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 27, 1999
[ ] 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:
20,339,743 shares of Common Stock as of April 7, 1999
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
February 27, August 31,
1999 1998
----- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 32,637 $ 27,760
Accounts receivable, less allowance for
doubtful accounts of $2,447 and $2,840 56,477 83,621
Inventories 59,154 47,799
Income taxes receivable 2,016
Other current assets 18,212 16,113
---------- ----------
Total current assets 168,496 175,293
Property and equipment, net 124,609 127,268
Goodwill and other intangible assets, net 267,893 270,202
Other long-term assets 27,115 24,514
---------- ----------
$ 588,113 $ 597,277
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,127 $ 27,417
Accrued acquisition earnouts 12,960
Income taxes payable 5,900
Current portion of long-term debt and capital lease obligations 3,594 4,350
Other current liabilities 45,260 42,726
---------- ----------
Total current liabilities 66,981 93,353
Line of credit 61,500 35,000
Long-term debt and capital lease obligations, less current portion 89,855 91,413
Deferred income taxes 35,165 35,857
---------- ----------
Total liabilities 253,501 255,623
---------- ----------
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 234,527 238,052
Retained earnings 227,242 209,772
Deferred compensation (549) (843)
Accumulated other comprehensive loss (Note 3) (1,323) (2,250)
Treasury stock at cost, 6,098,169 and 4,813,242 shares (126,638) (104,430)
---------- ----------
Total shareholders' equity 334,612 341,654
---------- ----------
$ 588,113 $ 597,277
========== ==========
(See Notes to Consolidated Condensed Financial Statements)
3
FRANKLIN COVEY CO.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
Quarter Ended Six Months Ended
-------------------------------- -------------------------------
February 27, February 28, February 27, February 28,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(unaudited) (unaudited)
Sales $ 137,089 $ 138,564 $ 277,451 $ 282,483
Cost of sales 57,961 53,496 111,892 110,146
--------- --------- --------- ---------
Gross margin 79,128 85,068 165,559 172,337
Selling, general and administrative 56,100 54,208 112,521 109,458
Depreciation and amortization 9,398 8,292 18,433 15,676
--------- --------- --------- ---------
Income from operations 13,630 22,568 34,605 47,203
Interest and other, net (2,325) (1,265) (4,485) (2,633)
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of accounting change 11,305 21,303 30,120 44,570
Provision for income taxes 4,748 8,841 12,650 18,497
--------- --------- --------- ---------
Income before cumulative effect of
accounting change 6,557 12,462 17,470 26,073
Cumulative effect of accounting change,
net of tax (Note 5) (2,080)
--------- --------- --------- ---------
Net income $ 6,557 $ 12,462 $ 17,470 $ 23,993
========= ========= ========= =========
Income from continuing operations per share:
Basic $ .31 $ .50 $ .82 $ 1.05
Diluted .31 .49 .81 1.02
Cumulative effect of accounting change,
net of tax, per share:
Basic (0.08)
Diluted (0.08)
Net income per share:
Basic $ .31 $ .50 $ .82 $ .97
Diluted .31 .49 .81 .94
Weighted average number of common and
common equivalent shares:
Basic 21,194 24,774 21,304 24,769
Diluted 21,352 25,423 21,552 25,480
(See Notes to Consolidated Condensed Financial Statements)
4
FRANKLIN COVEY CO.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
------------------------------
February 27, February 28,
1999 1998
----- ----
(unaudited)
Cash flows from operating activities:
Net income $ 17,470 $ 23,993
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 20,603 17,370
Other adjustments to reconcile net income to net cash provided by operations (93) 1,603
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable 27,537 12,771
Decrease (increase) in inventories (11,355) 3,004
Increase in other assets (6,011) (4,295)
Decrease (increase) in income taxes (7,916) 3,314
Decrease in accounts payable and accrued liabilities (9,009) (16,049)
---------- ----------
Net cash provided by operating activities 31,226 41,711
--------- ---------
Cash flows from investing activities:
Acquisition of businesses and earnout payments (19,025) (12,221)
Purchases of property and equipment (8,874) (16,497)
---------- ----------
Net cash used for investing activities (27,899) (28,718)
---------- ----------
Cash flows from financing activities:
Proceeds from short-term borrowings 5,793
Payments on short-term borrowings (3,625) (3,942)
Proceeds from long-term debt and line of credit 26,833
Payments on long-term debt and capital leases (2,645) (1,070)
Purchase of treasury shares (26,662) (5,819)
Proceeds from treasury stock issuance 929 1,922
--------- ---------
Net cash provided by (used for) financing activities 623 (8,909)
--------- ----------
Effect of foreign exchange rates 927 (447)
--------- ----------
Net increase in cash and cash equivalents 4,877 3,637
Cash and cash equivalents at beginning of period 27,760 20,389
--------- ---------
Cash and cash equivalents at end of period $ 32,637 $ 24,026
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 4,889 $ 3,477
Income taxes paid 21,027 13,890
Fair value of assets acquired $ 19,025 $ 12,221
Cash paid for net assets (19,025) (12,221)
--------- ----------
Liabilities assumed from acquisitions $ - $ -
--------- ----------
(See Notes to Consolidated Condensed Financial Statements)
5
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
did not affect the number of business days in the quarter ended February 27,
1999 compared to the quarter ended February 28, 1998. However, the six months
ended February 27, 1999 contains one less business day than the six months ended
February 28, 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 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 six months ended February
27, 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):
February 27, August 31,
1999 1998
---- ----
(unaudited)
Finished goods $ 36,789 $ 32,141
Work in process 5,440 5,261
Raw materials 16,925 10,397
----------- -----------
$ 59,154 $ 47,799
=========== ===========
6
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):
Quarter Ended Six Months Ended
---------------------------------- ----------------------------------
February 27, February 28, February 27, February 28,
1999 1998 1999 1998
-------------- --------------- --------------- ---------------
(unaudited) (unaudited)
Net income $ 6,557 $ 12,462 $ 17,470 $ 23,993
Other comprehensive income (loss):
Foreign currency translation
adjustments (114) 131 927 (447)
---------- --------- --------- ----------
Comprehensive income $ 6,443 $ 12,593 $ 18,397 $ 23,546
========= ========= ========= =========
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):
Quarter Ended Six Months Ended
---------------------------------- ----------------------------------
February 27, February 28, February 27, February 28,
1999 1998 1999 1998
-------------- --------------- --------------- ---------------
(unaudited) (unaudited)
Income before accounting change $ 6,557 $ 12,462 $ 17,470 $ 26,073
Cumulative effect of accounting change,
net of tax (2,080)
--------- --------- --------- ----------
Net income $ 6,557 $ 12,462 $ 17,470 $ 23,993
========= ========= ========= =========
Basic weighted-average shares
outstanding 21,194 24,774 21,304 24,769
Incremental shares from assumed
exercises of stock options 158 649 248 711
--------- --------- --------- ---------
Diluted weighted-average shares
outstanding and common stock equivalents 21,352 25,423 21,552 25,480
========= ========= ========= =========
Income from continuing operations per share:
Basic $ .31 $ .50 $ .82 $ 1.05
Diluted .31 .49 .81 1.02
Cumulative effect of accounting
change, net of tax, per share:
Basic (.08)
Diluted (.08)
Net income per share:
Basic $ .31 $ .50 $ .82 $ .97
Diluted .31 .49 .81 .94
7
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 February 27, 1999, the Company purchased
386,000 shares of its common stock for $5.9 million. For the six months ended
February 27, 1999, the Company has purchased 1.5 million shares of its common
stock for $26.7 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 208,000 shares of treasury stock in
connection with stock option exercises and the employee stock purchase plan
during the six months ended February 27, 1999.
