.  The $7.3 million decrease in sales was primarily due to the renewal of a $6.6 million government contract in fiscal 2015, which did not repeat in fiscal 2016 due to administrative changes at the federal agency that resulted in the contract not being opened for renewal bids, and a $2.7 million decrease in Customer Loyalty practice sales.  Partially offsetting these decreases were $1.0 million of sales from our Global 50 group, $0.7 million of increased government services sales (excluding the impact of the government contract that was not renewed), and $0.3 million of increased revenue from the Sales Performance practice.  Our Customer Loyalty practice sales decreased primarily due to the termination of a contract with a large, multi-unit retailer.  Sales Performance practice sales increased due to new contracts obtained primarily during the first half of fiscal 2016.

Education Practice – Our Education practice division is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed The Leader In Me program designed for students primarily in K-6 elementary schools.  We continue to see increased demand for The Leader in Me program in many school districts in the United States as well as in some international locations, which contributed to a $7.2 million, or 22 percent, increase in Education practice revenues compared with the prior year.  At August 31, 2016 over 3,000 schools around the world were using The Leader in Me curriculum.  Sales of subscription services during the previous fiscal year also improved sales during fiscal 2016 as we recognized a portion of the revenue that was deferred in previous periods.  We continue to make substantial investments in new sales personnel for our Education practice and expect that our sales will continue to grow compared with prior periods in the future.

International Licensees – In countries or foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees, which may translate and adapt our offerings to local preferences and customs, if necessary.  Our international licensee royalties increased $0.5 million as certain of our licensee partners' sales increased compared

with the prior year.  Licensee sales during the fiscal year ended August 31, 2016 were reduced by $0.6 million due to foreign exchange rate fluctuations as the U.S. dollar strengthened during the year.  As previously mentioned, effective September 1, 2016, we opened three new sales offices in China and we will recognize actual sales in China rather than royalty revenue on our licensee's sales.  Accordingly, we anticipate a significant decrease in total licensee sales during fiscal 2017 when compared with the corresponding periods of fiscal 2016.  While we continue to be confident in our other international licensee partners' ability to grow during future periods, a strengthening U.S. dollar may offset all or a portion of their growth in their functional currencies.

Corporate and other – Our "corporate and other" sales are mainly comprised of leasing, books and audio product sales, and shipping and handling revenues.  During fiscal 2016, these sales decreased primarily due to a $0.4 million decrease in shipping and handling revenues and a $0.2 million decrease in book and audio revenues from royalties on publications.

Gross Profit

Gross profit consists of net sales less the cost of services provided or the cost of goods sold.  Our cost of sales includes the direct costs of delivering content onsite at client locations, including presenter costs, materials used in the production of training products and related assessments, assembly, manufacturing labor costs, and freight.  Gross profit may be affected by, among other things, the mix of practice solutions sold to clients, prices of materials, labor rates, changes in product discount levels, and freight costs.

Our gross profit for the fiscal year ended August 31, 2016 was $135.2 million compared with $138.1 million in fiscal 2015.  The decrease in gross profit was primarily due to sales activity during fiscal 2016 as previously described.  Our gross margin for fiscal 2016 increased to 67.6 percent of sales compared with 65.8 percent in fiscal 2015.  The improvement in gross margin was primarily due to a change in the mix of sales, which produced increased intellectual property sales, including All Access Pass sales, decreased onsite presentations, increased international licensee royalty revenues, and decreased costs associated with our online offerings as we restructured our online program operations during the first quarter of fiscal 2016.

Operating Expenses

Our operating expenses consisted of the following for the periods indicated (in thousands):

Selling, General and Administrative (SG&A) – The increase in our SG&A expenses during fiscal 2016 was primarily due to 1) a $2.0 million increase in associate costs, primarily due to new sales and sales-related personnel; 2) a $1.5 million increase in the contingent earn out liability associated with the acquisition of NinetyFive 5; 3) a $1.4 million increase in software costs primarily related to our new enterprise resource planning system that is expected to be placed in service during mid-fiscal 2017; 4) a

$1.1 million increase in bad debt expense resulting primarily from the write off of an Education practice contract and receivables from a large retailer that declared bankruptcy, plus other increases to the allowance for doubtful accounts throughout the fiscal year; and 5) a $0.6 million increase in non-cash stock-based compensation.  We continue to invest in new sales and sales-related personnel and had 204 client partners at August 31, 2016 compared with 180 client partners at August 31, 2015.  A significant improvement in Sales Performance practice EBITDA during the first half of fiscal 2016 increased the probability of a second $2.2 million contingent consideration payment to the former owners of NinetyFive 5, which led to the significant increase in expense during fiscal 2016.  Partially offsetting these increases were $0.8 million of decreased foreign exchange losses, $0.8 million of reduced advertising and promotional expenses, and cost savings in various other areas of our operations.

Restructuring Costs – In the fourth quarter of fiscal 2016, we restructured the operations of certain of our domestic sales offices to reduce ongoing operational costs.  The cost of this restructuring was $0.4 million and was primarily comprised of employee severance costs, which were paid in August and September 2016.

During fiscal 2016 we also restructured the operations of our Australian direct office.  The restructuring was designed to reduce ongoing operating costs by closing the sales offices in Brisbane, Sydney, and Melbourne, and by reducing headcount for administrative functions.  Our remaining sales and support personnel in Australia now work from home offices, as do most of our sales personnel located in the U.S. and Canada.  The $0.4 million charge recorded during the second quarter of fiscal 2016 was primarily for office closure costs, including remaining lease expense on the offices that were closed, and for employee severance costs.

Depreciation – Depreciation expense decreased due to certain assets becoming fully depreciated during fiscal 2016.  Based on previous property and equipment acquisitions during fiscal 2016 and expected capital additions during fiscal 2017, we expect depreciation expense will total approximately $3.9 million in fiscal 2017.

Amortization – Our consolidated amortization expense decreased compared with the prior year due to the amortization of previously acquired intangibles, which are amortized more heavily early in their estimated useful lives.  Based on current carrying amounts of intangible assets and remaining estimated useful lives, we anticipate amortization expense from intangible assets will total $2.9 million in fiscal 2017.

