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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _______________
FRANKLIN COVEY CO.
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(Exact name of registrant as specified in its charter)
Utah 001-11107 87-0401551
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 817-1776
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which
Title of Each Class Registered
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Common Stock, $.05 Par Value New York Stock Exchange
[ ] Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant on November 1, 1998, based upon the closing sale price of the
Common Stock of $19.75 per share on that date, was approximately $419,907,554.
Shares of the Common Stock held by each officer and director and by each person
who may be deemed to be an affiliate of the Registrant have been excluded.
As of November 1, 1998, the Registrant had 21,261,142 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference in Parts,
II, III and IV of this Form 10-K: (1) Registrant's Annual Report to
Shareholders, for the fiscal year ended August 31, 1998 (Parts II and IV), and
(2) Proxy Statement for Registrant's Annual Meeting of Shareholders which is
scheduled to be held on January 8, 1999 (Part III).
INDEX TO FORM 10-K
Page
PART I .............................................................................................1
Item 1. BUSINESS.....................................................................................1
General......................................................................................1
Franklin Covey Products......................................................................2
Planners .............................................................................2
Binders .............................................................................2
Software .............................................................................3
Personal Development Products.........................................................3
Training, Facilitation and Consulting Services...............................................3
Workshops.............................................................................4
Personal Coaching.....................................................................5
Sales and Marketing..........................................................................5
Products .............................................................................5
Catalog ....................................................................5
Retail Stores................................................................5
Direct Product...............................................................6
Training Sales........................................................................6
Printing Services.....................................................................7
Strategic Distribution Alliances.............................................................7
International Operations.....................................................................7
Clients......................................................................................8
Competition..................................................................................8
Training .............................................................................8
Consulting............................................................................8
Products .............................................................................8
Manufacturing................................................................................8
Trademarks, Copyrights and Intellectual Property.............................................9
Employees...................................................................................10
Item 2. PROPERTIES..................................................................................10
Item 3. LEGAL PROCEEDINGS...........................................................................10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................10
PART II .............................................................................................11
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS....................11
Item 6. SELECTED FINANCIAL DATA.....................................................................11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......11
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................11
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........11
PART III ............................................................................................12
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................12
Item 11. EXECUTIVE COMPENSATION......................................................................12
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................12
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................12
PART IV ............................................................................................13
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................13
(a) Documents Filed......................................................................13
1. Financial Statements........................................................13
2. Exhibit List................................................................14
(b) Reports on Form 8-K..................................................................15
(c) Exhibits.............................................................................15
(d) Financial Statement Schedule.........................................................15
SIGNATURES.............................................................................................16
1
PART I
Item 1. BUSINESS
GENERAL
Franklin Covey Co. (the "Company" or "Franklin Covey") is an international
professional services and leadership development firm dedicated to increasing
the effectiveness of individuals and organizations. To achieve that goal, the
Company provides consulting services, seminars and workshops, educational
materials, publications and products designed to empower individuals and
organizations to become more effective. The offerings include a comprehensive
time and life management system that enables individuals to better manage their
time by identifying goals and prioritizing the tasks necessary to achieve them.
The Company also provides training, consulting services and products designed to
improve written and oral business communication skills. Franklin Covey also
offers book and commercial printing services. To facilitate implementation of
the principles it teaches, the Company produces and markets its primary product,
the Franklin Planner(R).
The basic Franklin Planner consists of a paper-based, two-page per day
Franklin Covey planning system combined with a seven-ring binder, a variety of
planning aids, weekly, monthly and annual calendars and personal management
sections. The Franklin Planner can also be purchased in one-page per day or
two-page per week versions. The Company offers various forms and accessories
that allow users to expand and customize their Franklin Planner. Franklin Covey
markets the Franklin Planner and accessory products directly to organizations,
and through its sales catalog and retail stores. At August 31, 1998, Franklin
Covey had 120 domestic retail stores located in 36 states and the District of
Columbia. A significant percentage of the users of the Franklin Planner continue
to purchase a renewal planner each year, creating substantial recurring sales.
The principles taught in the Company's curriculum have also been published,
in many cases, in book and audio tape form. Books sold by the Company include
THE 7 HABITS OF HIGHLY EFFECTIVE PEOPLE, PRINCIPLE-CENTERED LEADERSHIP, FIRST
THINGS FIRST, and THE 7 HABITS OF HIGHLY EFFECTIVE FAMILIES, all by Stephen R.
Covey, THE 10 NATURAL LAWS OF TIME AND LIFE MANAGEMENT by Hyrum W. Smith, THE
POWER PRINCIPLE by Blaine Lee and THE 7 HABITS OF HIGHLY EFFECTIVE TEENS, by
Sean Covey. These books, as well as audio tape versions of many of these
products, are sold through general retail channels, as well as through the
Company's own catalog and retail stores.
Product sales, consisting primarily of the Franklin Planner and related
products, accounted for 62.9% of the Company's sales during the year ended
August 31, 1998.
Franklin Covey provides its effectiveness training materials to business,
industry, educational institutions, communities and individuals. The Company
sells its services to the organizational market through its own direct sales
force. The Company delivers its training services to organizations in one of
three ways:
1. Franklin Covey consultants provide on-site consulting or training classes
for organizations. In these situations, the Franklin Covey consultant can
tailor the curriculum to the client's specific business and objectives.
2. The Company also conducts public seminars in more than 200 cities
throughout the United States, where organizations can send their employees
in smaller numbers. These public seminars are also marketed directly to the
public through the Company's catalog, retail stores, and by direct mail.
3. The Company's programs are also designed to be facilitated by licensed
professional trainers and managers in client organizations, reducing
dependence on the Company's professional presenters, and creating
continuing revenue as participant materials are purchased for trainees by
these facilitators.
In fiscal 1998, the Company provided products and services to 80 of the
Fortune 100 and more than 75% of the Fortune 500. The Company also provides its
products and services to a number of U.S. and foreign governmental agencies,
including the U.S. Department of Defense, as well as educational institutions.
The Company also markets its services and products internationally outside the
United States and Canada (in 34 countries) through Company-owned direct
operations and/or licensed operations.
2
Professional services, including training presented by client facilitators,
accounted for 32.0% of the Company's sales, representing more than 750,000
individuals trained, during the year ended August 31, 1998.
In December 1995, the Company acquired the assets of Productivity Plus,
Inc. ("Productivity Plus"), a time management company headquartered in Chandler,
Arizona. Productively Plus offers a paper-based, refillable planner/organizer
and accessories principally to customers in branches of the U.S. military.
Effective October 1, 1996, the Company acquired the assets of TrueNorth
Corporation ("Personal Coaching"), a training company headquartered in Salt Lake
City, Utah. Personal Coaching provides post-instruction personalized coaching to
corporations and individuals to augment the effectiveness and duration of
quality training curricula.
Effective March 4, 1997, the Company acquired the assets of Premier
Agendas, Inc., and Premier School Agendas, Ltd. (collectively, "Premier"), the
leading provider of academic and personal planners for students from
kindergarten to college throughout the United States and Canada. Premier has a
user base of approximately twelve million students.
Effective June 2, 1997, Covey Leadership Center, Inc. ("Covey") was merged
with and into the Company (the "Merger") and the name of the Company was changed
to Franklin Covey Co. Management believes that the Merger positions the Company
as a leading provider of products and training services designed to increase the
effectiveness of individuals and organizations. The Merger broadened the range
of products and services offered to include Covey's top-rated leadership
programs, "The 7 Habits of Highly Effective People(R)" and "Principle-Centered
Leadership(R)," increased the Company's capacity to develop and market new
programs and products and created the potential for significant efficiencies and
synergies as distribution and production facilities were combined.
Unless the context requires otherwise, all references to the "Company" or
to "Franklin Covey" herein refer to Franklin Covey Co. and each of its operating
divisions and subsidiaries. The Company's principal executive offices are
located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331 and its
telephone number is (801) 817-1776.
FRANKLIN COVEY PRODUCTS
Based upon its belief that organizational and individual productivity
require effective time management, the Franklin Planner has been developed as
the basic tool for implementing the principles of Franklin Covey's time
management system. The Franklin Planner consists of a paper-based Franklin Covey
planning system, a binder in which to carry it, various planning aids, weekly,
monthly and annual calendars as well as personal management sections. Franklin
Covey offers a broad line of renewal planners, forms and binders for the
Franklin Planner, which are available in various sizes and styles. During the
fiscal year ended August 31, 1998, product sales, consisting primarily of the
Franklin Planner and related products, amounted to $343.8 million and accounted
for 62.9% of Franklin Covey's sales during the period.
PLANNERS. Planners, forms, tabs, and retail kits generated more than $137
million in total sales during fiscal 1998. Planner renewals are available for
the Franklin Planner in five sizes and various styles and consist of daily or
weekly formats, appointment schedules, task lists, monthly calendars, daily
expense records, daily record of events, and personal management pages for an
entire year. Annual Renewal Planners range in price from $18.00 to $37.00. The
Master Pack, which includes personal management tabs, a guide to using the
planner, a pagefinder and weekly compass cards completes a Franklin Planner. The
Master Pack price ranges from $6.00 to $7.00.
BINDERS. Franklin Covey offers binders and accessories (briefcases,
portfolios, wallets/purses, leather care products, etc.) in a variety of
materials, styles and Franklin Planner sizes. These materials include high
quality leathers, fabrics, synthetics and vinyls in a variety of color and
design options. Binder styles include zipper closures, snap closures, and open
formats with pocket configurations to accommodate credit cards, business cards,
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checkbooks and writing instruments. Category products pricing ranges from $3.00
to $300.00.
SOFTWARE. The Company also offers its ASCEND(R) program, a complete
Personal Information Management ("PIM") system which can be used in conjunction
with the paper-based Franklin Planner or used as a stand-alone PIM system.
ASCEND permits users to generate and print data on Franklin Covey paper which
can be inserted directly into the Franklin Planner. The ASCEND program operates
in both the Windows(R) and Macintosh(R) environments. Franklin Covey offers
ASCEND at a retail price of $99.95 which includes all necessary software,
related tutorials and reference manuals. Franklin Covey offers ASCEND through
nationwide retail software stores, in its own retail stores and catalog, and a
specially-designed "home user" version through Sam's Club and Price Costco.
Franklin Covey is also an OEM provider of the PalmPilotTM which includes the
ASCEND software. The PalmPilot is a handheld electronic device manufactured by
3Com(R). The PalmPilot has become another successful planning tool offered by
the Company through its catalog and retail store operations. The Company has
introduced products that can add paper-based planning to the electronic planner
as well as binders and carrying cases specific to the PalmPilot.
PERSONAL DEVELOPMENT PRODUCTS. To supplement its principal products,
Franklin Covey offers a number of accessories and related products, including
books, video tapes and audio cassettes focused on time management, leadership,
personal improvement and other topics. The Company also markets a variety of
content-based personal development products. These products include books,
PrioritiesTM magazine, audio learning systems such as multi-tape and workbook
sets, CD-ROM software products, calendars, posters and other specialty name
brand items. The Company has also identified the home and family market for
development of principle-centered personal development products. Franklin Covey
published and launched Dr. Covey's latest book, THE 7 HABITS OF HIGHLY EFFECTIVE
FAMILIES, in October 1997. The Company offers numerous accessory forms,
including check registers, spread sheets, stationery, mileage logs, maps, menu
planners, shopping lists and other information management and project planning
forms. The Company's accessory products and forms are generally available in the
Franklin Planner sizes.
TRAINING, FACILITATION AND CONSULTING SERVICES
Franklin Covey's training, facilitation and consulting services are
marketed and delivered in the United States by the Company's Professional
Services Group, which consists of talented consultants selected through a
competitive and demanding process and highly qualified sales professionals.
Franklin Covey currently employs 144 training consultants in major
metropolitan areas of the United States and an additional 39 training
consultants outside of the United States. Training consultants are selected from
a large number of experienced applicants. These consultants generally have
several years of training and/or consulting experience and excellent
presentation skills. Once selected, the training consultant goes through a
rigorous training program including multiple live presentations. The training
program ultimately results in the Company's certification of the consultant.
Franklin Covey believes that the caliber of its training consultants has helped
build its reputation of providing high quality seminars. The Company's
Professional Services Group can also help organizational clients diagnose
inefficiencies in their organization and design the core components of a
client's organizational solutions. The efforts of the consultants are enhanced
by several proprietary consulting tools the Company has designed for their use:
Organizational Health Assessment(TM) ("OHA"), used to assess client needs; the
Organizational Effectiveness Cycle(TM) ("OE-Cycle(TM)"), utilized for
organizational diagnosis and re-design; and the Principle-Centered
Organizational Change Process(TM) ("PCOC Process(TM)"), a rigorous methodology
for organizational change management.
Franklin Covey's Professional Services Group is organized in sales teams in
order to assure that both the consultant and the client sales professional
participate in the development of new business and the assessment of client
needs. Consultants are then entrusted with the actual delivery of content,
seminars, processes and other solutions. Consultants follow up continuously with
client service teams, working with them to develop lasting client impact and
ongoing business opportunities.
4
WORKSHOPS. Franklin Covey offers a range of workshops designed to empower
organizations and individuals to effect principle-centered leadership and
change. The Company's workshops are oriented to address each of the four levels
of leadership needs: personal, interpersonal, managerial and organizational. In
addition, the Company believes each of its workshops provides an impactful
experience and frequently generates additional business. During fiscal 1998,
more than 750,000 individuals were trained using the Company's curriculum in its
single and multiple-day workshops and seminars.
Franklin Covey's workshops include its three-day 7 Habits workshop based
upon the material presented in THE 7 HABITS OF HIGHLY EFFECTIVE PEOPLE. The 7
HABITS workshop provides the foundation for continued client relationships and
generates more business as the Company's content and application tools are
delivered deeper into the organization. Additionally, a three-day
PRINCIPLE-CENTERED LEADERSHIP course is offered, which focuses on the managerial
aspects of client needs.
