<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 February 28, 1997
[ ] 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:
19,751,458 shares of Common Stock as of March 28, 1997
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN QUEST CO.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
February 28, August 31,
1997 1996
---------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,583 $ 24,041
Accounts receivable, less allowance for
doubtful accounts of $952 and $889 30,364 28,706
Inventories 42,060 49,463
Income taxes receivable 4,470 5,064
Other current assets 5,878 5,743
-------- --------
Total current assets 115,355 113,017
Property and equipment, net 102,047 102,063
Intangible assets, net 62,328 51,115
Other long-term assets 3,720 2,250
-------- --------
$283,450 $268,445
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,037 $ 12,585
Other current liabilities 17,367 16,092
-------- --------
Total current liabilities 33,404 28,677
Long-term debt, less current portion 5,280 5,500
Deferred income taxes 2,787 2,433
-------- --------
Total liabilities 41,471 36,610
-------- --------
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 134,106 132,959
Retained earnings 156,917 130,849
Deferred compensation (1,821) (1,240)
Cumulative translation adjustments (1,483) (940)
-------- --------
288,820 262,729
Less 2,288,828 and 1,497,407 shares of treasury stock, at cost (46,841) (30,894)
-------- --------
Total shareholders' equity 241,979 231,835
-------- --------
$283,450 $268,445
======== ========
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
2
<PAGE> 3
FRANKLIN QUEST CO.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28 and 29, February 28 and 29,
---------------------- -----------------------
1997 1996 1997 1996
-------- ------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $105,958 $93,593 $208,335 $185,473
Cost of sales 43,066 40,103 86,341 79,430
-------- ------- -------- --------
Gross margin 62,892 53,490 121,994 106,043
Operating expenses 41,383 32,282 78,764 63,642
-------- ------- -------- --------
Income from operations 21,509 21,208 43,230 42,401
Interest and other 322 408 397 924
-------- ------- -------- --------
Income before provision for income taxes 21,831 21,616 43,627 43,325
Provision for income taxes 8,787 8,838 17,559 17,543
-------- ------- -------- --------
Net income $ 13,044 $12,778 $ 26,068 $ 25,782
======== ======= ======== ========
Net income per share $ 0.63 $ 0.57 $ 1.25 $ 1.14
======== ======= ======== ========
Weighted average number of common and
common equivalent shares 20,779 22,432 20,845 22,650
======== ======= ======== ========
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
3
<PAGE> 4
FRANKLIN QUEST CO.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
February 28 and 29,
------------------------
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,068 $ 25,782
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,470 7,439
Other changes in assets and liabilities 7,644 (1,643)
-------- --------
Net cash provided by operating activities 43,182 31,578
-------- --------
Cash flows from investing activities:
Acquisition of businesses (11,960) (7,608)
Purchases of property and equipment (5,873) (11,194)
-------- --------
Net cash used in investing activities (17,833) (18,802)
-------- --------
Cash flows from financing activities:
Payments on short-term borrowings (121)
Proceeds from long-term debt 356
Payments on long-term debt and capital leases (849) (927)
Purchase of treasury shares (16,016) (7,426)
Proceeds from treasury stock issuance 367 694
-------- --------
Net cash used in financing activities (16,263) (7,659)
-------- --------
Effect of foreign exchange rates (544) (236)
-------- --------
Net increase in cash and cash equivalents 8,542 4,881
Cash and cash equivalents at beginning of period 24,041 35,006
-------- --------
Cash and cash equivalents at end of period $ 32,583 $ 39,887
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 283 $ 226
Income taxes paid 15,787 15,394
Supplemental schedule of non-cash investing and financing activities:
Fair value of assets acquired $ 13,770 $ 11,019
Cash paid for net assets (11,960) (7,608)
-------- --------
Liabilities assumed from acquisitions 1,810 3,411
======== ========
Tax effect of exercise of affiliate stock options 13 175
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
4
<PAGE> 5
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, 1996.
Certain reclassifications have been made in the consolidated condensed
financial statements to conform with the current year presentation.
The results of operations for the six months ended February 28, 1997
are not necessarily indicative of results for the entire fiscal year ending
August 31, 1997.
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 presented.
NOTE 3 - INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
February 28, August 31,
1997 1996
--------- ---------
(unaudited)
<S> <C> <C>
Finished Goods $25,245 $36,156
Work in Process 5,784 4,969
Raw Materials 11,031 8,338
------- -------
$42,060 $49,463
======= =======
</TABLE>
5
<PAGE> 6
NOTE 4 - TRUENORTH ACQUISITION
Effective October 1, 1996, the Company acquired the assets of TrueNorth
Corporation ("TrueNorth"). TrueNorth, a Utah corporation, is a leading provider
of post-instructional personal coaching to corporations and individuals.
TrueNorth develops and delivers one-on-one personalized coaching which is
designed to augment the effectiveness and duration of training cirricula. The
cash purchase price was $10.0 million. In addition, contingent payments may be
made over the next five years based on TrueNorth's operating performance during
the five years following the acquisition. TrueNorth had sales for the twelve
months ended July 31, 1996 of approximately $16.0 million. If the acquisition of
TrueNorth had taken place as of September 1, 1996, the impact on the
accompanying consolidated condensed financial statements would have been
immaterial.