Income Taxes

Our effective tax rate for the fiscal year ended August 31, 2016 was approximately 41 percent compared with approximately 36 percent in fiscal 2015.

Our effective tax rate increased primarily due to the fiscal 2015 recognition of benefits from claiming foreign tax credits instead of foreign tax deductions for fiscal 2008 through fiscal 2010.  In fiscal 2015 we finalized the calculations of the impact of amending previously filed federal income tax returns to realize foreign tax credits previously treated as expired under the tax positions taken in the original returns.  The income tax benefit recognized from these foreign tax credits totaled $0.6 million in fiscal 2015.  As of August 31, 2015, we have amended all available prior year returns to claim foreign tax credits instead of tax deductions.  In fiscal 2016 we also recorded a valuation allowance of $0.3 million against the deferred tax assets of a foreign subsidiary with recent and substantial taxable losses.  Consistent with fiscal 2016, we expect our effective income tax rate to remain near statutory rates in future periods.

During fiscal 2016, we paid $3.4 million in cash for income taxes, which was less than our income tax provision for fiscal 2016 primarily due to our utilization of foreign tax credit carryforwards.  Over the next four to six years, we expect that our total cash paid for income taxes will be less than our total income tax provision if All Access Pass sales continue to increase.  A significant increase in AAP sales will create substantial amounts of deferred revenue both for financial statement and income tax purposes and may result in reduced income before taxes.  Accordingly, the time over which we will utilize our foreign tax credit carryforwards and other deferred income tax assets may lengthen, resulting in lower total cash payments for income taxes than our income tax provision amounts over future periods.

FISCAL 2015 COMPARED WITH FISCAL 2014

Sales

The following sales analysis for the fiscal year ended August 31, 2015 is based on activity through our operating segments as previously described, and as shown in the preceding comparative sales table.

Direct Office Sales – During fiscal 2015, our direct office sales were primarily impacted by a $1.9 million decrease in sales from our domestic sales offices and by $3.7 million of adverse foreign exchange rate fluctuations at our foreign direct offices.  The decrease over the prior year at our domestic sales offices was primarily due to the successful second quarter fiscal 2014 launch of the re-created 7 Habits Signature Program , which is our best-selling offering worldwide, and $0.5 million of adverse impact from foreign exchange rates on sales in Canada.  During fiscal 2015, we did not launch an offering with such widespread acceptance.

Reported sales from our international direct offices were significantly impacted by the U.S. dollar strengthening against the functional currencies of these offices.  The fluctuation in exchange rates produced a $3.7 million decrease in translated sales when compared with the prior year.  Excluding the unfavorable impact of foreign currency translation, sales grew in two of our three international direct offices when compared with the prior year.  Our office in the United Kingdom maintained the momentum gained in fiscal 2014 and grew sales by 39 percent (in functional currency), primarily due to a $1.0 million contract obtained during the first quarter combined with strong growth in new clients and contracts during the year.  Despite a slowing economy and weak first quarter performance, our office in Japan increased its sales by one percent in functional currency compared with the same period of fiscal 2014.  The weakening Japanese Yen created a $2.4 million unfavorable impact on translated sales from our Japan office.  Sales decreased by $0.8 million at our office in Australia, of which $0.6 million was due to the translation of Australian dollars into U.S. dollars.  The remaining decrease was primarily due to reduced demand during the first half of fiscal 2015.

Strategic Markets – Sales through our strategic market segment increased $5.2 million compared with fiscal 2014.  The improvement was primarily due to a $3.5 million increase in government services sales and a $1.9 million increase in Sales Performance practice revenues.  The increase in government service sales was due to 1) the renewal of a large government contract that was obtained during the first quarter of fiscal 2015 and the significant delivery of services on this contract during fiscal 2015; and 2) new contracts obtained with other governmental entities during the year.  Our Sales Performance practice grew as a result of increased demand and new contracts for these services during fiscal 2015.  Partially offsetting these increases was a $0.2 million, or two percent, decrease in our Customer Loyalty practice revenues.

Education Practice – Our Education practice sales increased $2.2 million, or seven percent, compared with fiscal 2014.  We continue to see increased demand for The Leader in Me program in many school districts in the United States as well as in some international locations, which contributed to the increase in Education practice revenues.  At August 31, 2015, over 2,500 schools were using The Leader in Me program.  We have made substantial investments in new sales and sales support personnel in our Education practice and we expect that our sales will continue to grow compared with prior periods.

International Licensees – Despite the unfavorable effects of a strengthening U.S. dollar during fiscal 2015, certain of our licensees had increased sales, which provided a slight increase in our international licensee sales when compared with fiscal 2014.  Foreign exchange rates had a $1.0 million adverse impact on our international licensee royalty revenues during the fiscal year ended August 31, 2015.

Gross Profit

Our consolidated gross profit for the fiscal year ended August 31, 2015 was $138.1 million compared with $138.3 million in fiscal 2014.  Gross profit in fiscal 2015 was adversely impacted by the effects of foreign exchange on translated sales and cost of sales; $1.3 million of increased capitalized curriculum amortization costs, primarily resulting from fiscal 2014 expenditures to re-create the 7 Habits Signature Program ; the mix of offerings sold, including lower intellectual property license sales, which have higher gross margins than the majority of our other offerings; and additional coaches hired during the year to support growth in the Education practice.  Our consolidated gross margin for fiscal 2015 reflected the combination of the above factors and was 65.8 percent of sales in fiscal 2015 compared with 67.4 percent in fiscal 2014.

Operating Expenses

Our operating expenses consisted of the following for the periods indicated (in thousands):

Selling, General and Administrative – Our SG&A expenses during fiscal 2015 increased by $3.0 million compared with fiscal 2014.  The increase in SG&A expenses over the prior year was primarily due to 1) a $3.7 million increase related to the addition of new sales and sales support personnel in our direct offices and Education practice, and increased commissions on higher sales; 2) fiscal 2014 reductions to estimated contingent earn out payment from the acquisition of Ninety-Five 5 LLC totaling $1.6 million, which did not repeat in fiscal 2015; and 3) $1.0 million of increased foreign exchange transaction losses as the U.S. dollar strengthened during the year.  The impact of these increases was partially offset by reduced executive short-term incentive bonus expense as specified growth goals were not fully met, by decreased stock-based compensation expense, by the translation of foreign currency denominated expenses into U.S. dollars, and by cost cutting efforts in various areas of our operations.

