Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: August 31, 2002
Business Overview: Franklin Covey is an international learning and performance solutions company providing training, educational materials, and productivity tools (e.g., The 7 Habits of Highly Effective People, FranklinCovey Planner) to organizations and individual consumers. Operations are divided into two primary segments: the Consumer Strategic Business Unit (CSBU) and the Organizational Strategic Business Unit (OSBU).
Key Financial Metrics
| Metric | Fiscal 2002 | Fiscal 2001 | Change |
|---|---|---|---|
| Total Sales | $332.998 million | $439.781 million | (24.3%) |
| Gross Margin | $183.629 million (55.1%) | $249.799 million (56.8%) | (26.5%) |
| Operating Loss | $(122.573) million | $(14.793) million | Worsened |
| Net Loss (Continuing Ops) | $(96.466) million | $(13.196) million | Worsened |
| Net Loss (Total) | $(100.585) million | $(11.083) million | Worsened |
| Diluted EPS (Loss) | $(5.49) | $(0.95) | Worsened |
| Cash and Equivalents | $47.049 million | $14.864 million | +216.5% |
| Total Assets | $304.738 million | $536.480 million | (43.2%) |
| Long-Term Debt | $1.606 million | $61.101 million | (97.4%) |
Material Changes vs. Prior Period
- Revenue Decline: Sales dropped 24.3% to $333.0 million, driven by a 26% decline in product sales (specifically handheld electronic devices) and a 21% decline in training solutions due to economic downturns and reduced corporate travel post-September 11, 2001.
- Divestiture of Premier Agendas: The company sold its Premier Agendas subsidiary (Education Business Unit) in December 2001 for approximately $152.5 million. This resulted in a $64.9 million after-tax gain recorded as a discontinued operation.
- Debt Reduction: Proceeds from the Premier sale were used to retire nearly all outstanding debt, reducing long-term obligations from $61.1 million to $1.6 million and terminating the line of credit.
- Accounting Changes: Adoption of SFAS No. 142 (Goodwill and Other Intangible Assets) resulted in a $61.4 million after-tax cumulative effect charge, writing off goodwill and a portion of the Covey trade name.
- Impairment Charges: Significant non-cash charges included a $24.8 million provision for losses on management stock loans, a $16.3 million impairment of the investment in Franklin Covey Coaching, LLC, and $10.2 million in other impaired assets.
Outlook, Risks, and Management Commentary
- Liquidity Position: Management considers the liquidity position strong with $47.0 million in cash and minimal debt, sufficient to fund operations for fiscal 2003. However, future liquidity depends on generating positive operating cash flows.
- Cost Reduction: The company implemented significant cost-cutting measures, including workforce reductions ($5.2 million in severance) and outsourcing IT, warehousing, and call center operations to EDS. SG&A expenses decreased in absolute dollars but rose as a percentage of sales due to revenue declines.
- Management Stock Loan Risk: A significant risk involves a loan program for management personnel. As of August 31, 2002, the loans plus accrued interest exceeded the value of the stock held by participants by $29.2 million. The company recorded a $24.8 million reserve, but full repayment is not guaranteed.
- Joint Venture Termination: The joint venture with American Marketing Systems (Franklin Covey Coaching, LLC) was terminated due to failure to meet earnings thresholds. The company expects to receive up to $3.2 million in future payments under a new agreement.
- SEC Inquiry: 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 all applicable laws.
Investor Verification Checklist
- Recovery of Management Loans: Verify the likelihood of collecting the $29.2 million shortfall on management stock loans, which poses a significant risk to future cash flows.
- Operating Cash Flow: Monitor the ability to return to positive cash flow from operations, as the company currently relies on cash reserves and the one-time gain from the Premier sale.
- EDS Contract Obligations: Review the long-term outsourcing commitment to EDS, which requires minimum payments of approximately $361 million over the life of the agreements.
- Product Mix Shift: Assess the success of new product introductions (e.g., Tablet PC software) in offsetting the sharp decline in handheld electronic device sales.
- Goodwill and Intangibles: Monitor future impairment testing of the remaining Covey trade name and other intangible assets, which are subject to further write-downs if sales do not recover.