Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-K (Annual Report)
Fiscal Year End: August 31, 2003
Business Overview: Franklin Covey is an international learning and performance solutions company providing training, education programs, and productivity tools (planners, software, PDAs) to organizations and individual consumers. The company operates through two primary segments: the Consumer Business Unit (CBU) and the Organizational Solutions Business Unit (OSBU).
Key Financial Metrics (Fiscal 2003)
| Metric | Value (in thousands) |
|---|---|
| Net Sales | $307,160 |
| Gross Margin | $169,559 (55.2% of sales) |
| Loss from Continuing Operations | $(45,253) |
| Net Loss Attributable to Common Shareholders | $(53,988) |
| Diluted Loss Per Share | $(2.69) |
| Net Cash Provided by Operating Activities | $5,802 |
| Total Assets | $259,741 |
| Total Liabilities | $73,941 |
| Long-Term Debt | $1,435 (excluding current portion) |
| Cash and Cash Equivalents | $41,916 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 7.8% to $307.2 million from $333.0 million in fiscal 2002. This was driven by a 9% decline in retail store sales and a 13% decline in catalog sales, partially offset by growth in e-commerce and wholesale channels.
- Profitability Improvement: While the company remained unprofitable, the net loss from continuing operations improved significantly to $45.3 million from $96.5 million in fiscal 2002. This improvement was largely due to a reduction in the provision for losses on the management stock loan program (from $24.8 million to $3.9 million) and significant cost-cutting initiatives.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased 15% to $183.3 million, representing 59.7% of sales compared to 65.1% in the prior year.
- Asset Impairments: The company recorded a $0.9 million impairment charge for its investment in Agilix Labs, Inc. Conversely, it recorded a $1.6 million recovery of previously recorded impairment charges related to its joint venture, Franklin Covey Coaching, LLC.
- Store Closures: The company closed 22 domestic and 10 international retail stores during fiscal 2003 to eliminate unprofitable locations.
Guidance, Outlook, and Risks
- Liquidity: Management believes current cash levels and operating cash flows are adequate for the next 12 months. However, future liquidity depends on stabilizing revenues and controlling costs.
- NYSE Compliance: The company successfully regained compliance with the NYSE minimum stock price requirement ($1.00) in September 2003. It remains under review for the minimum market capitalization requirement ($15 million) through September 2004.
- Contractual Obligations: The company has significant long-term contractual obligations, primarily a $304.7 million outsourcing agreement with Electronic Data Systems (EDS) for warehousing, distribution, and IT services, extending through 2016.
- Management Stock Loan Program: A significant risk factor is the management stock loan program. As of August 31, 2003, the principal and accrued interest ($37.3 million) exceeded the market value of the stock held by participants by $32.6 million. The company has reserved $29.7 million against these loans, but further reserves may be required if stock prices do not recover by the March 2005 maturity date.
- Legal Proceedings: The company is cooperating with an SEC inquiry regarding its management stock loan program and a withdrawn tender offer. Management believes it has complied with applicable laws.
Investor Verification Checklist
- Stock Price Recovery: Verify the current market price of Franklin Covey common stock to assess the adequacy of the $29.7 million loan loss reserve and the risk of further write-downs.
- EDS Contract Performance: Review the operational impact and cost efficiency of the long-term EDS outsourcing agreement, which represents a major fixed cost.
- Retail Store Turnaround: Monitor comparable store sales trends and the financial impact of the ongoing store closure strategy.
- NYSE Listing Status: Confirm the company's continued compliance with NYSE market capitalization requirements to avoid delisting.
- Revenue Stabilization: Assess whether the shift from catalog to e-commerce sales is sufficient to offset the decline in traditional retail and catalog channels.