Impaired Assets – During fiscal 2015 we impaired $1.3 million of long-term assets, which consisted of $0.6 million of capitalized curriculum that was discontinued (and related prepaid royalties), $0.5 million of long-term receivables from FC Organizational Products (FCOP), and an investment in an unconsolidated subsidiary totaling $0.2 million.  We determined that we will receive payment from FCOP for certain rent expenses earlier than previously estimated.  While this determination improves cash flows from FCOP in the short term, the present value of our share of cash distributions to cover remaining long-term receivables was reduced and was less than the present value of the receivables previously recorded and accordingly, we recalculated the discount on the long-term receivables and impaired the difference.  During the fourth quarter of fiscal 2015, we became aware of financial difficulties at an unconsolidated subsidiary in which we previously invested $0.2 million.  Based on this information, we determined that the carrying value of this investment would not be recoverable and we wrote off the investment.  We previously accounted for this investment using the cost method based on our insignificant ownership and influence in the entity.

Restructuring Costs – During the fourth quarter of fiscal 2015, we realigned our regional sales offices that serve the United States and Canada.  As a result of this realignment, we closed our northeastern regional

sales office located in Pennsylvania and created three geographic sales regions.  In connection with this restructuring, we incurred costs related to involuntary severance and office closure costs totaling $0.6 million.  The majority of these costs were paid prior to August 31, 2015.

Depreciation – Depreciation expense increased by $0.8 million compared with fiscal 2014 primarily due to the addition of fixed assets, which consisted primarily of computer hardware, software, and leasehold improvements during fiscal 2015 and in the previous year.

Amortization – Our consolidated amortization expense decreased $0.2 million compared with the prior year due to the amortization of previously acquired intangibles, which are amortized more heavily early in their estimated useful lives.

Discount on Related Party Receivable

We record receivables from FCOP for reimbursement of certain operating costs, office space rent, and for working capital and other advances that we make, even though we are not contractually required to make advances or absorb the losses of FCOP.  Based on expected payment, some of these receivables are recorded as long-term receivables and are required to be recorded at net present value.  We discounted the long-term portion of the FCOP receivable based on forecasted repayments at a discount rate of 15 percent, which was the estimated risk-adjusted borrowing rate of FCOP.

During fiscal 2015, we adjusted the discount and carrying value of our receivables from FCOP as described above in the section entitled "Impaired Assets."  The corresponding adjustment to the discount on our long-term receivables from FCOP totaled $0.4 million.  We also adjusted the discount on the long-term portion of our receivables from FCOP in fiscal 2014.

Income Taxes

Our effective tax rate for the fiscal year ended August 31, 2015 was approximately 36 percent compared with approximately 17 percent in fiscal 2014.

QUARTERLY RESULTS

The following tables set forth selected unaudited quarterly consolidated financial data for the fiscal years ended August 31, 2016 and 2015.  The quarterly consolidated financial data reflects, in the opinion of management, all normal and recurring adjustments necessary to fairly present the results of operations for such periods.  Results of any one or more quarters are not necessarily indicative of continuing trends (in thousands, except for per-share amounts).

Our fourth quarter of each fiscal year has higher sales and operating income than other fiscal quarters primarily due to increased revenues in our Education practice (when school administrators and faculty have professional development days) and to increased facilitator sales that typically occur during that quarter resulting from year-end incentive programs.  Overall, training sales are moderately seasonal because of the timing of corporate training, which is not typically scheduled as heavily during holiday and certain vacation periods.  Quarterly fluctuations may also be affected by other factors including the introduction of new offerings, business acquisitions, the addition of new organizational customers, and the elimination of underperforming offerings.

For more information on our quarterly results of operations, refer to our quarterly reports filed on Form 10-Q as filed with the SEC.  Our quarterly reports for the periods indicated are available free of charge at www.sec.gov .

LIQUIDITY AND CAPITAL RESOURCES

Introduction

During fiscal 2016, we used a substantial amount of our liquidity and capital resources to acquire outstanding shares of our common stock.  During the second quarter of fiscal 2016 we completed a modified Dutch auction tender offer whereby we purchased 1,971,832 shares of our common stock for $17.75 per share.  The total cost of the tender offer, including various professional services fees, was $35.3 million.  We also purchased 531,433 shares of our common stock for $8.3 million on the open market under the terms of a Board of Director approved plan during the third and fourth quarters of fiscal 2016.  We have $17.7 million remaining under that Board approved common stock purchase plan at August 31, 2016.  Our cash balance at August 31, 2016 was $10.5 million, with no borrowings on our line of credit, compared with $16.2 million of cash, and no borrowings on the line of credit, at August 31, 2015.  As part of the regular renewal of our existing credit facility (refer to discussion below), we

borrowed $15.0 million on a promissory note that matures in May 2019 to help finance the acquisition of our common stock during fiscal 2016.  For further information regarding the impact on our cash flows from these purchases of our common stock, refer to the discussion entitled "cash flows from financing activities."

Our net working capital (current assets less current liabilities) was $35.7 million at August 31, 2016 compared with $55.8 million at August 31, 2015.  The reduction in our working capital was primarily due to reduced cash resulting from the purchases of our common stock during fiscal 2016, a significant increase in deferred revenues primarily from sales of the All Access Pass, and new term-loan borrowing to assist in financing the purchases of our common stock.  Of our $10.5 million in cash at August 31, 2016, $8.5 million was held outside the U.S. at our foreign subsidiaries.  We routinely repatriate cash from our foreign subsidiaries and consider cash generated from foreign activities a key component of our overall liquidity position.  Our primary sources of liquidity are cash flows from the sale of services in the normal course of business and available proceeds from our recently renewed revolving line of credit facility.  Our primary uses of liquidity include payments for operating activities, purchases of our common stock, capital expenditures (including curriculum development), working capital expansion, and debt payments.

