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Business Context and Reporting Period

Company: Franklin Covey Co.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended February 27, 1999.
Business Overview: The Company operates through three Strategic Business Units (SBUs): Consumer Products, Training and Education, and International. It distributes personal productivity products, provides training and consulting services, and operates retail stores. During the period, the Company adopted a modified 52/53-week reporting year.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Sales decreased 1% ($1.5 million) for the quarter and 2% ($5.0 million) for the six months compared to the prior year.
  • Consumer Products: Flat to slightly up (1% quarterly), driven by retail store expansion and technology sales, offset by declines in catalog and government sales.
  • Training & Education: Decreased 12% quarterly and 9% six-month due to lower core training volume and timing of book royalties.
  • International: Increased 30% quarterly and 25% six-month, primarily due to the acquisition of King Bear (Japan).
• Profitability: Operating income declined 40% for the quarter and 27% for the six months. Gross margin percentage contracted from 61.4% to 57.7% (quarter) and 61.0% to 59.7% (six months) due to product mix shifts (lower margin electronics), mass marketing costs, and reduced royalties.
• Expenses: SG&A expenses increased as a percentage of sales (40.9% vs 39.1% quarterly) due to the King Bear acquisition and new store openings. Depreciation and amortization increased due to new equipment and goodwill amortization.
• Cash Flow: Operating cash flow decreased 25% year-over-year for the six-month period ($31.2 million vs $41.7 million), primarily due to lower sales and inventory buildup for technology products.

Guidance, Outlook, and Risks

• Management Commentary: The Company is reevaluating mass market channel activity due to pricing and profitability concerns. It anticipates existing capital resources will be sufficient for current operations and planned growth.
• Divestiture: Signed a letter of intent to sell the commercial printing division (Publishers' Press), expected to close by May 1999. The Company will retain printing operations for its own planners.
• Share Repurchases: Purchased 1.5 million shares for $26.7 million during the six months. Subsequent to the period end, an additional 633,000 shares were purchased. 1.0 million shares remain available under the current plan.
• Year 2000 (Y2K) Issues: The Company is actively addressing Y2K compliance. Phases 1 (Financial/Supply Chain) and 2 (Payroll/HR) are complete. Phase 3 (Order to Collect) is ongoing with critical applications targeted for completion before end of 1999. Primary risk is service disruption from third-party providers (telecom, banking, shipping).
• Accounting Change: A cumulative effect of an accounting change (EITF 97-13) reduced net income by $2.1 million (net of tax) in the quarter, related to the write-off of previously capitalized business reengineering costs.

Investor Verification Checklist

• Mass Market Strategy: Verify the outcome of the reevaluation of the mass market channel and its impact on future revenue mix.
• King Bear Integration: Assess the long-term profitability of the King Bear acquisition given the immediate drag on gross margins and SG&A.
• Y2K Contingency: Confirm the status of third-party service provider certifications and the readiness of the "Order to Collect" system before year-end 1999.
• Product Mix Shift: Monitor the transition from high-margin paper planners to lower-margin electronic organizers and its effect on future gross margins.
• Debt Covenants: Verify continued compliance with financial ratios required by the $89 million line of credit and $85 million long-term notes.