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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, 1999
[ ] 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 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) 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, 1999, based upon the closing sale price of the
Common Stock of $8.38 per share on that date, was approximately $172,068,417.
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, 1999, the Registrant had 20,533,224 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: Proxy
Statement for Registrant's Annual Meeting of Shareholders, which is scheduled to
be held on January 28, 2000 (Part III).
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INDEX TO FORM 10-K
Page
PART I .............................................................................................1
Item 1. BUSINESS.....................................................................................1
General......................................................................................1
Franklin Covey Products......................................................................3
Paper Planners .......................................................................3
Binders .............................................................................3
Electronic Solutions .................................................................3
Personal Development Products.........................................................3
Training, Facilitation and Consulting Services...............................................4
Training and Education Programs........................................................4
Personal Coaching.....................................................................5
Sales and Marketing..........................................................................5
Domestic Consumer Products ............................................................6
Catalog ....................................................................6
Retail Stores................................................................6
Other Channels...............................................................6
Domestic Training and Education Sales..................................................7
International Operations...............................................................7
Printing Services .....................................................................8
Strategic Distribution Alliances.............................................................8
Clients......................................................................................8
Competition..................................................................................8
Training .............................................................................8
Consulting............................................................................8
Products .............................................................................8
Manufacturing and Distribution...............................................................9
Trademarks, Copyrights and Intellectual Property............................................10
Employees...................................................................................10
Item 2. PROPERTIES..................................................................................11
Item 3. LEGAL PROCEEDINGS...........................................................................11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................11
PART II ............................................................................................12
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS....................12
Item 6. SELECTED FINANCIAL DATA.....................................................................12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......13
Overview..............................................................................13
Restructuring.........................................................................14
Year 2000 Issues......................................................................15
State of Readiness...............................................................15
Cost to Address Y2K Issues.......................................................16
Risk of the Company's Y2K Issues.................................................16
Contingency Plans................................................................17
Results of Operations.................................................................17
Gross Margin.....................................................................19
Operating Expenses...............................................................19
Restructuring Costs..............................................................20
Loss on Impaired Assets..........................................................20
Interest Expense.................................................................20
Income Taxes.....................................................................20
Preferred Stock Dividends........................................................21
Fiscal 1998 Compared with Fiscal 1997.................................................21
Sales ...........................................................................21
Gross Margin.....................................................................21
Operating Expenses...............................................................22
Interest Expense.................................................................22
Income Taxes.....................................................................22
Change in Accounting Principle...................................................22
Quarterly Results.....................................................................22
Liquidity and Capital Resources.......................................................23
Market Risk of Financial Instruments..................................................26
"Safe Harbor" Statement...............................................................26
ii
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................27
Consolidated Balance Sheets...........................................................28
Consolidated Statements of Income and Comprehensive Income............................29
Consolidated Statements of Shareholders' Equity.......................................30
Consolidated Statements of Cash Flows.................................................31
Notes to Consolidated Financial Statements............................................32
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........51
PART III ............................................................................................52
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................52
Item 11. EXECUTIVE COMPENSATION......................................................................52
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................52
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................52
PART IV ............................................................................................53
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................53
(a) Documents Filed......................................................................53
1. Financial Statements........................................................53
2. Exhibit List................................................................53
(b) Reports on Form 8-K..................................................................54
(c) Exhibits.............................................................................57
(d) Financial Statement Schedule........................................................132
SIGNATURES ............................................................................................55
iii
PART I
Item 1. BUSINESS
GENERAL
Franklin Covey Co. (the "Company" or "Franklin Covey") is an
international learning and performance solutions company dedicated to increasing
the effectiveness of individuals and organizations. To achieve that goal, the
Company provides consulting services, training and education programs,
educational materials, publications, assessment and measurement tools,
implementation processes, application tools and products designed to empower
individuals and organizations to become more effective. The Company's 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 and education,
consulting services and products designed to improve organizational
effectiveness, leadership skills, written and oral business communication
skills, sales skills, performance skills and the ability to measure the impact
of training investments. 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 original 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, its retail stores, and its e-commerce Internet
site at www.franklincovey.com. At August 31, 1999, Franklin Covey had 125
domestic retail stores located in 36 states and the District of Columbia. A
significant percentage of the users of the original Franklin Planner continue to
purchase a renewal planner each year, creating substantial recurring sales. In
recent years, the Company has also made the Franklin Planner system available in
desktop software and as an add-on to the popular 3Com Palm(R) Computing
organizers and Windows CE(R) hand-held devices. The Company also recently
released an extension to Microsoft Outlook(R) that incorporates Franklin Planner
principles into the Outlook calendar system.
