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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
[ ] 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.
(Formerly Franklin Quest Co.)
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(Exact name of registrant as specified in its charter)
UTAH 1-11107 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) 975-1776
[X] 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. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant on November 18, 1997, based upon the closing sale price of the
Common Stock of $22.25 per share on that date, was approximately $457,945,139.
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 18, 1997, the Registrant had 24,780,928 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, 1997 (Parts II and IV), and
(2) Proxy Statement for Registrant's Annual Meeting of Shareholders which is
scheduled to be held on January 9, 1998 (Part III).
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AMENDMENT NO. 1
The Registrant hereby amends its Annual Report on Form 10-K for the fiscal
year ended August 31, 1997, previously filed with the Commission (the "Annual
Report") solely for the purpose of refiling Exhibit 13 to the Annual Report.
This Amendment does not include any revisions to the text of the Annual Report.
The Exhibit Index follows the signature page for this Amendment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Amendment
No. 1 to Annual Report to be signed on its behalf by the undersigned,
thereunder duly authorized.
FRANKLIN COVEY CO.
By: /s/ JOHN H. ROWBERRY
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Jon H. Rowberry
President and Chief Executive Officer
Dated: April 23, 1998
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EXHIBIT INDEX
Exhibit Incorporated Filed
No. Exhibit by Reference Herewith
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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
value $.05 per share (2)
10.1 Amended and Restated 1992 Employee Stock Purchase Plan (3)
10.2 First Amendment to Amended and Restated 1992 Stock
Incentive Plan (4)
10.3 Franklin 401(k) Profit Sharing Plan (1)
10.4 Forms of Nonstatutory Stock Options (1)
10.5 Shipley Acquisition Agreement (4)
10.6 Stock Exchange Agreement - Publishers Press, Inc. (5)
10.9 Merger Agreement - Covey Leadership Center, Inc. (6)
10.10 Lease Agreements, as amended and proposed to be amended, by
and between Covey Corporate Campus One, L.L.C. 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. (7)
13 Annual Report to Shareholders for the year ended August 31, 1997.
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. (8)
22 Subsidiaries of the Registrant (7)
23.1 Consent of Arthur Andersen LLP, independent public accountants (7)
23.2 Consent of Price Waterhouse LLP, independent public accountants (7)
27 Financial Data Schedule (7)
______________________
(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
fiscal year ended August 31, 1992.
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(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 and Form 8-K/A dated
January 3, 1995 and February 28, 1995.
(6) Incorporated by reference to Report on Form 8-K dated June 3, 1997.
(7) Incorporated by reference to Form 10-K filed December 1, 1997, for the
fiscal year ended August 31, 1997.
(8) Filed herewith.
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EXHIBIT 13
FRANKLIN COVEY CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Effective June 2, 1997, Franklin Quest Co. ("Franklin") and Covey Leadership
Center, Inc. ("Covey") merged (the "Merger") to form Franklin Covey Co. (the
"Company"). Franklin has been in the business of teaching time management
seminars since the Company's inception in 1983 and has been selling the Franklin
Day Planner since its introduction in February 1984. Covey has been providing
educational materials, training services and publications since its inception in
1980. The combined Company is uniquely positioned to provide educational and
time management products and services to improve the productivity, leadership
and effectiveness of both individuals and organizations. The Company's best
known products include the Franklin Day Planner as well as the best-selling
book, 7 Habits of Highly Effective People. Increases in sales during the periods
reported have resulted from the incremental revenues of Covey and other acquired
companies and have also been generated by teaching an increasing number of time
management seminar participants and selling an increasing number of Franklin
Covey Planners and Organizers and related products. Currently, the Company
derives its sales principally from three areas: (1) product sales including
planners, books, tapes and related products sold primarily through retail,
catalog and direct channels; (2) training, consulting and coaching services,
primarily in the areas of leadership, time management and personal improvement,
provided through institutional and public programs; and (3) printing and tabbing
services. The Company's results of operations have been seasonal in nature,
resulting primarily from customer buying habits for calendar-related products.
As a result of the Merger and corporate acquisitions during fiscal 1997, the
quarterly fluctuation in sales is expected to decrease.
The Company opened 20 new retail stores during fiscal 1997. Retail store sales
as a percentage of total product sales have increased as the Company has
continued its strategy of opening new stores in geographic areas where there is
a concentration of existing customers, which has resulted in some shifting from
catalog sales to retail store sales. During 1997, comparable store sales growth
was approximately 7%.
On December 1, 1994, the Company acquired Publishers Press, Inc. ("Publishers").
Publishers, a Utah corporation, prints Franklin Covey Planners and Organizers
and related accessory products and provides book and commercial printing
services to clients in the western United States.
Effective as of April 1, 1995, the Company acquired the assets of Time Systems,
Inc. ("Time Systems"), a time management training and product company
headquartered in Phoenix, Arizona. Time Systems markets a combination of time
management training and planner products to corporate and individual customers.
The cash purchase price was $8.6 million.
Effective as of December 1, 1995, the Company acquired the assets of
Productivity Plus, Inc. ("PPI"), a provider of time management products sold
primarily to the military. PPI is headquartered in Phoenix, Arizona. The initial
cash purchase price was approximately $7.9 million, plus additional payments
based on the operating results of PPI over the three years following its
acquisition. During fiscal 1997, the first year's additional payment was made in
the amount of $3.0 million.
