FRANKLIN COVEY CO. - 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Franklin Covey Co. for the period ended May 31, 1998. The Company, formed by the merger of Franklin Quest Co. and Covey Leadership Center effective June 2, 1997, operates in the personal development, training, and productivity products sectors. The report covers the three and nine months ended May 31, 1998, compared to the same periods in 1997.
Key Financial Metrics
| Metric | Three Months Ended May 31, 1998 | Nine Months Ended May 31, 1998 |
|---|---|---|
| Sales | $107,542,000 | $390,025,000 |
| Gross Margin | $64,814,000 (60.3%) | $237,151,000 (60.8%) |
| Income from Operations | $2,403,000 | $49,606,000 |
| Net Income | $470,000 | $24,463,000 |
| Diluted EPS | $0.02 | $0.97 |
| Cash and Equivalents | $31,153,000 | $31,153,000 (Balance Sheet) |
| Operating Cash Flow (9mo) | N/A | $52,690,000 |
| Long-Term Debt | $89,290,000 | $89,290,000 (Balance Sheet) |
| Line of Credit Outstanding | $26,037,000 | $26,037,000 (Balance Sheet) |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 35% for both the three-month and nine-month periods compared to the prior year. This growth is primarily attributed to the 1997 Merger with Covey Leadership Center, increased training seminar participation, and higher sales of Franklin Planners.
- Profitability: While operating income increased for the nine-month period ($49.6M vs $48.6M), operating income for the three-month period declined significantly ($2.4M vs $5.4M). This quarterly decline was driven by a $2.1 million non-cash charge related to a change in accounting principle (EITF 97-13) regarding the write-off of previously capitalized reengineering costs.
- Segment Performance: Training sales surged 103% in the quarter and 108% for the nine months, driven by the Merger. Product sales grew 6% in the quarter and 14% for the nine months, aided by new retail stores (119 stores vs 103 last year), though offset by declines in network marketing and government sales.
- Debt Structure: On May 4, 1998, the Company issued $85.0 million in unsecured senior notes due 2008 at 6.6% interest. Proceeds were used to reduce variable-rate line of credit financing.
Guidance, Outlook, and Risks
- Management Commentary: Management believes cash flows and credit facilities are sufficient to meet working capital requirements. The Company is in compliance with all financial covenants associated with its new senior notes.
- Year 2000 Compliance: The Company is replacing its accounting and information systems to be compliant with "year 2000" issues, with full operational status expected in fiscal 1999. Management does not anticipate additional material expenditures for compliance but notes potential risks from vendor systems.
- Stock Repurchase: The Board approved the purchase of an additional 3,000,000 shares in March 1998. During the nine months ended May 31, 1998, the Company purchased 1,222,100 shares for $28.5 million.
- Risks: Forward-looking statements are subject to risks including integration of acquired businesses, management of growth, consumer acceptance of new products, and competition.
Investor Verification Checklist
- Accounting Change Impact: Verify the specific impact of the EITF 97-13 write-off ($2.1 million net of tax) on the Q3 1998 net income and confirm future capitalization policies for IT reengineering costs.
- Debt Covenants: Review the specific financial ratios (Fixed Charge Coverage, Total Debt Ratio, Consolidated Net Worth) required by the new $85 million Senior Notes agreement to ensure ongoing compliance.
- Merger Integration: Assess the sustainability of the 100%+ growth in training sales and the 6% decline in comparable retail store sales to determine if growth is organic or purely acquisition-driven.
- Year 2000 Costs: Confirm that the projected costs for the new information system implementation are fully accounted for and that no hidden liabilities exist regarding vendor dependencies.