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, The 7 Habits of Highly Effective Families, Nature of
Leadership and Living the 7 Habits, 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.
Domestic consumer product sales, consisting primarily of the Franklin
Planner and related products, accounted for 48% of the Company's sales during
the year ended August 31, 1999.
Franklin Covey provides its effectiveness solutions to business,
industry, educational institutions, government entities, 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, e-commerce
website, retail stores, and by direct mail.
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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 1999, the Company provided products and services to 83 of the
Fortune 100 and more than 75% of the Fortune 500 companies. 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.
Domestic training and education sales, including training presented by
client facilitators, accounted for 38% of the Company's sales, representing
approximately 530,000 individuals trained, during the year ended August 31,
1999.
The Company also provides products, consulting and training services
internationally, either through directly operated offices, or through licensed
providers. At August 31, 1999, Franklin Covey had direct operations in Canada,
Japan, Australia, New Zealand, Mexico, Bahrain, Belgium and the United Kingdom.
The Company also had licensed operations in 33 countries, including Mexico and
the United Kingdom. During the year ended August 31, 1999, the total sales of
the direct operations and royalties from the licensed operations were $50.5
million and accounted for 9% of total Company revenue.
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
"Four Roles of 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.
In January 1999, the Company acquired the assets of Khalsa Associates,
a leading sales training company. In July 1999, Microsoft announced that it had
signed an agreement with Franklin Covey to train its world-wide sales force and
its 21,000 sales channel partners utilizing Franklin Covey's unique consultative
sales training program.
In September 1999, the Company acquired the assets of the Professional
Resources Organization (the Jack Phillips Group), a leading measurement
assessment firm specializing in measuring the impact and return on investment in
training and consulting.
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.
2
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 original 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. Franklin Covey also offers a variety of electronic solutions
incorporating the same principles as the original Franklin Planner. During the
fiscal year ended August 31, 1999, domestic product sales, consisting primarily
of the Franklin Planner and related products, amounted to $264.3 million and
accounted for 48% of Franklin Covey's sales during the period.
PAPER PLANNERS. Paper 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 $19.00 to $50.00. 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,
checkbooks and writing instruments. The Company's binder products range in price
from $19.00 to $330.00.
ELECTRONIC SOLUTIONS. The Company also offers its time and life
management methodology within a complete Personal Information Management ("PIM")
system known as the Franklin Planner Software (formerly ASCEND(R)) program. This
system can be used in conjunction with the paper-based Franklin Planner or used
as a stand-alone planning and information management system. The Franklin
Planner Software permits users to generate and print data on Franklin Covey
paper that can be inserted directly into the Franklin Planner. The program
operates in the Windows(R) 95, 98 and NT 4.0 operating systems. Franklin Covey
offers Franklin Planner Software at a retail price of $99.95, which includes all
necessary software, related tutorials and reference manuals. The Company offers
the software through nationwide retail software stores, as well as in its own
retail stores, catalog, and e-commerce Internet site.
Franklin Covey is also an OEM provider of the Palm Computing organizer
that includes the Franklin Planner Software when sold through Franklin Covey
channels. The Palm Computing organizer is a handheld electronic device
manufactured by 3Com(R). The Palm has become another successful planning tool
offered by the Company through all of its channels. 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 Palm.