NOTE 5 - SUBSEQUENT EVENTS
Effective March 1, 1997, the Company acquired Premier Agendas, Inc. and
Premier School Agendas, Ltd., located in Bellingham, Washington, and Abbotsford,
British Columbia, respectively (collectively, "Premier"). The combined cash
purchase price was $23.0 million with additional contingent payments being made
over the next three years based upon Premier's operating performance over that
same time period. Premier is the leading provider of academic and personal
planners for students from kindergarten to college throughout the U.S. and
Canada. Premier's revenues were approximately $35.4 million for the year ended
December 31, 1996.
On March 21, 1997, the Company signed a definitive merger agreement
with Covey Leadership Center ("Covey"). The transaction will involve issuance of
Franklin Quest Common Stock in exchange for all of the outstanding stock of
Covey. In addition, the Company will acquire from Stephen R. Covey and The
Stephen and Sandra Covey Posterity Trust, an exclusive, perpetual, worldwide,
royalty free, transferable license to make, use and promote derivative works of
the books, "The 7 Habits of Highly Effective People and Principle-Centered
Leadership" for an aggregate of $27.0 million payable in cash or Company Common
Stock or both. The transactions will be recorded using the purchase method of
accounting under Generally Accepted Accounting Principles and are valued at
approximately $150 million. Covey had approximately $98.7 million in revenues
for the year ended December 31, 1996. Covey is a leadership consulting firm
whose products include books, seminars and corporate training programs based on
the international best seller, "The 7 Habits of Highly Effective People".
6
<PAGE> 7
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, 1996.
RESULTS OF OPERATIONS
The following table sets forth selected data concerning the sales of
the Company's products and services:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28 and 29, February 28 and 29,
----------------------------------------- -----------------------------------------
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Product sales $ 80,190 $71,545 12% $155,124 $136,742 13%
Training sales 20,641 17,056 21% 41,308 35,788 15%
Services 5,127 4,992 3% 11,903 12,943 -8%
-------- ------- -- -------- --------
$105,958 $93,593 13% $208,335 $185,473 12%
======== ======= == ======== ========
</TABLE>
Three Months Ended February 28, 1997 Compared with Three Months Ended February
29, 1996
Sales for the three months ended February 28, 1997, increased $12.4
million, or 13%, over the same period in 1996. The total for the current quarter
included approximately $3.4 million in revenue from the Personal Coaching
Division, formerly TrueNorth Corporation, which was acquired effective October
1, 1996.
Product sales increased $8.6 million, or 12%, compared to the
corresponding quarter of the prior year. Of this increase, $5.3 million came
from growth in retail store sales. This was in large part due to the number of
stores opened during the past twelve months. At the end of the second quarter of
fiscal 1996 there were 80 retail stores, compared to 95 such stores at the end
of the current quarter. Comparable store sales increased 7% for the quarter
ended February 28, 1997 compared to the quarter ended February 29, 1996. The
remaining increase in sales was primarily due to increased revenues from network
marketing and international product sales over the corresponding period of the
prior year.
Training sales increased $3.6 million, or 21%, over the same quarter a
year ago. Approximately $3.4 million of this increase was a result of the
acquisition of the Personal Coaching Division, effective October 1, 1996.
Gross margin was 59.3% of sales in the three months ended February 28,
1997, compared to 57.2% for the same period in 1996. The increase was primarily
due to the addition of the Personal Coaching Division, which generates
significantly higher gross margins than the Company's core products and
services. In addition, improvements in the cost of paper and production
processes contributed to the higher gross margin.
7
<PAGE> 8
Operating expenses, consisting primarily of selling, general and
administrative expenses, increased by 4.6% as a percentage of sales during the
three months ended February 28, 1997 (39.1% compared to 34.5% in the same period
of 1996). The increase came primarily from the area of employee expenses which
resulted from staff increases in the areas of sales and technology support.
There were also increased marketing program expenses in the second quarter of
fiscal 1997 compared to the same quarter a year ago. In addition, operating
expenses of the Personal Coaching Division are generally higher as a percentage
of sales than expenses in the Company's core businesses. Depreciation and
leasehold amortization charges were higher by $767,000 because of new equipment
purchased to augment management information systems and improve customer
service, the addition of leasehold improvements in new stores and the expansion
of facilities at the Franklin Quest Institute of Fitness. Amortization charges
increased $434,000 primarily due to amortization of intangible assets acquired
in connection with the Personal Coaching Division acquisition.
Income taxes were accrued using an effective rate of 40.3% for the
three months ended February 28, 1997, and 40.9% for the same quarter of fiscal
1996. The decrease was caused by a reduction in the Company's calculation of its
effective state income tax rates.
Six Months Ended February 28, 1997 Compared with Six Months Ended February 29,
1996
Sales for the first six months of fiscal 1997 increased $22.9 million,
or 12.3%, over the same period in fiscal 1996. Sales include $5.7 million from
the Personal Coaching Division (TrueNorth) which was not acquired until October
1996.