The following table summarizes our cash flows from operating, investing, and financing activities for the past three years (in thousands):

Fifth Modification to Amended and Restated Credit Agreement

On May 24, 2016, we entered into the Fifth Modification Agreement to our existing amended and restated secured credit agreement (the Restated Credit Agreement) with our existing lender.  The primary purposes of the Fifth Modification Agreement were to (i) obtain a term loan from the lender for $15.0 million (the Term Loan); (ii) increase the maximum principal amount of the revolving line of credit from $30.0 million to $40.0 million; (iii) extend the maturity date of the Restated Credit Agreement from March 31, 2018 to March 31, 2019; (iv) permit us to convert balances outstanding from time to time under the revolving line of credit to term loans; and (v) adjust the fixed charge coverage ratio from 1.40 to 1.15.  The proceeds from the term loans may be used for general corporate purposes.

The Term Loan provided us $15.0 million at an interest rate of LIBOR plus 1.85% per annum.  Interest is payable monthly and principal payments of $937,500 are due and payable on the first day of each January, April, July, and October until May 2019.  The remaining $3.75 million of principal due at the Term Loan maturity date may be repaid by the Company or converted into another term loan.  The Term Loan may also be repaid sooner than May 2019 at the Company's discretion.  Subsequent to August 31, 2016, we obtained an additional term loan with a principal balance of $5.0 million.  Principal payments of $312,500 are due and payable on the first day of each January, April, July, and October until October 2019.  The other terms and conditions of this term loan are the same (except principal payment amounts) as the Term Loan described above.

The Fifth Modification Agreement preserves existing debt covenants that include (i) a Funded Debt to EBITDAR ratio of less than 3.0 to 1.0; (ii) a Fixed Charge Coverage ratio greater than 1.15 to 1.0 as discussed above; (iii) an annual limit on capital expenditures (excluding capitalized curriculum development) of $8.0 million; and (iv) outstanding borrowings on the revolving line of credit may not

exceed 150 percent of consolidated accounts receivable.  The other key terms and conditions of the Fifth Modification Agreement are substantially the same as those defined in the Restated Credit Agreement.  We believe that we were in compliance with the financial covenants and other terms applicable to the Restated Credit Agreement at August 31, 2016.

In addition to our revolving line of credit facility and term loan obligations, we have a long-term lease on our corporate campus that is accounted for as a 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 fiscal year ended August 31, 2016.

Cash Flows from Operating Activities

Our primary source of cash from operating activities was the sale of services and products to our customers in the normal course of business.  The primary uses of cash for operating activities were payments for selling, general, and administrative expenses, payments for direct costs necessary to conduct training programs, payments to suppliers for materials used in training manuals sold, and to fund working capital needs.  Our cash provided by operating activities increased to $32.7 million for the fiscal year ended August 31, 2016 compared with $26.2 million in fiscal 2015.  Although our net income during fiscal 2016 was reduced by the deferral of a portion of AAP sales, we invoice our clients at the inception of the contracted period and collect invoiced amounts within normal terms.  Accordingly, we do not expect our cash flows from operating activities to be unfavorably impacted by increased sales of AAP contracts in future periods.

Although our collections of accounts receivable improved significantly during fiscal 2016, our overall collections continue to be hampered by slower-than-anticipated collections from governmental sales, including Education practice sales, licensees, and longer payment terms on certain services contracts.  The longer payment terms granted to certain clients were within our normal credit policy.  We anticipate that these longer collection periods may continue in future periods and lengthen our collection cycle.

Cash Flows from Investing Activities and Capital Expenditures

Our cash used for investing activities during fiscal 2016 totaled $6.2 million.  Our primary uses of cash for investing activities included purchases of property and equipment, in the normal course of business, and spending on curriculum development.

Our purchases of property and equipment, which totaled $4.0 million, consisted primarily of computer software, hardware, and leasehold improvements.  We currently anticipate that our purchases of property and equipment will total approximately $5.4 million in fiscal 2017.  However, we are currently in the process of replacing our existing enterprise resource planning software, which may result in increased capital spending compared with current expectations.  We currently anticipate that the new enterprise resource planning software will be placed into service in mid-fiscal 2017.

For the fiscal year ended August 31, 2016, we spent $2.2 million on various curriculums, including significant revisions and development to offerings related to The Leader In Me , which is offered through our Education practice, Customer Loyalty, and for the newly released All Access Pass.  Our anticipated spending for capitalized curriculum in fiscal 2017 is expected to be approximately $8.0 million.  During fiscal 2017 we expect to make significant additions to our All Access Pass offerings and various other practices and offerings.

Cash Flows from Financing Activities

In fiscal 2016 we used $32.5 million of net cash for financing activities.  Our primary uses of cash for financing activities consisted of $35.3 million used to purchase 1,971,832 shares of our common stock in a modified Dutch auction tender offer (as previously described); the purchase of 531,433 shares of our

common stock for $8.3 million on the open market under the terms of a Board of Director approved plan; $2.4 million used for principal payments on our long-term financing obligation and Term Loan; and $2.2 million for the payment of contingent consideration from the purchase of NinetyFive 5 in a prior period.  Partially offsetting these uses of cash were $15.0 million of proceeds from a term note payable that matures in May 2019 and $0.7 million of cash received from participants in our employee stock purchase plan.  Subsequent to August 31, 2016, we obtained an additional term loan with a principal balance of $5.0 million.

On January 23, 2015, our Board of Directors approved a new plan to repurchase up to $10.0 million of the Company's common stock.  All previously existing common stock repurchase plans were canceled and the new common share repurchase plan does not have an expiration date.  On March 27, 2015, our Board of Directors increased the aggregate value of shares of Company common stock that may be purchased under the January 2015 plan to $40.0 million so long as we have either $10.0 million in cash and cash equivalents or have access to debt financing of at least $10.0 million.  Under the terms of this expanded common stock repurchase plan, we have purchased 1,291,347 shares of our common stock for $22.3 million through August 31, 2016.  Future purchases of common stock under the terms of this Board approved plan will increase the amount of cash used for financing activities.