The Company also recently introduced a version of its Franklin Planner
Software that is designed to operate as an extension to Microsoft's Outlook
software. This is intended especially for companies that have already
standardized on Microsoft for group scheduling, but wish to make the Franklin
Planner available to their employees without creating the need to support two
separate systems. As this kind of extension proves its value in the market, the
Franklin Planner Software extension model will be expanded to other platforms.
PERSONAL DEVELOPMENT PRODUCTS. To supplement its principal products,
Franklin Covey offers a number of accessories and related products, including
books, videotapes 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,
PrioritiesO magazine, audio learning systems such as multi-tape and workbook
sets, CD-ROM software products, calendars, posters and other specialty name
3
brand items. 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 155 training consultants in ajor
metropolitan areas of the United States with an additional 38 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.
TRAINING AND EDUCATION PROGRAMS. Franklin Covey offers a range of
training programs designed to significantly and measurably improve the
effectiveness of individuals and organizations. 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 1999, more than 530,000 individuals were
trained using the Company's curriculum in its single and multiple-day workshops
and seminars.
Franklin Covey's single-day What Matters Most workshop competes in the
time management industry. This time management seminar is conducted by the
Company's training consultants for employees of clients and in public seminars
throughout the United States and in many foreign countries. This is the
Company's single most popular workshop, generating approximately 29% of the
training revenue for the Company. 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 effective business
writing and communication skills; Planning for Results(TM); Building Trust(TM);
Managing Change(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.
Franklin Covey also delivers multiple-day workshops, primarily in the
Leadership area. Included in these offerings is 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 4 Roles of
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
4
focused on materials from Franklin Covey's The 7 Habits of Highly Effective
People and The 4 Roles of 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. The courses offered
in the leadership area generate over 27% of the training revenue for the
Company.
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 can
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.
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 and education services for the year ended August 31,
1999 were $210.6 million and accounted for 38% of Franklin Covey's total sales
during the period.
SALES AND MARKETING
The following table sets forth, for the periods indicated, the
Company's revenue and percentage of total revenue for each of its principal
distribution channels:
Year Ended August 31,
(dollars in thousands)
--------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- -------------------------
C>
Domestic Consumer Products $264,333 47.6% $258,973 47.4% $223,135 51.5%
Domestic Training and Education 210,621 38.0 207,015 37.9 154,595 35.7
International 50,535 9.1 45,068 8.2 23,927 5.5
All Other 29,434 5.3 35,556 6.5 31,615 7.3
================================================================================
Total Sales $554,923 100.0% $546,612 100.0% $433,272 100.0%
================================================================================
5
DOMESTIC CONSUMER PRODUCTS. Franklin Covey uses catalogs, retail
stores, its own Web site and other distribution channels 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 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. Franklin Covey
believes this approach increases client satisfaction as well as the frequency
and volume of purchases. At August 31, 1999, Franklin Covey had 125 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 original Franklin Planner, as well
as its various electronic versions, 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.
OTHER CHANNELS. In November 1998, the Company completed a
pilot agreement to sell selected Franklin Planners and binders through Office
Depot, a mass-market retail operation with approximately 580 stores. The
agreement allowed 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 results of this initial arrangement were not
satisfactory. The Company has discontinued its relationship with Office Depot
and does not intend to market its basic products through this channel in the
near future.
6
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 revenues have more than offset the anticipated lower
margins from selling product through this channel.
DOMESTIC TRAINING AND EDUCATION SALES. Franklin Covey's sales
professionals market the Company's training, consulting and measurement services
to institutional clients and public seminar clients.
Franklin Covey employs 220 sales professionals who service major
metropolitan areas throughout the United States and sell training services to
institutional clients. Franklin Covey employs an additional 53 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 155 training consultants throughout the
United States who present institutional and public seminars in their respective
territories and an additional 38 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.
Premier markets agendas to schools and school districts in order to
help teachers and students enhance the learning process. Premier sold more than
14.5 million agendas in fiscal 1999, mostly in the United States and Canada.
