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 November 30, 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 COVEY 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:
24,815,921 shares of Common Stock as of January 5, 1998
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(in thousands, except share amounts)
<TABLE>
<CAPTION>
November 30, August 31,
1997 1997
------------- -------------
(unaudited)
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,416 $ 20,389
Accounts receivable, less allowance for
doubtful accounts of $2,494 and $1,931 67,780 71,840
Inventories 56,786 55,748
Income taxes receivable 6,094
Other current assets 16,013 15,672
------ ------
Total current assets 166,995 169,743
Property and equipment, net 122,749 119,768
Goodwill and other intangible assets, net 267,448 269,219
Other long-term assets 14,124 13,457
------ ------
$ 571,316 $ 572,187
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 19,575 $ 31,611
Accrued acquisition earnouts 8,500 9,000
Other current liabilities 45,590 46,292
------ ------
Total current liabilities 73,665 86,903
Line of credit 86,000 86,000
Deferred income taxes 36,177 35,735
Long-term debt, less current portion 5,484 5,870
Capital lease obligations, less current portion 2,058 2,274
----- -----
Total liabilities 203,384 216,782
------- -------
Shareholders' equity:
Common stock, $0.05 par value, 40,000,000
shares authorized, 27,055,894 shares issued 1,353 1,353
Additional paid-in capital 238,805 239,699
Retained earnings 181,245 169,714
Deferred compensation (1,332) (1,495)
Cumulative translation adjustments (1,511) (934)
Treasury stock at cost, 2,269,921 and 2,373,223 shares (50,628) (52,932)
------- -------
Total shareholders' equity 367,932 355,405
------- -------
$ 571,316 $ 572,187
========== ==========
(See Notes to Consolidated Condensed Financial Statements)
</TABLE>
2
<PAGE>
FRANKLIN COVEY CO.
------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
-------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
November 30, November 30,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Sales $ 143,919 $ 102,377
Cost of sales 56,650 43,275
------ ------
Gross margin 87,269 59,102
Operating expenses 62,634 37,381
------ ------
Income from operations 24,635 21,721
Interest and other, net (1,368) 75
------ --
Income before income taxes and cumulative
effect of accounting change 23,267 21,796
Provision for income taxes 9,656 8,772
----- -----
Income before cumulative effect of accounting
change 13,611 13,024
Cumulative effect of accounting change,
net of tax (Note 5) (2,080)
------
Net income $ 11,531 $ 13,024
============ ============
Income per common share before cumulative
effect of accounting change $ 0.53 $ 0.62
Accounting change per common share (0.08)
-----
Net income per common share $ 0.45 $ 0.62
=========== ===========
Weighted average number of common and common
equivalent shares 25,537 20,909
====== ======
(See Notes to Consolidated Condensed Financial Statements)
</TABLE>
3
<PAGE>
FRANKLIN COVEY CO.
------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,531 $ 13,024
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 8,016 4,574
Deferred taxes 442 354
Other changes in assets and liabilities (6,113) 1,656
------ -----
Net cash provided by operating activities 13,876 19,608
------ ------
Cash flows from investing activities:
Acquisition of businesses (520) (11,684)
Purchases of property and equipment (7,204) (3,237)
------ ------
Net cash used in investing activities (7,724) (14,921)
------ -------
Cash flows from financing activities:
Payments on short-term borrowings (353)
Proceeds from long-term debt 164
Payments on long-term debt and capital leases (603) (181)
Purchase of treasury shares (16,016)
Proceeds from treasury stock issuance 1,409 194
----- ---
Net cash provided by (used in) financing activities 453 (15,839)
--- -------
Effect of foreign exchange rates (578) (76)
---- ---
Net increase (decrease) in cash and cash equivalents 6,027 (11,228)
Cash and cash equivalents at beginning of period 20,389 24,041
------ ------
Cash and cash equivalents at end of period $ 26,416 $ 12,813
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 1,709 $ 143
--------- ---------
Income taxes paid 246 107
--- ---
Fair value of assets acquired $ 520 $ 12,155
Cash paid for net assets (520) (11,684)
----- -------
Liabilities assumed from acquisition 0 471
----- -------
Supplemental schedule of non-cash investing and financing activities:
Tax effect of exercise of affiliate stock options 13
(See Notes to Consolidated Condensed Financial Statements)
</TABLE>
4
<PAGE>
FRANKLIN COVEY CO.