Effective October 1, 1996, the Company acquired the 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
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augment the effectiveness and duration of training curricula. The purchase price
was $10.0 million in cash plus additional payments, based on the operating
results of TrueNorth over the five years following its acquisition. The payment
accrued for fiscal 1997 was $1.5 million.
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 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 being made over the next three years based upon Premier's operating
performance over that same time period. The payment accrued for fiscal 1997 was
$7.0 million.
In the Merger with Covey, 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 connection with the Merger,
the Company acquired certain license rights from Stephen R. Covey for $27.0
million in cash.
The Company has reviewed its information systems and does not believe they are
affected by any significant problems related to the "year 2000" computer date
issue. However, the Company could be impacted by "year 2000" issues affecting
the information processing systems of vendors and other organizations with which
the Company does business.
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,
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1997 1996 1995
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Total sales 100.0% 100.0% 100.0%
Cost of sales 40.5 44.0 39.8
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Gross margin 59.5 56.0 60.2
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Operating expenses:
Selling, general and administrative 37.9 35.1 34.6
Depreciation and amortization 4.8 3.8 3.4
Merger related expenses 1.3
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Total operating expenses 44.0 38.9 38.0
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Income from operations 15.5 17.1 22.2
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Interest income 0.3 0.6 1.0
Interest expense (0.5) (0.2) (0.2)
Other income 0.2
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Total other income (expense) (0.2) 0.4 1.0
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Income before provision for income taxes 15.3 17.5 23.2
Provision for income taxes 6.3 7.2 9.2
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NET INCOME 9.0% 10.3% 14.0%
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Sales Data:
Product sales 69.6% 71.1% 69.4%
Training sales 24.8 21.3 24.6
Printing services sales 5.6 7.6 6.0
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 acquisition of Premier and
TrueNorth, the Merger with
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Covey, an increase in the number of Franklin Covey Planners and Organizers 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 1.0%.
Price increases had no material effect on increased sales between the periods.
Retail store sales increased $16.1 million over the previous 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 consists of sales less cost of sales. Costs include materials used
in the production of the planners and related products, commissions of training
consultants, direct costs of conducting seminars, assembly and manufacturing
labor, freight and overhead costs. Gross margin may be affected by, among other
things, changes in product discount levels, prices of materials, labor rates,
production efficiency, training consultant commissions, product mix and freight
costs. Gross margin was 59.5% of revenues for the year ended August 31, 1997,
compared to 56.0% for the same period in 1996. For fiscal 1997, Covey, Premier
and TrueNorth all had gross profit margins, as a percentage of sales, which were
larger than those of the Company, taken as a whole. This was caused by differing
markups on their products and the mix between revenue for 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 AND OTHER 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. Further, store expansions, information
systems and related equipment also contributed significantly 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 acquisitions.
FISCAL 1996 COMPARED WITH FISCAL 1995
SALES
Sales for the year ended August 31, 1996, increased $54.9 million, or 19.8% over
the same period in 1995 as a result of an increase in the number of Franklin Day
Planners sold, an increase in the number of time management seminar
participants, and the acquisition of new companies. Product sales (direct
product sales, catalog sales, retail store sales, and commercial printing sales)
increases of $52.2 million accounted for 95% of the increase and training sales
increases of $2.6 million accounted for 5% of the increase. Direct Product sales
increased by $9.0 million as a result of the acquisition of PPI on December 1,
1995 and by $8.0 million due to the full year inclusion of Publishers Press,
purchased on December 1, 1994. Price increases had no material effect on
increased sales between
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the periods. The Company continued to experience periodic fluctuations in direct
product sales due to irregular volume and timing of sales to network marketing
clients. Catalog sales growth continued to moderate as the retail store chain
expanded and accounted for $7.7 million of the product sales increase during
1996. Retail store sales increased $22.7 million over the previous year as a
result of 20 additional store openings and included an increase of 6% in
comparable store sales (stores are included in the calculation from the first
anniversary of their opening date).
GROSS MARGIN
Gross margin consists of sales less cost of sales. Costs include materials used
in the production of the Franklin Day Planner, commissions of training
consultants, direct costs of conducting seminars, assembly and manufacturing
labor, freight and overhead costs. Gross margin may be affected by, among other
things, changes in product discount levels, prices of materials, labor rates,
production efficiency, training consultant commissions, product mix and freight
costs. Gross margin was 56.0% of sales for the year ended August 31, 1996,
compared to 60.2% for the same period in 1995. In addition to reduction due to
fluctuation in the factors noted above, the gross margin was substantially
reduced by a one-time write-off of inventory in the fourth quarter of the year.
OPERATING EXPENSES AND OTHER EXPENSES
Selling, general and administrative expenses increased 0.5% as a percentage of
sales during the year ended August 31, 1996 (35.1% compared to 34.6% in fiscal
1995). About half of the increase in percentage was due to a fourth quarter
increase in customer service allowances. The balance of the increase resulted
from additional levels of investment in systems, marketing, and catalog
distribution. Because a significant portion of these expenses are selling
expenses, including certain variable expenses such as commissions and salary
expense related to sales volume, the Company has experienced increases in these
expenses associated with increases in the level of sales.
Depreciation charges were higher by $1.9 million much of which was due to the
completion and occupancy of the new headquarters building at the beginning of
the second quarter of fiscal 1996. The remaining increase was primarily due to
the additional manufacturing equipment and improvements in the 20 new stores.
Amortization charges increased by $1.2 million as a result of the amortization
of intangible assets acquired during fiscal 1995 and fiscal 1996.