Product revenue for the first six months of fiscal 1997 increased $18.4
million, or 13.4%, as compared to the first six months of the previous fiscal
year. Retail store sales comprised $8.6 million of this increase which
represents a 16.1% increase compared to the first six months of fiscal 1996.
Most of the remaining increase was realized in the areas of network marketing
and catalog sales.
Training revenue for the first six months grew by approximately $5.5
million or 15.4%, compared to the same period a year ago. This was a result of
the Personal Coaching Division, which was acquired effective October 1, 1996 and
was therefore not included in the amounts for the first six months of fiscal
1996.
Services revenue experienced a decrease of $1.0 million or 8.0%,
compared to the first six months of fiscal 1996. The decrease was primarily a
result of unusually strong sales in the first quarter a year ago from printing a
nationally best selling book and reduced per-unit revenues in the current six
month period due to paper price decreases which affected sales prices of
Publishers Press' outside printing sales.
Gross margin was 58.6% of sales in the first six months of fiscal 1997
compared to 57.2% in the comparable six months of fiscal 1996. The increase was
primarily a result of decreases in paper prices and the addition of the Personal
Coaching Division which generates higher gross margins than the Company's core
products and services.
8
<PAGE> 9
Operating expenses increased to 37.8% of sales for the first six months
of fiscal 1997 compared to 34.3% for the first six months of the previous year.
The increase came primarily from the area of employee expenses which resulted
from staff increases in the areas of sales and technology support. There were
also increased marketing program expenses in the second quarter of fiscal 1997
in comparison to the same quarter a year ago. In addition, operating expenses of
the Personal Coaching Division are generally higher as a percentage of sales
than expenses in the Company's core business. Depreciation and leasehold
amortization charges were higher by $1.6 million compared to the same period a
year ago because of new equipment purchased to augment management information
systems, improve customer service, the addition of leasehold improvements in new
stores and expansion of the facilities at the Franklin Quest Institute of
Fitness. Amortization charges increased by $745,000 primarily due to
amortization of intangible assets acquired in connection with the Personal
Coaching Division acquisition.
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 the sale of Common Stock. Working capital requirements have also
been financed through short-term borrowing. At February 28, 1997, the Company
had $32.6 million in cash and cash equivalents, although $23.0 million was
utilized immediately after the end of the quarter to purchase Premier.
Net cash provided by operating activities during the six months ended
February 28, 1997 was $43.2 million. Net cash used in investing activities was
$17.8 million. Of this total, $5.9 million was invested in property and
equipment, and the balance was used in the acquisition of TrueNorth and a
contingent earn out payment which was paid as part of the acquisition of
Productivity Plus. During the first six months of fiscal 1997, the Company used
$16.0 million to repurchase 860,000 shares of its Common Stock on the open
market.
Working capital during the period decreased by $2.4 million. Management
believes that cash flows and available credit facilities are sufficient to meet
working capital requirements, including anticipated increases in accounts
receivable and inventories associated with sales increases.
Management anticipates using up to $27.0 million in cash along with
shares of the Company's Common Stock for the merger with Covey. Management also
has Board authorization to purchase up to an additional 1,655,000 shares of
Common Stock. Should such authority be exercised at current prices, the Company
would utilize approximately $34.5 million in cash.
The Company also has available lines of credit, not utilized at
February 28, 1997, of $59.0 million.
9
<PAGE> 10
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 September 1996, the Board of Directors approved the
repurchase of up to 2,000,000 shares of the Company's Common
Stock. As of March 27, 1997, the Company had acquired 345,000
shares at an average price of $19.55.
On March 21, 1997, the Company signed a definitive merger
agreement with Covey. See Note 5 to the financial statements
included in this report.
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
Not applicable.
(B) Reports on Form 8-K:
Not applicable.
10
<PAGE> 11
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: ____________________________ By: _________________________
Jon H. Rowberry
President
Chief Operating Officer
Date: ____________________________ By: __________________________
John L. Theler
Executive Vice President
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> DEC-1-1996
<PERIOD-END> FEB-28-1997
<EXCHANGE-RATE> 1
<CASH> 32,583
<SECURITIES> 0
<RECEIVABLES> 30,364
<ALLOWANCES> 952
<INVENTORY> 42,060
<CURRENT-ASSETS> 115,355
<PP&E> 102,047
<DEPRECIATION> 0
<TOTAL-ASSETS> 283,450
<CURRENT-LIABILITIES> 33,404
<BONDS> 5,280
0
0
<COMMON> 1,101
<OTHER-SE> 240,878
<TOTAL-LIABILITY-AND-EQUITY> 283,450
<SALES> 105,958
<TOTAL-REVENUES> 105,958
<CGS> 43,066
<TOTAL-COSTS> 43,066
<OTHER-EXPENSES> 41,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (322)
<INCOME-PRETAX> 21,831
<INCOME-TAX> 8,787
<INCOME-CONTINUING> 13,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,044
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
</TABLE>