During fiscal 2013, we completed the acquisition of NinetyFive 5, an entity that provides sales success training services.  The consideration for the acquisition consisted of an initial $4.2 million payable in four installments through December 2013, and additional potential earn out payments up to a maximum of $8.5 million based on cumulative EBITDA as set forth in the purchase agreement.  Based on significantly improved EBITDA from our sales performance group during the first half of fiscal 2016, we paid the first contingent earn out payment of $2.2 million in the third quarter of fiscal 2016 and may have to pay additional contingent earn out payments in fiscal 2017.  The contingent earn out liability to the former owners of NinetyFive 5 is required to be recorded at fair value based on current and expected EBITDA performance.  At August 31, 2016, the fair value of this liability was $1.9 million, which was recorded as a component of other long-term liabilities in our consolidated balance sheet.  The contingent consideration measurement period for this acquisition ends on August 31, 2017.

Sources of Liquidity

We expect to meet our projected capital expenditures, service our existing financing obligation, and meet other working capital requirements during fiscal 2017 from current cash balances, future cash flows from operating activities, and borrowings on our available credit facility.  Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use our available revolving line of credit and other financing alternatives, if necessary, for these expenditures.  Our Restated Credit Agreement expires in March 2019 and we expect to renew the Restated Credit Agreement on a regular basis to maintain the long-term borrowing capacity of this credit facility.  Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources.  If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital.

We believe that our existing cash and cash equivalents, cash generated by operating activities, and availability of external funds as described above, will be sufficient for us to maintain our operations in the foreseeable future.  However, our ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors.  Some of the factors that influence our operations are not within our control, such as general economic conditions and the introduction of new offerings or technology by our competitors.  We will continue to monitor our liquidity position and may pursue additional financing alternatives, as described above, to maintain sufficient resources for future growth and capital requirements.  However, there can be no assurance such financing alternatives will be available to us on acceptable terms, or at all.

Contractual Obligations

We have not structured any special purpose entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity.  Required contractual payments primarily consist of lease payments resulting from the sale of our corporate campus (financing obligation); term loans payable to our bank; short-term purchase obligations for inventory items and other products and services used in the ordinary course of business; an expected contingent consideration payment to the former owners of NinetyFive 5; minimum operating lease payments for domestic regional and foreign sales office space; and payments to HP Enterprise Services (HPE) for minimum outsourced warehousing and distribution service charges.  At August 31, 2016, our expected payments on these obligations over the next five fiscal years and thereafter are as follows (in thousands):

Our contractual obligations presented above exclude unrecognized tax benefits of $3.0 million for which we cannot make a reasonably reliable estimate of the amount and period of payment.  For further information regarding our unrecognized tax benefits, refer to the notes to our consolidated financial statements as presented in Part II, Item 8 of this report on Form 10-K.

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.  The significant accounting policies that we used to prepare our consolidated financial statements are outlined primarily in Note 1 to the consolidated financial statements, which are presented in Part II, Item 8 of this Annual Report on Form 10-K.  Some of those accounting policies require us to make assumptions and use judgments that may affect the amounts reported in our consolidated financial statements.  Management regularly evaluates its estimates and assumptions and bases those estimates and assumptions on historical experience, factors that are believed

to be reasonable under the circumstances, and requirements under accounting principles generally accepted in the United States of America.  Actual results may differ from these estimates under different assumptions or conditions, including changes in economic and political conditions and other circumstances that are not in our control, but which may have an impact on these estimates and our actual financial results.

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

Revenue Recognition

We derive revenues primarily from the following sources:

We recognize revenue when: 1) persuasive evidence of an arrangement exists, 2) delivery of product has occurred or services have been rendered, 3) the price to the customer is fixed or determinable, and 4) collectability is reasonably assured.  For training and service sales, these conditions are generally met upon presentation of the training seminar or delivery of the consulting services based upon daily rates.  For most of our product sales, these conditions are met upon shipment of the product to the customer.  At times, our customers may request access to our intellectual property for the flexibility to print certain training materials or to have access to certain training videos and other training aids at their convenience.  For intellectual property license sales, the revenue recognition conditions are generally met at the later of delivery of the curriculum to the client or the effective date of the arrangement.

Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.  A deliverable constitutes a separate unit of accounting when it has standalone value to our clients.  We routinely enter into arrangements that can include various combinations of multiple training curriculum, consulting services, and intellectual property licenses.  The timing of delivery and performance of the elements typically varies from contract to contract.  Generally, these items qualify as separate units of accounting because they have value to the customer on a standalone basis.

When the Company's training and consulting arrangements contain multiple deliverables, consideration is allocated at the inception of the arrangement to all deliverables based on their relative selling prices at the beginning of the agreement, and revenue is recognized as each curriculum, consulting service, or intellectual property license is delivered.  We use the following selling price hierarchy to determine the fair value to be used for allocating revenue to the elements: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence (TPE), and (iii) best estimate of selling price (BESP).  Generally, VSOE is based on established pricing and discounting practices for the deliverables when sold separately.  In determining VSOE, we require that a substantial majority of the selling prices fall within a narrow range.  When VSOE cannot be established, judgment is applied with respect to whether a selling price can be established based on TPE, which is determined based on competitor prices for similar offerings when sold separately.  Our products and services normally contain a significant level of differentiation such that the comparable pricing of services with similar functionality cannot be obtained.  When we are unable to establish a selling price using VSOE or TPE, BESP is used in our allocation of arrangement consideration.  BESPs are established as best estimates of what the selling price would be if the deliverables were sold regularly on a stand-alone basis.  Our process for determining BESPs requires judgment and considers multiple factors, such as market conditions, type of customer, geographies, stage of product lifecycle, internal costs, and gross margin objectives.  These factors may vary over time depending upon the unique facts and circumstances related to each deliverable.  However, we do not

expect the effect of changes in the selling price or method or assumptions used to determine selling price to have a significant effect on the allocation of arrangement consideration.

Our multiple-element arrangements generally do not include performance, cancellation, termination, or refund-type provisions.

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.  Licensees are required to pay us royalties based upon a percentage of their sales to clients.  We recognize royalty income each period based upon the sales information reported to us from our licensees.  International royalty revenue is reported as a component of training and consulting service sales in our consolidated income statements.

