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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10–Q

      (Mark One)

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

        For the quarterly period ended November 27, 2004

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

      For the transition period from __________ to __________

Commission file no. 1–11107

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FRANKLIN COVEY CO.

(Exact name of registrant as specified in its charter)

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

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      X  

No           

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b–2 of the Exchange Act).

Yes           

No      X  

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

        19,914,690 shares of Common Stock as of January 3, 2005

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

November 27,
2004		 August 31,
2004
(unaudited)
                                                                                                 
ASSETS 
Current assets: 
     Cash and cash equivalents  $   32,990   $   41,904  
     Accounts receivable, less allowance for doubtful 
        accounts of $1,429 and $1,034  23,394   18,636  
     Inventories  29,067   23,693  
     Other current assets  5,915   5,794  
       Total current assets  91,366   90,027  

Property and equipment, net		  38,902   40,584  
Intangible assets, net  86,470   87,507  
Other long-term assets  8,299   7,593  
   $ 225,037   $ 225,711  


LIABILITIES AND SHAREHOLDERS' EQUITY		 
Current liabilities: 
     Current portion of long-term debt  $        123   $        120  
     Accounts payable  13,494   14,018  
     Outsourcing contract costs payable  5,370   4,914  
     Income taxes payable  6,617   5,903  
     Accrued liabilities  29,995   31,244  
       Total current liabilities  55,599   56,199  

Long-term debt, less current portion		  1,418   1,350  
Other liabilities  1,682   1,550  
       Total liabilities  58,699   59,099  
Shareholders' equity: 
     Preferred stock - Series A, no par value; convertible into common 
        stock at $14 per share; 4,000 shares authorized, 873 shares issued; 
        liquidation preference totaling $89,530  87,203   87,203  
     Common stock - $0.05 par value; 40,000 shares authorized, 
27,056 shares issued  1,353   1,353  
     Additional paid-in capital  203,382   205,585  
     Accumulated deficit  (7,272 ) (8,798 )
     Deferred compensation on restricted stock grant  (691 ) (732 )
     Accumulated other comprehensive income  1,369   1,026  
     Treasury stock at cost, 7,025 and 7,028 shares  (119,006 ) (119,025 )
       Total shareholders' equity  166,338   166,612  
   $ 225,037   $ 225,711  

See notes to condensed consolidated financial statements.

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

Quarter Ended
November 27, 2004 November 29, 2003
(unaudited)
                                                                                  
Net sales: 
      Products  $ 44,051   $ 51,776  
      Training and services  25,053   23,255  
   69,104   75,031  
Cost of sales: 
      Products  20,084   24,664  
      Training and services  7,861   7,841  
   27,945   32,505  
      Gross margin  41,159   42,526  

Selling, general, and administrative		  35,960   40,016  
Restructuring cost reversal  (306 )
Depreciation  2,178   3,591  
Amortization  1,043   1,043  
      Income (loss) from operations  2,284   (2,124 )

Interest income		  118   86  
Interest expense  (38 ) (112 )
      Income (loss) before provision for income taxes  2,364   (2,150 )
Provision for income taxes  (838 ) (1,030 )
      Net income (loss)  1,526   (3,180 )
Preferred stock dividends  (2,184 ) (2,184 )
      Net loss attributable to common shareholders  $    (658 ) $(5,364 )
Net loss attributable to common shareholders per share: 
        Basic and diluted  $    (.03 ) $    (.27 )
Weighted average number of common shares: 
        Basic and diluted  19,729   19,927  

See notes to condensed consolidated financial statements.

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Quarter Ended
November 27,
2004		 November 29,
2003
(unaudited)
Cash flows from operating activities:            
     Net income (loss)   $ 1,526   $ (3,180 )
     Adjustments to reconcile net income (loss) to net cash used for  
       operating activities:  
       Depreciation and amortization    3,736    5,080  
       Gain on disposal of assets        (33 )
       Restructuring cost reversal    (306 )
       Amortization of deferred compensation    41  
       Changes in assets and liabilities:  
         Increase in accounts receivable, net    (4,404 )  (2,864 )
         Increase in inventories    (5,245 )  (1,898 )
         Decrease (increase) in other assets    (653 )  825  
         Decrease in accounts payable, outsourcing contract costs  
           payable, and accrued liabilities    (1,545 )  (4,713 )
         Increase (decrease) in other long-term liabilities    128    (17 )
         Increase in income taxes payable    715    642  
     Net cash used for operating activities    (6,007 )  (6,158 )
Cash flows from investing activities:  
     Purchases of property and equipment    (621 )  (781 )
     Proceeds from sale of property and equipment        1,540  
     Net cash provided by (used for) investing activities    (621 )  759  
Cash flows from financing activities:  
     Principal payments on long-term debt and capital lease obligations    (31 )  (22 )
     Proceeds from sales of common stock from treasury    25    39  
     Purchase of treasury shares    (22 )  (47 )
     Payment of preferred stock dividends    (2,184 )  (2,184 )
     Net cash used for financing activities    (2,212 )  (2,214 )
Effect of foreign exchange rates on cash and cash equivalents    (74 )  121  
     Net decrease in cash and cash equivalents    (8,914 )  (7,492 )
Cash and cash equivalents at beginning of the period    41,904    41,916  
Cash and cash equivalents at end of the period   $ 32,990   $ 34,424  
Supplemental disclosure of cash flow information:  
     Cash paid for interest   $ 27   $ 103  
     Cash paid for income taxes   $ 395   $ 136  
Non-cash investing and financing activities:  
     Accrued preferred stock dividends   $ 2,184   $ 2,184  