FRANKLIN COVEY LEADERSHIP WEEK, which management believes is one of the
premier leadership programs in the United States, consists of a five-day session
focused on materials from Franklin Covey's 7 HABITS OF HIGHLY EFFECTIVE PEOPLE
and PRINCIPLE-CENTERED LEADERSHIP courses. FRANKLIN COVEY LEADERSHIP WEEK is
reserved for executive level management. As a part of the week's agenda,
executive participants design strategies for long-term implementation of the
Company's principles and content within their organizations.
Franklin Covey's single-day TIMEQUEST seminar and FIRST THINGS FIRST
workshop are designed to complement other Company curricula and compete in the
time management industry. These time management seminars are conducted by the
Company's training consultants for employees of clients and in public seminars
throughout the United States and in many foreign countries. Public seminars and
workshops utilizing the FIRST THINGS FIRST curriculum are also conducted in the
United States by SkillPath, Inc. ("SkillPath"), a national provider of training
seminars and workshops, under a license arrangement between Franklin Covey and
SkillPath. These courses are conducted using the materials presented in the
books titled THE 10 NATURAL LAWS OF TIME AND LIFE MANAGEMENT and FIRST THINGS
FIRST. In October 1998, the Company launched a new time management seminar
titled "WHAT MATTERS MOST(R)." This new seminar includes content from both
pre-existing time management seminars and has added new material to create a new
and improved time management curriculum. Though there are still many licensed
trainers for TIMEQUEST and FIRST THINGS FIRST, the Company intends for the new
WHAT MATTERS MOST seminar to replace the other time management seminars. The
Company offers a number of other single-day seminars and workshops including
PRESENTATION ADVANTAGE(TM), a seminar helping individuals and organizations make
more effective business presentations; WRITING ADVANTAGE(R), a seminar that
teaches better business writing and communication skills; PLANNING FOR
RESULTS(TM); BUILDING TRUST(TM); and POWER OF UNDERSTANDING(TM). The Company's
training consultants conduct these seminars and workshops for employees of
institutional clients and public seminar participants.
In addition to providing consultants and presenters, Franklin Covey also
trains and certifies client facilitators to teach selected Company workshops
within the client's organization. Franklin Covey believes client-facilitated
training is important to its fundamental strategy to create recurring client
revenue streams. After having been certified, clients purchase manuals,
profiles, planners and other products to conduct training workshops within their
organization, generally without the Company repeating the sales process. This
creates an annuity-type business, providing recurring revenue, especially when
combined with the fact that curriculum content in one course leads the client to
additional participation in other Company courses. Since 1988, Franklin Covey
has trained more than 19,000 client facilitators. Client facilitators are
certified only after graduating from one of Franklin Covey's certification
workshops and completing post-course certification requirements.
Franklin Covey regularly sponsors public seminars in cities throughout the
United States and in several foreign countries. The frequency of seminars in
each city or country depends on the concentration of Franklin Covey clients, the
level of promotion and resulting demand, and generally ranges from semi-monthly
to quarterly. Smaller institutional clients often utilize the public seminars to
train their employees.
5
In fiscal 1996, Franklin Covey introduced the Franklin Covey Leadership
Library series of video workshops. The Franklin Covey Leadership Library is a
series of stand-alone video workshops that can be used in informal settings as
discussion starters, in staff meetings or as part of an in-house leadership
development program.
PERSONAL COACHING. Franklin Covey offers post-seminar training in the form
of personal coaching. The Company employs 41 coaches that interact with clients
on the telephone to help them implement the training from the seminar they have
taken. The Company offers personal coaching for some of its own curriculum as
well as seminars offered by other training companies.
Sales of training services for the year ended August 31, 1998 were $174.9
million and accounted for 32.0% of Franklin Covey's total sales during the
period.
SALES AND MARKETING
The following table sets forth, for the periods indicated, the Company's
sales and percentage of total sales for each of its principal distribution
channels:
Year Ended August 31,
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1998 1997 1996
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Product Sales........................... $343,832 62.9% $301,687 69.6% $236,039 71.1%
Training Services....................... 174,927 32.0 107,417 24.8 70,812 21.3
Printing Services....................... 27,853 5.1 24,168 5.6 25,155 7.6
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Total Sales........................ $546,612 100.0% $433,272 100.0% $332,006 100.0%
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PRODUCTS. Franklin Covey uses catalogs, retail stores and a direct product
sales force to market its products to organizations and individuals.
CATALOG. Franklin Covey periodically mails catalogs to its clients,
including a reference catalog, holiday catalog, catalogs timed to coincide with
planner renewals and catalogs related to special events, such as store openings
or new product offerings. Catalogs may be targeted to specific geographic areas
or user groups as appropriate. Catalogs are typically printed in full color with
an attractive selling presentation highlighting product benefits and features.
Franklin Covey maintains a client service department which clients may
call toll-free, 24 hours a day, Monday through Saturday, to inquire about a
product or to place an order. Through Franklin Covey's computerized order entry
system, client representatives have access to client preferences, prior orders,
billings, shipments and other information on a real-time basis. Each of the
Company's more than 375 customer service representatives has the authority to
immediately solve any client service problem.
Franklin Covey utilizes a zone picking system for processing orders.
This system enables the Company to respond rapidly to client orders. Client
information stored within the order entry system is also used for additional
purposes, including target marketing of specific products to existing clients
and site selection for Company retail stores. Franklin Covey believes that its
order entry system helps assure client satisfaction through both rapid delivery
and accurate order shipment.
RETAIL STORES. Beginning in late 1985, Franklin Covey began opening
retail stores in areas of high client density. The initial stores were generally
located in lower traffic destination locations. The Company has since adopted a
strategy of locating retail stores in high-traffic retail centers, primarily
large shopping malls, to serve existing clients and to attract increased numbers
of walk-in clients. Franklin Covey believes that higher costs associated with
locating retail stores in these centers have been offset by increased sales in
6
these locations. Franklin Covey's retail stores, which average approximately
2,000 square feet, are stocked almost entirely with Franklin Covey products. The
Company's retail stores strategy focuses on providing exceptional client service
at the point of sale that Franklin Covey believes increases client satisfaction
as well as the frequency and volume of purchases. At August 31, 1998, Franklin
Covey had 120 domestic retail stores located in 36 states and the District of
Columbia.
Franklin Covey attracts existing clients to its retail stores by
informing them of store openings through direct mail advertising. The Company
believes that its retail stores encourage walk-through traffic and
impulse-buying and that store clients are a source of participants for Franklin
Covey's public seminars. The stores have also provided the Company with an
opportunity to assess client reaction to new product offerings.
Franklin Covey believes that its retail stores have a high-end image
consistent with its marketing strategy. Franklin Covey's products are generally
grouped in sections supporting the different sizes of the Franklin Planner.
Products are attractively presented and displayed with an emphasis on
integration of related products and accessories. Stores are staffed with a
manager, an assistant manager and additional sales personnel as needed. Franklin
Covey employees have been trained to use the Franklin Planner, enabling them to
assist and advise clients in selection and use of the Company's products. During
peak periods, additional personnel are added to promote prompt and courteous
client service.
In November 1998, the Company completed an agreement to sell selected
Franklin Planners and binders through Office Depot, a mass-market retail
operation with approximately 580 stores. The agreement allows Office Depot to
market and sell selected Franklin Planners, renewal planners, master packs,
binders and accessories in a four-foot retail shelf location in their stores.
The Company anticipates that this relationship will allow its products to become
more readily available to its current customer base as well as attract new
customers to the planning system. The Company believes that additional
anticipated revenues will more than offset the anticipated lower margins from
selling product through this channel.
DIRECT PRODUCT. As part of its strategy to adapt Franklin Covey's
services and products to additional market segments, the Company develops and
markets customized forms, pagefinders, tabs, binders and sales and training
materials for specific applications such as for use by salespersons, real estate
professionals and government employees. Franklin Covey believes that the
Franklin Planner is effective in communicating uniform marketing plans, product
information and procedures to large numbers of employees, sales representatives
and distributors.
In January 1998, the Company formed an alliance with the At-A-Glance
group to sell its products through the category contract stationer channel.
At-A-Glance wholesales other products to contract stationer businesses such as
Boise Cascade, Office Express and Staples, which in turn sell office products
through catalog order entry systems to businesses and organizations. The Company
signed an agreement to have At-A-Glance represent a selected Franklin Planner
product line through this office products channel. The Company believes that
additional anticipated revenues will more than offset the anticipated lower
margins from selling product through this channel.
Premier markets agendas to schools and school districts in order to
help teachers and students enhance the learning process. Premier sold more than
12 million agendas in fiscal 1998 mostly in the United States and Canada.
Premier has a direct sales force of 115 sales professionals. An agenda consists
of a wire-bound notebook with dated pages to help the student keep track of
assignments and due dates. Most agendas are customized to include the individual
school's rules, regulations, administrators and scheduled events.
Productivity Plus markets The Ultimate Organizer(TM), an undated,
paper-based planner, together with annual renewal calendars and accessories.
Approximately 85% of Ultimate Organizer sales are to customers within branches
of the U.S. military.
TRAINING SALES. Franklin Covey's sales professionals market the Company's
training and consulting services to institutional clients and public seminar
clients.
7
Franklin Covey employs 219 sales professionals who service major
metropolitan areas throughout the United States and sell training services to
institutional clients. Franklin Covey employs an additional 63 sales
professionals outside of the United States. Sales professionals must have
significant selling experience prior to employment by the Company and are
trained and evaluated at Franklin Covey and in their respective sales
territories during the first six months of employment. Sales professionals
typically call upon persons responsible for corporate employee training, such as
corporate training directors or human resource officers. Sales professionals
work closely with training consultants in their territories to schedule and
tailor seminars and workshops to meet specific objectives of institutional
clients.
Franklin Covey also employs 144 training consultants throughout the United
States who present institutional and public seminars in their respective
territories and an additional 39 training consultants outside of the United
States. Training consultants work with sales professionals and institutional
clients to incorporate a client's policies and objectives in seminars and
present ways that employee goals may be aligned with those of the institution.
Public seminars are planned, implemented and coordinated with training
consultants by a staff of marketing and administrative personnel at the
Company's corporate offices. These seminars provide training for the general
public and are also used as a marketing tool for attracting corporate and other
institutional clients. Corporate training directors are often invited to attend
public seminars to preview the seminar content prior to engaging Franklin Covey
to train in-house employees. Smaller institutional clients often enroll their
employees in public seminars when a private seminar is not cost effective. In
the public seminars, attendees are also invited to provide names of potential
persons and companies who may be interested in Franklin Covey's seminars and
products. These referrals are generally used as prospects for Franklin Covey's
sales professionals.
PRINTING SERVICES. Through the acquisition of Publishers Press in December
1994, Franklin Covey acquired greater control over printing of the materials for
the Franklin Planner and of other related products. Publishers Press also
provides book and commercial printing services to clients in the western United
States.
STRATEGIC DISTRIBUTION ALLIANCES
Franklin Covey has pursued an aggressive strategy to create strategic
alliances with innovative and respected organizations in an effort to develop
effective distribution of its products and services. The principal distribution
alliances currently maintained by Franklin Covey are: SIMON & SCHUSTER and
GOLDEN FAMILY ENTERTAINMENT in publishing books for the Company; MICROSOFT to
market the 7 Habits name in software; WYNCOM to promote and facilitate Dr.
Covey's personal appearances and teleconferences; NIGHTINGALE-CONANT to market
and distribute audio and video tapes of the Company's book titles; SKILLPATH to
market and present the Company's public time management seminars; and
AT-A-GLANCE to market and distribute selected Franklin Planners and accessories
through catalog office supply channels.
INTERNATIONAL OPERATIONS
The Company provides products, training and printing services
internationally through Company-owned and licensed operations. Franklin Covey
has Company-owned operations and offices in Australia, Belgium, Canada, Japan,
Mexico, New Zealand and the United Kingdom. These international offices serve
organizations and individuals in more than 30 countries. The Company also
markets its products and training services to more than 75 countries through
licensee and copyright agreements. Franklin Covey operates retail operations in
Australia, Canada, Japan and Mexico. Franklin Covey's four most popular books,
THE 7 HABITS OF HIGHLY EFFECTIVE PEOPLE, PRINCIPLE-CENTERED LEADERSHIP, THE 10
NATURAL LAWS OF TIME AND LIFE MANAGEMENT and FIRST THINGS FIRST are currently
published in multiple languages.
8
CLIENTS
Franklin Covey has developed a broad base of institutional and individual
clients. The Company has more than 8,000 institutional clients consisting of
corporations, governmental agencies, educational institutions and other
organizations. The Company believes its products, workshops and seminars
encourage strong client loyalty. Employees in each of Franklin Covey's
distribution channels focus on providing timely and courteous responses to
client requests and inquiries. Institutional clients frequently receive
assistance in designing and developing customized forms, tabs, pagefinders and
binders necessary to satisfy specific needs.
COMPETITION
TRAINING. Competition in the organizational training industry is highly
fragmented with few large competitors. Franklin Covey estimates that the
industry represents more than $6 billion in annual revenues and that the largest
traditional organizational training firms have sales in the $200 million range.
Based upon Franklin Covey's fiscal 1998 sales of approximately $175 million, the
Company believes it is a leading competitor in the organizational training
market. Other significant competitors in the leadership training market are
Development Dimensions International, Achieve Global (formerly Zenger Miller),
Organizational Dynamics Inc., Provant, and the Center for Creative Leadership.
CONSULTING. Franklin Covey's PCOC change management methodology, which it
initiated in 1996, is directly linked to organization and culture change.