Premier has a direct sales force of 146 sales professionals. An agenda consists
of a wire-bound notebook with dated pages to help the student keep track of
assignments and due dates, and to encourage regular communication among the
student, the parents and the teacher. Most agendas are customized to include the
individual school's rules, regulations, administrators and scheduled events.
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, Bahrain,
Belgium, Canada, Japan, Mexico, New Zealand and the United Kingdom. Mainland
Europe is represented by an affiliate and agent network. The Company also has
licensed operations in Bermuda, Indonesia, Ireland, Korea, Malaysia, India,
Egypt, Lebanon, Saudi Arabia, Turkey, UAE, Israel, Estonia, Nigeria,
Philippines, Singapore, China, Hong Kong, Taiwan, South Africa, Chile, Panama,
Netherlands Antilles, Argentina, Colombia, Uruguay, Bahamas, Ecuador, Puerto
Rico, Venezuela and Trinidad/Tobago. Franklin Covey operates retail operations
in Australia, Canada, Japan, Hong Kong, Singapore, Taiwan and Mexico. Franklin
Covey's seven most popular books, The 7 Habits of Highly Effective People,
Principle-Centered Leadership, The 10 Natural Laws of Time and Life Management,
First Things First, The Power Principle, The 7 Habits of Highly Effective
Families and The 7 Habits of Highly Effective Teens are currently published in
multiple languages.
7
The international operations of the Company generated $50.5 million in
revenue in the year ended August 31, 1999. Training and education services
generated 53% of the revenue, consumer product generated 43%, and the balance
came from publishing activities in Japan. After grossing up royalties from
licensed operations to their actual sales level, total sales generated in the
international area were $68.3 million.
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. The Company has announced its intention to sell the
commercial part of this printing operation, and expects that transaction to be
completed in fiscal 2000.
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 Saint
Martin's Press in publishing books for the Company; 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; At-A-Glance to market and distribute selected Franklin
Planners and accessories through catalog office supply channels; and 3Com to
serve as the official training organization for their Palm Computing products.
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 may choose to receive
assistance in designing and developing customized forms, tabs, pagefinders and
binders necessary to satisfy specific needs.
COMPETITION
TRAINING. Competition in the performance skills 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 1999 domestic training
and education sales of approximately $210 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, Forum Corporation, EPS Solutions 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 DayTimer, At-A-Glance and Day Runner.
Franklin Covey also competes, to a lesser extent, with companies that market
8
substitutes for paper-based products, such as electronic organizers, software
PIMs and hand-held computers. The Company's Franklin Planner Software competes
directly with numerous other PIMs. Many of Franklin Covey's competitors have
significant marketing, product development, financial and other resources. An
emerging potential source of competition is the appearance of calendars and
event-planning services available at no charge on the Web. There is no
indication that the current level of features has proven to be attractive to the
traditional planner customer as a stand-alone service, but as these products
evolve and improve, they are likely to pose a competitive threat. In response,
Franklin Covey intends to combine online planning services with 3Com's Palm
Computing organizers, Software and paper planners to provide a competitive,
complete planning solution to its clients.
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 concepts embodied in its
Franklin Planner, 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 AND DISTRIBUTION
The manufacturing and distribution operations of Franklin Covey consist
primarily of printing, collating, assembling, packaging, warehousing and
shipping components used in connection with the Franklin Covey product line.
Franklin Covey operates its central manufacturing and distribution
services out of Salt Lake City. At that location, the Company prints, packages
and distributes its products to its worldwide customers. By operating in this
fashion, Franklin Covey has gained greater control of production costs,
schedules and quality control of printed materials. This has also allowed the
Company to develop partner printers, both domestic and international, who can
meet the Company's quality standards, thereby facilitating efficient delivery of
product in a global market. The Company believes this has positioned it for
greater flexibility and growth capacity. 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. These binders are
produced by multiple and alternative product suppliers. 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 binders, most of which are manufactured by suppliers
in the United States, Europe, Canada, Korea, Mexico and China.
