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 28, 1998
[ ] 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:
21,233,885 shares of Common Stock as of January 4, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
November 28, August 31,
1998 1998
----- ----
(unaudited)
ASSETS
- ------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 35,185 $ 27,760
Accounts receivable, less allowance for
doubtful accounts of $3,280 and $2,840 71,305 83,621
Inventories 55,753 47,799
Other current assets 16,379 16,113
---------- ----------
Total current assets 178,622 175,293
Property and equipment, net 125,107 127,268
Goodwill and other intangible assets, net 269,170 270,202
Other long-term assets 23,747 24,514
---------- ----------
$ 596,646 $ 597,277
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 18,654 $ 27,417
Accrued acquisition earnouts 14,900 12,960
Income taxes payable 7,682 5,900
Current portion of long-term debt and capital lease obligations 4,396 4,350
Other current liabilities 37,306 42,726
---------- ----------
Total current liabilities 82,938 93,353
Line of credit 53,500 35,000
Long-term debt and capital lease obligations, less current portion 90,839 91,413
Deferred income taxes 35,857 35,857
---------- ----------
Total liabilities 263,134 255,623
---------- ----------
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 236,456 238,052
Retained earnings 220,685 209,772
Deferred compensation (679) (843)
Accumulated other comprehensive loss (Note 3) (1,209) (2,250)
Treasury stock at cost, 5,824,060 and 4,813,242 shares (123,094) (104,430)
----------- -----------
Total shareholders' equity 333,512 341,654
---------- ----------
$ 596,646 $ 597,277
========== ==========
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
<PAGE>
FRANKLIN COVEY CO.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------
November 28, November 30,
1998 1997
----------------- ----------------
(unaudited)
<S> <C> <C>
Sales $ 140,362 $ 143,919
Cost of sales 53,931 56,650
------------ ------------
Gross margin 86,431 87,269
Selling, general and administrative 56,421 55,250
Depreciation and amortization 9,035 7,384
------------ ------------
Income from operations 20,975 24,635
Interest expense, net (2,160) (1,368)
------------- -------------
Income before income taxes and cumulative
effect of accounting change 18,815 23,267
Provision for income taxes 7,902 9,656
------------ ------------
Income before cumulative effect of accounting
change 10,913 13,611
Cumulative effect of accounting change,
net of tax (Note 5) (2,080)
------------ -------------
Net income $ 10,913 $ 11,531
============ ============
Income from continuing operations per share:
Basic $ .51 $ .55
Diluted .50 .53
Cumulative effect of accounting change, net of tax, per share:
Basic (.08)
Diluted (.08)
Net income per share:
Basic $ .51 $ .47
Diluted .50 .45
Weighted average number of common and common equivalent shares:
Basic 21,413 24,763
Diluted 21,751 25,537
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
<PAGE>
FRANKLIN COVEY CO.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------
November 28, November 30,
1998 1997
----- ----
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 10,913 $ 11,531
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 9,772 8,016
Other adjustments to reconcile net income to net cash provided by operations 972 984
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable 11,876 3,750
Increase in inventories (7,954) (1,038)
Decrease (increase) in other assets 317 (2,578)
Decrease in accounts payable and accrued liabilities (10,557) (11,640)
Increase in income taxes 1,783 7,841
--------- ---------
Net cash provided by operating activities 17,122 16,866
--------- ---------
Cash flows from investing activities:
Acquisition of businesses and earnout payments (1,520) (520)
Purchases of property and equipment (3,304) (7,204)
---------- ----------
Net cash used for investing activities (4,824) (7,724)
---------- ----------
Cash flows from financing activities:
Payments on short-term borrowings (3,625) (3,343)
Proceeds from long-term debt and line of credit 18,650
Payments on long-term debt and capital leases (678) (603)
Purchase of treasury shares (20,751)
Proceeds from treasury stock issuance 490 1,409
--------- ---------
Net cash used for financing activities (5,914) (2,537)
---------- ----------
Effect of foreign exchange rates 1,041 (578)
--------- ----------
Net increase in cash and cash equivalents 7,425 6,027
Cash and cash equivalents at beginning of period 27,760 20,389
--------- ---------
Cash and cash equivalents at end of period $ 35,185 $ 26,416
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 3,781 $ 1,709
========= =========
Income taxes paid $ 6,147 $ 246
========= =========
Fair value of assets acquired $ 1,520 $ 520
Cash paid for net assets (1,520) (520)
--------- ---------
Liabilities assumed from acquisition $ - $ -
--------- ---------
Non-cash investing activities:
Accrued earnout payments $ 1,940 $ -
(See Notes to Consolidated Condensed Financial Statements)
</TABLE>
<PAGE>
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
During the first quarter of fiscal 1999, the Company adopted a modified
52/53 week reporting year that will end on August 31, 1999. Correspondingly,
fiscal quarters will generally consist of 13-week periods that for fiscal 1999
will end on November 28, 1998, February 27, 1999 and May 29, 1999. This change
has resulted in one less business day for the quarter ended November 28, 1998
compared to same quarter in the prior year.