Effective change is achieved through creating a principle-centered foundation
within an organization and by aligning systems and structures with that
foundation. Franklin Covey believes its approach to organization and culture
change is distinguishable from the approach taken by more traditional change
management and re-engineering firms, as Franklin Covey's approach complements
rather than competes with the offerings of such firms.
PRODUCTS. The paper-based time management and personal organization
products market is intensely competitive and subject to rapid change. Franklin
Covey competes directly with other companies that manufacture and market
calendars, planners, personal organizers, appointment books, diaries and related
products through retail, mail order and other direct sales channels. In this
market, several competitors have widespread name recognition. The Company
believes its principal competitors include Day-Timer, At-A-Glance and Day
Runner. Franklin Covey also competes, to a lesser extent, with companies that
market substitutes for paper-based products, such as electronic organizers,
software PIMs and hand-held computers. Franklin Covey's ASCEND software competes
directly with numerous other PIMs. Many of Franklin Covey's competitors have
significant marketing, product development, financial and other resources.
Given the relative ease of entry in Franklin Covey's product markets, the
number of competitors could increase, many of whom may imitate the Company's
methods of distribution, products and seminars, or offer similar products and
seminars at lower prices. Some of these companies may have greater financial and
other resources than the Company. Franklin Covey believes that the Franklin
Planner and related products compete primarily on the basis of user appeal,
client loyalty, design, product breadth, quality, price, functionality and
client service. Franklin Covey also believes that the Franklin Planner has
obtained market acceptance primarily as a result of the high quality of
materials, innovative design, the Company's attention to client service, and the
strong loyalty and referrals of its existing clients. Franklin Covey believes
that its integration of training services with products has become a competitive
advantage. Moreover, management believes that the Company is a market leader in
the United States among a small number of integrated providers of time
management products and services. Increased competition from existing and future
competitors could, however, have a materially adverse effect on the Company's
sales and profitability.
MANUFACTURING
The manufacturing operations of Franklin Covey consist primarily of
printing, assembling, packaging and shipping components used in connection with
the Franklin Covey product line.
9
Franklin Covey currently prints the various Franklin Planners and other related
forms and tabs. The Company believes the acquisition of its own internal
printing capacity has enabled it to control production costs of printed
materials, exercise greater control over production schedules and timing of
inventories, increase quality control and reduce risks associated with
dependence on outside suppliers.
Franklin Covey obtains its high-quality paper from a supplier in Wisconsin
that is a subsidiary of a Fortune 500 company. The paper is manufactured in two
separate facilities to reduce the risk of a supply disruption. The Company
believes there are several alternative suppliers available to meet Franklin
Covey's paper needs. If Franklin Covey were required to obtain paper from
another source, any resulting delay or disruption is not expected to have an
adverse effect on its long-term business or financial condition.
The planners and other forms printed internally are cut, collated and
finished in the Company's facilities. The products are then assembled and
packaged for placement into inventory. Franklin Covey generally maintains three
to four months of inventory. Franklin Covey primarily uses UPS, along with
Federal Express and common carriers to ship its products to clients and to the
Franklin Covey retail stores. Automated production, assembly and material
handling equipment is used in the manufacturing process to insure consistent
quality of production materials and to control costs and maintain efficiencies.
Binders used for Franklin Covey's products are produced from either
leather, simulated leather, tapestry or vinyl materials. All of the vinyl
binders are produced by multiple and alternative product suppliers. The
tapestry, leather and simulated leather binders are manufactured by both third
party and by Franklin Covey. Franklin Covey believes it enjoys good relations
with its suppliers and vendors and does not anticipate any difficulty in
obtaining the required binders and materials needed in its business.
The Company has implemented special procedures to insure a high standard of
quality for its leather binders, most of which are manufactured by suppliers in
the United States, Canada, Korea and China. Representatives of the Company
attend leather shows and supervise the buying process by leather binder
suppliers who purchase and inventory leather before producing and selling the
finished binders to Franklin Covey.
Franklin Covey also purchases numerous accessories, including pens, books,
videotapes, calculators and other products, from various suppliers for resale to
its clients. These items are manufactured by a variety of outside contractors
located in the United States and abroad. The Company does not believe that it is
dependent on any one or more of such contractors and considers its relationships
with such suppliers to be good.
TRADEMARKS, COPYRIGHTS AND INTELLECTUAL PROPERTY
Franklin Covey seeks to protect its intellectual property through a
combination of trademarks, copyrights and confidentiality agreements. The
Company claims rights for more than 120 trademarks in the United States and has
obtained registration in the United States and many foreign countries for many
of its trademarks, including Franklin Covey, TimeQuest, The 7 Habits of Highly
Effective People, First Things First, Principle-Centered Leadership, What
Matters Most, Franklin Planner, Ascend, Writing Advantage, and The Seven Habits.
Franklin Covey considers its trademarks and other proprietary rights to be
important and material to its business. Each of the marks set forth in italics
above is a registered mark or a mark for which protection is claimed.
Franklin Covey owns all copyrights on its planners, books, manuals, text
and other printed information provided in its training seminars, the programs
contained within ASCEND and its instructional materials, and its software and
electronic products, including audio tapes and video tapes. Franklin Covey
licenses rather than sells all facilitator workbooks and other seminar and
training materials in order to limit its distribution and use. Franklin Covey
places trademark and copyright notices on its instructional, marketing and
advertising materials. In order to maintain the proprietary nature of its
product information, Franklin Covey enters into written confidentiality
agreements with certain executives, product developers, sales professionals,
training consultants, other employees and licensees. Although Franklin Covey
believes its protective measures with respect to its proprietary rights are
important, there can be no assurance that such measures will provide significant
protection from competitors.
10
EMPLOYEES
As of August 31, 1998, Franklin Covey had 4,247 full and part-time
associates, including 1,707 in sales, marketing and training; 1,332 in customer
service and retail; 891 in production operations and distribution; and 317 in
administration and support staff. None of Franklin Covey's associates are
represented by a union or other collective bargaining group. Management believes
that its relations with its associates are good. Franklin Covey does not
currently foresee a shortage in qualified personnel needed to operate the
Company's business.
Item 2. PROPERTIES
Franklin Covey's principal business operations and executive offices are
located in Salt Lake City, Utah and Provo, Utah. The Company's Salt Lake City
facilities currently consist of approximately 800,000 square feet, including
approximately 491,000 square feet for manufacturing, distribution and
warehousing, and approximately 309,000 square feet for administration. All of
Franklin Covey's Salt Lake City facilities are owned by the Company, subject to
mortgages of approximately $3.6 million as of August 31, 1998. The four
buildings in Provo are located in a fifteen mile area. Franklin Covey occupies
all or a portion of each of these buildings, with total leased space of
approximately 173,000 square feet as of August 31, 1998, with leases that
terminate intermittently through the year 2009. Franklin Covey's 120 retail
stores are operated under leases with remaining terms of up to seven years; some
of these leases include rentals based on a percentage of sales. The Company also
maintains sales, administrative and/or warehouse facilities in or near Salt Lake
City; Phoenix; Atlanta; Dallas; Washington, D.C.; Bellingham, Washington; Tokyo;
London; Brussels, Belgium; Toronto; Vancouver; Montreal; Burlington; Brisbane,
Australia; Monterrey, Mexico; Mexico City, Mexico; and Auckland, New Zealand
under leases which expire intermittently through the year 2004. All of Franklin
Covey's facilities are used exclusively by Franklin Covey and its divisions and
are believed to be adequate and suitable for its current needs.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to, any
material pending legal proceedings, nor are any such proceedings known to the
Company to be contemplated.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended August 31, 1998.
11
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is listed and traded on the New York Stock
Exchange ("NYSE") under the symbol "FC." The following table sets forth, for the
periods indicated, the high and low sale prices for the Company's common stock,
as reported on the NYSE Composite Tape, for the fiscal years ended August 31,
1998 and 1997, respectively.
High Low
----------- -----------
Fiscal Year Ended August 31, 1998:
Fourth Quarter................................ $ 21 1/8 $ 18 9/16
Third Quarter................................. 25 3/4 19 1/4
Second Quarter................................ 24 11/16 20 3/4
First Quarter................................. 28 1/8 21 1/8
Fiscal Year Ended August 31, 1997:
Fourth Quarter................................ $ 28 1/4 $ 24 1/8
Third Quarter................................. 24 20 5/8
Second Quarter................................ 22 7/8 20 1/2
First Quarter................................. 21 3/8 17 3/8
The Company did not pay or declare dividends on its common stock during the
fiscal years ended August 31, 1997 and 1998. The Company currently anticipates
that it will retain all available funds to finance its future growth and
business expansion. The Company does not presently intend to pay cash dividends
in the foreseeable future.
As of November 1, 1998, the Company had 21,220,813 shares of its common
stock outstanding, held by approximately 360 shareholders of record.
Item 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page
1 of the Company's 1998 Annual Report to Shareholders.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to pages
6 through 11 of the Company's 1998 Annual Report to Shareholders.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages
13 through 26 of the Company's 1998 Annual Report to Shareholders.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
12
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
sections titled "Election of Directors," "Executive Officers" and "Executive
Compensation" in the Company's definitive Proxy Statement for the annual meeting
of shareholders which is scheduled to be held on January 8, 1999. The definitive
Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections titled "Election of Directors--Director Compensation" and "Executive
Compensation" in the Company's definitive Proxy Statement for the annual meeting
of shareholders which is scheduled to be held on January 8, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section titled "Principal Holders of Voting Securities" in the Company's
definitive Proxy Statement for the annual meeting of shareholders which is
scheduled to be held on January 8, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section titled "Certain Relationships and Related Transactions" in the Company's
definitive Proxy Statement for the annual meeting of shareholders which is
scheduled to be held on January 8, 1999.
13
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed
1. Financial Statements. The following Consolidated Financial
Statements of the Company and Report of Independent Public
Accountants included in the Annual Report to Shareholders for the
year ended August 31, 1998, are incorporated by reference in Item
8 hereof:
Report of Arthur Andersen LLP, Independent Public Accountants,
for the years ended August 31, 1998, 1997 and 1996
Consolidated Balance Sheets at August 31, 1998 and 1997
Consolidated Statements of Income for the years ended August 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years
ended August 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended August
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
14
2. Exhibit List.
Exhibit Incorporated Filed
No. Exhibit by Reference Herewith
-------- --------------------------------------------------------------- ------------- ----------
3.1 Revised Articles of Incorporation of the Registrant (1)
3.2 Amended and Restated Bylaws of the Registrant (1)
4 Specimen Certificate of the Registrant's Common Stock, par (2)
value $.05 per share
10.1 Amended and Restated 1992 Employee Stock Purchase Plan (3)
10.2 First Amendment to Amended and Restated 1992 Stock Incentive (4)
Plan
10.3 Franklin 401(k) Profit Sharing Plan (1)
10.4 Forms of Nonstatutory Stock Options (1)
10.5 Merger Agreement-- Covey Leadership Center, Inc. (5)
10.6 Lease Agreements, as amended and proposed to be amended, by (6)
and between Covey Corporate Campus One, LLC and Covey
Corporate Campus Two, LLC (Landlord) and Covey Leadership
Center, Inc. (Tenant) which were assumed by Franklin Covey
Co. in the Merger with Covey Leadership Center, Inc.
10.7 Notes Payable Purchase Agreement for $85.00 million of 6.6% (7)
unsecured senior notes payable due 2008
13 Annual Report to Shareholders for the year ended August 31, (8)
1998. Certain portions of this exhibit are incorporated by
reference into Items 6 through 8 of this Annual Report on
Form 10-K and, except as so incorporated by reference, the
Annual Report to Shareholders is not deemed to be filed as
part of this Report.
22 Subsidiaries of the Registrant (8)
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants (8)
27 Financial Data Schedule (8)
99.1 Report of Arthur Andersen LLP, Independent Public (8)
Accountants, on Consolidated Financial Statement
Schedule for the years ended August 31, 1998, 1997
and 1996
99.2 Valuation and Qualifying Accounts and Reserves. Financial
statements and schedules other than those listed are (8)
omitted for the reason that they are not required or are
not applicable, or the required information is shown in the
Financial Statements or Notes thereto, or contained
in this Report.
- -----------------------
(1) Incorporated by reference to Registration Statement on Form S-1 filed with
the Commission on April 17, 1992, Registration No. 33-47283.
(2) Incorporated by reference to Amendment No. 1 to Registration Statement on
Form S-1 filed with the Commission on May 26, 1992, Registration No.
33-47283.
(3) Incorporated by reference to Form 10-K filed November 27, 1992, for the
year ended August 31, 1992.
(4) Incorporated by reference to Registration Statement on Form S-1 filed with
the Commission on January 3, 1994, Registration No. 33-73728.
(5) Incorporated by reference to Reports on Form 8-K dated June 3, 1997.
(6) Incorporated by reference to Report of Form 10-K filed December 1, 1997,
for the year ended August 31, 1997.
(7) Incorporated by reference to Report of Form 10-Q filed July 14, 1998, for
the quarter ended May 31, 1998.
(8) Filed herewith and attached to this Report following page 22 hereof.
(b) Reports on Form 8-K
None.
(c) Exhibits
Exhibits to this Report are attached following hereof.
(d) Financial Statement Schedule
See herein.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 24, 1998.
FRANKLIN COVEY CO.
