SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 29, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file no. 1-11107
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) 817-1776
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X
---
No
---
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock as of the latest practicable date:
20,361,736 shares of Common Stock as of July 2, 1999
Page 1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(in thousands, except share amounts)
<TABLE>
<CAPTION>
May 29, August 31,
1999 1998
--------- ---------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 22,976 $ 27,760
Accounts receivable, less allowance for
doubtful accounts of $2,971 and $2,840 53,691 83,621
Inventories 62,992 47,799
Income taxes receivable 6,627
Other current assets 19,394 16,113
---------- ----------
Total current assets 165,680 175,293
Property and equipment, net 127,397 127,268
Goodwill and other intangible assets, net 265,371 270,202
Other long-term assets 24,019 24,514
---------- ----------
$ 582,467 $ 597,277
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 14,053 $ 27,417
Accrued acquisition earnouts 1,725 12,960
Income taxes payable 5,900
Lines of credit 6,218 3,625
Current portion of long-term debt and capital lease obligations 3,572 4,350
Other current liabilities 41,677 39,101
---------- ----------
Total current liabilities 67,245 93,353
Line of credit 65,000 35,000
Long-term debt and capital lease obligations, less current portion 89,389 91,413
Deferred income taxes 35,857 35,857
---------- ----------
Total liabilities 257,491 255,623
---------- ----------
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 234,655 238,052
Retained earnings 222,647 209,772
Deferred compensation (435) (843)
Accumulated other comprehensive loss (Note 3) (1,106) (2,250)
Treasury stock at cost, 6,705,037 and 4,813,242 shares (132,138) (104,430)
---------- ----------
Total shareholders' equity 324,976 341,654
---------- ----------
$ 582,467 $ 597,277
========== ==========
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
Page 2
<PAGE>
FRANKLIN COVEY CO.
------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
-------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
-------------------------------- -------------------------------
May 29, May 31, May 29, May 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 109,267 $ 107,542 $ 386,718 $ 390,025
Cost of sales 50,745 42,728 162,638 152,874
--------- --------- --------- ---------
Gross margin 58,522 64,814 224,080 237,151
Selling, general and administrative 54,647 53,825 167,168 163,283
Depreciation and amortization 10,003 8,586 28,435 24,262
--------- --------- --------- ---------
Income (loss) from operations (6,128) 2,403 28,477 49,606
Interest and other, net (1,794) (1,600) (6,279) (4,233)
--------- --------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change (7,922) 803 22,198 45,373
Provision (benefit) for income taxes (3,327) 333 9,323 18,830
--------- --------- --------- ---------
Income (loss) before cumulative effect of
accounting change (4,595) 470 12,875 26,543
Cumulative effect of accounting change,
net of tax (Note 5) (2,080)
--------- --------- --------- ----------
Net income (loss) $ (4,595) $ 470 $ 12,875 $ 24,463
========== ========= ========= =========
Income (loss) from continuing operations per
share:
Basic $ (.22) $ .02 $ .61 $ 1.08
Diluted (.22) .02 .60 1.05
Cumulative effect of accounting change, net of tax, per share:
Basic (0.08)
Diluted (0.08)
Net income (loss) per share:
Basic $ (.22) $ .02 $ .61 $ 1.00
Diluted (.22) .02 .60 .97
Weighted average number of common and common equivalent shares:
Basic 20,522 24,040 21,252 24,522
Diluted 20,522 24,732 21,461 25,227
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
Page 3
<PAGE>
FRANKLIN COVEY CO.