Subsequent to February 27, 1999, the Company purchased 633,000 shares
of its common stock for $6.0 million. All shares were acquired for fair market
value on the date of purchase.
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 March 29, 1999, the
Company had 1.0 million shares remaining for purchase under the current plan.
NOTE 7 - SALE OF PUBLISHERS PRESS
During the quarter ended February 27, 1999, the Company signed a letter
of intent to sell its 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 are subject to normal due diligence and regulatory reviews. The
transaction is expected to be closed by the end of May 1999.
8
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, 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 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 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 SBUs (dollars in thousands):
Quarter Ended Six Months Ended
-------------------------------------------- --------------------------------------------
February 27, February 28, February 27, February 28,
1999 1998 Variance % 1999 1998 Variance %
---- ---- ---------- ---- ---- ----------
(unaudited) (unaudited)
Consumer Products $ 80,946 $ 80,166 1 $ 157,827 $ 157,817 0
Training and Education 35,065 39,737 (12) 75,645 83,180 (9)
International 14,010 10,777 30 28,711 23,048 25
Other 7,068 7,884 (10) 15,268 18,438 (17)
---------- ---------- ---------- ----------
$ 137,089 $ 138,564 (1) $ 277,451 $ 282,483 (2)
========== ========== ========== ==========
Quarter Ended February 27, 1999 Compared with the Quarter
Ended February 28, 1998
Consumer Products sales increased $0.8 million, or 1%, compared to the
prior year. Sales increases from the Company's retail stores, mass market and
contract stationer channels, technology-related products and the Internet
channel were offset by decreases in sales from Productivity Plus and catalog
operations. Retail store sales increased due to the addition of eight new stores
and a 1% increase in comparable store sales. At February 27, 1999, the Company
was operating 125 retail stores compared to 117 stores at February 28, 1998. The
Company also had increased sales from mass marketing and contract stationer
channels due to 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. In
addition, technology sales increased primarily due to an increase in demand for
9
electronic-based organizers, including items such as the Palm V(TM) by 3Com(R)
and the Company's Franklin Planner(TM) software (formerly "Ascend"). 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 a decrease in
sales from Productivity Plus and the catalog. Productivity Plus, which sells
product primarily to the government, continues to be adversely affected by
changes in the government procurement process. A portion of the decrease in
catalog sales, and slower than expected comparable store sales, is attributable
to sales growth from other distribution channels including mass markets,
contract stationers and the Internet.
Training and Education sales decreased by $4.7 million, or 12%,
compared to the prior year. Training sales decreased primarily due to decreased
core training program sales, primarily from corporate/on-site programs for
leadership training. In addition, book royalties decreased due to the timing of
royalties from the "7 Habits of Highly Effective Families" book that was
released in fiscal 1998. These decreases were partially offset by growth from
new business in the network marketing channel.
International sales increased by $3.2 million, or 30%, compared to the
prior year. The increase was primarily due to the acquisition of King Bear, a
former licensee located in Japan, which added $2.7 million in sales to the
quarter ended February 27, 1999. The Company also recognized increased product
and training sales in the United Kingdom, Australia, Canada and Mexico.
Offsetting these increases were generally weaker exchange rates, which adversely
affected reported sales.
Other sales, which consist primarily of the Company's commercial
printing services and fitness training sales, decreased $0.8 million, or 10%,
compared to the prior year. The decrease was primarily due to the sale of the
Company's Institute of Fitness, which recognized $1.3 million of sales during
the second 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 57.7% of sales for the quarter ended February 27,
1999, compared to 61.4% for the prior year. During the current quarter, the
Company's gross margin was adversely affected by changes in product mix,
decreased core training volume, costs associated with a mass marketing
agreement, product discounting and decreased book royalties. The Company's
product mix was affected by a decrease in high-margin planner sales and an
increase in low-margin electronic organizer sales. Core training programs
offered by the Company have gross margins that are generally higher than the
Company's gross margin taken as a whole. Decreased sales of these higher-margin
programs resulted in a lower total gross margin for the Company during the
second quarter of fiscal 1999. During the prior year, the Company entered into a
mass marketing agreement with a national office products retailer to distribute
a limited line of the Company's products. However, related inventory write-offs
and other costs of the agreement were higher than expected, resulting in an
unfavorable impact to the Company's gross margin. Additionally, the Company
discounted several binder models during the second quarter that resulted in
favorable unit sales, but at reduced margins. 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. Partially offsetting these
unfavorable items, the Company continues to improve its purchasing and
production processes, which have reduced the cost of paper-based products.