By: /s/ JON H. ROWBERRY
---------------------------
Jon H. Rowberry, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ HYRUM W. SMITH
- --------------------------------------
Hyrum W. Smith Chairman of the Board November 24, 1998
/s/ STEPHEN R. COVEY Co-Chairman of the Board November 24, 1998
- --------------------------------------
Stephen R. Covey
/s/ JON H. ROWBERRY President, Chief Executive November 24, 1998
- --------------------------------------
Jon H. Rowberry Officer and Director
/s/ STEPHEN M. R. COVEY Executive Vice President and November 24, 1998
- --------------------------------------
Stephen M. R. Covey Director
/s/ JOHN L. THELER Executive Vice President and November 24, 1998
- --------------------------------------
John L. Theler Chief Financial Officer
/s/ J. SCOTT NIELSEN Chief Accounting Officer November 24, 1998
- --------------------------------------
J. Scott Nielsen
16
/s/ STEVEN C. WHEELWRIGHT Director November 24, 1998
- --------------------------------------
Steven C. Wheelwright
/s/ ROBERT F. BENNETT Director November 24, 1998
- --------------------------------------
Robert F. Bennett
/s/ BEVERLY B. CAMPBELL Director November 24, 1998
- --------------------------------------
Beverly B. Campbell
/s/ ROBERT H. DAINES Director November 24, 1998
- --------------------------------------
Robert H. Daines
/s/ E. J. "JAKE" GARN Director November 24, 1998
- --------------------------------------
E. J. "Jake" Garn
/s/ DENNIS G. HEINER Director November 24, 1998
- --------------------------------------
Dennis G. Heiner
/s/ THOMAS H. LENAGH Director November 24, 1998
- --------------------------------------
Thomas H. Lenagh
/s/ JOEL C. PETERSON Director November 24, 1998
- --------------------------------------
Joel C. Peterson
/s/ E. KAY STEPP Director November 24, 1998
- --------------------------------------
E. Kay Stepp
/s/ ROBERT A. WHITMAN Director November 24, 1998
- --------------------------------------
Robert A. Whitman
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Franklin Covey Co. (the "Company") provides products and training services
to improve the productivity, leadership and effectiveness of both individuals
and organizations. The current strength of the Company's products and training
services is a result of the June 1997 merger (the "Merger") between Franklin
Quest Co. and the Covey Leadership Center ("Covey"). The Company's best known
products include the Franklin Planner(R) as well as the best selling book,
THE 7 HABITS OF HIGHLY EFFECTIVE PEOPLE.
The Company derives its sales principally from three areas: (1) product
sales, including planners, electronic personal planners, books, tapes and
related products sold primarily through retail, catalog and direct channels; (2)
training services, including consulting and coaching services, primarily in the
areas of leadership, time management, personal improvement and business
communication, provided through institutional and public programs; and (3)
printing services.
In connection with the Merger, the Company issued 5,030,894 shares of its
common stock, valued at $22.16 per share, in exchange for all of the issued and
outstanding capital stock of Covey. All outstanding options to purchase Covey
common stock were converted into 382,100 options to purchase the Company's
common stock, exerciseable at $5.97 per share. In addition, the Company also
acquired certain license rights for $27.0 million in cash.
Effective April 1, 1998, the Company acquired King Bear, Inc. ("King
Bear"), a Tokyo, Japan based company. King Bear, a former Covey licensee,
provides leadership and time management training as well as publishing services.
The publishing division of King Bear translated and currently publishes 7 Habits
of Highly Effective People in Japanese. The cash purchase price was $5.3 million
with additional contingent payments to be made over the next five years based
upon the operating results of King Bear over that same period.
On March 1, 1997, the Company acquired Premier Agendas, Inc., and Premier
School Agendas, Ltd., located in Bellingham, Washington, and Abbotsford, British
Columbia, respectively (collectively, "Premier"). Premier manufactures and
markets academic and personal planners for students from kindergarten to college
throughout the United States and Canada. Premier's business is seasonal in
nature and nearly all of its revenue is recognized during the Company's fourth
fiscal quarter. The combined cash purchase price was $23.2 million with
additional contingent payments to be paid over the next three years, based upon
Premier's operating performance over that same time period. During fiscal 1998,
the first contingent payment of $10.3 million was made. At August 31, 1998, $9.9
million was accrued for the second contingent payment.
Effective October 1, 1996, the Company acquired the net assets of TrueNorth
Corporation ("TrueNorth"). TrueNorth, a Utah Corporation, is a provider of
post-instructional personal coaching to corporations and individuals. TrueNorth
develops and delivers one-on-one personalized coaching which is designed to
augment the effectiveness and duration of training curricula. The purchase price
was $10.0 million with additional contingent payments to be paid over the next
five years, based on the operating results of TrueNorth. During fiscal 1998, the
first additional payment of $1.6 million was paid. At August 31, 1998, $3.1
million was accrued for the second contingent payment.
Effective December 1, 1995, the Company acquired the assets of Productivity
Plus, Inc. ("PPI"), a Phoenix, Arizona based provider of time management
products sold primarily to the military. The initial cash purchase price was
$7.9 million with additional contingent payments to be paid over the next four
years, based upon PPI's operating performance over that same period. During
fiscal 1997, the first contingent payment of $3.0 million was paid. No
contingent payment was required during fiscal 1998 based upon operating results
for the second measurement period. In addition, no future contingent payments
for the third measurement period have been accrued as of August 31, 1998.
2
YEAR 2000 ISSUES
The Company is actively engaged in assessing and correcting potential year
2000 ("Y2K") information system problems. During fiscal 1997, the Company
initiated a business reengineering and information system implementation project
(the "Project") which affects nearly every aspect of the Company's operations.
In an effort to address compliance issues, the scope of the Project was expanded
to ensure Y2K compliance for newly acquired software and hardware. The Project
has three significant phases that are designed to improve both operating
processes and information systems capabilities.
The first phase of the Project included hardware and software for the
Company's financial reporting and manufacturing operations. During fiscal 1998,
phase one was completed with hardware and software that has been tested and
certified as Y2K compliant. Phase two focuses on payroll and human resource
applications and is expected to be operational in January 1999. Phase three
addresses the "Order to Collect" systems and is expected be completed in various
stages through the year 2000. Both phase two and phase three are expected to
address and resolve Y2K compliance issues.
State of Readiness
The Company's information systems fall into four general categories: (i)
Financial, (ii) Supply Chain, (iii) Order to Collect, and (iv) Office Support.
The Financial system includes the general ledger, accounts payable, sales and
use tax calculations, payroll and human resources applications. Phase one of the
Project provided systems that are Y2K compliant for the general ledger, accounts
payable and sales and use tax calculations. Payroll and human resource systems
are the subject of phase two, which is expected to be operational and compliant
by January 1999.
The Supply Chain system includes applications for production planning,
purchasing and product management. These systems were also an element of phase
one and are certified by the software manufacturer as Y2K compliant.
The Company's Order to Collect system includes applications for order
entry, seminar registration, retail sales, order fulfillment, order shipping,
invoicing and collections. These systems will be affected by phase three of the
Project and completion is expected in various stages through the year 2000. As a
result, the Order to Collect system has been reviewed for non-compliance.
Certain Y2K issues have been noted in the seminar registration and database
applications, third-party utilities and services (primarily telephones,
electrical, bankcard processing services and shipping services) and the accounts
receivable database and invoicing system. The Company is currently working to
obtain software upgrades for the critical applications, as well as certification
letters from service providers, to mitigate potential exposure in these areas.
The Office Support system includes network hardware and operating systems,
desktop and laptop computers and servers. The Company is in the process of
evaluating Y2K compliance for these systems and has identified potential
compliance issues primarily related to imbedded time clocks. However, since the
majority of the Company's hardware has been replaced or upgraded over the past
two years, critical systems compliance is not expected to be a major issue.
The Company is also in the process of evaluating non-information systems
for Y2K compliance. Non-compliance issues have been identified in connection
with computer-controlled printing presses at the Company's printing services
divisions. Such Y2K compliance issues are currently being identified in the
Company's non-information systems and will be evaluated and prioritized to
ensure that critical functions of the business will be operational in the year
2000.
Cost to Address Y2K Issues
As of August 31, 1998, the Company has spent $6.9 million on hardware and
$3.1 million for software in connection with the Project. Consultants were hired
to implement software modules and improve business processes, but not
necessarily to provide specific Y2K remediation services. The Company also has
commitments of $6.6 million for purchased software and expects to spend an
additional $1.0 million in other direct costs related to the assessment and
correction of potential Y2K issues.
3
Risk of the Company's Y2K Issues
The Company anticipates that the risks related to its information and
non-information systems will be mitigated by current efforts being made in
conjunction with the Project as well as ongoing assessment and correction
programs. However, the primary Y2K risk to the Company's operations is service
disruption from third-party providers that supply telephone, electrical, banking
and shipping services. Any disruption of these critical services would hinder
the Company's ability to receive, process and ship orders. Therefore, efforts
are currently underway to obtain Y2K compliance certification from the Company's
major service providers.
Contingency Plans
The Company has not yet approved a formal contingency plan for Y2K issues.
However, the Company does have well-defined manual processes which could be used
in the event of system and service disruption. A formal contingency plan is
expected to be completed and approved during fiscal 1999.
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data and other
selected operating data expressed as percentages of total sales.
Income Statement Data:
YEAR ENDED
AUGUST 31, 1998 1997 1996
- --------------------------- ---------- ----------- ----------
Total sales 100.0% 100.0% 100.0%
Cost of sales 39.1 40.5 44.0
---------- ----------- ----------
Gross margin 60.9 59.5 56.0
---------- ----------- ----------
Operating expenses:
Selling, general and
administrative 40.5 37.9 35.1
Depreciation and
amortization 6.1 4.8 3.8
Merger related expenses
--- 1.3 ---
---------- ----------- ----------
Total operating expenses
46.6 44.0 38.9
---------- ----------- ----------
Income from
operations 14.3 15.5 17.1
---------- ----------- ----------
Interest income 0.4 0.3 0.6
Interest expense (1.5) (0.5) (0.2)
---------- ----------- ----------
Total interest income
(expense) (1.1) (0.2) 0.4
---------- ----------- ----------
Income before
provision for income
taxes and change in
accounting principle 13.2 15.3 17.5
Provision for income
taxes 5.5 6.3 7.2
---------- ----------- ----------
Income before change
in accounting
principle 7.7 9.0 10.3
Cumulative effect of
change in
accounting
principle, net of tax (0.4) --- ---
---------- ----------- ----------
Net income 7.3% 9.0% 10.3%
---------- ----------- ----------
Sales Data:
Product 62.9% 69.6% 71.1%
Training 32.0 24.8 21.3
Printing services 5.1 5.6 7.6
4
FISCAL 1998 COMPARED WITH FISCAL 1997
Sales
Sales for the year ended August 31, 1998, increased $113.3 million, or
26.2%, compared to the prior year. The increase in sales was primarily the
result of the Merger, an increase in the number of seminar participants and an
increase in the number of planners, agendas and related products sold.
Product sales increased $42.1 million, or 14.0%, compared to the prior
year. Overall retail store sales increased $17.1 million, or 14.7%, over the
prior year, primarily as a result of 10 new stores that were opened during
fiscal 1998. Comparable store sales increased 3.0% compared to the prior year.
At the end of fiscal 1998, the Company operated 120 retail stores. School agenda
sales through Premier increased $10.3 million, or 27.2%, compared to the prior
year primarily due to increased unit sales in the U.S. The remaining product
sales increase of $22.8 million, or 19.2%, over the prior year was due to
increases in catalog, international, corporate wholesale and book royalties
resulting from the Merger. Sales increases during the year were offset by a
decrease in sales of $9.8 million, or 40.9%, due to declining network marketing
business and declining government sales at PPI. Price increases had no material
effect on increased sales between the periods.
Training sales increased $67.5 million, or 62.8%, as compared to the prior
year primarily from additional domestic and international training sales related
to the Merger, as well as increased personal coaching sales.
Printing services sales increased $3.7 million, or 15.2%, compared to the
prior year due to increased commercial sales at the Company's printing services
subsidiary and Premier's printing facility as well as King Bear's publishing
division which was purchased during fiscal 1998. Gross Margin
Gross margin consists of sales less cost of sales. Cost of sales includes
materials used in the production of planners and related products, assembly and
manufacturing labor costs, commissions of training consultants, direct costs of
conducting seminars, freight and certain other overhead costs. Gross margin may
be affected by, among other things, prices of materials, labor rates, product
mix, changes in product discount levels, production efficiency, training
consultant commissions and freight costs. Gross margin was 60.9% compared to
59.5% for the prior year. The increase was primarily due to higher margin
training sales resulting from the Merger. Generally, training sales have a
higher gross margin than product sales, and during fiscal 1998, training sales,
as percentage of total sales, increased to 32.0% of total sales compared to
24.8% in the prior year.
Operating Expenses
Operating expenses include selling, general and administrative expenses as
well as depreciation and amortization charges that occur in the normal course of
business. Selling, general and administrative expenses increased to 40.5% of
sales compared to 37.9% of sales during the prior year. The increase reflects
the higher operating expenses, as a percentage of sales, of Covey, a full year
of Premier operating expenses, the addition of 10 new retail stores and
additional direct operations in Japan, Australia and New Zealand. Premier has
seasonal sales which occur primarily in the Company's fourth fiscal quarter, but
continues to incur selling, general and administrative expenses during the
entire year.
Depreciation expense increased $6.0 million over the prior year due to
purchases of computer hardware and software in connection with the Project, the
addition of new printing presses and leasehold improvements related to the
opening of new retail stores. Amortization charges increased $6.2 million
compared to the prior year due to the amortization of intangibles acquired in
connection with the Merger and contingent payments made to Premier and TrueNorth
during fiscal 1998.
Income Taxes
Income taxes were accrued using an effective rate of 41.5% for fiscal 1998
compared to 41.4% for the prior year. The increase was due primarily to
additional non-deductible goodwill generated from the Merger and certain
acquisitions.