INCOME TAXES
Income taxes were accrued using an effective rate of 41.2% for fiscal 1996
compared to 39.7% for the prior fiscal year. The increase from the prior year
was due partly to non-deductible goodwill generated from the Publishers
acquisition and partly to non-deductible losses incurred in foreign countries.
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. Quarterly
Financial Information:
YEAR ENDED AUGUST 31, 1997
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Q1 Q2 Q3 Q4
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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
Net income per share .62 .63 .15 .37
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YEAR ENDED AUGUST 31, 1996
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Q1 Q2 Q3 Q4
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In thousands, except per share amounts
Sales $91,880 $93,593 $72,465 $74,068
Gross margin 52,553 53,490 41,604 38,137
Income before provision
for income taxes 21,709 21,616 10,634 4,283
Net income 13,004 12,778 6,285 2,172
Net income per share .57 .57 .28 .10
The Company's quarterly results of operations reflect seasonal trends that are
primarily the result of customers who renew their Franklin Covey Planner or
Organizer on a calendar year basis. Seminar sales are moderately seasonal
because of the reluctance of corporate training directors to schedule seminars
during holiday and vacation periods. In the Company's experience, catalog sales,
retail store sales and income from operations tend to be lower during the third
and fourth quarters of each fiscal year. The seasonality of the Company's
operations has resulted in slightly higher sales and significantly higher
operating margins during the first two quarters, with declines in sales and
income in the third quarter of each fiscal year. The Company believes that as a
result of the Merger and acquisitions during fiscal 1997, the seasonal patterns
of sales and earnings will experience roughly similar patterns for the first
three quarters as in the past. However, consistent with the results of the
fourth quarter of fiscal 1997, the Company believes the acquisition of Premier
will result in increased sales and earnings in the fourth quarter of future
years.
During the fourth quarter of fiscal 1997, the Company recorded a charge for
integration costs related to the Merger with Covey. The amount of the charge,
net of related tax effects, was $3.2 million. During the fourth quarter of 1996,
the Company took a one-time write-off primarily related to inventory and
customer service allowances. The amount of the write-off, net of related tax
effect, was $3.1 million.
Quarterly fluctuations may also be affected by other factors including the
operating results of recent acquisitions, the addition of new institutional
customers and introduction of new products, the timing of large institutional
orders, and the opening of retail stores.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of capital have been net cash
provided by operating activities, long-term borrowing, capital lease financing
and proceeds from sale of common stock. Working capital requirements have also
been financed through short-term borrowing.
Net cash provided by operating activities during fiscal 1997 and 1996 was $45.7
million and $45.4 million, respectively. In fiscal 1997, $38.9 million was used
to finance increases in inventory, accounts receivable and other assets, while
$18.8 million was provided by increases in accounts payable and accrued
liabilities. The most notable use of cash was represented by the increase in
receivables from seasonally heavy fourth quarter sales by Premier. In fiscal
1996, $3.6 million was provided by decreases in inventory and accounts
receivable.
Net cash used in investing activities in fiscal 1997 and 1996 was $80.0 million
and $26.9 million, respectively. 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. During fiscal
1996, PPI was purchased for an initial cash outlay of approximately $7.9
million, using cash provided from operations. Funds invested in property and
equipment in fiscal 1997 and 1996 were $20.2 million and $19.5 million,
respectively and included new store leasehold improvements, additional
manufacturing equipment and upgrades to the Company's core computer systems.
Going forward, the Company will incur buildout and inventory costs for
additional retail stores as
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well as normal equipment additions related to the growth of the business, all of
which it expects to finance from cash provided by operations. During fiscal
1997, the Company began a project to replace its current information systems
with newer integrated systems to support Company growth. As part of this
project, the Company is also reengineering business processes to improve the
efficiency of operations. The costs of this project will be provided jointly by
cash provided by operations or from the Company's borrowing facilities.
Financing activities provided cash of $30.7 million in 1997 and used cash of
$29.2 million in 1996. In 1997, the primary source of cash was proceeds from
long-term debt and line of credit. The primary use of cash was the purchase of
common stock for the treasury for both fiscal 1997 and 1996.
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 shares that may be
made under the remaining 795,000 shares authorized for purchase by the Board of
Directors.
The Company has unsecured bank lines of credit available for working capital
needs totaling $104.0 million at August 31, 1997. On August 31, 1997, the
Company had $86.0 million outstanding on the $100.0 million line of credit with
interest at the lesser of the prime rate less .50% or the LIBOR rate plus .75%.
The $100.0 million line of credit agreement which expires in October 2001,
requires the maintenance of certain financial ratios and working capital levels.
As of August 31, 1997, the Company was in compliance with these borrowing
covenants.
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 any
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 the planners and related products,
including paper and leather materials. The Company may not be able to pass on
such increased costs to its customers.
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"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. 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 Report
on form 10-K for the year ended August 31, 1997 and elsewhere in the Company's
filings with the Securities and Exchange Commission.