------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Effective June 2, 1997 Franklin Quest Co. merged with the Covey Leadership
Center ("Covey") to form Franklin Covey Co. (the "Company"). Accordingly, the
results of operations and Statement of Cash Flows for the three months ended
November 30, 1996 do not include the results of operations or the financial
position of Covey Leadership Center for the period then ended. Pro forma
information related to the Covey merger is presented in Note 4 to these
financial statements.
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 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 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, 1997. The Company also suggests reading this report
in conjunction with the definitive Proxy Statement relating to the Covey merger
which was filed with the Securities and Exchange Commission on April 30, 1997
which includes certain pro forma financial information giving effect to the
merger.
The results of operations for the three months ended November 30, 1997 are
not necessarily indicative of results for the entire fiscal year ending August
31, 1998.
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>
November 30, August 31,
1997 1997
---- ----
(unaudited)
<S> <C> <C>
Finished Goods $ 39,187 $ 40,955
Work in Process 6,078 7,286
Raw Materials 11,521 7,507
------ -----
$ 56,786 $ 55,748
=========== ===========
</TABLE>
5
<PAGE>
NOTE 4 - PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the Covey merger and the
acquisition of Premier School Agendas had occurred at the beginning of the
fiscal year ended August 31, 1997. Pro forma adjustments have been made to give
effect to amortization of goodwill, interest expense on acquisition debt and
certain other adjustments. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the Covey merger and the
acquisition of Premier School Agendas been in effect for the entire three months
of the first quarter of the fiscal year ended August 31, 1997.
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
(Unaudited and in thousands except for per share amounts) November 30,
------------
1997 1996
---- ----
(actual) (pro forma)
-------- -----------
<S> <C> <C>
Sales $ 143,919 $ 132,768
Income from Operations 24,635 23,048
Income Before Cumulative Effect of Accounting Change 13,611 13,354
Net Income 11,531 13,354
Earnings per Share Before Cumulative Effect of
Accounting Change $ 0.53 $ 0.52
Earnings per Share 0.45 0.52
</TABLE>
NOTE 5 - CHANGE IN ACCOUNTING PRINCIPLE
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board issued consensus ruling 97-13 which
requires certain business reengineering and information technology
implementation costs that have previously been capitalized to now be expensed as
incurred. In addition, any previously capitalized costs which are addressed by
EITF 97-13 must also be written off as a cumulative adjustment in the quarter
containing November 20, 1997.
The Company is currently involved in a business reengineering and
information system implementation project and has capitalized costs in
accordance with previously accepted accounting standards. Certain capitalized
costs of the project have been written off in accordance with EITF 97-13 during
the Company's first fiscal quarter. The Company expects that the majority of the
remaining costs associated with the business reengineering project will qualify
for capitalization in accordance with EITF 97-13.
6
<PAGE>
FRANKLIN COVEY 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 Management's Discussion
and Analysis included in the Company's Annual Report to Shareholders for the
fiscal year ended August 31, 1997.
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
November 30,
1997 1996 Change
---- ---- ------
(in thousands)
<S> <C> <C> <C>
Product $ 90,015 $ 74,934 20%
Training 45,844 20,667 122%
Printing Services 8,060 6,776 19%
----- -----
$ 143,919 $ 102,377 41%
=========== ===========
</TABLE>
Three Months Ended November 30, 1997 Compared with Three Months Ended November
- ------------------------------------------------------------------------------
30, 1996
- --------
Sales for the three months ended November 30, 1997 increased $41.5 million,
or 41%, over the same period in 1996, primarily as a result of the Covey merger,
an increase in the number of Franklin Covey Planners sold, an increase in the
number of participants attending public seminars and the effects of other
corporate acquisitions.
Product sales increased $15.1 million or 20% compared to the first quarter
of fiscal 1996. Increases in retail store sales comprised $8.5 million of this
amount. The increase in retail store sales is due in large part to the number of
stores opened during the past twelve months. At the end of the current quarter,
there were 117 retail stores open compared to 93 retail stores at November 30,
1996. The increase in comparable store sales (comparing the 93 stores that were
open during the entire first quarter in both years) was 10%. An additional $2.5
million of the increase was due to current quarter revenues of Premier School
Agendas, Inc. ("Premier"), which was acquired subsequent to the first quarter of
the prior year. Catalog sales contributed another $4.2 million of the increase
in product sales compared to the first quarter last year.
