Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 29, 1999 (Third Quarter of Fiscal 1999)
Business Overview: The Company operates through three Strategic Business Units (SBUs): Consumer Products, Training and Education, and International. It distributes productivity products, provides training and consulting services, and operates retail stores.
Key Financial Metrics
| Metric | Quarter Ended May 29, 1999 | Nine Months Ended May 29, 1999 |
|---|---|---|
| Sales | $109.3 million | $386.7 million |
| Gross Margin | $58.5 million (53.6%) | $224.1 million (57.9%) |
| Operating Income (Loss) | $(6.1) million | $28.5 million |
| Net Income (Loss) | $(4.6) million | $12.9 million |
| Diluted EPS | $(0.22) | $0.60 |
| Cash and Equivalents | $23.0 million | (Balance Sheet) |
| Operating Cash Flow (9mo) | N/A | $26.5 million |
| Debt (Current + Long-term) | $160.2 million | (Balance Sheet) |
Note: Net loss for the quarter includes a cumulative effect of an accounting change of $(2.1) million.
Material Changes vs. Prior Period
- Quarterly Performance: Sales increased 2% to $109.3 million compared to $107.5 million in the prior year quarter. However, the Company reported a net loss of $4.6 million compared to a net income of $0.5 million in the prior year.
- Margin Compression: Gross margin declined to 53.6% from 60.3% year-over-year. This was driven by inventory write-offs, a shift to lower-margin technology products, decreased high-margin training volume, and reduced book royalties.
- Segment Shifts: Consumer Products sales grew 9% due to retail expansion and internet sales, offsetting a decline in catalog sales. Training and Education sales fell 1% due to lower core training program sales. International sales were flat.
- Cash Flow: Operating cash flow for the nine-month period dropped significantly to $26.5 million from $55.7 million in the prior year, primarily due to lower net income and changes in working capital.
Outlook, Risks, and Unusual Items
- Subsequent Financing Event: On June 2, 1999, the Company issued 750,000 shares of Series A Preferred Stock for $75.0 million to Knowledge Capital Investment Group. The stock carries a 10% annual dividend (payable in stock until 2002) and is convertible to common stock at $14.00 per share.
- Leadership Changes: Robert A. Whitman was named Chairman of the Board and Interim CEO following the resignation of Jon Rowberry on July 6, 1999.
- Asset Sale: The Company announced the sale of its commercial printing division (Publishers Press), with completion expected in August 1999. The impact is expected to be immaterial.
- Accounting Change: The Company adopted EITF 97-13, requiring the expensing of certain business reengineering and IT costs. A cumulative adjustment of $2.1 million (net of tax) was recorded in the prior fiscal year, affecting current comparability.
- Year 2000 (Y2K) Risk: The Company is actively remediating Y2K issues. As of May 29, 1999, $15.1 million had been spent on hardware and software. Critical risks remain regarding external vendors and shipping providers.
- Strategic Review: Management is reevaluating mass-market channel sales due to pricing and profitability concerns.
Investor Verification Checklist
- Preferred Stock Terms: Verify the impact of the $75 million Series A Preferred Stock issuance on future earnings (10% dividend) and potential dilution upon conversion.
- Margin Recovery: Assess management's plan to reverse the gross margin decline caused by product mix shifts and inventory write-offs.
- Y2K Contingency: Review the status of critical external vendor compliance and the Company's contingency plans for potential supply chain disruptions.
- Leadership Stability: Monitor the appointment of a permanent CEO following the interim appointment of Robert A. Whitman.
- Debt Covenants: Confirm continued compliance with financial ratios required by the $89 million line of credit and long-term notes.