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SELECTED FINANCIAL & STATISTICAL HIGHLIGHTS
AUGUST 31,
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1997 1996 1995 1994 1993
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In thousands, except per share data
INCOME STATEMENT DATA
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Total Sales $433,272 $332,006 $277,122 $215,940 $165,483
Net Income 38,865 34,239 38,746 30,917 23,416
Earnings Per Share 1.76 1.53 1.71 1.40 1.10
BALANCE SHEET DATA
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Total Assets $572,187 $268,445 $263,305 $198,433 $144,734
Long-Term Obligations 94,144 5,500 4,521 7,598 8,206
Shareholders' Equity 355,405 231,835 224,342 162,085 112,997
COMMON STOCK FIRST SECOND THIRD FOURTH
PRICE RANGE QUARTER QUARTER QUARTER QUARTER
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FISCAL 1997
High $21 3/8 $22 7/8 $24 $28 1/4
Low 17 3/8 20 1/2 20 5/8 24 1/8
Close (at quarter end) 21 1/4 20 7/8 24 24 7/8
FISCAL 1996
High 25 5/8 24 1/2 29 1/8 22 1/4
Low 18 1/4 17 7/8 19 3/4 18 1/8
Close (at quarter end) 18 7/8 20 20 18 1/4
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FRANKLIN COVEY CO.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Franklin Covey Co.:
We have audited the accompanying consolidated balance sheets of Franklin Covey
Co. (formerly Franklin Quest Co., a Utah corporation) and subsidiaries as of
August 31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for the years then ended. 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. The consolidated financial statements of Franklin Covey Co. and
subsidiaries for the year ended August 31, 1995, were audited by other auditors
whose report dated September 20, 1995 expressed an unqualified opinion on those
statements.
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, 1997 and 1996, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
September 26, 1997
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FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997 1996
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In thousands, except share data
ASSETS
Current assets:
Cash and cash equivalents $ 20,389 $ 24,041
Accounts receivable, less allowance for doubtful
accounts of $1,931 and $889 71,840 28,706
Inventories 55,748 49,463
Income taxes receivable 6,094 5,064
Other assets 15,672 5,743
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Total current assets 169,743 113,017
Property and equipment, net 119,768 102,063
Goodwill and other intangibles, net 269,219 51,115
Other assets 13,457 2,250
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$ 572,187 $ 268,445
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,611 $ 12,585
Accrued compensation 13,349 8,029
Accrued acquisition earnouts 9,000
Other accrued liabilities 28,324 7,157
Current portion of long-term debt 3,644 906
Current portion of capital lease obligations 975
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Total current liabilities 86,903 28,677
Line of credit 86,000
Deferred income taxes 35,735 2,433
Long-term debt, less current portion 5,870 5,500
Capital lease obligations, less current portion 2,274
---------------------
Total liabilities 216,782 36,610
---------------------
Commitments and contingencies (Notes 7, 9 and 14)
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 and 22,025,000 shares issued 1,353 1,101
Additional paid-in capital 239,699 132,959
Retained earnings 169,714 130,849
Deferred compensation (1,495) (1,240)
Cumulative translation adjustment (934) (940)
Treasury stock, 2,373,223 and 1,497,407 shares, at cost (52,932) (30,894)
---------------------
Total shareholders' equity 355,405 231,835
---------------------
$ 572,187 $ 268,445
=====================
See accompanying notes to consolidated financial statements
2
11
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED AUGUST 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------
In thousands, except per share data
Sales:
Product $ 301,687 $ 236,039 $ 192,356
Training 107,417 70,812 68,168
Printing services 24,168 25,155 16,598
---------------------------------
Total sales 433,272 332,006 277,122
---------------------------------
Cost of sales:
Product 126,419 104,486 77,459
Training 31,283 22,475 19,525
Printing services 17,900 19,261 13,160
---------------------------------
Total cost of sales 175,602 146,222 110,144
---------------------------------
Gross margin 257,670 185,784 166,978
Selling, general and administrative 164,057 116,362 95,802
Depreciation and amortization 20,800 12,739 9,625
Merger and integration costs 5,450
---------------------------------
Income from operations 67,363 56,683 61,551
Interest income 1,344 2,188 2,513
Interest expense (2,344) (630) (578)
Other income 744
---------------------------------
Income before provision for income taxes 66,363 58,241 64,230
Provision for income taxes 27,498 24,002 25,484
---------------------------------
NET INCOME $ 38,865 $ 34,239 $ 38,746
=================================
NET INCOME PER SHARE $ 1.76 $ 1.53 $ 1.71
=================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 22,117 22,328 22,692
=======================================================================================
See accompanying notes to consolidated financial statements.
3
12
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK TREASURY STOCK
------------------ ------------------
CUMULA-
TIVE
ADDI- DE- TRANSLA- TOTAL
TIONAL RETAINED FERRED TION SHARE-
PAID-IN EARN- COMPEN- ADJUST- HOLDERS'
SHARES AMOUNT CAPITAL INGS SATION MENT SHARES AMOUNT EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
In thousands
Balance at
August 31, 1994 22,025 $ 1,101 $ 106,783 $ 57,864 $ $ (520) (1,209) $ (3,143) $ 162,085
Tax benefit from exercise
of affiliate stock options 1,571 1,571
Issuance of common
stock from treasury 21,987 1,065 2,670 24,657
Purchase of treasury
shares (110) (2,673) (2,673)
Deferred compensation 887 (740) 147
Cumulative translation
adjustment (191) (191)
Net income 38,746 38,746
------------------------------------------------------------------------------------------------------
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
adjustment 6 6
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
======================================================================================================
See accompanying notes to consolidated financial statements.