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, 1998.
The results of operations for the quarter ended November 28, 1998 are
not necessarily indicative of results for the entire fiscal year ending August
31, 1999.
In order to conform with the current period presentation, certain
reclassifications have been made in the prior period financial statements.
NOTE 2 - INVENTORIES
<TABLE>
<CAPTION>
Inventories are comprised of the following (in thousands):
November 28, August 31,
1998 1998
(unaudited)
<S> <C> <C>
Finished goods $ 36,559 $ 32,141
Work in process 5,068 5,261
Raw materials 14,126 10,397
----------- -----------
$ 55,753 $ 47,799
=========== ===========
</TABLE>
<PAGE>
NOTE 3 - COMPREHENSIVE INCOME
Effective September 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income and
its components. Comprehensive income includes net income and other revenues,
expenses, gains and losses that are excluded from net income but are included as
components of shareholders' equity. Comprehensive income for the Company is as
follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------
November 28, November 30,
1998 1997
--------------- --------------
(unaudited)
<S> <C> <C>
Net income $ 10,913 $ 11,531
Other comprehensive income (loss):
Foreign currency translation
adjustments 1,041 (578)
--------- ----------
Comprehensive income $ 11,954 $ 10,953
========= =========
</TABLE>
NOTE 4 - NET INCOME PER COMMON SHARE
Basic earnings per share ("EPS") is calculated by dividing income from
continuing operations by the weighted-average number of common shares
outstanding for the period. Diluted EPS is calculated by dividing income from
continuing operations by the weighted-average number of common shares
outstanding plus the assumed exercise of all dilutive securities using the
treasury stock method. Significant components of the numerator and denominator
used for Basic and Diluted EPS are as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------
November 28, November 30,
1998 1997
--------------- --------------
(unaudited)
<S> <C> <C>
Income before accounting change $ 10,913 $ 13,611
Cumulative effect of accounting
change, net of tax (2,080)
--------- ----------
Net income $ 10,913 $ 11,531
========= =========
Basic weighted-average shares
outstanding 21,413 24,763
Incremental shares from assumed
exercises of stock options 338 774
--------- ---------
Diluted weighted-average shares
outstanding and common stock
equivalents 21,751 25,537
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Income from continuing operations per share:
<S> <C> <C>
Basic $ .51 $ .55
Diluted .50 .53
Cumulative effect of accounting
change, net of tax, per share:
Basic (.08)
Diluted (.08)
Net income per share:
Basic $ .51 $ .47
Diluted .50 .45
</TABLE>
NOTE 5 - CHANGE IN ACCOUNTING PRINCIPLE
During the first quarter of fiscal 1998, the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board ("FASB") issued consensus
ruling 97-13 which requires certain business reengineering and information
technology implementation costs to be expensed as incurred rather than
capitalized. In addition, because the change was retroactive, any previously
capitalized costs that were addressed by EITF 97-13 were written off and
recorded as a cumulative adjustment in the Company's quarter ended November 30,
1997.