------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
May 29, May 31,
1999 1998
----- ----
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 12,875 $ 24,463
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 31,763 27,123
Other adjustments to reconcile net income to net cash provided by operations 1,350 1,637
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable 29,799 19,147
Increase in inventories (15,193) (7)
Increase in other assets (4,933) (11,735)
Decrease (increase) in income taxes (12,527) 4,737
Decrease in accounts payable and accrued liabilities (16,666) (9,684)
--------- ---------
Net cash provided by operating activities 26,468 55,681
--------- ---------
Cash flows from investing activities:
Acquisition of businesses and earnout payments (19,025) (16,786)
Purchases of property and equipment (17,849) (21,118)
--------- ---------
Net cash used for investing activities (36,874) (37,904)
--------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings 12,011
Payments on short-term borrowings (3,625) (3,880)
Proceeds from long-term debt and line of credit 30,727 110,037
Payments on long-term debt and capital leases (3,528) (86,672)
Purchase of treasury shares (32,709) (28,471)
Proceeds from treasury stock issuance 1,604 3,438
--------- ---------
Net cash provided by (used for) financing activities 4,480 (5,548)
--------- ---------
Effect of foreign exchange rates 1,142 (1,465)
--------- ---------
Net increase (decrease) in cash and cash equivalents (4,784) 10,764
Cash and cash equivalents at beginning of period 27,760 20,389
--------- ---------
Cash and cash equivalents at end of period $ 22,976 $ 31,153
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 8,812 $ 5,386
Income taxes paid 21,453 14,569
Fair value of assets acquired $ 19,025 $ 18,943
Cash paid for net assets (19,025) (16,786)
--------- ---------
Liabilities assumed from acquisitions $ - $ 2,157
========= =========
Non-cash investing activities:
Accrued acquisition earnouts $ 1,725 $ 875
</TABLE>
(See Notes to Consolidated Condensed Financial Statements)
Page 4
<PAGE>
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
During the first quarter of fiscal 1999, Franklin Covey Co. (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 resulted in one additional business day during the
quarter ended May 29, 1999 compared to the quarter ended May 31, 1998. However,
the nine months ended May 29, 1999 had the same number of business days as the
nine months ended May 31, 1998.
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 quarterly 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 and nine months ended May 29,
1999 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
Inventories are comprised of the following (in thousands):
<TABLE>
May 29, August 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Finished goods $ 41,815 $ 32,141
Work in process 5,733 5,261
Raw materials 15,444 10,397
----------- -----------
$ 62,992 $ 47,799
=========== ===========
</TABLE>
Page 5
<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 (loss) 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 (loss) for
the Company is as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------------------- ----------------------------------
May 29, May 31, May 29, May 31,
1999 1998 1999 1998
-------------- --------------- --------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ (4,595) $ 470 $ 12,875 $ 24,463
Other comprehensive income (loss):
Foreign currency translation
adjustments 217 (1,019) 1,144 (1,465)
--------- --------- --------- ---------
Comprehensive income (loss) $ (4,378) $ (549) $ 14,019 $ 22,998
========= ========= ========= =========
</TABLE>
NOTE 4 - SHAREHOLDERS' EQUITY
During the quarter ended May 29, 1999, the Company purchased 633,000
shares of its common stock for $6.0 million. For the nine months ended May 29,
1999, the Company has purchased 2.1 million shares of its common stock for $32.7
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. An additional 92,000 shares were purchased from a former officer and
director for $12.75 per share when the concurrent market price was $13.00 per
share. The Company also issued 234,000 shares of treasury stock in connection
with stock option exercises and the employee stock purchase plan during the nine
months ended May 29, 1999.
In October 1998, the Board of Directors approved the purchase of up to
2.0 million shares of the Company's common stock. As of June 17, 1999, the
Company had 1.0 million shares remaining for purchase under the current plan.
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.
Page 6
<PAGE>
NOTE 6 - 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. During periods of net operating loss, all common stock
equivalents are considered antidilutive and are excluded from the diluted
earnings per share calculation. 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 Nine Months Ended
---------------------------------- ----------------------------------
May 29, May 31, May 29, May 31,
1999 1998 1999 1998
-------------- --------------- --------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Income (loss) before accounting change $ (4,595) $ 470 $ 12,875 $ 26,543
Cumulative effect of accounting
change, net of tax (2,080)
--------- --------- --------- ---------
Net income (loss) $ (4,595) $ 470 $ 12,875 $ 24,463
========== ========= ========= =========
Basic weighted-average shares
outstanding 20,522 24,040 21,252 24,522
Incremental shares from assumed
exercises of stock options 692 209 705
--------- --------- --------- ---------
Diluted weighted-average shares
outstanding and common stock
equivalents 20,522 24,732 21,461 25,227
========= ========= ========= =========
Income (loss) from continuing Operations
per share:
Basic $ (.22) $ .02 $ .61 $ 1.08
Diluted (.22) .02 .60 1.05
Cumulative effect of accounting
change, net of tax, per share:
Basic (.08)
Diluted (.08)
Net income (loss) per share:
Basic $ (.22) $ .02 $ .61 $ 1.00
Diluted (.22) .02 .60 .97
</TABLE>
NOTE 7 - SALE OF PUBLISHERS PRESS
During the quarter ended February 27, 1999, the Company announced its
intention to sell the commercial printing division of Publishers Press. The
Company will retain printing operations related to the production of its
planners and other related products. The purchase price and other elements of
the transaction will be subject to normal due diligence and regulatory reviews.