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

Share-Based Compensation

Our shareholders have approved performance-based long-term incentive plans (LTIP) that provide for grants of share-based performance awards to certain managerial personnel and executive management as directed by the Organization and Compensation Committee of the Board of Directors.  The number of common shares that are vested and issued to LTIP participants is variable and is based upon the achievement of specified financial performance objectives during defined performance periods.  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 expected vesting dates and number of shares expected to be awarded based upon actual and estimated financial results of the Company compared with 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 awards contains uncertainties because we are required to make assumptions and judgments about the timing and 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 may produce additional volatility in our consolidated financial statements as we record cumulative adjustments to the estimated service periods and number of common shares to be awarded under the LTIP grants as described above.

We have also previously granted share-based compensation awards that have share-price, or market-based, vesting conditions.  Accordingly, we used "Monte Carlo" simulation models to determine the fair value and expected service period of these awards.  The Monte Carlo pricing models required the input of subjective assumptions, including items such as the expected term of the options.  If factors change, and we use different assumptions for estimating share-based compensation expense related to future awards, our share-based compensation expense may differ materially from that recorded in previous periods.

Accounts Receivable Valuation

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  Our allowance for doubtful accounts calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding the collectability of customer accounts, which may be influenced by a number of factors that are not within our control, such as the financial health of each customer.  We regularly review the collectability assumptions of our allowance for doubtful accounts calculation and compare them against historical collections.  Adjustments to the assumptions may either increase or

decrease our total allowance for doubtful accounts.  For example, a 10 percent increase to our allowance for doubtful accounts at August 31, 2016 would decrease our reported income from operations by approximately $0.2 million.

For further information regarding the calculation of our allowance for doubtful accounts, refer to the notes to our financial statements as presented in Item 8 of this report on Form 10-K.

Related Party Receivable

At August 31, 2016, we had receivables from FCOP, an entity in which we own 19.5 percent, for reimbursement of certain operating costs and for working capital and other advances, even though we are not obligated to provide advances to, or fund the losses of FCOP.  We make use of estimates to account for these receivables, including estimates of the collectability of amounts receivable from FCOP in future periods and, based upon the timing of estimated collections, we were required to classify a portion of the receivable to long-term.  In accordance with applicable accounting guidance, we are required to discount the long-term portion of the receivable to its net present value using an estimated effective borrowing rate for FCOP.

We estimated the effective risk-adjusted borrowing rate to discount the long-term portion of the receivable at 15 percent, which was recorded as a discount on a related party receivable in our consolidated income statements.  Our estimate of the effective borrowing rate required us to estimate a variety of factors, including the availability of debt financing for FCOP, projected borrowing rates for comparable debt, and the timing and realizability of projected cash flows from FCOP.  These estimates were based on information known at the time of the preparation of these financial statements.  A change in the assumptions and factors used, including estimated interest rates, may change the amount of discount taken.

Our assessments regarding the collectability of the FCOP receivable require us to make assumptions and judgments regarding the financial health of FCOP and are dependent on projected financial information for FCOP in future periods.  Such financial information contains inherent uncertainties, and is subject to factors that are not within our control.  Failure to receive projected cash flows from FCOP in future periods may result in adverse consequences to our liquidity, financial position, and results of operations.  For instance, changes in expected cash flows during fiscal 2015 and fiscal 2014 resulted in impaired asset charges and increased discount expense during those periods.

For further information regarding our investment in FCOP, refer to the notes to our financial statements as presented in Item 8 of this report on Form 10-K.

Inventory Valuation

Our inventories are primarily comprised of training materials and related accessories.  Inventories are reduced to their fair market value through the use of inventory valuation reserves, which are recorded during the normal course of business.  Our inventory valuation calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding a number of factors, including future inventory demand requirements and pricing strategies.  During the evaluation process we consider historical sales patterns and current sales trends, but these may not be indicative of future inventory losses.  While we have not made material changes to our inventory valuation methodology during the past three years, our inventory requirements may change based on projected customer demand, technological and product life cycle changes, longer or shorter than expected usage periods, and other factors that could affect the valuation of our inventories.  If our estimates regarding consumer demand and other factors are inaccurate, we may be exposed to losses that may have an adverse impact upon our financial position and results of operations.  For example, a 10 percent increase to our inventory valuation reserves at August 31, 2016 would decrease our reported income from operations by $0.1 million.

Indefinite-Lived Intangible Assets and Goodwill

Intangible assets that are deemed to have an indefinite life and goodwill balances are not amortized, but rather are tested for impairment on an annual basis, or more often if events or circumstances indicate that a potential impairment exists.  The Covey trade name intangible asset was generated by the merger with the Covey Leadership Center and has been deemed to have an indefinite life.  This intangible asset is quantitatively tested for impairment using the present value of estimated royalties on trade name related revenues, which consist primarily of training seminars and international licensee royalties.

Goodwill is recorded when the purchase price for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired.  We tested goodwill for impairment at August 31, 2016 at the reporting unit level using a quantitative approach.  The first step of the goodwill impairment testing process (Step 1) involves determining whether the estimated fair value of the reporting unit exceeds its respective book value.  In performing Step 1, we compare the carrying amount of the reporting unit to its estimated fair value.  If the fair value exceeds the book value, goodwill of that reporting unit is not impaired.  The estimated fair value of each reporting unit was calculated using a combination of the income approach (discounted cash flows) and the market approach (using market multiples derived from a set of companies with comparable market characteristics).  The estimated fair values of the reporting units from these approaches were weighted in the determination of the total fair value.

If the Step 1 result concludes that the fair value does not exceed the book value of the reporting unit, goodwill may be impaired and additional analysis is required (Step 2).  Step 2 of the goodwill impairment test compares the implied fair value of a reporting unit's goodwill to its carrying value.  The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date, allocating the reporting unit's estimated fair value to its assets and liabilities, including any recognizable intangible assets.  The residual amount from performing this allocation represents the implied fair value of goodwill.  To the extent this amount is below the carrying value of goodwill, an impairment loss is recorded.