5
Change in Accounting Principle
During fiscal 1998, the Emerging Issues Task Force (the "EITF") of the
Financial Accounting Standards Board issued consensus ruling 97-13 which
specifies the accounting treatment of certain business reengineering and
information technology implementation costs. In connection with the Project, the
Company has capitalized costs in accordance with generally accepted accounting
principles. Certain previously capitalized costs of the Project were written off
in accordance with EITF 97-13 as a cumulative adjustment during the Company's
first quarter of fiscal 1998. The cumulative amount written off in fiscal 1998
was $2.1 million, net of tax.
FISCAL 1997 COMPARED WITH FISCAL 1996
Sales
Sales for the year ended August 31, 1997, increased $101.3 million, or
30.5%, over the same period in 1996 as a result of the acquisitions of Premier
and TrueNorth, the Merger, an increase in the number of planners and related
products sold and an increase in the number of time management seminar
participants. Product sales, (direct product sales, catalog sales and retail
store sales) increases of $65.6 million accounted for 65% of the increase and
training sales increases of $36.6 million accounted for 36% of the increase,
while printing services sales decreased by $1.0 million, causing an offsetting
decrease in sales of 1%. Price increases had no material effect on increased
sales between the periods. Retail store sales increased $16.1 million over the
previous fiscal year as a result of 20 additional store openings and included an
increase of 7% in comparable store sales. The Merger and the two acquisitions
completed during fiscal 1997 accounted for $76.1 million of the increase in
total revenues.
Gross Margin
Gross margin was 59.5% of revenues for the year ended August 31, 1997,
compared to 56.0% for the prior year. For fiscal 1997, Covey, Premier and
TrueNorth all had gross profit margins, as a percentage of sales, that were
larger than those of the Company taken as a whole. This was caused by differing
markups on their products and the sales mix between products and services.
Excluding the effect of the Merger and these two acquisitions during fiscal
1997, gross margin for the year would have been 57.9%.
Operating Expenses
Selling, general and administrative expenses increased 2.8% as a percentage
of sales during the year ended August 31, 1997 (37.9% compared to 35.1% in
fiscal 1996). The increase reflects the higher operating expenses, as a
percentage of sales, of Covey and TrueNorth, as well as overall increases in
operating expenses for the Company as a whole.
Depreciation charges were higher by $3.4 million. Of this amount, $1.2
million of the increase was a result of assets acquired in the Merger and the
acquisition of TrueNorth and Premier. In addition, 20 new retail stores, new
information systems and related equipment also contributed to the increase.
Amortization charges increased by $4.8 million as a result of the amortization
of intangible assets acquired in the Merger and acquisition activity during the
fiscal year.
Income Taxes
Income taxes were accrued using an effective rate of 41.4% for fiscal 1997
compared to 41.2% for the prior fiscal year. The increase was due primarily to
non-deductible goodwill generated from the Merger and certain other
acquisitions.
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly consolidated
financial data for the most recent eight quarters. The quarterly consolidated
financial data reflects, in the opinion of Management, all adjustments necessary
to fairly present the results of operations for such periods. Results of any one
or more quarters are not necessarily indicative of continuing trends.
6
Quarterly Financial Information:
YEAR ENDED AUGUST 31, 1998
- ------------------ ---------- ---------- ---------- ----------
Q1 Q2 Q3 Q4
- ------------------ ---------- ---------- ---------- ----------
In thousands, except per share amounts
Sales $ 143,919 $138,564 $107,542 $156,587
Gross margin 87,269 85,068 64,814 95,573
Income before
provision
for income
taxes 23,267 21,303 803 26,658
Income before
accounting
change 13,611 12,462 470 15,595
Cumulative
effect of
accounting
change, net
of tax (2,080)
Net income 11,531 12,462 470 15,595
Diluted income
from
continuing
operations
per share .53 .49 .02 .67
Diluted net
income per
share .45 .49 .02 .67
YEAR ENDED AUGUST 31, 1997
- ------------------ ---------- ---------- ---------- ----------
Q1 Q2 Q3 Q4
- ------------------ ---------- ---------- ---------- ----------
In thousands, except per share amounts
Sales $102,377 $105,958 $79,840 $145,097
Gross margin 59,102 62,892 46,228 89,448
Income before
provision
for income
taxes 21,796 21,831 5,234 17,502
Net income 13,024 13,044 3,127 9,670
Diluted net
income per
share .62 .63 .15 .37
7
The Company's quarterly results of operations reflect seasonal trends that
are primarily the result of customers who renew their Franklin Planners on a
calendar year basis. Training sales are moderately seasonal because of the
timing of corporate training which typically is not scheduled during holiday and
vacation periods. In the Company's experience, catalog sales, retail store sales
and income tend to be lower during the third quarter of each fiscal year. The
seasonal nature of the Company's operations has historically resulted in higher
sales and significantly higher operating margins during the first two quarters,
with declines in sales and income occurring in the third quarter of each fiscal
year. The Company believes that the seasonal patterns of sales and earnings for
the first three quarters will continue as in the past. As a result of the
acquisition of Premier, which has seasonal sales occurring primarily in the
fourth quarter, the Company has strengthened its sales and income during the
fourth quarter.
During the fourth quarter of fiscal 1997, the Company recorded a charge for
integration costs related to the Merger. The amount of the charge was $3.2
million, net of tax.
Quarterly fluctuations may also be affected by other factors including the
addition of new institutional customers, the introduction of new products, the
timing of large institutional orders and the opening of new retail stores.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of capital have been net cash
provided by operating activities, long-term borrowings and proceeds from the
sale of common stock. Working capital requirements have also been financed
through short-term borrowing and line-of-credit financing.
Net cash provided by operating activities during fiscal years 1998 and 1997
was $74.1 million and $45.7 million, respectively. During fiscal 1998,
adjustments to net income included $38.6 million of depreciation and
amortization charges. The Company used $27.4 million to finance an increase in
accounts receivable from seasonally high fourth quarter sales by Premier, an
increase in other assets and a decrease in accounts payable and accrued
liabilities. Approximately $20.3 million was provided by a decrease in inventory
and an increase in income taxes payable. In fiscal 1997, adjustments to net
income for depreciation and amortization totaled $23.6 million, while $33.8
million was used to increase accounts receivable, inventory and other assets. In
addition, $19.3 million was provided by an increase in accounts payable, accrued
liabilities and income taxes payable during fiscal 1997.
Net cash used for investing activities during fiscals 1998 and 1997 was
$43.8 million and $80.0 million, respectively. In fiscal 1998, $11.9 million was
paid as contingent payments in connection with certain acquisitions. An
additional $4.9 million of net cash was paid to acquire King Bear. During fiscal
1998, the Company sold its Institute of Fitness and certain consulting business
units. The net cash received for these divestitures was $12.1 million. During
fiscal 1997, $33.2 million of cash was used to purchase TrueNorth and Premier.
In addition, $27.0 million of cash was used to acquire license rights in
connection with the Merger. Funds invested in property and equipment during
fiscal years 1998 and 1997 were $39.2 million and $20.2 million, respectively,
and included new store leasehold improvements, computer hardware and software
purchased in connection with the Project, printing presses and manufacturing
equipment.
Going forward, the Company will incur costs necessary for additional retail
store buildouts and related inventory, retail store renovations, expansion of
distribution facilities and normal equipment purchases related to the growth of
the business, all of which are expected to be financed from cash provided by
operations and available lines of credit. During fiscal 1997, the Company
commenced spending related to its Project and expects to incur additional costs
through 2000 to complete the Project. The remaining costs of the Project are
expected to be provided by cash flows from operations and available lines of
credit.
8
During fiscal 1998, financing activities used cash of $21.6 million
resulting from the net of $120.0 million in proceeds from the issuance of
unsecured senior notes and borrowings on the Company's long-term line of credit,
payments of $87.2 million used to repay line of credit borrowings and other debt
instruments and $57.0 million used to purchase shares of its common stock.
During fiscal 1997, financing activities provided net proceeds of $30.7 million.
The primary source of cash during fiscal 1997 was $64.4 million in proceeds from
long-term debt and the line of credit, while the primary use of cash was
purchases of treasury stock that totaled $36.4 million for the year.
Management anticipates that its existing capital resources will enable it
to maintain its current level of operations and its planned internal growth for
the foreseeable future. This includes any purchase of Company common stock that
may be made under authorized purchase plans. At August 31, 1998, the Company had
authorization to purchase 1,107,906 shares of its common stock. Subsequent to
August 31, 1998, the Company's Board of Directors approved the purchase of an
additional 2,000,000 shares.
The Company has unsecured bank lines of credit available for working
capital needs totaling $89.0 million at August 31, 1998. As of August 31, 1998,
the Company had $35.0 million outstanding on a $75.0 million line of credit with
interest at the lesser of the prime rate less .75% or the LIBOR rate plus 1.00%.
The $75.0 million line of credit agreement expires in October 2001 and requires
the maintenance of certain financial ratios and working capital levels. As of
August 31, 1998, the Company was in compliance with these borrowing covenants.
The Company also has a $14.0 million short-term line of credit with interest at
.25% below the prevailing prime rate. The outstanding balance on the $14.0
million line of credit was $3.6 million at August 31, 1998.
During fiscal 1998, the Company privately issued $85.0 million of unsecured
senior notes payable (the "Notes Payable"). The Notes Payable are due May 4,
2008 and bear interest at a fixed rate of 6.6%. Interest is due semi-annually
beginning on November 4, 1998 with principal payments of $17.0 million due
annually beginning May 4, 2004. In addition, the Notes Payable purchase
agreement requires the Company to maintain certain financial ratios and net
worth levels until the Notes Payable are paid in full. At August 31, 1998, the
Company was in compliance with the terms of the agreement.
The Company is registered in all states that have a sales tax and collects
and remits sales or use tax on retail sales made through its stores and catalog
sales. Compliance with environmental laws or regulations has not had a material
effect on the Company's operations. Inflation has not had a material effect on
the Company's operations. However, in the future inflation may have an impact on
the price of materials used in planners and related products, including paper
and leather materials. The Company may not be able to pass on such increased
costs to its customers.
"Safe Harbor" Statement Under the Private Securities
Litigation Reform Act of 1995
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. Such uncertanties include, but
are not limited to, unanticipated developments in any one or more of the
following areas: the integration of acquired or merged businesses, management of
growth, dependence on products or services, the rate and consumer acceptance of
new product introductions, competition, Y2K issues, the number and nature of
customers and their product orders, pricing, pending and threatened litigation,
and other risk factors which may be detailed from time to time in the Company's
press releases, reports to shareholders and in the Securities and Exchange
Commission filings.
These forward-looking statements are based on management's expectations as
of the date hereof, and the Company does not undertake any responsibility to
update any of these statements in the future. Actual future performance and
results could differ from that contained in or suggested by these
forward-looking statements as a result of the factors set forth in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the business risks described in the Company's Form 10-K Report for
the year ended August 31, 1998 and elsewhere in the Company's filings with the
Securities and Exchange Commission.
9
FRANKLIN COVEY CO.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Franklin Covey Co.:
We have audited the accompanying consolidated balance sheets of Franklin
Covey Co. (a Utah corporation) and subsidiaries as of August 31, 1998 and 1997,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended August 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Franklin Covey Co. and
subsidiaries as of August 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
September 25, 1998
10
FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1998 1997
- --------------------------------------------------------------------------- ---------------- -----------------
In thousands, except share data
ASSETS
Current assets:
Cash and cash equivalents $ 27,760 $ 20,389
Accounts receivable, less allowance for doubtful
accounts of $2,840 and $1,931 83,621 71,840
Inventories 47,799 55,748
Income taxes receivable 6,094
Other assets 16,113 15,672
---------------- -----------------
Total current assets 175,293 169,743
Property and equipment, net 127,268 119,768
Goodwill and other intangibles, net 270,202 269,219
Other assets 24,514 13,457
---------------- -----------------
$ 597,277 $ 572,187
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,417 $ 31,611
Accrued compensation 12,323 13,349
Accrued acquisition earnouts 12,960 9,000
Other accrued liabilities 30,403 28,324
Income taxes payable 5,900
Current portion of long-term debt 3,562 3,644
Current portion of capital lease obligations 788 975
---------------- -----------------
Total current liabilities 93,353 86,903
Line of credit 35,000 86,000
Long-term debt, less current portion 89,929 5,870
Deferred income taxes 35,857 35,735
Capital lease obligations, less current portion 1,484 2,274
---------------- -----------------
Total liabilities 255,623 216,782
---------------- -----------------
Commitments and contingencies (Notes 1, 5, 6, 8 and 16)
Shareholders' equity:
Preferred stock, no par value; 4,000,000 shares
authorized, no shares issued or outstanding
Common stock, $.05 par value; 40,000,000 shares
authorized, 27,055,894 shares issued 1,353 1,353
Additional paid-in capital 238,052 239,699
Retained earnings 209,772 169,714
Deferred compensation (843) (1,495)
Cumulative translation adjustment (2,250) (934)
Treasury stock at cost, 4,813,242 and 2,373,223 shares (104,430) (52,932)
---------------- -----------------
Total shareholders' equity 341,654 355,405
---------------- -----------------
$ 597,277 $ 572,187
================ =================
See accompanying notes to consolidated financial statements.