Initially, the Company expected to close the sale during May 1999, however, the
Company now estimates an August 1999 completion date. The net effect of this
transaction is expected to have an immaterial effect on the Company's financial
statements.
Page 7
<PAGE>
NOTE 8 - SUBSEQUENT EVENT
On June 2, 1999, the Company issued 750,000 shares of Series A
Preferred Stock (the "Preferred Stock") for $75.0 million in cash to Knowledge
Capital Investment Group, a private investment firm. The Preferred Stock
dividends accrue at an annual rate of 10%, and are payable, at the Company's
option, in Preferred Stock until July 1, 2002. Subsequent to July 1, 2002,
dividends will be payable in cash. The Preferred Stock is convertible at any
time into the Company's common stock at a conversion price of $14.00 per share.
The Preferred Stock will rank senior to the Company's common stock and holders
of the Preferred Stock will have generally the same voting rights as holders of
common stock on an as-converted basis. As part of the Preferred Stock
transaction, the Company plans to offer its existing shareholders the
opportunity to purchase up to 750,000 additional shares of Series A Preferred
Stock pursuant to a registered offering of non-transferable rights. In addition,
a partner of Knowledge Capital Investment Group was named Chairman of the Board
of Directors. The new Chairman was previously a member of the Company's Board.
Page 8
<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 the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report to Shareholders for the fiscal 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, Productivity Plus, technology wholesale and the Internet. The
Training and Education SBU, which includes Premier Agendas ("Premier") and
Personal Coaching, 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 that 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 presents selected data concerning sales of the
Company's SBUs (dollars in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
-------------------------------------------- -----------------------------------------------
May 29, May 31, May 29, May 31,
1999 1998 Variance % 1999 1998 Variance %
----------- ---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consumer Products $ 49,366 $ 45,393 9 $ 207,192 $ 203,210 2
Training and Education 41,237 41,586 (1) 116,885 124,765 (6)
International 11,213 11,376 (1) 39,922 34,423 16
Other 7,451 9,187 (19) 22,719 27,627 (18)
---------- ---------- ---------- ----------
$ 109,267 $ 107,542 2 $ 386,718 $ 390,025 (1)
========== ========== ========== ==========
</TABLE>
Page 9
<PAGE>
Quarter Ended May 29, 1999 Compared to the Quarter Ended May 31, 1998
- ---------------------------------------------------------------------
Consumer Products sales increased $4.0 million, or 9%, compared to the
prior year. Sales increases from the Company's retail stores, contract stationer
channels, Productivity Plus and the Internet channel were offset by a decrease
in sales from catalog operations. Retail store sales increased due to six
additional stores and a 6% increase in comparable store sales. At May 29, 1999,
the Company was operating 125 retail stores compared to 119 stores at May 31,
1998. Comparable store sales growth was primarily attributable to increased
sales of technology-related products such as the Palm V(TM) by 3Com(R) bundled
with the Company's new Franklin Planner(TM) software, as well as the
introduction of limited edition planners such as the Hallmark(R) and Shoebox(R)
planners. The Company also had increased sales from contract stationer channels
due to increased demand and new marketing and distribution agreements.
Productivity Plus, which sells products primarily to the government, increased
its sales over the prior year due to improved distribution opportunities at
military base retail stores. Sales from the Internet channel have increased due
to general changes in consumer buying habits and ongoing enhancements to the
Company's electronic commerce infrastructure. Increased sales in these channels
were offset by decreased sales from the Company's catalog operations. Sales
growth in other distribution channels, including retail stores, contract
stationers and the Internet, continue to have an unfavorable effect on catalog
sales.
Training and Education sales decreased by $0.3 million, or 1%,
compared to the prior year. Training sales decreased primarily due to decreased
core training program sales, primarily from corporate/on-site and facilitated
programs for leadership training. In addition, book royalties decreased due to
the decline in royalties received from the "7 Habits of Highly Effective
Families" book that was released in fiscal 1998. Decreases in core training
programs were partially offset by sales growth from new business in both the
network-marketing channel and Personal Coaching.
International sales decreased by $0.2 million, or 1%, compared to the
prior year. The decrease was primarily due to declining sales in the Middle East
and Canada. During the current year, the Company converted most of its Middle
East direct offices into licensee operations. Although this conversion reduced
expenses and certain other business risks, the Company only receives licensee
royalties on qualifying sales. The Company's Canadian operations were adversely
affected as a result of labor disputes at one of its largest clients. Offsetting
these decreases were sales increases in Japan and Australia, primarily due to
the acquisition of a former licensee in Japan and increased training sales in
Australia.
Other sales, which consist primarily of the Company's commercial
printing services and fitness training sales, decreased $1.7 million, or 19%,
compared to the prior year. The decrease was primarily due to the sale of the
Company's Institute of Fitness, which recognized sales of $2.1 million during
the third quarter of fiscal 1998, but was sold during the fourth quarter of
fiscal 1998. The decrease resulting from the Institute of Fitness sale was
partially offset by increased commercial printing sales at Publishers Press.
Gross margin was 53.6% of sales for the quarter, compared to 60.3% in
the prior year. The Company's gross margin was unfavorably affected in the
current quarter by inventory write-offs, changes in product mix, channel
pricing, decreased core training volume, and decreased book royalties. The
Company's product mix continues to be affected by an overall decrease in
high-margin planner sales and an increase in lower-margin technology-related
product sales. Increased sales from the contract stationer channel adversely
affected gross margin due to contracted pricing terms that have resulted in
higher volume, but at reduced margins. Core training programs offered by the
Company have gross margins that are generally higher than the Company's gross
margin on product sales. Continued lower sales of these higher-margin programs
resulted in a lower total gross margin for the Company during the third quarter
of fiscal 1999. Book royalties received in the prior year reflect the impact of
"7 Habits of Highly Effective Families," which was released in fiscal 1998 and
had decreased sales during the current quarter, thus directly impacting the
Company's gross margin.
Page 10
<PAGE>
Selling, general and administrative ("SG&A") expenses increased $0.8
million, but remained consistent as a percent of sales at 50.0%, compared to
50.1% in the prior year. The increase was primarily due to the acquisition of
King Bear (a former licensee located in Japan), which was effective April 1,
1998, as well as increased operating expenses in Europe in connection with
expanded operations. In addition, SG&A expenses increased due to new store
openings. These increases were partially offset by decreases in operating costs
resulting from the sale of the Institute of Fitness, which had $1.1 million of
SG&A expenses during the third quarter of fiscal 1998, and by decreases in other
core operating costs.
Depreciation charges increased by $0.9 million over the prior year
primarily due to new computer software and hardware purchased in conjunction
with the business transformation project and the addition of leasehold
improvements for new stores. Amortization charges increased by $0.5 million due
to amortization of contingent earnout payments made during the second quarter of
fiscal 1999 and the amortization of certain business transformation costs.
Income taxes have been accrued using an effective rate of 42.0% for
the quarter ended May 29, 1999 compared to 41.5% for the prior year. The
increase was primarily due to additional non-deductible goodwill generated from
Premier contingent earnout payments.
Nine Months Ended May 29, 1999 Compared to the Nine Months Ended May 31, 1998
- -----------------------------------------------------------------------------
Consumer Products sales increased $4.0 million, or 2%, compared to the
prior year. Increased sales from the Company's retail stores, mass marketing and
contract stationer channels, technology wholesale and the Internet were offset
by decreased sales from Productivity Plus and the Company's catalog operations.
Retail store sales increased due to the addition of six new stores and a 1%
increase in comparable store sales. Comparable store sales growth was primarily
attributable to increased sales of technology-based products such as the Palm
V(TM) by 3Com(R) bundled with the Company's Franklin Planner(TM) software. The
Company also had increased sales from mass market and contract stationer
channels resulting from increased demand and new marketing and distribution
agreements. However, based upon pricing and profitability concerns, the Company
is reevaluating any future product sales activity in its mass-market channel.
Sales from the Internet channel have increased due to general changes in
consumer buying habits and ongoing enhancements to the Company's electronic
commerce infrastructure. Increased sales from these channels were offset by
sales decreases at Productivity Plus and from the Company's catalog operations.
Productivity Plus, which sells product primarily to the government, was
unfavorably affected during the year by changes in the government procurement
process. A portion of the decrease in catalog sales is directly attributable to
sales growth in other distribution channels including retail stores, mass
markets, contract stationers and the Internet.
Training and Education sales have decreased $7.9 million, or 6%,
compared to the prior year. Decreased sales in core training program sales, from
both public and corporate/on-site leadership seminars, has been the primary
cause of reduced training sales. Book royalties also decreased due to the timing
of royalty payments from the "7 Habits of Effective Families," which was
released during fiscal 1998. These decreases were partially offset by growth
from new business in the network marketing channel and increased Personal
Coaching program sales.
International sales increased by $5.5 million, or 16%, compared to the
prior year. The increase was due to the acquisition of King Bear, which has
added approximately $6.8 million of incremental sales to the current fiscal
year. Decreased sales in Canada and the Middle East, combined with generally
flat sales performance in other geographic regions partially offset the
increased sales from King Bear. In addition, generally weaker exchange rates
adversely affected reported sales compared to the prior year.
Page 11
<PAGE>
Other sales decreased by $4.9 million, or 18%, compared to the prior
year. The decrease was due to the sale of the Company's Institute of Fitness,
which recognized $5.2 million of sales during the nine months ended May 31,
1998, but was sold during the fourth quarter of fiscal 1998. The decrease
resulting from the Institute of Fitness sale was partially offset by increased
commercial printing sales at Publishers Press.
Gross margin was 57.9% of sales compared to 60.8% for the prior year.
Although the Company has improved its manufacturing and procurement procedures,
and expanded internal production capacity, gross margin was unfavorably affected
by changes in product mix, channel pricing, decreased core training volume,
inventory write-offs, decreased book royalties and costs associated with a mass
marketing agreement. Based upon pricing and profitability concerns, the Company
is reevaluating any future product sales activity through mass-market channels.
Selling, general and administrative expenses increased $3.9 million to
43.2% of sales, compared to 41.9% of sales during the prior year. The increase
was primarily due to the acquisition of King Bear, which added $5.9 million of
incremental SG&A expenses during the nine months ended May 29, 1999. SG&A
expenses also increased due to new store openings. These increases were
partially offset by decreases in operating costs resulting from the sale of the
Institute of Fitness, which had $3.0 million of SG&A expenses during the first
nine months of fiscal 1998. In addition, core SG&A expenses decreased due to
general initiatives to reduce operating expenses as a result of slower than
expected sales performance.
Depreciation charges increased by $2.0 million due to new computer
software and hardware purchased in conjunction with the business transformation
project, new printing presses and other manufacturing equipment, and the
addition of leasehold improvements for new retail stores. Amortization charges
increased by $2.2 million compared to the prior year due to goodwill
amortization from the acquisition of King Bear, contingent earnout payments and
the amortization of certain business transformation costs.
Income taxes have been provided for using an effective rate of 42.0%
during the nine months ended May 29, 1999 compared to 41.5% for the prior year.
The increase was primarily due to additional non-deductible goodwill generated
from Premier contingent earnout payments. Based upon current income estimates
for the remaining fiscal year, the effective tax rate is expected to increase
during the fourth quarter of fiscal 1999.
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.
Page 12
<PAGE>
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. Working capital for the nine months ended May 29, 1999
has increased by $16.5 million. Subsequent to May 29, 1999, the Company issued
750,000 shares of Series A Preferred Stock for $75.0 million in cash to a
private equity investor. The Preferred Stock dividends accrue at an annual rate
of 10%, and are payable, at the Company's option, in Preferred Stock until July
1, 2002. Subsequent to July 1, 2002, dividends will be payable in cash.
Net cash provided by operating activities for the nine months ended
May 29, 1999, was $26.5 million compared to $55.7 million in the prior year.
Adjustments to net income for the nine months ended May 29, 1999 included $31.8
million of depreciation and amortization charges during fiscal 1999. The primary
source of cash from operations was the collection of accounts receivable. The
decline in accounts receivable was due primarily to the business cycle of
Premier, which has seasonally high sales during the Company's fourth fiscal
quarter. However, accounts receivable also declined due to decreased sales
during the nine months ended May 29, 1999. The primary use of cash was the
production and purchase of inventory items, especially technology-related items
and new products. The decrease in accounts payable and accrued liabilities was
also primarily due to the seasonal nature of Premier's operations. The decrease
in income taxes was due to the timing of estimated payments and actual taxable
income recognized by the Company.
Net cash used for investing activities totaled $36.9 million during the
first nine months of fiscal 1999 compared to $37.9 million in the prior year. Of
this amount, $17.9 million was used to purchase computer hardware and software,
manufacturing equipment, leasehold improvements and other property and
equipment. The remaining $19.0 million was used to complete the purchase of King
Bear, acquire certain intellectual property and pay contingent earnout payments
to the former owners of Premier and Personal Coaching.
Net cash provided by financing activities was $4.5 million for the nine
months ended May 29, 1999 compared to net cash used of $5.5 million in the prior
year. The primary uses of financing cash were the purchase of 2.1 million shares
the Company's common stock for $32.7 million and the payment of Premier's
short-term line of credit. Cash from financing sources was primarily derived
from the Company's long-term and short-term credit facilities. The Company has
unsecured bank lines of credit available for working capital needs totaling
$89.0 million, of which $71.2 million was outstanding at May 29, 1999. 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 May 29, 1999.
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. Corresponding gains and losses on derivative
contracts was also immaterial for the nine months ended May 29, 1999. 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 May 29, 1999, the Company had not entered into derivative
instruments to hedge its exposure to interest rate risk.
Page 13
<PAGE>
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
(the "Project") that affects nearly every aspect of the Company's operations. In
an effort to address Y2K compliance issues, the scope of the Project was
expanded to ensure Y2K compliance for newly acquired software and hardware as
well as test existing systems for compliance. From this process, a team
representing different areas of the Company was assembled to specifically work
toward timely Y2K compliance. As of May 29, 1999, the Company's progress toward
completion of Y2K remediation projects is as follows:
State of Readiness
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. Phase two focused on payroll and human
resource applications and became operational in January 1999. 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.
Within the framework of this Project, 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 and hardware
that are Y2K compliant for the general ledger, accounts payable and sales and
use tax calculations. Payroll and human resource systems were the subject of
phase two, which was made operational with compliant hardware and software 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. The
Office Support system includes network hardware and operating systems, desktop
and laptop computers, and servers and includes applications not specifically
addressed by the Project.
In order to correct possible Y2K problems, the Company has developed a
plan to assess potential Y2K problems, prioritize identified problems as
critical or non-critical, test compliance of critical systems, and implement
solutions for all critical systems. To ensure Y2K readiness, all Company
systems, including completed Project modules, were subject to assessment and
testing. To date, the Company has completed its assessment of systems and
applications that could have a significant impact on the Company's ability to
sell and deliver its products and services. Following the assessment, all system
problems were prioritized in order to mitigate concerns with business-critical
systems. The Company is currently testing critical systems in an isolated test
environment that does not compromise current operations. Based upon these test
results, the Company has obtained hardware and/or software solutions for many of
its critical applications. Critical applications that have been tested,
corrected and certified as Y2K compliant include the Company's order entry and
distribution systems, all internal manufacturing systems and all international
financial and computer systems. In addition, the Company's electronic data
interface ("EDI") replacement has been selected and tested, with implementation
scheduled for fall of 1999. The Company expects that all critical systems will
be tested and certified prior to December 31, 1999. All non-critical and/or
non-information systems concerns, such as elevators, have also been assessed and
prioritized with all critical non-information systems to be made compliant by
December 31, 1999.
Page 14
<PAGE>
Cost to Address Y2K Issues
As of May 29, 1999, the Company had spent $9.9 million on hardware and
$5.2 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 had
commitments of $4.6 million for purchased software and expects to spend an
additional $1.0 million in other direct costs related to the assessment and
correction of potential Y2K issues as of May 29, 1999.