See notes to condensed consolidated financial statements.

FRANKLIN COVEY CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 – BASIS OF PRESENTATION

        Franklin Covey Co. (the Company) provides integrated consulting, training, and performance enhancement solutions to organizations and individuals in productivity, leadership, strategy execution, sales force effectiveness, effective communications, and other areas. Each integrated solution may include components of training and consulting, assessment, and other application tools that are generally available in electronic or paper-based formats. The Company’s products and services are available through professional consulting services, public workshops, retail stores, catalogs, and the Internet at www.franklincovey.com. The Company’s historically best-known offerings include the FranklinCovey PlannerTM, the productivity workshop entitled, “Focus: Achieving Your Highest Priorities,” and courses based on the best-selling book, The Seven Habits of Highly Effective People. The Company’s new offerings include facilitated work sessions, a course entitled “The 4 Disciplines of Execution”, and its assessment tool, xQ (Execution Quotient).

        The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations of the Company as of the dates and for the periods indicated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules and regulations. The information included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2004.

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

        The Company utilizes a modified 52/53-week fiscal year that ends on August 31 of each year. Corresponding quarterly periods generally consist of 13-week periods that end on November 27, 2004, February 26, 2005, and May 28, 2005 during fiscal 2005. Under the modified 52/53-week fiscal year, the quarter ended November 27, 2004 had two fewer business days than the quarter ended November 29, 2003.

        The results of operations for the quarter ended November 27, 2004 are not indicative of results expected for the entire fiscal year ending August 31, 2005.

NOTE 2 – ACCOUNTING FOR STOCK-BASED COMPENSATION

        The Company accounts for its stock-based compensation and awards using the intrinsic-value method of accounting as outlined in Accounting Principles Board Opinion 25 and related interpretations. Under the intrinsic-value methodology, no compensation expense is recognized for stock option awards granted at, or above, the fair market value of the stock on the date of grant. Accordingly, no compensation expense has been recognized for the Company’s stock option plans or employee stock purchase plan in its condensed consolidated statements of operations. Had compensation expense for the Company’s stock option plans and employee stock purchase plan been determined in accordance with the fair value approach as defined by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company’s net loss attributable to common shareholders and corresponding basic and diluted loss per share would have been the following (in thousands, except per share data):

Quarter Ended
November 27,
2004		 November 29,
2003
Net loss attributable to common      
   shareholders, as reported  $(658 ) $(5,364 )
Fair value of stock-based 
   compensation, net of tax  (187 ) (194 )
Net loss attributable to common 
   shareholders, pro forma  $(845 ) $(5,558 )
Basic and diluted loss per 
   share, as reported  $(.03 ) $  (.27 )

Basic and diluted loss per		 
   share, pro forma  $(.04 ) $  (.28 )

        In connection with proposed changes in the Company’s Chief Executive Officer (CEO) compensation plan and in recognition of the CEO’s leadership in achieving substantial improvements in the Company’s operating results (Note 12), the CEO will be granted 225,000 shares of restricted stock as a long-term incentive consistent with the restricted stock awards provided to other key employees in January 2004, and will be granted 187,000 shares of common stock that is fully vested. In addition, the Company will accelerate the vesting on the CEO’s 1.6 million stock options with an exercise price of $14.00 per share. These changes to the CEO’s compensation were based upon conditions and events necessary to complete the new agreement that occurred subsequent to November 27, 2004. Accordingly, and the financial statement impact of these awards will be recognized during December 2004.

