SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 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:
24,378,500 shares of Common Stock as of March 30, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
February 28, August 31,
1998 1997
----- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 24,026 $ 20,389
Accounts receivable, less allowance for
doubtful accounts of $2,545 and $1,931 58,456 71,840
Inventories 52,744 55,748
Income taxes receivable 2,780 6,094
Other current assets 14,957 15,672
---------- ----------
Total current assets 152,963 169,743
Property and equipment, net 126,257 119,768
Goodwill and other intangible assets, net 267,344 269,219
Other long-term assets 15,658 13,457
---------- ----------
$ 562,222 $ 572,187
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,843 $ 31,611
Accrued acquisition earnouts 9,000
Other current liabilities 41,681 46,292
---------- ----------
Total current liabilities 57,524 86,903
Line of credit 86,000 86,000
Deferred income taxes 36,179 35,735
Long-term debt, less current portion 5,313 5,870
Capital lease obligations, less current portion 1,824 2,274
---------- ----------
Total liabilities 186,840 216,782
---------- ----------
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 238,469 239,699
Retained earnings 193,707 169,714
Deferred compensation (1,169) (1,495)
Cumulative translation adjustments (1,380) (934)
Treasury stock at cost, 2,492,665 and 2,373,223 shares (55,598) (52,932)
---------- ----------
Total shareholders' equity 375,382 355,405
---------- ----------
$ 562,222 $ 572,187
========== ==========
(See Notes to Consolidated Condensed Financial Statements)
FRANKLIN COVEY CO.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended Six Months Ended
February 28, February 28,
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
(unaudited) (unaudited)
Sales $ 138,564 $ 105,958 $ 282,483 $ 208,335
Cost of sales 53,496 43,066 110,146 86,341
--------- --------- --------- ---------
Gross margin 85,068 62,892 172,337 121,994
Operating expenses 62,500 41,383 125,134 78,764
--------- --------- --------- ---------
Income from operations 22,568 21,509 47,203 43,230
Interest and other, net (1,265) 322 (2,633) 397
---------- --------- ---------- ---------
Income before income taxes and cumulative
effect of accounting change 21,303 21,831 44,570 43,627
Provision for income taxes 8,841 8,787 18,497 17,559
--------- --------- --------- ---------
Income before cumulative effect of
accounting change 12,462 13,044 26,073 26,068
Cumulative effect of accounting change,
net of tax (Note 5) (2,080)
--------- --------- --------- ---------
Net income $ 12,462 $ 13,044 $ 23,993 $ 26,068
========= ========= ========= =========
Income from continuing operations per share
Basic $ 0.50 $ 0.66 $ 1.05 $ 1.31
Diluted 0.49 0.63 1.02 1.25
Cumulative effect of accounting change,
net of tax, per share
Basic (0.08)
Diluted (0.08)
Net income per share
Basic $ 0.50 $ 0.66 $ 0.97 $ 1.31
========= ========= ========= =========
Diluted $ 0.49 $ 0.63 $ 0.94 $ 1.25
========= ========= ========= =========
Weighted average number of common and
common equivalent shares
Basic 24,774 19,735 24,769 19,870
========= ========= ========= =========
Diluted 25,423 20,779 25,480 20,845
========= ========= ========= =========
(See Notes to Consolidated Condensed Financial Statements)
FRANKLIN COVEY CO.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
February 28,
-----------------
1998 1997
---- ----
(unaudited)
Cash flows from operating activities:
Net income $ 23,993 $ 26,068
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 17,370 9,470
Deferred taxes 444 354
Deferred compensation 326 268
Other changes in assets and liabilities (3,412) 7,022
--------- ---------
Net cash provided by operating activities 38,721 43,182
--------- ---------
Cash flows from investing activities:
Acquisition of businesses (contingent earnout payments in 1998) (12,221) (11,960)
Purchases of property and equipment (16,497) (5,873)
---------- ----------
Net cash used in investing activities (28,718) (17,833)
--------- ----------
Cash flows from financing activities:
Payments on short-term borrowings (952) (121)
Proceeds from long-term debt 356
Payments on long-term debt and capital leases (1,070) (849)
Purchase of treasury shares (5,819) (16,016)
Proceeds from treasury stock issuance 1,922 367
--------- ---------
Net cash used in financing activities (5,919) (16,263)
--------- ----------
Effect of foreign exchange rates (447) (544)
--------- ----------
Net increase in cash and cash equivalents 3,637 8,542
Cash and cash equivalents at beginning of period 20,389 24,041
--------- ---------
Cash and cash equivalents at end of period $ 24,026 $ 32,583
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 3,477 $ 283
Income taxes paid 13,890 15,787
Fair value of assets acquired $ 12,221 $ 13,770