Training sales increased by $25.2 million or 122% compared to the first
quarter of fiscal 1996. This increase was primarily caused by training sales of
Covey. The Company expects that, in the future, training sales as a percentage
of total sales will decline because product sales will increase at a faster rate
due to strong renewals of replacement planners.
7
<PAGE>
Printing service revenues, comprised primarily of the external sales of
Publishers Press, Inc., increased by $1.3 million, or 19%, compared to the first
quarter last year. The increase was primarily a result of several large printing
jobs being sold and delivered during the quarter as well as the incremental
printing service revenues from Premier's printing division which was acquired
subsequent to the first quarter of the prior year.
Gross margin was 60.6% of sales in the three months ended November 30,
1997, compared to 57.7% for the same period in 1996. The increase was primarily
caused by the effects of the merger with Covey which had a gross profit margin,
as a percentage of sales, which was larger than that of the Company, taken as a
whole. This was caused by higher markups on certain of their products and the
mix between revenue for products and services.
Operating expenses, consisting primarily of selling, general and
administrative expenses, increased by 7.0% as a percentage of sales during the
three months ended November 30, 1997 (43.5% compared to 36.5% in the same period
of 1996). The increase reflects the higher operating expenses, as a percentage
of sales, of Covey and Premier, as well as overall increases in operating
expenses for the Company as a whole. Depreciation and leasehold amortization
charges were higher by $1.3 million because of the larger asset base resulting
from the merger, new equipment purchases and the addition of leasehold
improvements in new stores. Amortization charges also increased by $2.3 million
from amortization of intangible assets acquired in connection with the merger
with Covey and the acquisition of Premier.
On November 20, 1997, the EITF of the Financial Accounting Standards Board
issued a consensus ruling which requires that certain business and information
system reengineering costs that would have been capitalized must now be expensed
as incurred. In addition, reengineering costs previously capitalized were
required to be written off as a cumulative adjustment during the Company's
quarter ended November 30, 1997. In accordance with this ruling, the Company
recorded a charge of $2.1 million, net of related income taxes, during the
current quarter to charge off certain costs of its business and information
systems reengineering project that had been previously capitalized.
Income taxes have been accrued using an effective rate of 41.5% for the
three months ended November 30, 1997 compared to 40.3% for the same quarter of
1996. The increase was due primarily to non-deductible goodwill generated from
the merger and 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 November 30, 1997 the Company had $26.4 million
in cash and cash equivalents.
Net cash provided by operating activities during the three months ended
November 30, 1997 was $13.9 million. Net cash used in investing activities was
$7.7 million which was primarily used to purchase property and equipment.
Working capital during the period increased by $10.5 million. Management
believes that cash flows and resources are sufficient to meet working capital
requirements, including increases in accounts receivable and inventories
associated with anticipated sales increases.
8
<PAGE>
The Company has unsecured bank lines of credit available for working
capital needs totaling $104.0 million, of which $86.0 million was outstanding as
of November 30, 1997. The Company was in compliance with the borrowing covenants
associated with these lines of credit as of November 30, 1997.
"Safe Harbor" Statement Under the Private Securities Litigation Reform
Act of 1995
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. These forward-looking statements
are based on management's expectations as of the date hereof, and the Company
does not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these 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 the Company's filings with the
Securities and Exchange Commission.
9
<PAGE>
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 2,000,000 shares of the Company's Common Stock.
As of January 5, 1998, 1,205,000 of these shares had been
purchased, at an average price of $22.49 per share.
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
Not applicable.
(B) Reports on Form 8-K:
Not applicable.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN COVEY CO.
Date: ____________________________ By: _________________________
Jon H. Rowberry
President
Chief Operating Officer
Date: ____________________________ By: __________________________
John L. Theler
Executive Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000886206
<NAME> FRANKLIN COVEY CO
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1.0
<CASH> 26,416
<SECURITIES> 0
<RECEIVABLES> 70,274
<ALLOWANCES> 2,494
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<BONDS> 93,542
0
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<COMMON> 1,353
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<SALES> 143,919
<TOTAL-REVENUES> 143,919
<CGS> 56,650
<TOTAL-COSTS> 56,650
<OTHER-EXPENSES> 62,634
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</TABLE>