11
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED AUGUST 31, 1998 1997 1996
- -------------------------------------------------------------------------- ----------------- ---------------- -----------------
In thousands, except per share data
Sales:
Product $ 343,832 $ 301,687 $ 236,039
Training 174,927 107,417 70,812
Printing services 27,853 24,168 25,155
----------------- ---------------- -----------------
Total sales 546,612 433,272 332,006
----------------- ---------------- -----------------
Cost of sales:
Product 148,212 126,419 104,486
Training 44,153 31,283 22,475
Printing services 21,523 17,900 19,261
----------------- ---------------- -----------------
Total cost of sales 213,888 175,602 146,222
----------------- ---------------- -----------------
Gross margin 332,724 257,670 185,784
Selling, general and administrative 221,303 164,057 116,362
Depreciation and amortization 33,028 20,800 12,739
Merger and integration costs 5,450
----------------- ---------------- -----------------
Income from operations 78,393 67,363 56,683
Interest income 1,954 1,344 2,188
Interest expense (8,316) (2,344) (630)
----------------- ---------------- -----------------
Income before provision for income taxes
and cumulative effect of accounting change 72,031 66,363 58,241
Provision for income taxes 29,893 27,498 24,002
----------------- ---------------- -----------------
Income before cumulative effect of accounting
change 42,138 38,865 34,239
Cumulative effect of accounting change, net of tax (Note 13) (2,080)
----------------- ---------------- -----------------
Net income $ 40,058 $ 38,865 $ 34,239
================= ================ =================
Income from continuing operations per share:
Basic $ 1.75 $ 1.83 $ 1.61
Diluted 1.70 1.76 1.53
Cumulative effect of accounting change, net of tax, per share:
Basic (.09)
Diluted (.08)
----------------- ---------------- -----------------
Net income per share:
Basic $ 1.66 $ 1.83 $ 1.61
Diluted 1.62 1.76 1.53
================= ================ =================
Weighted average number of common and common equivalent shares:
Basic 24,091 21,201 21,298
Diluted 24,726 22,117 22,328
----------------- ---------------- -----------------
See accompanying notes to consolidated financial statements.
12
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TOTAL
COMMON STOCK ADDITIONAL CUMULATIVE TREASURY STOCK SHARE-
----------------- PAID-IN RETAINED DEFERRED TRANSLATION -------------------- HOLDERS'
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION ADJUSTMENT SHARES AMOUNT EQUITY
- ----------------------- ----------- ----------- ----------- ------------ ----------- ----------- ---------- ----------- ----------
In thousands
Balance at
August 31, 1995 22,025 $ 1,101 $ 131,228 $ 96,610 $ (740) $ (711) (254) $ (3,146) $ 224,342
----------- ----------- ----------- ------------ ----------- ----------- ---------- ----------- ----------
Tax benefit from
exercise of affiliate
stock options 287 287
Issuance of common
stock from treasury 654 132 371 1,025
Purchase of treasury
shares (1,375) (28,119) (28,119
Deferred
compensation 790 (500) 290
Cumulative
translation
adjustment (229) (229
Net income 34,239 34,239
----------- ----------- ----------- ------------ ----------- ----------- ---------- ----------- ----------
Balance at
August 31, 1996 22,025 1,101 132,959 130,849 (1,240) (940) (1,497) (30,894) 231,835
----------- ----------- ----------- ------------ ----------- ----------- ---------- ----------- ----------
Issuance of common
stock in connection
with merger 5,031 252 111,246 111,498
Value of options
granted in merger 4,331 4,331
Tax benefit from
exercise of affiliate
stock options 1,654 1,654
Issuance of common
stock from treasury (11,340) 844 14,340 3,000
Purchase of treasury
shares (1,720) (36,378) (36,378)
Deferred
compensation 849 (255) 594
Cumulative
translation 6 6
adjustment
Net income 38,865 38,865
----------- ----------- ----------- ------------ ----------- ----------- ---------- ----------- ----------
Balance at
August 31, 1997 27,056 1,353 239,699 169,714 (1,495) (934) (2,373) (52,932) 355,405
----------- ----------- ----------- ------------ ----------- ----------- ---------- ----------- ----------
Tax benefit from
exercise of affiliate
stock options 266 266
Issuance of common
stock from treasury (1,913) 247 5,515 3,602
Purchase of treasury
shares (2,687) (57,01) (57,013)
Deferred
compensation 652 652
Cumulative
translation
adjustment (1,316) (1,316)
Net income 40,058 40,058
----------- ----------- ----------- ------------ ----------- ----------- ---------- ----------- ----------
Balance at
August 31, 1998 27,056 $ 1,353 $ 238,052 $ 209,772 $ (843) $ (2,250) (4,813) $(104,430) $ 341,654
=========== =========== =========== ============ =========== =========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
13
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31, 1998 1997 1996
- -------------------------------------------------------------------------- ----------------- ---------------- -----------------
In thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40,058 $ 38,865 $ 34,239
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 38,626 23,576 16,217
Provision for losses on accounts receivable 890 349 244
Deferred income taxes 613 (3,178) (756)
Deferred compensation 652 594 290
Loss on sale of assets 317 8 187
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in accounts receivable (10,885) (19,332) 1,671
Decrease (increase) in inventories 8,061 (1,068) 1,889
Increase in other assets (12,044) (13,397) (1,026)
Increase (decrease) in accounts payable
and accrued liabilities (4,495) 18,783 (3,515)
Increase (decrease) in income taxes 12,261 465 (4,049)
----------------- ---------------- -----------------
Net cash provided by operating activities 74,054 45,665 45,391
----------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses (16,786) (33,188) (7,608)
Disposal of businesses 12,126
Purchase of license rights (27,000)
Purchases of property and equipment, net of effects from
acquisitions (39,239) (20,189) (19,463)
Proceeds from sale of property and equipment 84 366 148
----------------- ---------------- -----------------
Net cash used for investing activities (43,815) (80,011) (26,923)
----------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 3,256 316
Payments on short-term borrowings (889) (398)
Proceeds from long-term debt and line of credit, net of effects
from acquisitions 119,969 64,419 121
Payments on long-term debt and capital leases (87,221) (3,211) (2,834)
Purchases of common stock for treasury (57,013) (36,378) (28,119)
Proceeds from treasury stock issuances 3,602 3,000 1,312
----------------- ---------------- -----------------
Net cash (used for) provided by financing activities (21,552) 30,688 (29,204)
----------------- ---------------- -----------------
Effect of foreign exchange rates (1,316) 6 (229)
----------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents 7,371 (3,652) (10,965)
Cash and cash equivalents at beginning of year 20,389 24,041 35,006
----------------- ---------------- -----------------
Cash and cash equivalents at end of year $ 27,760 $ 20,389 $ 24,041
================= ================ =================
See accompanying notes to consolidated financial statements.
14
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Franklin Covey Co. (the "Company") provides training seminars and
manufactures and distributes products designed to improve organization and
individual effectiveness through proven leadership and productivity principles.
The Company's best known products include the Franklin Planner as well as the
best-selling book, 7 Habits of Highly Effective People. The Company operates
principally in the education and personal planner industries.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. As of August
31, 1998, the Company had demand deposits at various banks in excess of the
$100,000 limit for insurance by the Federal Deposit Insurance Corporation.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the expected
useful lives of the assets as follows:
Description Useful Lives
- ---------------------------------------------- -----------------
Machinery and equipment 3-7 years
Furniture and fixtures 5-7 years
Buildings and improvements 15-39 years
Expenditures for maintenance and repairs are charged to expense as
incurred. Gains and losses on sale of property and equipment are recorded in
current operations.
Long-Lived Assets
The Company evaluates its long-lived assets at each balance sheet date to
determine whether events and circumstances have occurred which indicate possible
impairment. Based upon its most recent analysis, the Company believes that no
material impairment of long-lived assets exists at August 31, 1998.
15
Other Assets
The Company is currently involved in a business reengineering and
information systems implementation project (the "Project"). Certain costs of the
Project have been capitalized in accordance with authoritative accounting
pronouncements (see Note 13). At August 31, 1998, the Company had capitalized
$17.9 million of Project costs that are classified as other assets. As phases of
the Project are completed and placed into service, the associated costs will be
reclassified to property and equipment or intangible assets, as appropriate, and
depreciated or amortized over a five-year period.
Foreign Currency Translation and Transactions
The balance sheet accounts of the Company's foreign subsidiaries are
translated into U.S. dollars using the current exchange rate. Revenues and
expenses are translated using an average exchange rate. The resulting
translation gains or losses are recorded as a cumulative translation adjustment
in shareholders' equity. Transaction gains and losses are reported in current
operations.
Revenue Recognition
Revenue is recognized upon shipment of product and presentation of training
seminars. As part of the training seminar, the Company provides a seminar kit to
each participant which may include a Franklin Planner, manuals and other
training materials.
Pre-Opening Costs
Pre-opening costs associated with new retail stores are charged to expense
as incurred. These amounts were not significant for the periods presented in the
accompanying consolidated financial statements.
Income Taxes
The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. In the
normal course of business, the Company provides credit terms to its customers.
Accordingly, the Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when realized, have been
within the range of management's expectations.
Fair Value of Financial Instruments
The book value of the Company's financial instruments approximates fair
value. The estimated fair values have been determined using appropriate market
information and valuation methodologies.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components. The statement requires an
"all-inclusive" approach which specifies that all revenues, expenses, gains and
losses recognized during the period be reported in income, regardless of whether
they are considered to be results of operations of the period. This statement is
effective for fiscal years beginning after December 15, 1997, and accordingly,
the Company will adopt SFAS No. 130 in fiscal 1999. The Company believes it will
not have a material impact on its financial statements.
16
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements. The statement specifies disclosure
requirements about the products and services of a company, the geographic areas
in which it operates, and their major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997, and accordingly, the Company
will adopt this statement in fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at fair value. The
statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement is effective for fiscal years beginning after June 15, 1999
and is not expected to have a material impact on the Company's financial
statements.
Reclassifications
Certain reclassifications have been made in the prior periods' consolidated
financial statements to conform with the current year presentation.
2. INVENTORIES
Inventories are comprised of the following (in thousands):
AUGUST 31,
- ------------------------------ --------------- ---------------
1998 1997
- ------------------------------ --------------- ---------------
Finished goods $ 32,141 $ 40,955
Work-in-process 5,261 7,286
Raw materials 10,397 7,507
--------------- ---------------
$ 47,799 $ 55,748
=============== ===============
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
AUGUST 31,
- ------------------------------------ ------------- -------------
1998 1997
- ------------------------------------ ------------- -------------
Land and improvements $ 10,382 $ 11,301
Buildings 42,797 50,978
Machinery and equipment 91,841 68,106
Furniture and fixtures 52,128 45,508
------------- -------------
197,148 175,893
Less accumulated depreciation (69,880) (56,125)
------------- -------------
$ 127,268 $ 119,768
============= =============
Certain real estate represents collateral for debt obligations (see Note
5).
17
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in
thousands):
AUGUST 31,
- ----------------------------------- ------------- -------------
1998 1997
- ----------------------------------- ------------- -------------
Goodwill $ 115,290 $ 88,685
License rights 27,000 27,000
Curriculum rights 62,685 64,019
Trade names and other 98,476 109,375
------------- -------------
303,451 289,079
Less accumulated amortization (33,249) (19,860)
------------- -------------
$ 270,202 $ 269,219
============= =============
Goodwill and other intangible assets are amortized on a straight-line basis
over the following estimated useful lives:
Useful Lives
-----------------
Goodwill 5-30 years
License rights 40 years
Curriculum rights 14-30 years
Trade names and other 4-40 years
At each balance sheet date, the Company evaluates its goodwill and other
intangible assets to determine whether events or circumstances may have occurred
which indicate possible impairment. Based upon its most recent analysis, the
Company believes that no material impairment of goodwill or other intangibles
exists at August 31, 1998.
5. DEBT
Lines of Credit
The Company has unsecured bank lines of credit available for working
capital needs totaling $89.0 million at August 31, 1998. On August 31, 1998, the
Company had $35.0 million outstanding on a $75.0 million line of credit with
interest at the lesser of the prime rate less .75% or the LIBOR rate plus 1.00%.
The $75.0 million line of credit agreement expires in October 2001. The Company
also has a $14.0 million short-term line of credit with interest at .25% below
the prevailing prime rate. At August 31, 1998, $3.6 million was outstanding on
this line of credit which expires in January 1999. The short-term line of credit
is reported as a component of other accrued liabilities.
18
The lines of credit require the Company to maintain certain financial
ratios and working capital levels. At August 31, 1998, the Company was in
compliance with the terms of the agreements. Commitment fees associated with the
lines of credit were immaterial for fiscal years 1998 and 1997.
Long-Term Debt
Long-term debt is comprised of the following (in thousands):
AUGUST 31,
- ------------------------------------ ------------ ------------
1998 1997
- ------------------------------------ ------------ ------------
>
Senior unsecured notes payable with
interest at 6.6% due semi-annually,
principal payments of $17,000 due
annually May 2004 through 2008 $ 85,000
Note payable on demand, plus
interest at 8.0% 1,749 $ 2,834
Mortgage payable in monthly
installments of $18 including
interest at 8.5% through August
2016, secured by real estate 1,769 1,834
Note payable to bank, payable in
monthly installments of $23 plus
interest at prime plus .5% payable
through September 2002, secured by
real estate 1,152 1,432
Note payable due in January 1999,
plus interest at 6.0% 1,000 1,000
Note payable to a Japanese bank
for YEN 140,000 due April 2000
plus interest at 2.7% 996
Mortgage payable in monthly installments
of $8 including interest at 9.9% through
October 2014, secured by real estate 728 747
Other mortgages and notes, payable in
monthly installments, interest ranging
from 2.0% to 9.7%, due at various dates
through 2003, secured by equipment,
inventories and accounts receivable 1,097 1,667
------------ ------------
93,491 9,514
Less current portion (3,562) (3,644)
------------ ------------
Long-term debt, less current
portion $ 89,929 $ 5,870
============ ============
19
The $85.0 million senior unsecured notes payable require the Company to
maintain certain financial ratios and net worth levels until the notes are paid
in full. At August 31, 1998, the Company was in compliance with the terms of the
notes.