NOTE 3 – INVENTORIES

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

November 27,
2004		 August 31,
2004
Finished goods   $25,434   $19,756  
Work in process  1,006   978  
Raw materials  2,627   2,959  
   $29,067   $23,693  


NOTE 4 – INTANGIBLE ASSETS

The Company's intangible assets were comprised of the following (in thousands):

November 27, 2004 Gross Carrying
Amount		 Accumulated
Amortization		 Net Carrying
Amount
Definite-lived intangible assets:        
        License rights  $   27,000   $(5,777 ) $21,223  
        Curriculum  58,227   (23,587 ) 34,640  
        Customer lists  18,774   (11,167 ) 7,607  
        Trade names  1,277   (1,277 )
   105,278   (41,808 ) 63,470  
Indefinite-lived intangible asset: 
        Covey trade name  23,000     23,000  
        Balance at November 27, 2004  $ 128,278   $(41,808 ) $86,470  
August 31, 2004 
Definite-lived intangible assets: 
        License rights  $   27,000   $(5,543 ) $21,457  
        Curriculum  58,221   (23,067 ) 35,154  
        Customer lists  18,774   (10,878 ) 7,896  
        Trade names  1,277   (1,277 )
   105,272   (40,765 ) 64,507  
Indefinite-lived intangible asset: 
        Covey trade name  23,000     23,000  
        Balance at August 31, 2004  $ 128,272   $(40,765 ) $87,507  

        The Company’s aggregate amortization expense totaled $1.0 million for each of the quarters ended November 27, 2004 and November 29, 2003.

NOTE 5 – RESTRUCTURING AND STORE CLOSURE COSTS

Restructuring Costs

        During fiscal 1999, the Company’s Board of Directors approved a plan to restructure the Company’s operations, reduce its workforce, and formally exit the Company’s leased office space located in Provo, Utah. The Company recorded a $16.3 million restructuring charge during fiscal 1999 to record the expected costs of these activities. Included in the restructuring charge were costs to provide severance and related benefits, as well as expected costs to formally exit the leased office space. This restructuring plan was substantially completed during fiscal 2000.

        The Company, under a long-term agreement, leased office space in buildings that were owned by partnerships, the majority interest of which were owned by a Vice-Chairman of the Board of Directors and certain other employees and former employees of the Company. During the quarter ended November 27, 2004, the Company exercised an option, available under its master lease agreement, to purchase, and simultaneously sell, the office facility to the current tenant, an unrelated party. Based on the continuing negative cash flow associated with these buildings, and other factors, the Company determined that it was in its best interest to exercise the option and sell the property. The negotiated purchase price with the landlord was $14.0 million and the tenant agreed to purchase the property for $12.5 million. These prices were within the range of estimated fair values of the buildings as determined by an independent appraisal obtained by the Company. The Company paid the difference between the sale and purchase prices, plus other closing costs, which were included as a component of the restructuring plan accrual. After completion of the sale transaction, the remaining fiscal 1999 restructuring costs, which totaled $0.3 million, were credited to operating expenses under the caption, “Restructuring Cost Reversal” in the Company’s condensed consolidated statement of operations for the quarter ended November 27, 2004.

Store Closure Costs

        During fiscal 2004, the Company closed certain retail stores and plans to close additional retail locations in fiscal 2005. The Company currently plans to close 21 retail locations in fiscal 2005 and may close additional stores if further analysis indicates that the Company’s operating results may be improved through additional closures. The Company has incurred severance and lease termination costs related to these store closure activities, which are included as a component of selling, general, and administrative expenses in the Company’s consolidated statements of operations.

        The components of the restructuring and store closure accrual were as follows for the periods indicated (in thousands):

Severance
Costs		 Leased
Space Exit
Costs		 Total
Balance at August 31, 2004   $   16   $ 2,766   $ 2,782  
Charges to the accrual  178   67   245  
Amounts utilized  (16 ) (2,207 ) (2,223 )
Balance at 
   November 27, 2004  $ 178   $    626   $    804  

        At November 27, 2004, accrued store closure costs were recorded in accrued liabilities in the Company’s condensed consolidated balance sheet. Although the Company believes that its accruals for retail store closures are adequate at November 27, 2004, these amounts are partially based upon estimates and may change if actual amounts related to these activities differ.