Cash paid for net assets (12,221) (11,960)
--------- ----------
Liabilities assumed from acquisitions $ -0- $ 1,810
========= =========
(See Notes to Consolidated Condensed Financial Statements)
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Effective June 2, 1997, Franklin Quest Co. merged (the "Merger") with
the Covey Leadership Center ("Covey") to form Franklin Covey Co. (the
"Company"). Accordingly, the accompanying consolidated condensed Statements of
Income for the three and six months ended February 28, 1997 and the Statement of
Cash Flows for the six months ended February 28, 1997 do not include the
financial position or results of operations of Covey. Pro forma information
related to the 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 the Securities and
Exchange Commission rules and regulations. The Company suggests the information
included in this report on Form 10-Q be read in conjunction with the financial
statements and related notes included in the Company's Annual Report to
Shareholders for the fiscal year ended August 31, 1997. The Company also
suggests reading this report in conjunction with the definitive Proxy Statement
relating to the 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.
Certain reclassifications have been made in the consolidated condensed
financial statements to conform with the current year presentation.
The results of operations for the six months ended February 28, 1998
are not necessarily indicative of results for the entire fiscal year ending
August 31, 1998.
NOTE 2 - NET INCOME PER COMMON SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" for the period ended
February 28, 1998. Basic earnings per share is calculated by dividing income
from continuing operations by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share 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. The following schedule reconciles the numerator and
denominator of the basic and diluted earnings per share calculations (in
thousands, except for per share amounts):
Three Months Ended Six Months Ended
February 28, February 28,
---------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- ---------------
Net income $ 12,462 $ 13,044 $ 23,993 $ 26,068
========= ========= ========= =========
Basic Weighted Average Shares:
Weighted average shares
outstanding 24,774 19,735 24,769 19,870
Plus: Incremental shares from
assumed exercises of stock options
using the treasury stock method 649 1,044 711 975
--------- --------- --------- ---------
Diluted Weighted Average Shares:
Total weighted average shares
outstanding and common stock
equivalents 25,423 20,779 25,480 20,845
========= ========= ========= =========
Basic EPS $ 0.50 $ 0.66 $ 0.97 $ 1.31
========= ========= ========= =========
Diluted EPS $ 0.49 $ 0.63 $ 0.94 $ 1.25
========= ========= ========= =========
NOTE 3 - INVENTORIES
Inventories are comprised of the following (in thousands):
February 28, August 31,
1998 1997
----------- -----------
(unaudited)
Finished Goods $ 36,111 $ 40,955
Work in Process 5,256 7,286
Raw Materials 11,377 7,507
----------- -----------
$ 52,744 $ 55,748
=========== ===========
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 ("Premier") 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 Merger and Premier
acquisition been consummated at the beginning of the fiscal year ended August
31, 1997 (in thousands, except per share data).
Three Months Ended Six Months Ended
February 28, February 28,
---------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- ---------------
(unaudited) (unaudited)
Sales $ 138,564 $ 131,911 $ 282,483 $ 264,679
Income from Operations 22,568 19,249 47,203 42,081
Income before Cumulative Effect of
Accounting Change 12,462 10,655 26,073 23,234
Net Income 12,462 10,655 23,993 23,234
Earnings Per Share:
Basic $ 0.50 $ 0.43 $ 0.97 $ 0.93
Diluted 0.49 0.41 0.94 0.89
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 be expensed as
incurred. In addition, any previously capitalized costs which are addressed by
EITF 97-13 were written off as a cumulative adjustment in the quarter ended
November 30, 1997.
The Company is currently involved in a business reengineering and
information system implementation project and has capitalized costs in
accordance with generally accepted accounting standards. Certain previously
capitalized costs of the project were written off in accordance with EITF 97-13
during the Company's first quarter of fiscal 1998. During the Company's second
quarter of fiscal 1998, the majority of costs associated with the information
system implementation were capitalized in accordance with Statement of Position
98-1, " Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use" and EITF 97-13. In addition, the Company expects that the majority
of the remaining costs of the project will qualify for capitalization.