In connection with the issuance of the $85.0 million notes payable, the
Company capitalized $0.6 million of loan fees which are being amortized over the
term of the notes payable. The loan fees are classified as other assets on the
accompanying balance sheet.
Future maturities of long-term debt at August 31, 1998 are as follows (in
thousands):
YEAR ENDING
AUGUST 31,
- -------------------------------------------- --------------
1999 $ 3,562
2000 1,765
2001 566
2002 474
2003 141
Thereafter 86,983
--------------
$ 93,491
==============
6. LEASE OBLIGATIONS
Capital Leases
Future minimum lease payments for equipment held under capital lease
arrangements as of August 31, 1998 are as follows (in thousands):
YEAR ENDING
AUGUST 31,
- -------------------------------------------- --------------
1999 $ 932
2000 658
2001 592
2002 393
--------------
Total future minimum leas payments 2,575
Less amount representing interest (303)
--------------
Present value of future minimum lease
payments 2,272
Less current portion (788)
--------------
$ 1,484
==============
20
Total assets held under capital lease arrangements were $4.1 million with
accumulated amortization of $1.4 million as of August 31, 1998. Amortization of
capital lease assets is included in depreciation and amortization expense.
Operating Leases
The Company leases certain retail store and office locations under
noncancelable operating lease agreements with remaining terms of one to eight
years. The following summarizes future minimum lease payments under operating
leases at August 31, 1998 (in thousands):
YEAR ENDING
AUGUST 31,
- -------------------------------------------- --------------
1999 $ 12,039
2000 10,120
2001 7,749
2002 6,915
2003 6,425
Thereafter 18,792
--------------
$ 62,040
==============
Rental expense for leases under operating lease terms was $16.8 million,
$11.7 million and $8.9 million for the years ended August 31, 1998, 1997 and
1996, respectively.
7. ADVERTISING
Costs for newspaper, television, radio and other advertising are expensed
as incurred. Direct response advertising costs consist primarily of printing and
mailing costs for catalogs and seminar mailers that are charged to expense over
the period of projected benefit, not to exceed twelve months. Total advertising
costs were $26.7 million, $18.9 million and $15.6 million for the years ended
August 31, 1998, 1997 and 1996, respectively. Prepaid catalog and seminar mailer
costs reported in other current assets were $4.4 million and $4.3 million at
August 31, 1998 and 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
At August 31, 1998, the Company had purchase commitments for information
systems hardware, software, licenses, support and education totaling
approximately $9.0 million.
Legal Matters
The Company is the subject of certain legal actions, which it considers
routine to its business activities. As of August 31, 1998, management believes
that, after discussion with its legal counsel, any potential liability to the
Company under such actions will not materially affect the Company's financial
position or results of operations.
21
9. RELATED PARTY TRANSACTIONS
During fiscal years 1998 and 1997, the Company purchased 500,000 and
750,000 shares of its common stock for $12.0 million and $18.0 million in cash,
respectively, from the Chairman of the Board of Directors. All shares were
purchased at the existing fair market value on the dates of the transactions.
During the years ended August 31, 1998 and 1997, the Company purchased
100,000 and 110,000 shares of its common stock for $2.5 million and $2.4 million
in cash, respectively, from a former officer and director of the Company. The
shares were purchased at the existing fair market value on the dates of the
transactions.
The Company purchased 194,000 shares of its common stock from a director of
the Company for $3.7 million in cash during the year ended August 31, 1998. Also
during fiscal 1998, the Company purchased 57,094 shares of its common stock from
a former officer of the Company for $1.1 million. The foregoing shares were
purchased at the existing fair market value on the dates of the transactions.
Premier Agendas ("Premier"), a subsidiary of the Company, had trade
accounts payable to various companies which are partially owned by certain
former owners of Premier totaling $1.5 million and $3.0 million at August 31,
1998 and 1997, respectively. In addition, Premier had notes payable to key
employees totaling $1.8 million and $2.8 million at August 31, 1998 and 1997
(see Note 5). The notes payable were used for working capital, are due upon
demand, and have interest rates which approximate prevailing market rates.
The Company, under a long-term agreement, leases buildings from a
partnership which is partially owned by the Co-Chairman of the Board of
Directors and certain officers of the Company. Rental expense paid to the
partnership totaled approximately $1.8 million and $0.4 million during fiscal
years 1998 and 1997, respectively.
The Company pays the Co-Chairman of the Board of Directors a percentage of
the proceeds received for seminars that are presented by the Co-Chairman. During
the years ended August 31, 1998 and 1997, the Company paid approximately $2.4
million and $0.2 million, respectively, for such seminars.
During fiscal 1998, the Company sold one of its consulting units to a group
of former employees for $1.6 million. The amount is payable to the Company in
six annual installments from September 1998 through 2003. The Company also
granted certain employees the option to purchase another consulting unit of the
Company for $1.2 million payable to the Company in equal annual installments
over a ten-year period commencing January 2001. Such option becomes exerciseable
upon the achievement of certain financial thresholds over the next two years.
10. CAPITAL TRANSACTIONS
Capital Stock
The Company's Board of Directors and shareholders have authorized 4,000,000
shares of preferred stock, no par value, of which none has been issued. The
Board of Directors is authorized to determine the designation, powers,
preferences, rights and limitations of any series of preferred stock and the
number of shares constituting any such series.
22
Treasury Stock
The Company sold 247,069, 844,342 and 132,021 shares of its common stock
held in treasury as a result of the exercise of options and the purchase of
shares under the Company's employee stock purchase plan for the years ended
August 31, 1998, 1997 and 1996, respectively. These shares were sold for a total
of approximately $3.6 million, $4.9 million and $1.0 million and had a cost of
approximately $5.5 million, $14.3 million and $0.4 million for the years ended
August 31, 1998, 1997 and 1996, respectively. In March 1998, March 1996 and
September 1996, the Company's Board of Directors approved the purchase of up to
3,000,000 shares, 1,000,000 shares and 2,000,000 shares, respectively, of the
Company's common stock. During fiscal years 1998, 1997 and 1996, the Company
purchased 2,687,000 shares at a cost of $57.0 million, 1,720,000 shares at a
cost of $36.4 million and 1,375,000 shares at a cost of $28.1 million,
respectively.
Subsequent to August 31, 1998, the Company's Board of Directors approved
the purchase of an additional 2,000,000 shares of the Company's common stock.
Tax Benefit from Exercise of Affiliate Stock Options
During fiscal years 1998, 1997 and 1996, certain employees exercised
affiliate stock options (nonqualified stock options received from principal
shareholders of the Company) which resulted in tax benefits to the Company of
$0.3 million, $1.7 million and $0.3 million, respectively, which were recorded
as increases to additional paid-in capital.
Deferred Compensation
Deferred compensation represents restricted stock granted to key
executives. The stock vests in full four years from the date of grant and was
recorded at the fair market value at the date of grant. Compensation expense is
recognized ratably over the four-year period.
Stock Options
The Company's Board of Directors has approved an incentive stock option
plan whereby 5,000,000 shares of common stock have been reserved for issuance to
key employees at a price not less than the fair market value of the Company's
common stock at the date of grant. The term, not to exceed ten years, and
exercise period of each incentive stock option awarded under the plan are
determined by a committee appointed by the Company's Board of Directors. At
August 31, 1998, shares available for granting under the incentive stock option
plan were 1,074,981.
A summary of nonqualified and incentive stock option activity is set forth
below:
Number of Weighted Avg.
Options Exercise Price
- ------------------------ ----------------- -------------------
Outstanding at
August 31, 1995 2,965,429 $ 17.76
Granted 838,500 19.19
Exercised (41,950) 2.32
Forfeited (23,825) 27.72
----------------- -----------------
Outstanding at
August 31, 1996 3,738,154 18.36
Granted:
At market value 747,340 19.03
In connection with
the Merger 382,100 5.97
Exercised (838,092) 4.32
Forfeited (127,574) 22.91
----------------- -----------------
Outstanding at
August 31, 1997 3,901,928 20.24
Granted 434,800 23.64
Exercised (200,024) 13.62
Forfeited (466,974) 23.72
----------------- -----------------
Outstanding at
August 31, 1998 3,669,730 $ 21.89
================= =================
23
Options exerciseable at August 31, 1998, 1997 and 1996 were 2,261,935,
2,269,399 and 2,214,073 and had weighted average exercise prices of $22.65,
$22.04 and $15.40, respectively.
The Company applies Accounting Principles Board ("APB") Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock option plans or employee
stock purchase plan. Had compensation cost for the Company's stock option plans
and employee stock purchase plan been determined in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands, except per share data):
YEAR ENDED
AUGUST 31,
- ---------------------------- ----------- ----------- ------------
1998 1997 1996
- ---------------------------- ----------- ----------- ------------
Net income as reported $ 40,058 $ 38,865 $ 34,239
Net income pro forma 34,978 30,514 30,410
Diluted earnings per
share as reported 1.62 1.76 1.53
Diluted earnings per
share pro forma 1.41 1.38 1.36
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to September 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The following information applies to options outstanding at August 31,
1998:
o Option shares outstanding of 413,972 have exercise prices between $1.11 and
$11.83, with a weighted average exercise price of $3.29 and a weighted
average remaining contractual life of 4.6 years of which 170,891 are
exercisable at August 31, 1998.
o A total of 2,413,883 options have exercise prices between $15.50 and
$26.82, with a weighted average exercise price of $20.41 and a weighted
average remaining contractual life of 7.0 years of which 1,260,419 are
exercisable at August 31, 1998.
o The remaining 841,875 options outstanding have exercise prices between
$29.38 and $34.50, with a weighted average exercise price of $34.21 and a
weighted average remaining contractual life of 5.7 years of which 830,625
are exercisable at August 31, 1998.
The weighted average fair value of options granted under the Company's
stock option plans during the year ended August 31, 1998 was $11.17. The
weighted average fair value of options granted under the Company's stock option
plans during the year ended August 31, 1997 was estimated at $11.23 for options
granted at the market price and $15.08 for options granted below the market
price in connection with the Merger (see Note 16). The weighted average fair
value of options granted during the year ended August 31, 1996 was $10.73.
24
The Black-Scholes option-pricing model was used to calculate the weighted
average fair value of options using the following assumptions for grants in
fiscal years 1998, 1997 and 1996:
YEAR ENDED AUGUST 31
- -------------------------- ----------- ------------ -----------
1998 1997 1996
- -------------------------- ----------- ------------ -----------
Dividend yield none none none
Volatility 57.7% 61.5% 61.5%
Expected life (years) 1.2 2.5 2.5
Risk free rate of
return 5.4% 6.1% 5.9%
The estimated fair value of options granted is subject to the assumptions
made and if the assumptions were to change, the estimated fair value amounts
could be significantly different. The weighted average fair value of options
exercised during fiscal years 1998, 1997 and 1996 was $11.49, $4.41 and $2.44,
respectively.
11. EMPLOYEE BENEFIT PLANS
Profit Sharing Plans
The Company has defined contribution profit sharing plans that qualify
under Section 401(k) of the Internal Revenue Code. The plans provide retirement
benefits for employees meeting minimum age and service requirements.
Participants may contribute up to 15% of their gross wages, subject to certain
limitations. The plans provide for matching contributions by the Company. The
matching contributions expensed in the years ended August 31, 1998, 1997 and
1996 were approximately $1.7 million, $1.4 million and $1.2 million,
respectively.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan which reserved up to
300,000 shares of common stock for issuance under the plan. Accordingly, shares
of common stock can be purchased by qualified employees at a price equal to 85%
of the fair market value of common stock at time of purchase. Shares totaling
46,934, 42,527 and 47,574 have been issued under this plan for the years ended
August 31, 1998, 1997 and 1996, respectively. Shares available for issuance
under this plan at August 31, 1998, were 82,783. The Company accounts for its
employee stock purchase plan under the provisions of APB Opinion 25 and related
interpretations.
12. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEAR ENDED AUGUST 31,
- ------------------------- ----------- ------------ -----------
1998 1997 1996
- ------------------------- ----------- ------------ -----------
Current:
Federal $ 24,620 $ 24,103 $ 19,960
State 4,067 5,755 3,886
Foreign 1,920 790 778
Deferred:
Federal (614) (2,544) (548)
State (100) (606) (74)
----------- ------------ -----------
$ 29,893 $ 27,498 $ 24,002
=========== ============ ===========
25
In connection with a change in accounting principle, the Company also
recognized a $1.5 million tax benefit in fiscal 1998.
The differences between income taxes at the statutory federal income tax
rate and income taxes reported in the consolidated statements of income are as
follows:
YEAR ENDED AUGUST 31,
- ------------------------- ----------- ------------ -----------
1998 1997 1996
- ------------------------- ----------- ------------ -----------
Federal statutory
tax rate 35.0% 35.0% 35.0%
State income
taxes, net of
federal benefit 3.5 5.0 4.8
Goodwill
amortization 2.3 .8 .3
Other .7 .6 1.1
----------- ------------ -----------
41.5% 41.4% 41.2%
=========== ============ ===========
Significant components of the Company's deferred tax assets and liabilities
are comprised of the following (in thousands):
AUGUST 31,
- ------------------------------------ ------------ ------------
1998 1997
- ------------------------------------ ------------ ------------
Current deferred tax assets:
Inventory and bad debt
reserves $ 3,203 $ 2,435
Sales returns and
contingencies 993 2,822
Vacation and other
accruals 2,454 1,461
Other 243 666
------------ ------------
Total current deferred tax assets 6,893 7,384
------------ ------------
Long-term deferred tax assets and (liabilities):
Interest and other
capitalization 431 593
Intangibles and fixed
asset step-up (31,647) (33,316)
Depreciation and
amortization (2,203) (2,286)
Other (2,438) (726)
------------ ------------
Net long-term deferred tax
liabilities (35,857) (35,735)
------------ ------------
Net deferred income tax
liability $ (28,964) $ (28,351)
=========== ============
Current deferred tax assets are reported as a component of other current
assets.