Risk of the Company's Y2K Issues
The primary Y2K risk to the Company is from external vendors and
service providers. As part of its assessment of Y2K issues, the Company has
gathered information from its suppliers and other external vendors regarding
their Y2K compliance status. Based upon information received, the most
significant risk to the Company appears to be from certain critical
international suppliers that, despite their best efforts, may be affected by
utility outages and may not be able to meet delivery deadlines. In addition, the
Company has not yet received Y2K compliance certification from its two largest
shipping service providers and is currently pursuing contingency plans to
mitigate this risk. Based upon inquiry responses, the Company does not
anticipate any significant problems from its utility, telephone and financial
service providers. Although the Company is not aware of any other external
risks, the Company has no means of ensuring that all external vendors and
service providers will be Y2K compliant. The inability of certain external
vendors or service providers to complete their Y2K remediation efforts in a
timely manner could materially effect the operations of the Company. However,
the effect of Y2K non-compliance by external vendors is not readily
determinable.
The Company has also assessed Y2K compliance issues related to its
products available for sale and does not believe that Y2K presents a material
exposure to the Company related to its products.
Contingency Plans
The Company has completed formal contingency plans for most critical
business units. An integrated, Company-wide contingency plan, based upon
business unit plans, is expected to be completed by November 30, 1999.
The Company's plan to complete Y2K remediation efforts is based upon
management's best estimates, which are subject to numerous assumptions regarding
future events including the availability of certain resources and other
circumstances beyond the control of management. Estimated completion dates and
total costs are based upon current levels of activity and specific efforts to
correct potential Y2K problems. However, there can be no guarantee that stated
estimates can be achieved and actual results may differ materially from current
expectations. Specific factors that may result in material differences include,
but are not limited to, availability of critical application corrections, the
availability of required hardware and other similar uncertainties.
Page 15
<PAGE>
"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 uncertainties 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 filings with the Securities and
Exchange Commission.
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 will differ and may differ materially 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 Annual
Report on 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 16
<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 connection with the $75.0 million Preferred Stock offering, Robert
A. Whitman was named Chairman of the Board of Directors. Hyrum Smith,
formerly Chairman of the Board, and Stephen R. Covey, formerly
Co-Chairman of the Board, now serve as Vice-Chairmen of the Board of
Directors.
On July 6, 1999, Jon Rowberry resigned as the Company's President and
Chief Executive Officer. Until a successor is named, Robert A. Whitman
will act as interim Chief Executive Officer.
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
3.1 Articles of Amendment to Articles of Incorporation of
Franklin Covey Co. containing Certificate of Designation of
Series A Preferred Stock dated as of June 2, 1999 (filed as
Exhibit 2 to Schedule 13D (CUSIP No. 353469109) as filed
with the Commission on June 2, 1999 and incorporated herein
by reference).
4.1 Stockholders Agreement, dated June 2, 1999 (filed as Exhibit
3 to Schedule 13D (CUSIP No. 353469109) as filed with the
Commission on June 2, 1999 and incorporated herein by
reference).
4.2 Registration Rights Agreement, dated June 2, 1999 (filed as
Exhibit 4 to Schedule 13D (CUSIP No. 353469109) as filed
with the Commission on June 2, 1999 and incorporated herein
by reference).
10.1 Monitoring Agreement between the Company and Hampstead
Interests, LP dated June 2, 1999 (filed as Exhibit 5 to
Schedule 13D (CUSIP No. 353469109) as filed with the
Commission on June 2, 1999 and incorporated herein by
reference).
27 Financial Data Schedule (filed herewith)
99.1 Schedule 13D filed with the Commission on June 2, 1999
(CUSIP No. 353469109 and incorporated herein by reference)
99.2 Stock Purchase Agreement, dated May 11, 1999 (filed as
Exhibit 1 to Schedule 13D (CUSIP No. 353469109) as filed
with the Commission on June 2, 1999 and incorporated herein
by reference).
(B) Reports on Form 8-K: None
Page 17
<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: July 13, 1999 By: /s/ Robert A. Whitman
--------------------------- ------------------------------------
Robert A. Whitman
Chief Executive Officer
Date: July 13, 1999 By: /s/ John L. Theler
--------------------------- ------------------------------------
John L. Theler
Chief Financial Officer
Page 18
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