Under the two-step impairment test, we determine the fair value of our reporting units using both an income approach and a market approach, and weigh both approaches to determine the fair value of each reporting unit.  Under the income approach, we perform a discounted cash flow analysis which incorporates our cash flow projections over a five-year period and a terminal value is calculated by applying a capitalization rate to terminal year projections based on an estimated long-term growth rate.  The five-year projected cash flows and calculated terminal value are discounted using a weighted average cost of capital (WACC) which takes into account the costs of debt and equity.  The cost of equity is based on the risk-free interest rate, equity risk premium, and industry and size equity premiums.  To arrive at a fair value for each reporting unit, the terminal value is discounted by the WACC and added to the present value of the estimated cash flows over the discrete five-year period.  There are a number of other variables which impacted the projected cash flows, such as expected revenue growth and profitability levels, working capital requirements, capital expenditures, and related depreciation expense.  Under the market approach, we perform a comparable public company analysis and apply revenue and earnings multiples from the identified set of companies to the reporting unit's actual and forecasted financial performance to determine the fair value of each reporting unit.  We evaluate the reasonableness of the fair value calculations of our reporting units by reconciling the total of the fair values of all our reporting units to our total market capitalization, and adjusting for an appropriate control premium.  In addition, we make certain judgments in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions.  These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables.  We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.  Actual future results may differ from those estimates.  In addition, we make certain judgments and

assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.  The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment.  Based on the results of the fiscal 2016 goodwill test, we did not record an impairment charge against our goodwill during fiscal 2016 as each reportable operating segment's estimated fair value exceeded its carrying value.  We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present.

The acquisition of NinetyFive 5 in fiscal 2013 requires us to reassess the fair value of the contingent earn out payments each reporting period.  Although subsequent changes to the contingent consideration liability do not affect the goodwill generated from the acquisition transaction, the valuation of expected contingent consideration requires us to estimate future sales and profitability.  These estimates require the use of numerous assumptions, many of which may change frequently and lead to increased or decreased operating income in future periods.  For instance, we recorded increases totaling $1.5 million to the fair value of expected contingent consideration payments during fiscal 2016 which resulted in a corresponding increase to selling, general, and administrative expenses.

Impairment of Long-Lived Assets

Long-lived tangible assets and definite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  We use an estimate of undiscounted future net cash flows of the assets over their remaining useful lives in determining whether the carrying value of the assets is recoverable.  If the carrying values of the assets exceed the anticipated future cash flows of the assets, we calculate an impairment loss.  The impairment loss calculation compares the carrying value of the asset to the asset's estimated fair value, which may be based upon discounted cash flows over the estimated remaining useful life of the asset.  If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis, which is then depreciated or amortized over the remaining useful life of the asset.  Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets.

Our impairment evaluation calculations contain uncertainties because they require us to make assumptions and apply judgment in order to estimate future cash flows, forecast the useful lives of the assets, and select a discount rate that reflects the risk inherent in future cash flows.  Although we have not made any material recent changes to our long-lived assets impairment assessment methodology, if forecasts and assumptions used to support the carrying value of our long-lived tangible and definite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.

Income Taxes

We regularly evaluate our United States federal and various state and foreign jurisdiction income tax exposures.  We account for certain aspects of our income tax provision using the provisions of FASC 740-10-05, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon final settlement.  The provisions of FASC 740-10-05 also provide guidance on de-recognition, classification, interest, and penalties on income taxes, accounting for income taxes in interim periods, and require increased disclosure of various income tax items.  Taxes and penalties are components of our overall income tax provision.

We record previously unrecognized tax benefits in the financial statements when it becomes more likely than not (greater than a 50 percent likelihood) that the tax position will be sustained.  To assess the

probability of sustaining a tax position, we consider all available evidence.  In many instances, sufficient positive evidence may not be available until the expiration of the statute of limitations for audits by taxing jurisdictions, at which time the entire benefit will be recognized as a discrete item in the applicable period.

Our unrecognized tax benefits result from uncertain tax positions about which we are required to make assumptions and apply judgment to estimate the exposures associated with our various tax filing positions.  The calculation of our income tax provision or benefit, as applicable, requires estimates of future taxable income or losses.  During the course of the fiscal year, these estimates are compared to actual financial results and adjustments may be made to our tax provision or benefit to reflect these revised estimates.  Our effective income tax rate is also affected by changes in tax law and the results of tax audits by various jurisdictions.  Although we believe that our judgments and estimates discussed herein are reasonable, actual results could differ, and we could be exposed to losses or gains that could be material.

We establish valuation allowances for deferred tax assets when we estimate it is more likely than not that the tax assets will not be realized.  The determination of whether valuation allowances are needed on our deferred income tax assets contains uncertainties because we must project future income, including the use of tax-planning strategies, by individual tax jurisdictions.  Changes in industry and economic conditions and the competitive environment may impact the accuracy of our projections.  We regularly assess the likelihood that our deferred tax assets will be realized and determine if adjustments to our valuation allowance are necessary.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT

In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes .  This guidance requires all deferred tax assets and liabilities to be classified as non-current in the statement of financial position.  The provisions of ASU No. 2015-17 are effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period.  We have elected, as permitted by the guidance, to early adopt ASU No. 2015-17 on a prospective basis as of August 31, 2016 and prior periods were not restated.  The adoption of this standard did not have a material effect on our consolidated balance sheet at August 31, 2016.

ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED

On May 28, 2014 the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers .  This new standard was issued in conjunction with the International Accounting Standards Board (IASB) and is designed to create a single, principles-based process by which all businesses calculate revenue.  The new standard replaces numerous individual, industry-specific revenue rules found in U.S. generally accepted accounting principles and is required to be adopted in fiscal years beginning after December 15, 2017 and for interim periods therein.  The new standard may be applied using the "full retrospective" or "modified retrospective" approach.  As of August 31, 2016, we have not yet determined the method of adoption nor the impact that ASU No. 2014-09 will have on our reported revenue or results of operations.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing .  The guidance in ASU 2016-10 clarifies aspects of Topic 606 related to identifying performance obligations and the licensing implementation guidance, while retaining the related core principles for those areas.  The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements for Topic 606 (ASU 2014-09) discussed above.  While we do not expect the adoption of ASU 2016-10 to have a material effect on our business, we are evaluating the potential impact that adoption of ASU 2016-10 may have on our financial position, results of operations, and cash flows.