No corresponding pro forma disclosures for the three and six months
ended February 28, 1997 are necessary for this change in accounting principle
since the Company did not have any costs associated with the project or other
costs that would need to be expensed under the provisions of EITF 97-13 during
these periods.
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 included in the Company's Annual Report to Shareholders
for the fiscal year ended August 31, 1997.
The Company has reviewed its information systems and does not believe
they are affected by any significant problems related to the "year 2000"
computer date issue. However, the Company could be impacted by "year 2000"
issues affecting the information processing systems of vendors and other
organizations with which the Company does business. During fiscal 1997, the
Company began a project to replace its current information systems with newer
integrated systems to support Company growth. These newer systems are "year
2000" compliant.
RESULTS OF OPERATIONS
The following table sets forth selected data concerning the sales of
the Company's products and services:
Three Months Ended Six Months Ended
February 28, February 28,
------------- ------------
1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
(in thousands) (in thousands)
Product sales $ 91,575 $ 80,190 14% $ 181,590 $ 155,124 17%
Training sales 40,994 20,641 99% 86,838 41,308 110%
Services 5,995 5,127 17% 14,055 11,903 18%
---------- ---------- ---------- ----------
$ 138,564 $ 105,958 31% $ 282,483 $ 208,335 36%
========== ========== ========== ==========
Three Months Ended February 28, 1998 Compared With Three Months
Ended February 28, 1997
--------------------------------------
Sales for the three months ended February 28, 1998, increased $32.6
million, or 31%, over the same period in 1997 primarily as a result of the
Merger, an increase in the number of Franklin Planners sold, an increase in the
number of participants attending public seminars and the effects of other
corporate acquisitions.
Product sales increased $11.4 million, or 14%, compared to the
corresponding quarter of the prior year. Of this increase, $9.9 million came
from growth in retail store sales, which was in large part due to the number of
stores opened during the past twelve months. At the end of the second quarter of
fiscal 1997 there were 95 retail stores, compared to 117 such stores at the end
of the current quarter. Comparable store sales increased 6% for the quarter
ended February 28, 1998 compared to the quarter ended February 28, 1997. The
remaining increase in sales was primarily due to increased revenues from catalog
sales and international product sales over the corresponding period of the prior
year.
Training sales increased $20.4 million, or 99%, over the same quarter a
year ago. This increase was primarily attributable to incremental training sales
resulting from the Merger. 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.
Printing services revenue increased by $0.9 million or 17%, compared to
the same quarter a year ago. 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 second quarter of the prior year.
Gross margin was 61.4% of sales in the three months ended February 28,
1998, compared to 59.4% for the same period in 1997. The increase in gross
margin for the Company as a whole reflects the higher margins on certain Covey
products and services added as a result of the Merger and a favorable mix of
revenues from higher margin products and services.
Operating expenses, consisting primarily of selling, general and
administrative expenses, increased by 6.0% as a percentage of sales during the
three months ended February 28, 1998 (45.1% compared to 39.1% in the same period
of 1997). 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 $2.0 million because of new equipment purchased to
augment management information systems and improve customer service and the
addition of leasehold improvements in new stores. Amortization charges increased
$2.1 million primarily due to amortization of intangible assets acquired in
connection with the Merger and the acquisition of Premier.
Income taxes were accrued using an effective rate of 41.5% for the
three months ended February 28, 1998 compared to 40.3% for the same quarter of
fiscal 1997. The increase was due primarily to non-deductible goodwill generated
from the Merger and other acquisitions.
Six Months Ended February 28, 1998 Compared with Six Months
Ended February 28, 1997
------------------------------
Sales for the first six months of fiscal 1998 increased $74.1 million,
or 36% over the same period in fiscal 1997, primarily as a result of the Merger,
an increase in the number of Franklin Planners sold, an increase in the number
of participants attending public seminars and the effects of other corporate
acquisitions.
Product revenue for the first six months of fiscal 1998 increased $26.5
million, or 17%, as compared to the first six months of the previous fiscal
year. Retail store sales comprised $18.4 million of this increase, which
represented a 30% increase compared to the first six months of fiscal 1997. 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 second quarter, there
were 117 retail stores open, compared to 95 retail stores at February 28, 1997.
The remaining increase in sales was primarily due to increased revenues from
catalog sales and international product sales over the corresponding period of
the prior year.
Training revenue for the first six months grew by approximately $45.5
million or 110%, compared to the same period a year ago. This increase was
primarily caused by the addition of training sales from the Merger.
Printing services revenue increased by $2.2 million or 18%, compared to
the first six months of fiscal 1997. The increase was primarily a result of
several large printing jobs being sold and delivered during the first six months
of the current year as well as the incremental printing service revenues from
Premier's printing division which was acquired subsequent to the second quarter
of the prior year.
Gross margin was 61.0% of sales in the first six months of fiscal 1998
compared to 58.6% in the comparable six months of fiscal 1997. The increase in
gross margin for the Company as a whole reflects the higher margins on certain
Covey products and services added as a result of the Merger and a favorable mix
of revenues from higher margin products and services
Operating expenses increased to 44.3% of sales for the first six months
of fiscal 1998 compared to 37.8% for the first six months of the previous year.
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 $3.3 million compared to the same period a year ago because of new equipment
purchased to augment management information systems and improve customer service
and the addition of leasehold improvements in new stores. Amortization charges
increased by $4.4 million, primarily due to amortization of intangible assets
acquired in connection with the merger with Covey and the Premier acquisition.
On November 20, 1997, the Emerging Issues Task Force (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 be expensed as incurred. In addition, certain previously
capitalized reengineering costs 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 its first fiscal quarter of 1998 to write 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
six months ended February 28, 1998, compared to 40.3% for the same quarter of
fiscal 1997. The increase in the tax rate was due primarily to non-deductible
goodwill generated from the Merger and other 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 the sale of Common Stock. Working capital requirements have also
been financed through short-term borrowing. At February 28, 1998, the Company
had $24.0 million in cash and cash equivalents.
Net cash provided by operating activities during the six months ended
February 28, 1998 was $38.7 million. Net cash used in investing activities was
$28.7 million. Of this total, $16.5 million was invested in property and
equipment, and the balance consisted of contingent earn out payments from
previous corporate acquisitions. During the first six months of fiscal 1998, the
Company used $5.8 million to repurchase 260,800 shares of its Common Stock on
the open market.
Working capital during the period increased by $12.6 million.
Management believes that cash flows and available credit facilities are
sufficient to meet working capital requirements, including anticipated increases
in accounts receivable and inventories associated with sales increases.
The Company also has available lines of credit, not utilized at
February 28, 1998, of $14.0 million. The Company was in compliance with the
borrowing covenants associated with these lines of credit as of February 28,
1998.
"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, 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, and elsewhere in the Company's filings with the Securities and
Exchange Commission.
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:
The Company held its Annual Meeting of Shareholders on January
9, 1998. Steven C. Wheelwright was elected as a member of the
Board of Directors for a three-year term expiring at the
annual meeting of shareholders to be held in 2001, or until
his successor is elected and qualified. The number of shares
voted in favor of Mr. Wheelwright's election was 19,390,425.
During the annual meeting, the shareholders also ratified the
appointment of Arthur Andersen LLP independent certified
public accountants for the fiscal year ending August 31, 1998.
Item 5. Other information:
In September 1996, the Board of Directors approved the
repurchase of up to 2,000,000 shares of the Company's Common
Stock. As of March 31, 1998, the Company had acquired
1,687,800 shares at an average price of $22.71 per share.
In March 1998, the Board of Directors approved a 3,000,000
share expansion of the Company's Common Stock repurchase
program.
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits: Not applicable.
(B) Reports on Form 8-K: Not applicable.
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
5
0000886206
FRANKLIN COVEY CO.
1,000
US DOLLARS
3-MOS
AUG-31-1998
DEC-01-1997
FEB-28-1998
1.0
24,026
0
61,001
2,545
52,744
152,963
190,056
63,799
562,222
57,524
93,137
0
0
1,353
374,029
562,222
138,564
138,564
53,496
53,496
62,500
0
1,265
21,303
8,841
12,462
0
0
0
12,462
.50
.49