10
Selling, general and administrative ("SG&A") expenses increased $1.9
million to 40.9% of sales, compared to 39.1% of sales during the prior year. The
increase was primarily due to the acquisition of King Bear, which added $2.6
million of SG&A expenses during the quarter ended February 27, 1999. 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 $0.9 million of SG&A expenses during the
second quarter of fiscal 1998, and by decreases in other core operating costs.
Depreciation charges increased by $0.2 million over the prior year due
to new computer equipment purchased in conjunction with the business
transformation project and the addition of leasehold improvements for new
stores. Amortization charges increased by $0.9 million due to goodwill
amortization from the acquisition of King Bear, amortization of contingent
earnout payments made during the second quarter of fiscal 1999, and amortization
of certain business transformation costs.
Income taxes have been accrued using an effective rate of 42.0% for the
quarter ended February 27, 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.
Six Months Ended February 27, 1999 Compared to the Six Months
Ended February 28,1998
Consumer Products sales were flat compared to the prior year. Sales
increases from the Company's retail stores, mass marketing and contract
stationer channels, technology-related products and the Internet channel were
offset by sales decreases from Productivity Plus and catalog operations. Retail
store sales increased due to the addition of eight new stores as comparable
store sales were flat compared to the prior year. The Company 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. In addition, technology sales
increased primarily due to an increase in demand for electronic-based
organizers, including items such as the Palm V(TM) by 3Com(R) and the Company's
Franklin Planner(TM) software (formerly "Ascend"). 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 a decrease in sales from
Productivity Plus and the catalog. Productivity Plus, which sells product
primarily to the government, continues to be unfavorably affected by changes in
the government procurement process. A portion of the decrease in catalog sales,
and slower than expected comparable store sales, is attributable to sales growth
in other distribution channels including mass markets, contract stationers and
the Internet.
Training and Education sales decreased by $7.5 million, or 9%,
compared to the prior year. Training sales decreased in core training program
sales, primarily from both public and corporate/on-site leadership seminars.
Book royalties also decreased due to the timing of royalty payments from the "7
Habits of Effective Families," which was released during fiscal 1998. In
addition, sales from Premier decreased compared to the prior year due to the
timing of school agendas shipped. 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 $5.7 million, or 25%, compared to the
prior year. The increase was due to the acquisition of King Bear, which has
added $6.4 million in sales to the current fiscal year. Decreased sales in
Canada, the United Kingdom 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.
11
Other sales decreased by $3.2 million, or 17%, compared to the prior
year. The decrease was due to the sale of the Company's Institute of Fitness,
which recognized $3.7 million of sales during the six months ended February 28,
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 59.7% of sales for the six months ended February 27,
1999, compared to 61.0% for the prior year. During the first quarter of fiscal
1999, the Company improved its gross margin percentage due to manufacturing
process improvements, enhanced inventory management procedures and expanded
internal production capacity. The Company continued to improve procedures during
the second quarter of fiscal 1999, which further reduced the cost of paper-based
products. However, the gross margin was unfavorably affected by changes in
product mix, decreased core training volume, costs associated with a mass
marketing agreement, product discounting and decreased book royalties during the
second quarter of fiscal 1999, as described above.