26
13. CHANGE IN ACCOUNTING PRINCIPLE
During fiscal 1998, the Emerging Issues Task Force (the "EITF") of the FASB
issued consensus ruling 97-13 which specifies the accounting treatment of
certain business reengineering and information technology implementation costs.
EITF 97-13 requires that certain costs which have been previously capitalized to
now be expensed as incurred. In addition, any previously capitalized costs that
were incurred, and are addressed by EITF 97-13, were required to be written off.
The Company is currently involved in a business reengineering and
information system implementation project and has capitalized costs in
accordance with generally accepted accounting principles. Certain previously
capitalized costs of the Project were written off in accordance with EITF 97-13
as a cumulative adjustment in the Company's first quarter of fiscal 1998. During
the remainder of fiscal 1998, the majority of the costs associated with the
Project were capitalized in accordance with EITF 97-13 and other related
accounting standards. The Company expects that the majority of remaining Project
costs will also qualify for capitalization.
The Company incurred significant costs associated with the Project during
the fourth quarter of fiscal 1997. The following unaudited pro forma schedule
presents the financial results of the Company as if the provisions of EITF 97-13
were adopted on September 1, 1996 (in thousands, except per share data):
YEAR ENDED
AUGUST 31, 1997
- ---------------------------------- -------------- --------------
Actual Pro Forma
- ---------------------------------- -------------- --------------
(unaudited)
Sales $ 433,272 $ 433,272
Gross margin 257,670 257,670
Operating income 67,363 64,184
Net income 38,865 37,026
Net income per share:
Basic $ 1.83 $ 1.75
Diluted 1.76 1.67
27
14. NET INCOME PER SHARE
During fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share"
("EPS") which simplifies the standards for calculating EPS and replaces the
presentations of Primary EPS and Fully Diluted EPS with Basic EPS and Diluted
EPS. Basic EPS is calculated by dividing income from continuing operations by
the weighted-average number of common shares outstanding during the period.
Diluted EPS is calculated by dividing income from continuing operations by the
weighted-average number of common shares outstanding plus the assumed exercise
of all dilutive securities using the treasury stock method. Significant
components of the numerator and denominator used for Basic and Diluted EPS are
as follows (in thousands, except per share amounts):
YEAR ENDED
AUGUST 31,
- ------------------------------ ----------- ---------- -----------
1998 1997 1996
- ------------------------------ ----------- ---------- -----------
>
Income before accounting
change $ 42,138 $38,865 $ 34,239
Cumulative effect of
accounting change,
net of tax (2,080)
----------- ---------- -----------
Net Income $ 40,058 $38,865 $ 34,239
=========== ========== ===========
Basic weighted-average
shares outstanding 24,091 21,201 21,298
Incremental shares from the
assumed exercise of
stock options 635 916 1,030
----------- ---------- -----------
Diluted weighted-average
shares outstanding 24,726 22,117 22,328
=========== ========== ===========
Income from continuing
operations per share:
Basic $ 1.75 $ 1.83 $ 1.61
Diluted 1.70 1.76 1.53
Cumulative effect of accounting
change, net of tax, per share:
Basic (.09)
Diluted (.08)
----------- ---------- -----------
Net income per share:
Basic $ 1.66 $ 1.83 $ 1.61
Diluted 1.62 1.76 1.53
=========== ========== ===========
Options to purchase 1,661,875 shares of common stock with exercise prices
ranging from $23.00 to $34.50 per share were outstanding during fiscal 1998 but
were not included in the calculation of Diluted EPS because the exercise price
was greater than the average market price of the common shares.
Subsequent to August 31, 1998, the Company purchased 688,200 shares of its
common stock for $13.0 million.
28
15. STATEMENTS OF CASH FLOWS
The following supplemental disclosures are provided for the Consolidated
Statements of Cash Flows (in thousands):
YEAR ENDED AUGUST 31,
- ------------------------- ----------- ------------ -----------
1998 1997 1996
- ------------------------- ----------- ------------ -----------
Cash paid for:
Income taxes $ 15,961 $ 27,916 $ 27,973
Interest 5,991 2,042 616
=========== ============ ===========
Fair value of
assets acquired $ 18,943 $ 88,208 $ 11,336
Cash paid for
net assets (16,786) (33,188) (7,608)
----------- ------------ -----------
Liabilities
assumed from
acquisitions $ 2,157 $ 55,020 $ 3,728
=========== ============ ===========
Tax effect of
exercise of
affiliate stock
options $ 266 $ 1,654 $ 287
=========== ============ ===========
Non-Cash Investing and Financing Activities
During the years ended August 31, 1998 and 1997, the Company accrued $13.0
million and $9.0 million, respectively, for earnout payments in connection with
the acquisition of certain entities (see Note 16).
Effective June 2, 1997, Franklin Quest Co. ("Franklin") and Covey
Leadership Center ("Covey") merged (the "Merger") to form Franklin Covey Co. In
the Merger, the Company issued 5,030,894 shares of its common stock in exchange
for all of the issued and outstanding capital stock of Covey. The total value of
the stock exchanged was approximately $111.5 million. In connection with the
foregoing exchange, the Company issued 382,100 stock options, exerciseable at
$5.97 per share and valued at approximately $4.3 million, in exchange for all of
the outstanding options to purchase Covey stock.
In connection with recording the tax effects of the Merger and the
acquisition of Premier (see Note 16), the Company recognized approximately $29.4
million of net deferred tax liabilities with a corresponding increase to
goodwill.
During fiscal 1997, the Company received 84,779 shares of common stock with
a fair market value of approximately $1.9 million as consideration for 684,000
stock options exercised at $2.78 per share. The common stock issued from
treasury for the options exercised had a weighted average cost of $20.35 per
share.
29
16. MERGER, ACQUISITIONS & DIVESTING ACTIVITIES
Effective August 1, 1998, the Company sold its Institute of Fitness located
near St. George, Utah for $13.4 million in cash. During fiscal 1998, the Company
also sold certain consulting units and discontinued its operations at certain
international locations. The net impact of these divestitures was immaterial to
the consolidated financial statements of the Company.
Effective April 1, 1998, the Company acquired King Bear, Inc. ("King Bear")
a Tokyo, Japan based company. King Bear, a former Covey licensee, provides
leadership and time management training as well as publishing services. The
publishing division of King Bear translated and currently publishes 7 Habits of
Highly Effective People in Japanese. The cash purchase price was $5.3 million
with additional contingent payments to be made over the next five years based
upon the operating results of King Bear over that same period. The acquisition
of King Bear was accounted for using the purchase method of accounting and
generated $4.3 million of intangible assets which are being amortized over an
estimated useful life of 15 years.
During fiscal 1997, Franklin and Covey merged to form Franklin Covey Co. In
the Merger, the Company issued 5,030,894 shares of its common stock in exchange
for all of the issued and outstanding capital stock of Covey. The Company's
shares were valued at $22.16 per share, which was the average per share closing
sales price of Franklin common stock on the New York Stock Exchange for the
twenty consecutive trading days ended May 28, 1997. In connection with the
Merger, the Company also acquired certain license rights for $27.0 million in
cash.
The Merger was accounted for using the purchase method of accounting and
generated approximately $175.6 million of intangible assets which are being
amortized over estimated useful lives ranging from 12 to 40 years. In connection
with recording the tax effects of the Merger, the Company recognized a net
deferred tax liability totaling $24.0 million with a corresponding increase to
goodwill which is being amortized over 30 years.
The following unaudited pro forma combined financial data presents the
results of operations of the Company as if the Merger had been effective at the
beginning of the periods presented (in thousands):
YEAR ENDING
AUGUST 31,
- ---------------------------------- ------------- -------------
1997 1996
- ---------------------------------- ------------- -------------
(Unaudited)
Revenue $ 517,756 $ 421,064
Operating income 72,928 62,838
Net income 39,839 35,142
Diluted EPS 1.53 1.29
The foregoing unaudited pro forma results of operations reflect the effect
of certain pro forma adjustments including (1) the amortization of the goodwill
and other intangibles resulting from the Merger, (2) the recognition of
increased interest expense resulting from the assumption of Covey liabilities
and the cash payment for certain license rights, (3) the adjustment of income
taxes to reflect a combined effective federal and state income tax rate and (4)
the effect on earnings per share of the shares exchanged in the Merger having
been outstanding for the periods presented.
30
On March 1, 1997, the Company acquired Premier with operations located in
Bellingham, Washington and Abbotsford, British Columbia. Premier manufactures
and markets academic and personal planners for students from kindergarten to
college throughout the U.S. and Canada. Premier's business is seasonal in nature
and nearly all of its revenue is recognized in the Company's fourth fiscal
quarter. The combined cash purchase price was $23.2 million with additional
contingent payments to be made over the next three years based upon Premier's
operating performance over that same time period. The Premier acquisition was
accounted for using the purchase method of accounting and generated $27.6
million of intangible assets that are being amortized over an estimated useful
life of 15 years. In connection with recording the tax effects of the Premier
acquisition, the Company recognized a deferred tax liability totaling $5.4
million with a corresponding increase to goodwill which is being amortized over
15 years. During fiscal 1998, the Company paid the first contingent payment of
approximately $10.3 million. Such payment was classified as goodwill and is
being amortized over the remaining life of the original purchased goodwill. As
of August 31, 1998, $9.9 million has been accrued for the second contingent
payment.
Effective October 1, 1996, the Company acquired the net assets of TrueNorth
Corporation ("TrueNorth"). TrueNorth, a Utah Corporation, is a provider of
post-instructional personal coaching to corporations and individuals. TrueNorth
develops and delivers one-on-one personalized coaching which is designed to
augment the effectiveness and duration of training curricula. The purchase price
was $10.0 million in cash. In addition, contingent payments may be made over the
next five years based on TrueNorth's operating performance. The acquisition of
TrueNorth was accounted for using the purchase method of accounting and
generated $9.3 million of intangible assets which are being amortized over an
estimated useful life of 15 years. During fiscal 1998, the Company paid the
first contingent payment of approximately $1.6 million. Such payment was
classified as goodwill and is being amortized over the remaining life of the
original purchased goodwill. As of August 31, 1998, $3.1 million has been
accrued for the second contingent payment.
Effective December 1, 1995, the Company acquired the assets of Productivity
Plus, Inc. ("PPI"), a provider of time management products sold primarily to the
military. The company is headquartered in Phoenix, Arizona. The cash purchase
price was $7.9 million, and additional payments may be made, based on the
operating results of the company over the next four years following its
acquisition. The acquisition of PPI was accounted for using the purchase method
of accounting and generated intangible assets totaling $6.6 million which are
being amortized over estimated useful lives of eight to ten years. During fiscal
1997, $3.0 million of additional payments were paid to PPI based on operating
results of the period measured. Such payments are being amortized over the
remaining useful life of goodwill generated by the acquisition. No additional
payments were required during fiscal 1998 based upon operating results for the
second measurement period. In addition, no future contingent payments for the
third measurement period were accrued as of August 31, 1998.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The unaudited quarterly financial information included on page 10 of the
annual report to shareholders is an integral part of the consolidated financial
statements.
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-8, File Nos.
33-73624 and 33-51314, and Form S-3, File No. 33-47894.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
November 18, 1998
Exhibit 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To Franklin Covey Co.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Franklin Covey Co.'s annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated September 25, 1998. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed in the index on page 39 is the responsibility of the Company's management
and is presented for the purpose of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
September 25, 1998
Exhibit 99.2
SCHEDULE II
FRANKLIN COVEY CO.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Three Years Ended August 31, 1998
(Dollars in Thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
---------
Balance at Charged to Charged
Beginning Costs and to Other Balance at
Description of Period Expenses Accounts Deductions End of Period
- ----------- --------- -------- -------- ---------- -------------
Year ended August 31, 1996:
Allowance for doubtful
accounts $ 672 $ 301 $ 12(1) $ (96)(3) $ 889
Allowance for inventories 1,022 7,267 62(2) (2,973)(4) 5,378
-------- -------- ------ --------- --------
$ 1,694 $ 7,568 $ 74 $ (3,069) $ 6,267
======== ======== ====== ========= ========
Year ended August 31, 1997:
Allowance for doubtful
accounts $ 889 $ 1,038 $1,322(1) $ (1,318) (3) $ 1,931
Allowance for inventories 5,378 4,254 400(2) (5,557) (4) 4,475
-------- -------- ------ --------- --------
$ 6,267 $ 5,292 $1,722 $ (6,875) $ 6,406
======== ======== ====== ========= ========
Year ended August 31, 1998:
Allowance for doubtful
accounts $ 1,931 $ 3,472 $ (2,563) (3) $ 2,840
Allowances for inventories 4,475 6,522 (5,998) (4) 4,999
-------- -------- --------- --------
$ 6,406 $ 9,994 $ (8,561) $ 7,839
======== ======== ========= ========
(1) Represents the addition of the allowances for doubtful accounts of acquired
companies.
(2) Represents the addition of the allowances for inventories of acquired
companies.
(3) Represents a write-off of accounts deemed uncollectible.
(4) Reduction in the allowance is due to a write-off of obsolete inventories.
5
0000886206
FRANKLIN COVEY CO.
1,000
US DOLLARS
12-MOS
AUG-31-1998
SEP-01-1997
AUG-31-1998
1
27,760
0
86,461
2,840
47,799
175,293
197,148
69,880
597,277
93,353
126,413
0
0
1,353
340,301
596,277
546,612
546,612
213,888
213,888
254,331
0
8,316
72,031
29,893
42,138
0
0
(2,080)
40,058
1.75
1.70