On February 25, 2016 the FASB issued ASU No. 2016-02, Leases .  The new lease accounting standard is the result of a collaborative effort with the IASB (similar to the new revenue standard described above), although some differences remain between the two standards.  This new standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee.  For lessors, accounting for leases is substantially the same as in prior periods.  For public companies, the new lease standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted for all entities.  For leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach.  While we expect the adoption of this new standard will increase reported assets and liabilities, as of August 31, 2016, we have not yet determined the full impact that the adoption of ASU 2016-02 will have on our financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting .  The guidance in ASU 2016-09 simplifies several aspects of the accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of items on the statement of cash flows.  ASU 2016-09 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016.  Early adoption is permitted subject to certain requirements, and the method of application (i.e., retrospective, modified retrospective or prospective) depends on the transaction area that is being amended.  Following adoption, the primary impact on our consolidated financial statements will be the recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital, which will likely result in increased volatility in the reported amounts of income tax expense and net income.  As of August 31, 2016, we have not completed our evaluation of the impact of ASU 2016-09 on our results of operations or cash flows.

In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718) .  The guidance in ASU No. 2014-12 addresses accounting for stock-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period.  ASU 2014-12 indicates that, in such situations, the performance target should be treated as a performance condition and, accordingly, the performance target should not be reflected in estimating the grant-date fair value of the award.  Instead, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved.  The guidance in ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.  We do not expect the adoption of ASU 2014-12 in fiscal 2017 will have a material effect on our financial position, results of operations, or cash flows.

REGULATORY COMPLIANCE

We are registered in states in which we do business that have a sales tax and we collect and remit sales or use tax on sales made in these jurisdictions.  Compliance with environmental laws and regulations has not had a material effect on our operations.

INFLATION AND CHANGING PRICES

Inflation has not had a material effect on our operations.  However, future inflation may have an impact on the price of materials used in the production of training products and related accessories, including paper and related raw materials.  We may not be able to pass on such increased costs to our customers.

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

Certain written and oral statements made by us in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 as amended (the Exchange Act).  Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as "believe," "anticipate," "expect," "estimate," "project," or words or phrases of similar meaning.  In our reports and filings we may make forward-looking statements regarding our expectations about future reported revenues and operating results, future sales growth, including the impact of our new China offices, expected introduction of new or refreshed offerings, including additions to the All Access Pass, future training and consulting sales activity, renewal of existing contracts, the release and success of new publications, anticipated expenses, the adequacy of existing capital resources, projected cost reduction and strategic initiatives, expected levels of depreciation and amortization expense, expectations regarding tangible and intangible asset valuation expenses, the seasonality of future sales, the seasonal fluctuations in cash used for and provided by operating activities, future compliance with the terms and conditions of our Restated Credit Agreement, the ability to borrow on, and renew, our Restated Credit Agreement, expectations regarding income tax expenses as well as tax assets and credits and the amount of cash expected to be paid for income taxes, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets.  These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.  These risks and uncertainties are disclosed from time to time in reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and 10-K.  Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of this annual report on Form 10-K for the fiscal year ended August 31, 2016, entitled "Risk Factors."  In addition, such risks and uncertainties may include unanticipated developments in any one or more of the following areas:  unanticipated costs or capital expenditures; difficulties encountered by HP Enterprise Services in operating and maintaining our information systems and controls, including without limitation, the systems related to demand and supply planning, inventory control, and order fulfillment; delays or unanticipated outcomes relating to our strategic plans; dependence on existing products or services; the rate and consumer acceptance of new product introductions; foreign currency exchange rates; competition; the number and nature of customers and their product orders, including changes in the timing or mix of product or training orders; pricing of our products and services and those of competitors; adverse publicity; adverse effects on certain licensee's performance due to civil unrest in some of the countries where our licensees operate; and other factors which may adversely affect our business.

The risks included here are not exhaustive.  Other sections of this report may include additional factors that could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements.  Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.

The market price of our common stock has been and may remain volatile.  In addition, the stock markets in general have experienced increased volatility.  Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock.  In addition, the price of our common stock can change for reasons unrelated to our performance.  Due to our relatively low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.

Forward-looking statements are based on management's expectations as of the date made, and the Company does not undertake any responsibility to update any of these statements in the future except as required by law.  Actual future performance and results will differ and may differ materially from that contained in or suggested by forward-looking statements as a result of the factors set forth in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our filings with the SEC.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Franklin Covey Co.

Salt Lake City, Utah

We have audited the internal control over financial reporting of Franklin Covey Co. (the "Company") as of August 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended August 31, 2016 of the Company and our report dated November 14, 2016 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company's early adoption of Financial Accounting Standards Board Accounting Standards Update No. 2015-17, "Balance Sheet Classification of Deferred Taxes," as of August 31, 2016 on a prospective basis.

/s/ Deloitte & Touche LLP

Salt Lake City, Utah

November 14, 2016

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Franklin Covey Co.

Salt Lake City, Utah

We have audited the accompanying consolidated balance sheet of Franklin Covey Co. (the "Company") as of August 31, 2016, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for the year then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Franklin Covey Co. as of August 31, 2016, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company early adopted the Financial Accounting Standards Board Accounting Standards Update No. 2015-17, "Balance Sheet Classification of Deferred Taxes," as of August 31, 2016 on a prospective basis.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of August 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 14, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Salt Lake City, Utah

November 14, 2016

The Board of Directors and Shareholders of Franklin Covey Co.

We have audited the accompanying consolidated balance sheets of Franklin Covey Co. as of August 31, 2015, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for each of the two years in the period ended August 31, 2015.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Franklin Covey Co. at August 31, 2015, and the consolidated results of its operations and its cash flows for each of the two years in the period ended August 31, 2015, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Salt Lake City, Utah

November 12, 2015

FRANKLIN COVEY CO.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

FRANKLIN COVEY CO.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

See accompanying notes to consolidated financial statements.

FRANKLIN COVEY CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS