<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- -----------
Commission file no. 1-11107
FRANKLIN QUEST CO.
(Exact name of registrant as specified in its charter)
Utah 87-0401551
(State of incorporation) (I.R.S. Employer
Identification No.)
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
(Address of principal executive offices) (Zip code)
Registrant's telephone number,
including area code: 801-975-1776
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 the number of shares outstanding of each of the issuer's
classes of Common Stock as of the latest practicable date.:
20,722,246 shares of Common Stock as of July 1, 1996
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN QUEST CO.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
May 31, August 31,
1996 1995
----------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,538 $ 35,006
Accounts receivable, less allowance for
doubtful accounts of $924 and $672 25,357 29,355
Inventories 52,457 49,796
Other current assets 6,609 5,627
--------- ---------
Total current assets 117,961 119,784
Property and equipment, net 100,404 92,654
Intangible assets, net 51,346 47,726
Other long-term assets 2,786 3,141
--------- ---------
$ 272,497 $ 263,305
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,711 $ 16,708
Other current liabilities 13,928 15,447
--------- ---------
Total current liabilities 25,639 32,155
Long-term debt, less current portion 5,246 4,521
Deferred income taxes 2,287 2,287
--------- ---------
Total liabilities 33,172 38,963
--------- ---------
Shareholders' equity:
Common stock, $0.05 par value, 40,000,000
shares authorized, 22,025,000 shares issued 1,101 1,101
Additional paid-in capital 133,544 131,228
Retained earnings 128,676 96,610
Deferred compensation (1,069) (740)
Cumulative translation adjustments (909) (711)
--------- ---------
261,343 227,488
Less 1,082,568 and 254,428 shares of treasury stock, at cost (22,018) (3,146)
--------- ---------
Total shareholders' equity 239,325 224,342
--------- ---------
$ 272,497 $ 263,305
========= =========
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
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FRANKLIN QUEST CO.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------- -------
1996 1995 1996 1995
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $72,465 $59,380 $257,938 $205,116
Cost of sales 30,861 23,826 110,291 79,778
------- ------- -------- --------
Gross margin 41,604 35,554 147,647 125,338
Operating expenses 31,299 25,977 94,941 76,205
------- ------- -------- --------
Income from operations 10,305 9,577 52,706 49,133
Interest and other 329 998 1,253 1,843
------- ------- -------- --------
Income before provision for income taxes 10,634 10,575 53,959 50,976
Provision for income taxes 4,349 4,210 21,892 20,169
------- ------- -------- --------
Net income $ 6,285 $ 6,365 $ 32,067 $ 30,807
======= ======= ======== ========
Net income per share $ 0.28 $ 0.28 $ 1.42 $ 1.36
======= ======= ======== ========
Weighted average number of common and common
equivalent shares 22,447 22,888 22,583 22,612
======= ======= ======== ========
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
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FRANKLIN QUEST CO.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
---------------------
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 32,067 $ 30,807
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 11,636 8,145
Other changes in assets and liabilities (2,889) (5,442)
-------- --------
Net cash provided by operating activities 40,814 33,510
-------- --------
Cash flows from investing activities:
Purchase of net assets of Time Systems, Inc. (8,323)
Purchase of net assets of Productivity Plus (7,608)
Purchase of property and equipment (14,640) (24,971)
Other 51 932
-------- --------
Net cash used in investing activities (22,197) (32,362)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit 1,969
Payments on line of credit (5,744)
Proceeds from long-term debt 48
Payments on long-term debt (2,477) (11,725)
Purchase of treasury shares (19,070)
Proceeds from stock issuance 1,462 1,958
-------- --------
Net cash used in financing activities (20,085) (13,494)
-------- --------
Net decrease in cash and cash equivalents (1,468) (12,346)
Cash and cash equivalents at beginning of period 35,006 49,705
-------- --------
Cash and cash equivalents at end of period $ 33,538 $ 37,359
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 461 $ 578
Income taxes paid 21,247 22,970
Supplemental schedule of non-cash investing and financing activities:
Fair value of assets acquired $ 1,000 $ 41,088
Liabilities assumed from acquisition (1,000) (19,657)
Issuance of treasury stock (1,864)
Additional paid-in capital on treasury stock issued (20,567)
Tax effect of exercise of stock options 175 123
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
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FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The attached unaudited consolidated condensed 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 Franklin Quest Co. (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 generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. The Company suggests the information
included in this report on Form 10-Q be read in conjunction with the financial
statements and related notes included in the Company's Annual Report to
Shareholders for the fiscal year ended August 31, 1995.