4
13
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
In thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38,865 $ 34,239 $ 38,746
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,576 16,217 11,745
Provision for losses on accounts receivable 349 244 103
Deferred compensation 594 290 147
Loss (gain) on sale of assets 8 187 (377)
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in accounts receivable (19,332) 1,671 (3,179)
Decrease (increase) in inventories (1,068) 1,889 (5,256)
Decrease (increase) in other assets (18,462) (1,928) 286
(Decrease) increase in accounts payable and accrued liabilities 18,783 (3,515) (3,098)
Increase (decrease) in income taxes 2,352 (3,903) 1,669
------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 45,665 45,391 40,786
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses (33,188) (7,608) (10,060)
Purchase of license rights (27,000)
Purchases of property and equipment, net of effects from acquisitions (20,189) (19,463) (32,523)
Proceeds from sale of property and equipment 366 148 3,287
------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (80,011) (26,923) (39,296)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 3,256 316
Payments on short-term borrowings (398) (363)
Proceeds from long-term debt and line of credit, net of effects
from acquisitions 64,419 121
Payments on long-term debt and capital leases (3,211) (2,834) (15,166)
Purchases of common stock for treasury (36,378) (28,119) (2,673)
Proceeds from treasury stock issuances 3,000 1,312 2,224
------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 30,688 (29,204) (15,978)
------------------------------
Effect of foreign exchange rates 6 (229) (211)
------------------------------
Net decrease in cash and cash equivalents (3,652) (10,965) (14,699)
Cash and cash equivalents at beginning of year 24,041 35,006 49,705
------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,389 $ 24,041 $ 35,006
==============================
See accompanying notes to consolidated financial statements.
5
14
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective June 2, 1997, Franklin Quest Co. merged (the "Merger") with Covey
Leadership Center, Inc. ("Covey") to form Franklin Covey Co. (the "Company").
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 Covey Planners and Organizers as well as the best-selling
book, 7 Habits of Highly Effective People. The Company operates principally in
the education and personal organizer industry.
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.
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. For
property and equipment placed in service prior to fiscal 1994, other than
buildings, depreciation is computed using declining-balance methods over the
estimated useful lives of the assets, ranging from three to seven years.
Effective September 1, 1993, the Company began depreciating newly acquired
equipment using the straight-line method, which conforms to prevailing industry
practice. Depreciation is calculated based upon the expected useful lives of the
assets as follows:
Description Useful Lives
- ---------------------------------------------------------------
Machinery and equipment 3-7 years
Furniture and fixtures 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 accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-
6
15
Lived Assets and Long-Lived Assets to be Disposed of." SFAS No. 121 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the book value of the asset may not be recoverable.
The Company evaluates at each balance sheet date whether events and
circumstances have occurred which indicate possible impairment. SFAS No. 121 was
adopted in fiscal 1997 and did not have a material impact on the Company's
financial position or results of operations.
Foreign Currency Translation
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.
Revenue Recognition
Revenue is recognized upon shipment of product and presentation of training
seminars. As part of the time management seminar, the Company provides a seminar
kit to each participant which includes a Franklin Covey Planner.
Net Income Per Share
Net income per share is computed using the weighted average number of common and
common equivalent shares outstanding during the year. Common equivalent shares
consist of the Company's common stock issuable upon exercise of stock options,
determined using the treasury stock method.
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 which 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 February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." This statement specifies requirements for the
computation, presentation and disclosure of earnings per share ("EPS") for all
periods ending after December 15, 1997. Early adoption is prohibited and upon
adoption, all prior period EPS data must be restated. SFAS No. 128 simplifies
the standards for computing EPS and replaces the presentations of Primary EPS
and Fully Diluted EPS with Basic EPS and Diluted EPS. The Company will adopt
SFAS No. 128 in fiscal 1998 and believes it will not have a material impact.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
Under current reporting requirements, extraordinary and non-recurring gains and
losses are excluded from income from current operations. SFAS No. 130 requires
an "all-inclusive" approach which
7
16
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. The statement is effective for fiscal years
beginning after December 15, 1997.
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. The objectives of SFAS No. 131 are to help
users of financial statements better understand the enterprise's performance,
better assess its prospects for future cash flows and make more informed
judgments about the enterprise as a whole. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997 with comparative information from past
years to be restated.
Reclassifications
Certain reclassifications have been made in the prior periods' consolidated
financial statements to conform with the current year presentation.
2. STATEMENTS OF CASH FLOWS
The following supplemental disclosures are provided for the Consolidated
Statements of Cash Flows (in thousands):
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
CASH PAID FOR:
Income taxes $ 27,916 $ 27,973 $ 24,279
Interest 2,042 616 1,025
Fair value of assets acquired 88,208 11,336 51,126
Cash paid for net assets (33,188) (7,608) (32,523)
--------------------------------------
Liabilities assumed from
acquisitions 55,020 3,728 18,603
--------------------------------------
Tax effect of exercise of
affiliate stock options 1,654 287 1,571
Effective June 2, 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 total value of
the stock exchanged was approximately $111.5 million. The stock issued in the
exchange was valued at $22.1625 per share, which represents the average of the
per share closing 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 foregoing exchange, the Company issued 382,100 stock options 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 above Merger and the
acquisition of Premier Agendas, Inc. (See Note 14), the Company recognized
approximately $29.4 million of net deferred tax liabilities with a corresponding
increase to goodwill.
On May 30, 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
related to the options exercised had a weighted average cost of $20.35 per
share.
8
17
During the fiscal year ended August 31, 1997, the Company accrued $9.0 million
for anticipated earnout payments related to the acquisition of certain entities
(See Note 14).