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.
9
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 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, The 7 Habits of Highly Effective
People, Principle-Centered Leadership, What Matters Most, Franklin Planner,
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 Franklin Planner Software 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.
EMPLOYEES
As of August 31, 1999, Franklin Covey had 4,165 full and part-time
associates, including 1,230 in sales, marketing and training; 1,530 in customer
service and retail; 930 in production operations and distribution; and 475 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.
10
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 seven buildings with approximately 860,000
available square feet, including approximately 551,000 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 $3.3 million as of
August 31, 1999. The Company's Provo, Utah operations consist of four buildings
located within 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, 1999. Lease contracts on the Provo buildings terminate
intermittently through the year 2009. As part of its restructuring plan, the
Company plans to formally exit two of the Provo buildings, representing
approximately 119,000 square feet of office space, during fiscal 2000. In
connection with the restructuring plan, the Company will move its sales and
marketing functions for the training and education business from its Provo
facilities to eight leased regional sales offices located in New York, Chicago,
Los Angeles, San Francisco, Columbus, Dallas, Atlanta and Washington, D.C. The
regional offices are expected to become fully operational during fiscal 2000.
Remaining business functions previously located in the two Provo buildings will
be moved to the Company's Salt Lake City headquarters. The Company estimates the
cost to exit the Provo buildings to be $4.6 million and has charged this amount
to current operations during the fourth quarter of fiscal 1999.
Franklin Covey also operates 125 retail stores currently under lease,
with remaining terms of up to seven years; some of these leases include rentals
based on a percentage of sales.
In addition, the Company maintains sales, administrative and/or
warehouse facilities in or near Salt Lake City; Phoenix; Atlanta; Dallas;
Washington, D.C.; and Bellingham, Washington. The Company also has foreign
offices and facilities located in Tokyo, London, Brussels, Toronto, Vancouver,
Montreal, Brisbane, Mexico City, Monterrey and Auckland all under leases which
expire intermittently through the year 2006. 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, 1999.
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,
1999 and 1998, respectively.
High Low
------------ ------------
Fiscal Year Ended August 31, 1999:
Fourth Quarter................................ $ 7 13/16 $ 7 11/16
Third Quarter................................. 9 13/16 9 9/16
Second Quarter................................ 12 15/16 11 7/8
First Quarter................................. 18 3/4 18 3/8
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
The Company did not pay or declare dividends on its common stock during
the fiscal years ended August 31, 1998 and 1999. 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
dividendson its common stock in the foreseeable future.
During fiscal 1999, the Company issued 750,000 shares of Series A
Preferred Stock (the "Preferred Stock") for $75.0 million in cash. The Preferred
Stock dividends accrue at an annual rate of 10% and are payable quarterly in
cash or additional shares of Preferred Stock until July 1, 2002. Accordingly,
the Company accrued $1.9 million in Preferred Stock divdends as of August 31,
1999 which were subsequently paid with additional shares of Preferred Stock.
As of November 1, 1999, the Company had 20,533,224 shares of its
common stock outstanding, held by approximately 360 shareholders of record.
Item 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
August 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
In thousands, except per share data
INCOME STATEMENT DATA:
Sales $554,923 $546,612 $433,272 $332,006 $277,122
Net (Loss) Income (8,772) 40,058 38,865 34,239 38,746
Preferred Stock Dividends 1,875
Diluted Earnings Per Share (0.51) 1.62 1.76 1.53 1.71
BALANCE SHEET DATA:
Total Assets $623,303 $597,277 $572,187 $268,445 $263,305
Current Liabilities 203,508 93,353 86,903 28,677 32,155
Long-Term Obligations 6,543 126,413 94,144 5,500 4,521
Shareholders' Equity 378,434 341,654 355,405 231,835 224,342
12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Franklin Covey Co. (the "Company") provides integrated learning and
performance solutions to organizations and individuals to increase productivity
and improve skills for leadership, sales, communication and other areas. Each
solution set includes capabilities in training, consulting and assessment, and
various application tools that are generally available in paper-based or
electronic formats. The Company's products and services are available through
professional consulting services, public workshops, catalogs, retail stores and
the Internet at www.franklincovey.com. The Company's best known products include
the Franklin Planner and the best-selling book, The 7 Habits of Highly Effective
People.