The Company is currently involved in a business reengineering and
information system implementation project (the "Project") and has accounted for
such costs in accordance with EITF 97-13 and other related accounting
pronouncements. The Company expects that the majority of the remaining costs
associated with the Project will qualify for capitalization in accordance with
EITF 97-13.
NOTE 6 - SHAREHOLDERS' EQUITY
During the quarter ended November 28, 1998, the Company purchased 1.1
million shares of its common stock for $20.8 million. Of this amount, 130,000
shares were purchased from an officer of the Company for $17.63 per share when
the concurrent market price was $17.88 per share. The Company also issued 96,182
shares of treasury stock in connection with stock option exercises and the
employee stock purchase plan during the quarter ended November 28, 1998.
NOTE 7 - SUBSEQUENT EVENTS
The purchase agreements for Premier Agendas ("Premier") and TrueNorth
("Personal Coaching") contain provisions for additional contingent earnout
payments to be made based upon the achievement of specified operating
performance marks. Subsequent to November 28, 1998, the Company paid $11.2
million to the former owners of Premier and $3.7 million to the former owners of
Personal Coaching for operating performance during the measurement period.
Contingent earnout payments are classified as additional goodwill and are
amortized over the remaining life of the goodwill established at the purchase
date.
During December 1998, the Company granted incentive options to purchase
703,800 shares of common stock with an exercise price of $17.69 per share which
represents the fair market value on the date of grant. The options were granted
to key employees and vest over a four-year period.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2.
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
year ended August 31, 1998.
RESULTS OF OPERATIONS
During the first quarter of fiscal 1999, the Company organized its
operations into the following three Strategic Business Units ("SBUs"):
o Consumer Products
o Training and Education
o International
The Consumer Products SBU is responsible for distribution of the
Company's products through retail stores, catalog sales, mass markets, contract
stationers, technology and the Internet. The Training and Education SBU, which
includes Premier, Personal Coaching and Productivity Plus, is responsible for
training, consulting and implementation services, and delivery of products to
corporations, business, government and educational institutions. The
International SBU is responsible for products and services delivered outside the
United States. In addition to these SBUs, the Company defined four support units
which provide essential operating and administrative support services to the
SBUs. The support units are comprised of Finance, Legal, Information Systems and
Manufacturing and Distribution. The Company anticipates that this organizational
alignment will allow the Company to more proactively meet the needs of its
customers.
The following table sets forth selected data concerning sales of the
Company's SBU's (dollars in thousands):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------
November 28, November 30,
1998 1997 Variance %
---------------- ---------------- ----------
(unaudited)
<S> <C> <C> <C>
Consumer Products $ 74,613 $ 74,632 0
Training and Education 42,848 46,463 (8)
International 14,701 12,270 20
Other 8,200 10,554 (22)
----------- -----------
$ 140,362 $ 143,919 (2)
=========== ===========
</TABLE>
Inflation and price increases did not have a material effect upon the
sales of the Company during the quarter ended November 28, 1998.
<PAGE>
Quarter Ended November 28, 1998 Compared with the Quarter Ended
November 30, 1997
- --------------------------------------------------------------------------------
Consumer Products sales were flat compared to the first quarter of
fiscal 1998. Sales increases from the Company's retail stores, mass markets,
contract stationers, technology related products and the Internet were offset by
a decrease in sales from catalog operations. Retail store sales increased
compared to the same period in the prior year primarily due to the addition of
eight new stores. The increase from new store sales was offset by a 2% decrease
in comparable store sales versus the same period in the prior year. At November
28, 1998, the Company was operating 125 retail stores compared to 117 stores at
November 30, 1997. The Company also had increased sales over the same period of
the prior year from its mass marketing and contract stationer channels due to
increased demand and new marketing and distribution agreements. In addition,
technology sales increased compared to the prior year primarily due to an
increase in demand for electronic-based organizers, including items such as the
PalmPilot(TM) and the Company's Ascend(R) software. Increased sales from these
channels were offset by a decrease in catalog sales. A portion of the decrease
in catalog sales and comparable store sales is attributable to sales increases
from other distribution channels including mass markets, contract stationers and
the Internet.
Training and Education sales decreased by $3.6 million, or 8%, compared
to the first quarter of fiscal 1998. Training sales decreased compared to the
prior year due to decreases in core program sales, primarily from public
leadership seminars. In addition, sales from Premier and Productivity Plus
decreased compared to the same quarter of fiscal 1998 due to the timing of
school agendas shipped and declining government sales resulting from changes in
the procurement process. Offsetting these decreases, the Company's network
marketing sales increased due to the addition of new network marketing business.
Also, Personal Coaching program sales increased slightly compared to the same
period of the prior year.
International sales increased by $2.4 million, or 20%, compared to the
quarter ended November 30, 1997 due to the acquisition of King Bear (located in
Japan) which added $3.7 million in sales to the quarter ended November 28, 1998.
Decreased sales in Canada and the United Kingdom, combined with flat sales
performance in other geographic regions offset the increased sales from King
Bear. In addition, generally weaker exchange rates adversely affected reported
sales compared to the prior year.
Other sales, which consist primarily of the Company's commercial
printing services and fitness training sales, decreased $2.4 million, or 22%,
compared to the prior year. The decrease is due to the sale of the Company's
Institute of Fitness which recognized $2.3 million of sales during the first
quarter of fiscal 1998, but was sold during the fourth quarter of fiscal 1998.
Gross margin was 61.6% of sales for the quarter ended November 28,
1998, compared to 60.6% for the quarter ended November 30, 1997. Although the
Company increased its sales of lower margin products through mass market and
contract stationer channels, gross margin has improved due to manufacturing
process improvements, enhanced inventory management procedures and expanded
internal production capacity. During fiscal 1998, and as part of its business
transformation project, the Company identified and implemented procedures to
improve its production and materials management processes. As a result, improved
purchasing and production processes have reduced the cost of raw materials and
manufactured products. In addition, the Company improved its inventory
<PAGE>
management procedures which reduced product obsolescence as compared to the same
quarter of the prior year. With improved manufacturing processes and the
acquisition of certain manufacturing equipment, the Company was also able to
complete more printing and tabbing work internally which generated additional
savings during the first quarter of fiscal 1999.
Selling, general and administrative ("SG&A") expenses increased $1.2
million to 40.2% of sales, compared to 38.4% of sales during the quarter ended
November 30, 1997. The increase is primarily due to the acquisition of King Bear
which added $2.6 million of SG&A expenses during the first quarter of fiscal
1999. In addition, SG&A expenses increased due to new store openings. These
increases were offset by decreases in operating costs resulting from the sale of
the Institute of Fitness which had $1.0 million of SG&A expenses during the
first quarter of fiscal 1998, and by decreases in other core operating costs
compared to the same period in the prior year.
Depreciation charges increased by $0.9 million over the corresponding
quarter of the prior year due to new computer equipment purchased in conjunction
with the business transformation project, new printing presses and other
manufacturing equipment, and the addition of leasehold improvements for new
stores. Amortization charges increased by $0.7 million compared to the prior
year due to the acquisition of King Bear, contingent earnout payments made
during fiscal 1998 and amortization of certain business transformation costs.
Income taxes have been accrued using an effective rate of 42.0% for the
quarter ended November 28, 1998 compared to 41.5% for the same quarter of the
prior year. The increase was primarily due to additional non-deductible goodwill
generated from the Premier contingent earnout payment.
During fiscal 1998, the EITF of the FASB issued consensus ruling 97-13,
which specifies the accounting treatment of certain business reengineering and
information technology implementation costs. In connection with the project, the
Company has capitalized costs in accordance with generally accepted accounting
principles. Certain previously capitalized costs of the project were written off
in accordance with EITF 97-13 and recorded as a cumulative adjustment during the
Company's first quarter of fiscal 1998. The cumulative amount written off during
the first quarter of fiscal 1998 was $2.1 million, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of capital have been net
cash provided by operating activities, long-term borrowings, and line of credit
financing. Working capital requirements have also been financed through
short-term borrowings.
Net cash provided by operating activities during quarter ended November
28, 1998 was $17.1 million compared to $16.9 million in the prior year.
Adjustments to net income included $9.8 million of depreciation and amortization
charges during the first quarter of fiscal 1999. The primary source of cash from
operations was the collection of accounts receivable. The decline in accounts
receivable was primarily from Premier which has seasonally high sales during the
Company's fourth fiscal quarter. The primary use of cash was the payment of
accounts payable and accrued liabilities. The decrease in accounts payable and
accrued liabilities is also primarily due to the seasonal nature of Premier's
operations and a concerted effort to utilize purchase discounts.
Net cash used for investing activities totaled $4.8 million during the
first quarter of fiscal 1999 compared to $7.7 million in the prior year. Of this
<PAGE>
amount, $3.3 million was used to purchase computer hardware and software,
manufacturing equipment, leasehold improvements and other property and
equipment. The remaining $1.5 million was used to complete the purchase of King
Bear which was effective April 1, 1998.
Net cash used for financing activities was $5.9 million for the quarter
ended November 28, 1998 compared to $2.5 million in the prior year. The primary
uses of financing cash were the payment of Premier's short-term line of credit
and the purchase of 1.1 million shares the Company's common stock for $20.8
million. Cash from financing sources was primarily derived from the Company's
long-term line-of-credit facility. The Company has unsecured bank lines of
credit available for working capital needs totaling $89.0 million, of which
$53.5 million was outstanding at November 28, 1998. The lines of credit and
$85.0 million long-term notes payable require the Company to maintain certain
financial ratios and working capital levels. The Company was in compliance with
the borrowing covenants associated with these debt instruments as of November
28, 1998.
Working capital during the quarter ended November 28, 1998 increased by
$13.7 million. Management anticipates that its existing capital resources and
available lines of credit will be sufficient to maintain current operations and
planned growth for the foreseeable future.
MARKET RISK OF FINANCIAL INSTRUMENTS
The Company has exposure to market risk from foreign currency exchange
rates and changes in interest rates. To manage the volatility related to
currency exchange rates, the Company has entered into limited derivative
transactions to manage well-defined foreign exchange risks. However, the
notional amount of the exchange contracts is immaterial and any default by
counterparties, although unlikely, would have an insignificant effect on the
Company's financial statements. As the Company continues to expand
internationally, the Company's use of foreign exchange contracts may grow in
order to manage the foreign currency risks to the Company. As of November 28,
1998, the Company has not entered into derivative instruments to hedge its
exposure to interest rate risk.
YEAR 2000 ISSUES
The Company is actively engaged in assessing and correcting potential
year 2000 ("Y2K") information system problems. During fiscal 1997, the Company
initiated a business reengineering and information system implementation project
that affects nearly every aspect of the Company's operations. In an effort to
address compliance issues, the scope of the Project was expanded to ensure Y2K
compliance for newly acquired software and hardware. The Project has three
significant phases that are designed to improve both operating processes and
information systems capabilities.
The first phase of the Project included hardware and software for the
Company's financial reporting and manufacturing operations. During fiscal 1998,
phase one was completed with hardware and software that has been tested and
certified as Y2K compliant by the manufacturers. Phase two focuses on payroll
and human resource applications and became operational in January 1999 with
hardware and software that has been tested and certified as Y2K compliant by the
manufacturers. Phase three addresses the "Order to Collect" systems and is
expected to be completed in various stages through the year 2000 with critical
applications to be made Y2K compliant before the end of 1999.
<PAGE>
State of Readiness
- ------------------
The Company's information systems fall into four general categories:
(i) Financial, (ii) Supply Chain, (iii) Order to Collect, and (iv) Office
Support. The Financial system includes the general ledger, accounts payable,
sales and use tax calculations, payroll and human resources applications. Phase
one of the Project provided systems that are Y2K compliant for the general
ledger, accounts payable and sales and use tax calculations. Payroll and human
resource systems are the subject of phase two, which was made operational and
compliant in January 1999.
The Supply Chain system includes applications for production planning,
purchasing and product management. These systems were also an element of phase
one and are certified by the hardware and software manufacturers as Y2K
compliant.
The Company's Order to Collect system includes applications for order
entry, seminar registration, retail sales, order fulfillment, order shipping,
invoicing and collections. These systems will be affected by phase three of the
Project and completion is expected in various stages through the year 2000. As a
result, the Order to Collect system has been reviewed for non-compliance.
Certain Y2K issues have been noted in the seminar registration and database
applications, third-party utilities and services (primarily telephones,
electrical, bankcard processing services and shipping services) and the accounts
receivable database and invoicing system. The Company is currently working to
obtain software upgrades for the critical applications, as well as certification
letters from service providers, to mitigate potential exposure in these areas.
The Office Support system includes network hardware and operating
systems, desktop and laptop computers and servers. The Company is in the process
of evaluating Y2K compliance for these systems and has identified potential
compliance issues primarily related to imbedded time clocks in older hardware
and equipment. However, since the majority of the Company's hardware has been
replaced or upgraded over the past two years, critical systems compliance is not
expected to be a major issue.
The Company is also in the process of evaluating non-information
systems for Y2K compliance. Non-compliance issues have been identified and
prioritized to ensure that critical functions of the business will be
operational before the year 2000.
Cost to Address Y2K Issues
- --------------------------
As of November 28, 1998, the Company has spent $7.5 million on hardware
and $3.6 million for software in connection with the Project. Consultants were
hired to implement software modules and improve business processes, but not
necessarily to provide specific Y2K remediation services. The Company also has
commitments of $6.4 million for purchased software and expects to spend an
additional $1.2 million in other direct costs related to the assessment and
correction of potential Y2K issues as of November 28, 1998.
Risk of the Company's Y2K Issues
- --------------------------------
The Company anticipates that the risks related to its information and
non-information systems will be mitigated by current efforts being made in
conjunction with the Project as well as ongoing assessment and correction
programs. However, the primary Y2K risk to the Company's operations is service
disruption from third-party providers that supply telephone, electrical, banking
<PAGE>
and shipping services. Any disruption of these critical services would hinder
the Company's ability to receive, process and ship orders. Therefore, efforts
are currently underway to obtain Y2K compliance certification from the Company's
major service providers.
Contingency Plans
- -----------------
The Company has not yet approved a formal contingency plan for Y2K
issues. However, the Company does have well-defined manual processes which could
be used in the event of system and service disruption. A formal contingency plan
is expected to be completed and approved during fiscal 1999.
"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. Such uncertanties include, but
are not limited to, unanticipated developments in any one or more of the
following areas: the integration of acquired or merged businesses, management of
growth, dependence on products or services, the rate and consumer acceptance of
new product introductions, competition, Y2K issues, the number and nature of
customers and their product orders, pricing, pending and threatened litigation,
and other risk factors which may be detailed from time to time in the Company's
press releases, reports to shareholders and in the Securities and Exchange
Commission filings.
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, the business risks described in the Company's Form 10-K Report for
the year ended August 31, 1998 and elsewhere in the Company's filings with the
Securities and Exchange Commission.
<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 October 1998, the Board of Directors approved the purchase
of up to 2,000,000 shares of the Company's common stock. As of
January 4, 1999, 8,264 of these shares had been purchased, at
an average price of $19.00 per share.
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
Not applicable.
(B) Reports on Form 8-K:
Not applicable.
<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 Executive Officer
Date: _______________________ By: ________________________
John L. Theler
Executive Vice President
Chief Financial Officer
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