3. INVENTORIES
Inventories are comprised of the following (in thousands):
AUGUST 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Finished goods $40,955 $36,156
Work-in-process 7,286 4,969
Raw materials 7,507 8,338
--------------------------
$55,748 $49,463
==========================
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
AUGUST 31,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Land and improvements $ 11,301 $ 11,124
Buildings 50,978 50,038
Machinery and equipment 68,106 48,992
Furniture and fixtures 45,496 29,788
Construction in progress 12 223
---------------------------
175,893 140,165
Less accumulated depreciation (56,125) (38,102)
---------------------------
$ 119,768 $ 102,063
===========================
Certain real estate represents collateral for debt obligations (See Note 6).
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
AUGUST 31,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Goodwill $ 88,685 $ 31,001
License rights 27,000
Curriculum rights 64,019 11,990
Trade names and other 109,375 17,889
---------------------------
289,079 60,880
Less accumulated amortization (19,860) (9,765)
---------------------------
$ 269,219 $ 51,115
===========================
Goodwill is amortized over 10 to 30 years on a straight-line basis. Other
intangible assets are amortized on a straight-line basis over expected useful
lives ranging from 4 to 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, 1997.
6. DEBT
LINES OF CREDIT
The Company has unsecured bank lines of credit available for working capital
needs totaling $104.0 million at August 31, 1997. On August 31, 1997, the
Company had $86.0 million outstanding on a $100.0 million line of credit with
interest at the lesser of the prime rate less .50% or the LIBOR rate plus .75%.
The $100.0 million line of credit agreement requires the maintenance of certain
financial ratios and working capital levels and expires in October 2001. The
Company was in compliance with the terms of the agreement at
9
18
August 31, 1997. The Company also has a $4.0 million line of credit with
interest at .75% above prime. No borrowings were outstanding under this line of
credit at August 31, 1997.
LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
AUGUST 31,
- -------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------
Note payable on demand, plus interest at 8% $ 2,834 $
Mortgage payable in monthly installments
of $18 including interest at 9.9%
through August 2016, secured by real
estate 1,834 1,895
Note payable to bank, payable in monthly
installments of $23 plus interest at
prime plus .5% payable through September
2002, secured by real estate 1,432 1,714
Note payable due in January 1999, plus
interest at 6.0% 1,000 1,000
Mortgage payable in monthly installments
of $8 including interest at 9.9% through
October 2014, secured by real estate 747 763
Other mortgages and notes, payable in
monthly installments, interest ranging
from 6.0% to 15.1%, due at various dates
through 2002, secured by real estate,
equipment, inventories and accounts
receivable 1,667 1,034
-----------------
9,514 6,406
Less current portion (3,644) (906)
-----------------
LONG-TERM DEBT, LESS CURRENT PORTION $ 5,870 $ 5,500
=================
Future maturities of long-term debt at August 31, 1997 are as follows (in
thousands):
YEAR ENDING
AUGUST 31,
- ----------------------------------------------------------
1998 $3,644
1999 2,043
2000 671
2001 563
2002 451
Thereafter 2,142
------
$9,514
======
7. LEASE OBLIGATIONS
CAPITAL LEASES
Future minimum lease payments for equipment held under capital lease
arrangements as of August 31, 1997 are as follows (in thousands):
YEAR ENDING
AUGUST 31,
- ------------------------------------------------------------
1998 $ 1,200
1999 951
2000 669
2001 592
2002 391
-------
Total future minimum lease payments 3,803
Less amount representing interest (554)
-------
Present value of future minimum lease payments 3,249
Less current portion (975)
-------
$ 2,274
=======
Total assets held under capital lease arrangements were approximately $4.9
million with accumulated amortization of approximately $1.8 million as of August
31, 1997. Amortization of capital lease assets is included in depreciation and
amortization.
10
19
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, 1997 (in thousands):
YEAR ENDING
AUGUST 31,
- -----------------------------------------------------------------
1998 $10,197
1999 8,031
2000 6,500
2001 4,715
2002 3,905
Thereafter 17,636
-------
$50,984
=======
Rental expense for leases under operating lease terms was $11.7 million, $8.9
million and $5.6 million for the years ended August 31, 1997, 1996 and 1995,
respectively.
8. ADVERTISING
Costs for newspaper, television, radio and other advertising are expensed as
incurred and were approximately $18.9 million, $15.6 million and $10.9 million
for the years ended August 31, 1997, 1996 and 1995, respectively. Direct
response advertising costs consist primarily of catalog preparation and printing
costs which are charged to expense over the period of projected benefit, not to
exceed twelve months. Prepaid catalog costs reported in other current assets
were approximately $4.1 million and $1.0 million at August 31, 1997 and 1996,
respectively.
9. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
As of August 31, 1997, the Company had purchase commitments for information
systems improvements and printing presses totaling approximately $21.4 million.
As of August 31, 1996, the Company had purchase commitments for various capital
expenditures which totaled approximately $0.4 million.
LEGAL MATTERS
The Company is the subject of certain legal actions, which it considers routine
to its business activities. As of August 31, 1997, 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.
10. RELATED PARTY TRANSACTIONS
On August 11, 1997, the Company repurchased 750,000 shares of its common stock,
at the existing fair market value, from the Chief Executive Officer and Chairman
of the Board of the Company for $18.0 million in cash.
On May 13, 1997, the Company repurchased, for $2.4 million in cash, 110,000
shares of its common stock from a former officer and director of the Company.