During the first quarter of fiscal 1999, the Company aligned its
operations into the following three Strategic Business Units ("SBUs"):
o Consumer Products
o Training and Education
o International
Although the Company is currently in the process of restructuring its
operations, the above SBUs represent the primary management measurement tool
until the new reporting structure is completed and implemented. The Consumer
Products SBU is responsible for distribution of the Company's products through
its retail stores, catalog sales, mass markets, contract stationers, government
channels, wholesale channel and the Internet. The Training and Education SBU,
which includes Premier Agendas and Personal Coaching, is responsible for
training, consulting and implementation services, and delivery of products to
corporations, business, government and educational institutions. The
International SBU is responsible for the delivery of both products and services
outside the United States. Other revenue primarily consists of the Company's
commercial printing operations and the National Institute of Fitness, which was
sold during fiscal 1998. In addition, corporate functions, which consist
primarily of essential internal support services such as finance, legal,
information systems and manufacturing and distribution, were aligned to support
the operational SBUs.
Subsequent to August 31, 1999, the Company acquired the assets of the
Professional Resources Organization (the Jack Phillips Group) for $1.5 million.
The Professional Resources Organization is a leading measurement assessment firm
specializing in measuring the impact and return on investment of training and
consulting programs.
In January 1999, the Company acquired the assets of Khalsa Associates
for $2.7 million. Khalsa Associates is a leading sales training 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 The 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 following five
years based upon the operating results of King Bear over that same period. No
contingent payments have been paid or accrued based upon King Bear's fiscal 1999
operating results.
During fiscal 1997, Franklin Quest Co. merged (the "Merger") with
Covey Leadership Center ("Covey") to form Franklin Covey Co. In connection with
13
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.
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 following three years, based
upon Premier's operating performance over that same time period. As of August
31, 1999, the Company has made aggregate contingent payments of $21.5 million
and has accrued an additional $10.9 million at August 31, 1999 for the final
contingent payment.
Effective October 1, 1996, the Company acquired the net assets of
TrueNorth Corporation ("Personal Coaching"). Personal Coaching, a Utah
Corporation, is a provider of post-instructional personal coaching to
corporations and individuals. Personal Coaching 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 following five years, based
on the operating results of Personal Coaching. As of August 31, 1999, the
Company has made aggregate contingent payments of $5.3 million and has accrued
an additional $5.0 million at August 31, 1999 for the third contingent payment.
RESTRUCTURING
During the fourth quarter of fiscal 1999, the Company's Board of
Directors approved a plan to restructure the Company's operations, reduce its
workforce and formally exit the majority of its leased office space located in
Provo, Utah. These changes are intended to align the Company's products,
services and channels in a manner that focuses Company resources on providing
integrated learning and performance solutions to both individuals and
organizations. The restructure is also intended to lay strategic, operational,
organizational and financial foundations for profitable growth. In connection
with the restructuring plan, the Company recorded a fourth quarter restructuring
charge of $16.3 million, which is included in the Company's statement of income
for the fiscal year ended August 31, 1999. Included in the restructuring charge
are costs to provide severance and related benefits as well as costs to formally
exit the leased office space. The Company anticipates completion of the
restructuring plan by the end of fiscal 2000 and may incur additional expenses
to complete the plan.
As part of the restructuring, the Company will provide severance and
related benefits to employees affected by the changes. The cost to provide these
benefits under the restructuring plan is estimated to be $11.7 million and
covers a reduction of approximately 600 employees across all areas of the
business. As of August 31, 1999, 115 employees had left the Company as part of
the reduction plan. Subsequent to August 31, 1999, an additional 61 employees
have left the Company in connection with this plan.
