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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended May 31, 1997, for Franklin Covey Co. (formerly Franklin Quest Co.). The filing reflects the company's operations prior to a significant merger with the Covey Leadership Center, Inc., which became effective on June 2, 1997. The financial statements do not include the results of Covey. The company operates in the personal development, training, and publishing sectors, with recent strategic acquisitions of TrueNorth Corporation (Personal Coaching Division) and Premier Agendas, Inc.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 10.2% for the quarter and 11.7% for the nine-month period compared to the prior year. Growth was driven by the acquisition of the Personal Coaching Division (Coaching) and expansion of retail stores.
• Profitability Decline: Despite revenue growth, Net Income decreased 50.2% for the quarter ($3.1M vs $6.3M) and 9.0% for the nine-month period ($29.2M vs $32.1M). This was primarily due to a significant increase in operating expenses.
• Operating Expenses: Operating expenses rose to 51.2% of sales for the quarter (up from 43.2%) and 41.5% for the nine months (up from 36.8%). Increases were attributed to the Premier Agendas acquisition (which added expenses before significant seasonal sales) and the Coaching division, along with higher marketing and staff costs.
• Debt and Liquidity: Long-term debt increased substantially from $5.5 million to $53.8 million to fund acquisitions and the upcoming Covey merger. Cash and cash equivalents grew from $24.0 million to $46.7 million, though $27.0 million was committed for the Covey license rights purchase.

Outlook, Risks, and Unusual Items

• Merger with Covey: A material subsequent event is the merger with Covey Leadership Center, Inc., effective June 2, 1997. The company issued 5.03 million shares and paid $27.0 million in cash for license rights. Management anticipates integration of product offerings and distribution channels but notes no assurance of substantial improvements.
• Acquisition Impact: The Premier Agendas acquisition (March 1997) added significant operating expenses without immediate corresponding sales due to the seasonal nature of the academic planner business. The Coaching acquisition (October 1996) contributed higher gross margins but also higher operating expense ratios.
• Stock Repurchases: The company repurchased 970,000 shares for $18.4 million during the nine-month period. Board authorization remains for an additional 1.545 million shares.
• Risks: Forward-looking statements highlight risks regarding the integration of acquired businesses, management of growth, dependence on specific products, and competition. The company cautions that future results may differ materially from projections.

Investor Verification Checklist

• Merger Integration: Verify the progress and financial impact of the June 2, 1997 merger with Covey Leadership Center, including the $27.0 million cash outflow for license rights.
• Seasonality of Premier: Monitor the fourth fiscal quarter for the expected revenue contribution from Premier Agendas to offset the operating expenses incurred in the first nine months.
• Debt Covenants: Review the terms of the long-term line of credit (utilized $48.0 million of $100.0 million capacity) to ensure compliance with financial covenants post-merger.
• Operating Expense Ratios: Track whether operating expense percentages stabilize as the Coaching and Premier divisions mature and achieve expected sales volumes.
• Share Count: Confirm the impact of the 5.03 million shares issued in the merger on future earnings per share calculations.