Premier Agendas, a subsidiary of the Company, has trade accounts payable to
various companies which are partially owned by certain former owners of Premier
totaling $3.0 million. In addition, Premier has notes payable to key employees
totaling $2.8 million at August 31, 1997 (See Note 6). The notes payable were
used for working capital, are due upon demand and
11
20
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 who is
also a shareholder of the Company. Rental expense paid to the partnership
totaled approximately $0.4 million during fiscal 1997.
The Company pays the Co-Chairman of the Board of Directors a percentage of the
proceeds received for seminars which are presented by the Co-Chairman. During
fiscal 1997, the Company expensed approximately $0.2 million related to this
arrangement.
11. 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.
TREASURY STOCK
The Company sold 844,342, 132,021 and 309,045 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 1997, 1996 and
1995, respectively. These shares were sold for a total of approximately $4.9
million, $1.0 million and $2.2 million and had a cost of approximately $14.3
million, $0.4 million and $0.8 million for the years ended 1997, 1996 and 1995,
respectively. In November 1994, the Company exchanged 738,000 of its shares held
in treasury for all of the outstanding shares of Publishers Press, Inc. (See
Note 14). In January 1995, March 1996 and September 1996, the Company's Board of
Directors approved the repurchase of up to 1,000,000 shares, 1,000,000 shares
and 2,000,000 shares, respectively, of the Company's common stock. During fiscal
1997, 1996 and 1995, the Company repurchased 1,720,000 shares at a cost of
approximately $36.4 million, 1,375,000 shares at a cost of approximately $28.1
million and 110,000 shares at a cost of approximately $2.7 million,
respectively.
TAX BENEFIT FROM EXERCISE OF AFFILIATE STOCK OPTIONS
During fiscal 1997, 1996 and 1995, certain employees exercised affiliate stock
options (stock options received from principal shareholders of the Company)
which resulted in tax benefits to the Company of approximately $1.7 million,
$0.3 million and $1.6 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 has 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. Unoptioned
12
21
shares available for granting under the incentive stock option plan at August
31, 1997, are 936,434.
A summary of nonqualified and incentive stock option activity is set forth
below:
Year Ended Number of Weighted Avg.
August 31, 1995 Options Exercise Price
- -----------------------------------------------------------------------------------
Outstanding at
September 1, 1994 3,089,550 $ 16.17
Granted 174,500 24.78
Exercised (269,071) 4.49
Forfeited (29,550) 9.91
---------
Outstanding at August 31, 1995 2,965,429 17.76
---------
Exercisable 2,279,000 11.62
Year Ended
August 31, 1996
- -----------------------------------------------------------------------------------
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
---------
Exercisable 2,214,073 15.40
Year Ended
August 31, 1997
- -----------------------------------------------------------------------------------
Granted:
At market value 747,340 $ 19.03
In connection with
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
=========
Exercisable 2,269,399 22.04
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,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Net income as reported $38,865 $34,239
Net income pro forma 30,514 30,410
Earnings per share as reported $ 1.76 $ 1.53
Earnings per share pro forma 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 and exercisable at
August 31, 1997: 799,070 of the options outstanding have exercise prices between
$1.11 and $11.83, with a weighted average exercise price of $4.21 and a weighted
average remaining contractual life of 6.1 years of which 416,970 are exercisable
at August 31, 1997. 2,125,608 of the options have exercise prices between $15.50
and $26.82, with a weighted average exercise price of $19.90 and a weighted
average remaining contractual life of 7.5 years of which 1,050,728 are
exercisable at August 31, 1997. The remaining 977,250 options outstanding have
exercise prices between $29.38 and $34.50, with a weighted average exercise
price of $34.19 and a weighted average remaining contractual life of 6.7 years
of which 801,701 are exercisable at August 31, 1997.
The weighted average fair value of options granted under the Company's stock
option plans during the fiscal 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.
13
22
The weighted average fair value of options granted for the fiscal year ended
August 31, 1996 was $10.73. The Black-Scholes option-pricing model was used to
calculate the weighted average fair value of options using the following
assumptions for grants in 1997 and 1996, respectively: dividend yield of 0%,
expected volatility of 61.5%, and expected life of 2.5 years for both years and
a risk-free rate of return of 6.05% and 5.88%, respectively. 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 1997 and 1996 was $4.41 and $2.44, respectively.
12. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLANS
The Company has defined contribution profit sharing plans which 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, 1997, 1996 and
1995 were approximately $1.4 million, $1.2 million and $1.0 million,
respectively.
EMPLOYEE STOCK PURCHASE PLAN
In April 1992, the Company adopted 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 42,527, 47,574, and 30,974, have been issued under this plan for
the years ended August 31, 1997, 1996 and 1995. Shares available for issuance
under this plan at August 31, 1997, are 129,717. The Company accounts for its
employee stock purchase plan under the provisions of APB Opinion 25 and related
interpretations.
13. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Current:
Federal $ 24,103 $ 19,960 $ 20,943
State 5,755 3,886 4,447
Foreign 790 778 307
Deferred:
Federal (2,544) (548) (191)
State (606) (74) (22)
------------------------------------------
$ 27,498 $ 24,002 $ 25,484
==========================================
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,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Federal statutory
tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 5.0 4.8 4.7
Goodwill amortization .8 .3 .2
Other .6 1.1 (.2)
--------------------------------
41.4% 41.2% 39.7%
================================
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Significant components of the Company's deferred tax assets and liabilities are
comprised of the following (in thousands):
YEAR ENDING
AUGUST 31,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Current deferred tax assets:
Sales returns and contingencies $ 2,822 $
Inventory and bad debt reserves 2,435 1,352
Vacation and other accruals 1,461 926
Other 666 41
---------------------
Total current deferred tax assets 7,384 2,319
---------------------
Long-term deferred tax assets and (liabilities):
Interest and other capitalization 593 440
Intangibles and fixed asset step-up (33,316) (1,365)
Depreciation and amortization (2,286) (1,272)
Other (726) (236)
---------------------
Net long-term deferred tax liabilities (35,735) (2,433)
---------------------
NET DEFERRED INCOME TAX LIABILITY $(28,351) $ (114)
=====================
Current deferred tax assets are reported as a component of other current assets.
14. MERGER AND ACQUISITIONS
Effective June 2, 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 $22.1625 per share, which was the average of the per share
closing sales price of the Company's common stock on the New York Stock Exchange
for the twenty consecutive trading days ended May 28, 1997. All outstanding
options to purchase Covey common stock were converted into 382,100 options to
purchase the Company's common stock, exercisable at $5.97 per share. In
connection with the Merger, the Company acquired certain license rights from
Stephen R. Covey 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 September 1,
1995 (in thousands):
YEAR ENDING
AUGUST 31,
- --------------------------------------------------------------------------------
1997 1996
(Unaudited)
Revenue $515,567 $421,064
Operating income 73,672 62,838
Net income 40,885 35,142
Net income per share 1.56 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 license rights from Stephen R. Covey, (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
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the Merger having been outstanding for the periods presented.
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"). The combined cash purchase
price was $23.2 million with additional contingent payments being made over the
next three years based upon Premier's operating performance over that same time
period. As of August 31, 1997, $7.0 million has been accrued as an anticipated
earnout payment under terms of the purchase agreement. 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.
Premier's revenues for the twelve months ended December 31, 1996 were
approximately $35.4 million.
The Premier acquisition was accounted for using the purchase method of
accounting and generated $27.6 million of intangible assets which 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.
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. As of August 31,
1997, $1.5 million has been accrued as an anticipated earnout payment under
terms of the purchase agreement. TrueNorth had sales for the twelve months ended
July 31, 1996 of approximately $16.0 million.
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.
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 approximately $7.9 million, and additional payments may be made, based
on the operating results of the company over the three years following its
acquisition. During fiscal 1997, $3.0 million was paid to PPI for favorable
operating results under terms of the purchase agreement. PPI had sales for the
year ended November 30, 1995, of approximately $12.5 million.
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. The $3.0 million contingent
payment which was paid during fiscal 1997 is being amortized over nine years
which is the remaining useful life of goodwill generated by the acquisition.
In April 1995, the Company acquired the assets of Time Systems, Inc. ("Time
Systems"), a time management training and product company headquartered in
Phoenix, Arizona. The cash price was $8.6 million. Time Systems markets a
combination of time management training and planner products to corporate and
individual customers. The acquisition was accounted for as a purchase. Time
Systems had sales for the year ended December 31, 1994 of approximately $14.9
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million. The acquisition resulted in intangibles of $5.5 million, which are
being amortized over periods ranging from 4 to 30 years.
In June 1995, the Company acquired the assets of LTS, Inc. ("LTS"). LTS is
headquartered in Atlanta, Georgia, and distributed exclusively Time Systems
products and services. The cash purchase price was $1.9 million. At August 31,
1997, an additional $0.5 million was accrued as final earnout payment to the
previous owner of LTS for favorable operating performance under terms of the
purchase agreement. The acquisition of LTS was accounted for using the purchase
method. LTS, Inc., had sales for the year ended December 31, 1994 of
approximately $2.6 million. The acquisition, not including the accrued final
payment, resulted in intangible assets of $1.2 million, which are being
amortized over periods ranging from 5 to 7 years.
Effective December 1, 1994, the Company acquired Publishers Press, Inc.
("Publishers") for $22.4 million. Publishers, a Utah corporation, prints the
Franklin Day Planner and related accessory products and provides book and
commercial printing services to clients in the western United States.
Publishers' sales for the year ended December 31, 1993, were approximately $41.5
million, including sales to the Company of $23.8 million. The transaction, which
was accounted for as a purchase, was effected through the exchange of
approximately 738,000 shares of the common stock of the Company for all of the
issued and outstanding capital stock of Publishers. The acquisition resulted in
intangibles of approximately $18.5 million which are being amortized over
periods ranging from 7 to 30 years.
The following unaudited pro forma combined financial data presents the results
of operations of the Company as if Publishers had been acquired as of the
beginning of the periods presented (in thousands):
YEAR ENDING
AUGUST 31,
- --------------------------------------------------------------------------------
1995 1994
(Unaudited)
Revenue $284,028 $237,649
Net income 39,623 33,763
Net income per share 1.74 1.48
The foregoing unaudited pro forma results of operations reflect the effect of
certain pro forma adjustments including (1) conforming Publishers compensation
expense levels with those of the Company, (2) the depreciation of property and
equipment based on the estimated fair value of property and equipment acquired,
(3) the amortization of the goodwill and other intangibles resulting from the
acquisition and (4) the adjustment of income taxes to reflect a combined
effective federal and state income tax rate.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The unaudited quarterly financial information included on page 28 of the annual
report to shareholders is an integral part of the consolidated financial
statements.
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