Selling, general and administrative expenses increased $3.1 million to
40.6% of sales, compared to 38.7% of sales during the prior year. The increase
was primarily due to the acquisition of King Bear, which added $5.2 million of
SG&A expenses during the six months ended February 27, 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 $1.9 million of SG&A expenses during the first six 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 $1.1 million 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 retail stores. Amortization charges increased by
$1.6 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 accrued using an effective rate of 42.0% for the
six months ended February 27, 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, 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.
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 for the six months ended
February 27, 1999, was $31.2 million compared to $41.7 million in the prior
year. Adjustments to net income for the six months ended February 27, 1999
included $20.6 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 six months ended February 27, 1999. The primary use of cash was
the production and purchase of inventory, especially technology-related items
and new products. The decrease in accounts payable and accrued liabilities is
also primarily due to the seasonal nature of Premier's operations.
Net cash used for investing activities totaled $27.9 million during the
first six months of fiscal 1999 compared to $28.7 million in the prior year. Of
this amount, $8.9 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.
12
Net cash provided by financing activities was $0.6 million for the six
months ended February 27, 1999 compared to net cash used of $8.9 million in the
prior year. The primary uses of financing cash were the purchase of 1.5 million
shares the Company's common stock for $26.7 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 $67.3 million was outstanding at February 27, 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 February 27, 1999.
Working capital for the six months ended February 27, 1999 increased by
$19.6 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. Corresponding gains and losses on derivative
contracts was also immaterial for the six months ended February 27, 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 February 27, 1999, the Company had 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. From this process, a team
was created to specifically work toward Y2K compliance. The Project has three
significant phases that are designed to improve both operating processes and
information systems capabilities.
13
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.
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 were 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 or replacements 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 has evaluated
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 has also evaluated 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 February 27, 1999, the Company had spent $9.8 million on hardware
and $4.9 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 $1.8 million in other direct costs related to the assessment and
correction of potential Y2K issues as of February 27, 1999.
14
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
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. Due to the nature of its products and services, the
Company does not expect any significant Y2K problems with its products or
services.
Contingency Plans
The Company is currently working on a formal contingency plan for Y2K
issues and expects such a plan to be in place before the end of 1999. This
contingency plan includes items such as alternate sources of electricity and
other essential services necessary to maintain Company operations. However, the
Company does have well-defined manual processes which could be used in the event
of some system and service disruptions.
"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.
15
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 8,
1999. At this meeting, Jon H. Rowberry, Stephen M.R. Covey, Robert H.
Daines and E.J. "Jake" Garn were elected as members of the Board of
Directors for three-year terms that expire at the Annual Meeting of
Shareholders to be held in 2002, or until their successors are elected
and qualified. The number of shares voting in favor of each director
was as follows:
Jon H. Rowberry 16,980,833
Stephen M.R. Covey 16,974,497
Robert H. Daines 16,980,373
E.J. "Jake" Garn 16,845,826
During the annual meeting, the shareholders also ratified the
appointment of Arthur Andersen LLP as independent certified public
accountants for the fiscal year ending August 31, 1999. The number of
shares voting in favor of Arthur Andersen LLP was 17,211,145, with
3,127 shares voting against and 7,880 shares voting to abstain.
Item 5. Other information:
Not applicable.
Item 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
27. Financial Data Schedule
(B) Reports on Form 8-K:
Not applicable.
16
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: April 13, 1999 By: /s/ Jon H. Rowberry
-------------------- -----------------------------
Jon H. Rowberry
President
Chief Executive Officer
Date: April 13, 1999 By: /s/ John L. Theler
------------------- -----------------------------
John L. Theler
Executive Vice President
Chief Financial Officer
5
0000886206
FRANKLIN COVEY CO.
1,000
US DOLLARS
3-MOS
AUG-31-1999
NOV-29-1998
FEB-27-1999
1.0
32,637
0
58,924
2,447
59,154
168,496
204,630
80,021
588,113
66,981
151,355
0
0
1,353
333,259
588,113
137,089
137,089
57,961
57,961
65,498
0
2,325
11,305
4,748
6,557
0
0
0
6,557
.31
.31