Certain reclassifications have been made in the consolidated condensed
financial statements to conform with the current year presentation.
The results of operations for the nine months ended May 31, 1996, are
not necessarily indicative of results for the entire fiscal year ending August
31, 1996.
NOTE 2 - NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted average
number of common and common equivalent (stock options) shares outstanding for
the periods.
NOTE 3 - INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
May 31, August 31,
1996 1995
----------- ----------
(unaudited)
<S> <C> <C>
Finished goods $ 34,567 $ 32,721
Work in process 5,493 6,672
Raw materials 12,397 10,403
-------- --------
$ 52,457 $ 49,796
======== ========
</TABLE>
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NOTE 4 - PUBLISHERS PRESS ACQUISITION
Effective December 1, 1994, the Company acquired Publishers Press, Inc.
("Publishers"). Publishers, a Utah corporation, prints the Franklin Day Planner
and related products and provides book and commercial printing services to
clients in the western United States. The transaction, which was accounted for
as a purchase, was effected through the exchange of approximately 738,000 shares
of the Common Stock of the Company (including approximately 30,000 shares issued
on June 1, 1995, as a result of an adjustment contemplated by the purchase
agreement) for all of the issued and outstanding capital stock of Publishers.
If the acquisition of Publishers had taken place as of September 1,
1994, consolidated sales for the nine months ended May 31, 1995, would have been
$212.0 million on a pro forma basis. The pro forma effect on net earnings and
earnings per common share for that same period would have been immaterial.
NOTE 5 - TIME SYSTEMS, INC., ACQUISITION
Effective as of April 1, 1995, the Company acquired the assets of Time
Systems, Inc. ("Time Systems"), a time management training and product company
headquartered in Phoenix, Arizona. The cash purchase price was $8.6 million.
Time Systems markets a combination of time management training and planner
products to corporate and individual customers. Time Systems had sales for the
year ended December 31, 1994, of approximately $14.9 million and pre-tax income
of approximately $379,000. If the acquisition of Time Systems had taken place as
of September 1, 1994, the impact on the accompanying consolidated condensed
financial statements would have been immaterial.
NOTE 6 - PRODUCTIVITY PLUS, INC., ACQUISITION
Effective as of December 1, 1995, the Company acquired the assets of
Productivity Plus, Inc. ("PPI"), a time management company headquartered in
Chandler, Arizona. The guaranteed cash purchase price was $8.9 million. In
addition, contingent payments up to $11 million may be paid over the next three
years, based on PPI's operating performance during the three years following the
acquisition. PPI's revenues were approximately $12.5 million in the twelve
months ended November 30, 1995. If the acquisition of PPI had taken place as of
September 1, 1994, the impact on the accompanying consolidated condensed
financial statements would have been immaterial.
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FRANKLIN QUEST CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements, the Notes thereto and the Management's
Discussion and Analysis included in the Company's Annual Report to Shareholders
for the fiscal year ended August 31, 1995.
RESULTS OF OPERATIONS
The following table sets forth selected data concerning the sales of
the Company's services and products:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
---------------------------------- ------------------------------------
1996 1995 Change 1996 1995 Change
---- ---- ------ ---- ---- ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Training sales $18,200 $16,576 10% $ 53,987 $ 50,481 7%
Direct product sales 15,467 8,943 73% 44,354 22,250 99%
Catalog sales 19,452 19,352 1% 86,240 77,483 11%
Retail store sales 19,346 14,509 33% 73,357 54,902 34%
------- ------- -------- --------
$72,465 $59,380 22% $257,938 $205,116 26%
======= ======= ======== ========
</TABLE>
Three Months Ended May 31, 1996 Compared with Three Months Ended May 31, 1995
Sales for the three months ended May 31, 1996, increased $13.1 million,
or 22%, over the same period in 1995. The total for the current quarter includes
approximately $3.0 million in sales from PPI, acquired effective December 1,
1995. Without the sales from PPI, the growth from the prior year would have been
17%. Of that increase, training sales accounted for $1.6 million, or 3% of the
increase, the balance (14%) coming from increased product sales.
Direct product sales, before the inclusion of PPI sales, increased $3.5
million, or 39% from the prior year. Sales by Publishers Press accounted for
almost $1.0 million of the increase, with direct product sales to network
marketing companies growing over 60%.
Catalog sales increased by $0.1 million or 1%. The Company expects
catalog sales to continue to grow more slowly than overall Company sales as a
result of its aggressive program of opening new retail stores.
Retail store sales increased $4.8 million or 33% over the three months
ended May 31, 1995. This is in large part due to the number of stores opened
during the past twelve months. At the end of the third
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quarter of fiscal 1995 there were 60 retail stores, and at the end of the
current quarter there were 84 such stores. The increase in comparable store
sales (comparing the 52 stores that were open during the entire third quarter in
both years), was 7%.
Gross margin was 57.4% of sales in the three months ended May 31, 1996,
compared to 59.9% for the same period in 1995. The decline was primarily because
of increases in paper costs and an increase in the write-off of obsolete
product. In addition, the margins from PPI, acquired as of December 1, 1995, are
somewhat lower than the Company's average. Management expects to see previously
negotiated improvements in the cost of paper begin to be reflected in gross
margins in the fourth quarter.
Operating expenses, consisting primarily of selling, general and
administrative expenses, decreased by 0.5% as a percentage of sales during the
three months ended May 31, 1996 (43.2% compared to 43.7% in the same period of
1995). Operating expenses at PPI are generally lower as a percentage of sales
than expenses in the Company's core business, and employee expenses did not grow
as quickly as revenue. Depreciation and leasehold amortization charges were
higher by $670,000 because of new equipment purchased to augment management
information systems and improve customer service, the addition of leasehold
improvements in new stores, the completion of the new headquarters building, and
expansion of the facilities at the National Institute of Fitness. Amortization
charges also increased by $286,000 from amortization of intangible assets
acquired in connection with the PPI acquisition.
Income taxes have been accrued using an effective rate of 40.9% for the
three months ended May 31, 1996, and 39.8% for the same quarter of 1995. The
increase is attributable to the effect of non-deductible goodwill amortization
resulting from acquisitions and to the increase in foreign taxes as the
Company's operations in certain countries have used up previously available
operating losses.
Nine Months Ended May 31, 1996 Compared with Nine Months Ended May 31, 1995
Sales for the first nine months of fiscal 1996 increased $52.8 million,
or 25.8%, over the same period in fiscal 1995. These sales include $8.0 million
from Publishers Press in the first quarter of fiscal 1996 and $6.8 million from
PPI in the second and third quarters of fiscal 1996. Absent these acquisitions,
the growth rate of sales would have been 18.5%.
Training sales for the first nine months grew by approximately 7%, with
consulting group sales being weaker than the average, and the sale of time
management seminars being stronger than the average. Direct product sales, after
adjusting for the acquisitions noted above, increased by 36.4% from the prior
year. This is due primarily to additional product sales to network marketing
companies. Catalog sales grew 11%, primarily as the result of growing
international sales and the addition of Time Systems product to the catalog mix
during the first half of the year. Retail revenues grew by 34% as the number of
stores grew from 60 to 84. Same store sales for the first nine months of the
year were up 7% from the prior year.
Gross margin was 57.2% of sales in the first nine months of fiscal 1996
compared to 61.1% in the comparable nine months of fiscal 1995. The decline was
partially due to the inclusion of Publishers Press' printing business for
parties other than the Company, which carries significantly lower gross margins
than the Company's core products, and the addition of lower margin products from
PPI. In addition, increases in paper costs and an increase in the write-off of
obsolete product contributed to the lower gross margin. The impact of Publishers
Press and PPI on gross margins will continue, but management expects to see
improvements in the cost of paper and in the accuracy of production forecasts.
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Operating expenses decreased slightly as a percentage of sales during
the first nine months of fiscal 1996, from 37.2% to 36.8%. Lower operating
expenses at Publishers Press and at PPI and employee costs growing more slowly
than sales were offset by increases in catalog costs (the Company introduced a
holiday catalog and a Time Systems catalog for the first time in the first
quarter of fiscal 1996), and selling costs (reflecting the addition of the Time
Systems account executives). Depreciation and leasehold amortization charges
were higher by $1,384,000, because of new equipment purchased to augment
management information systems and improve customer service, the addition of
leasehold improvements in new stores, the completion of the new headquarters
building, and expansion of the facilities at the National Institute of Fitness.
Amortization charges also increased by $1,055,000 from amortization of
intangible assets acquired in connection with the PPI and Time Systems
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of capital have been net
cash provided by operating activities, long-term borrowing, capital lease
financing, and sale of Common Stock. Working capital requirements have also been
financed through short-term borrowing. At May 31, 1996, the Company had $33.5
million in cash and cash equivalents.
Net cash provided by operating activities during the nine months ended
May 31, 1996, was $40.0 million. Net cash used in investing activities was $19.3
million. Of this total, $14.6 million was invested in property and equipment,
and the balance was used in the acquisition of PPI. During the first nine months
of fiscal 1996, the Company used $19.1 million to repurchase 939,400 shares of
its Common Stock on the open market. Subsequent to the end of the quarter, the
Company purchased an additional 300,650 shares, using an additional $6.4 million
in cash.
Working capital during the period increased by $4.1 million. Management
believes that cash flows are sufficient to meet working capital requirements,
including increases in accounts receivable and inventories associated with sales
increases.
Management anticipates that its existing capital resources will enable
it to maintain its current level of operations and its planned internal growth
for the foreseeable future. Should the Company make acquisitions of significant
size, other financing could be required.
The Company also has available lines of credit, not utilized at May 31,
1996, of $9.0 million.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
Not applicable.
Item 2. Changes in Securities:
Not applicable.
Item 3. Defaults upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable.
Item 5. Other information:
In January 1995, the Board of Directors approved the
repurchase of up to 1,000,000 shares of the Company's Common
Stock. As of June 30, 1996, all shares so authorized had been
acquired under this authorization, at an average price of
$20.67.
Also, in March 1996, the Board of Directors approved the
repurchase of an additional 1,000,000 shares of the Company's
Common Stock. As of July 9, 1996, 350,050 of these shares had
been purchased, at an average price of $21.43.
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
Not applicable.
(B) Reports on Form 8-K:
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN QUEST CO.
Date: July 10, 1996 By: /s/ ARLEN B. CROUCH
-------------------------
Arlen B. Crouch
President
Chief Operating Officer
Date: July 10, 1996 By: /s/ JON H. ROWBERRY
-------------------------
Jon H. Rowberry
Executive Vice President
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 33,538
<SECURITIES> 0
<RECEIVABLES> 25,357
<ALLOWANCES> 924
<INVENTORY> 52,457
<CURRENT-ASSETS> 6,609
<PP&E> 100,404
<DEPRECIATION> 0
<TOTAL-ASSETS> 272,497
<CURRENT-LIABILITIES> 25,639
<BONDS> 7,533
0
0
<COMMON> 1,101
<OTHER-SE> 238,224
<TOTAL-LIABILITY-AND-EQUITY> 272,497
<SALES> 257,938
<TOTAL-REVENUES> 257,938
<CGS> 110,291
<TOTAL-COSTS> 110,291
<OTHER-EXPENSES> 94,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,253)
<INCOME-PRETAX> 53,959
<INCOME-TAX> 21,892
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,067
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
</TABLE>