NOTE 6 – PROPOSED SERIES A PREFERRED STOCK RECAPITALIZATION

        On November 12, 2004, the Company’s Board of Directors approved a plan to recapitalize its Series A preferred stock. The completion of the recapitalization transaction is subject to shareholder approval at the Company’s next annual meeting of shareholders. Under terms of the proposed plan, the Company will complete a one-to-four forward split of the Series A preferred stock and then divide each share of Series A preferred stock into a new share of Series A preferred stock that is no longer convertible into common stock, and a warrant to purchase shares of common stock. The new Series A preferred stock will retain its common-equivalent voting rights and will automatically convert to shares of Series B preferred stock if the holder of the original Series A preferred stock sells, or transfers, the stock to another party. Series B preferred stock does not have common-equivalent voting rights, but retains substantially all other characteristics of the new Series A preferred stock. The proposed recapitalization transaction will enable the Company to:

  o   Have the conditional right to redeem shares of preferred stock;

  o   Place a limit on the period in which the Company may be required to issue common stock. The warrants to purchase shares of common stock expire in eight years, compared to the perpetual right of existing Series A preferred stock to convert to shares of common stock;

  o   Increase the Company’s ability to purchase shares of its common stock. Purchases of common stock are currently subject to the approval of Series A preferred shareholders;

  o   Create the possibility that the Company will receive cash upon issuing additional shares of common stock to Series A preferred shareholders. The warrants have an exercise price of $8.00 per share compared to the existing right of Series A preferred shareholders to convert their preferred shares into common shares without paying cash; and

  o   Eliminate its requirement to pay common stock dividends to preferred shareholders on an “as converted” basis.

If approved, each current Series A preferred shareholder will receive a warrant to purchase a number of common shares equal to 71.43 shares for each $1,000 ($14 per share conversion) in aggregate liquidation value of Series A preferred shares held immediately prior to the recapitalization transaction. The exercise price of each warrant will be $8.00 per share (subject to customary anti-dilution and exercise features) and will be exercisable over an eight-year term.

Upon completion of the recapitalization transaction, Series A preferred rights will be amended to prevent the conversion of Series A preferred stock to shares of common stock. Series B preferred stock rights will be amended to be substantially equivalent to Series A rights, except for the eliminated voting rights. The rights of the new Series A and Series B preferred stock will include the following:

  o   Liquidation Preference – Both Series A and Series B preferred stock will have a liquidation preference of $25 per share plus accrued unpaid dividends, which will be paid in preference to the liquidation rights of all other equity classes.

  o   Conversion – Neither Series A or Series B preferred stock will be convertible to shares of common stock. Series A preferred stock converts into shares of Series B upon the sale or transfer of the new Series A shares. Series B preferred stock will not have any conversion rights.

  o   Dividends – Both Series A and Series B preferred stock accrue dividends at 10.0 percent, payable quarterly, in preference to dividends on all other equity classes. If dividends are in arrears for six or more quarters, the number of the Company’s Board of Directors will be increased by two and the Series A and Series B preferred shareholders will have the ability to select these additional directors.

  o   Redemption – The Company may redeem any of the Series A or Series B preferred shares during the first year following the recapitalization at a price per share equal to 100 percent of the liquidation preference. Subsequent to the first anniversary of the recapitalization and before the fifth anniversary of the transaction, the Company may only purchase preferred shares (up to $30 million in aggregate) from Knowledge Capital, which holds the majority of the Company’s preferred stock, at a premium that increases one percentage point annually. After the sixth anniversary of the recapitalization, the Company may redeem any shares of preferred stock at 101 percent of the liquidation preference on the date of redemption.

  o   Change in Control – In the event of any change in control of the Company, Knowledge Capital, to the extent that it still holds shares of Series A preferred stock, will have the option to receive a cash payment equal to 101 percent of the liquidation preference of its Series A preferred shares then held. The remaining Series A and Series B preferred shareholders have no such option.

  o   Voting Rights – Although the new Series A Preferred Stockholders will not have conversion rights, they will still be entitled to voting rights. The holder of each new share of Series A preferred stock will be entitled to the voting rights they would have if they held two shares of common stock. The cumulative number of votes will be based upon the number of votes attributable to shares of Series A held immediately prior to the recapitalization transaction less any transfers of Series A shares to Series B shares or redemptions. In the event that a Series A preferred shareholder exercises a warrant to purchase the Company’s common stock, their Series A voting rights will also be reduced by the number of the common shares issued upon exercise of the warrant. This feature will prevent the holders of Series A preferred stock from increasing their voting influence through the acquisition of additional shares of common stock from the warrants.

NOTE 7 – INCOME TAXES

        The Company recorded income tax expense during the quarters ended November 27, 2004 and November 29, 2003 that totaled $0.8 million and $1.0 million. The Company’s income tax expense during these periods was primarily due to taxable income in certain foreign tax jurisdictions. The Company was unable to offset the tax liabilities in these jurisdictions with its domestic operating loss. In addition, a rece