Also included in the restructuring provision is a charge to exit the
majority of the Company's leased office space in Provo, Utah. These facilities
14
currently contain sales, marketing and other functions primarily aligned with
the Training and Education SBU. Before exiting the lease, sales and other sales
support functions located in Provo will be moved to regional offices located in
New York, Chicago, Los Angeles, San Francisco, Columbus, Dallas, Atlanta and
Washington, D.C. Remaining business and support functions will be moved to the
Company's corporate headquarters located in Salt Lake City, Utah. The Company
anticipates the costs to exit the facilities and sublease the space to be
approximately $4.6 million.
YEAR 2000 ISSUES
The Company has been actively engaged in assessing and correcting
potential year 2000 ("Y2K") information system concerns throughout fiscal 1999.
During fiscal 1997, the Company initiated a business reengineering and
information system implementation project (the "Project") that affects nearly
every aspect of the Company's operations. In an effort to address Y2K compliance
issues, the scope of the Project was expanded to ensure Y2K compliance for newly
acquired software and hardware as well as test existing systems for compliance.
From this process, a team representing different areas of the Company was
assembled to specifically work toward timely Y2K compliance. As of August 31,
1999, the Company's progress toward completion of Y2K remediation projects is as
follows:
State of Readiness
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 and was made operational in August 1998.
Phase two focused on payroll and human resource applications and became
operational in January 1999. Phase three addresses the "Order to Collect"
systems and is expected to be completed in various stages through the year 2000
with critical applications to be made Y2K compliant before the end of 1999.
Within the framework of this Project, 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 and
hardware that are Y2K compliant for the general ledger, accounts payable and
sales and use tax calculations. Payroll and human resource systems were the
subject of phase two, which was made operational with compliant hardware and
software in January 1999. The Supply Chain system includes applications for
production planning, purchasing and product management. During the fourth
quarter of fiscal 1999, the Company completed upgrading Supply Chain systems
with the implementation of a new inventory management system. Supply Chain
systems were elements of phases one and three and have been certified by the
hardware and software manufacturers as Y2K compliant. The Company's Order to
Collect system includes legacy 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. The Office
Support system includes network hardware and operating systems, servers, desktop
and laptop computers and includes applications not specifically addressed by the
Project.
In order to correct possible Y2K problems, the Company has developed a
plan to assess potential Y2K problems, prioritize identified problems as
critical or non-critical, test compliance of critical systems and implement
solutions for all critical systems. To ensure Y2K readiness, all significant
15
Company systems, including completed Project modules, were subject to assessment
and testing. The Company has completed its assessment of office support systems
and applications that could have a significant impact on the Company's ability
to sell and deliver its products and services. Following the assessment, all
problems were prioritized in order to mitigate problems with business-critical
systems. This includes network hardware and operating systems, servers and
desktop and laptop computers. The Company's office support systems compliance
analysis is also completed. The operating systems, server hardware and desktop
computers are tested and are Y2K compliant. The networking environment is 90%
completed with the remaining 10% representing architectural changes that
eliminate software and hardware that will not be made compliant by the vendor or
are deemed unnecessary by changing technology. The completion date for this
phase of testing is expected to be November 30, 1999.
The Company's support system applications include two categories of
products. The first category represents purchased, or "off the shelf"
applications. The second category represents applications developed inside the
company. Certifications of compliance for purchased applications have been
obtained from the various software vendors. The Company is confident that all
necessary updates have been made based on vendor instructions and at this point,
the Company is reliant on the latest compliance information gathered from its
vendors. The Company is currently monitoring its software vendors for changes to
their Y2K compliance statements. Applications developed in-house have also been
reviewed. Code analysis and process tests will continue through December 31,
1999. The Company is confident, based on current analysis and test results that
it will not be adversely affected by Y2K related problems. In addition, the
Company's electronic data interface ("EDI") system has been replaced, tested and
certified as Y2K compliant.
The Company is currently testing interfaces between processes of
critical systems in a specially developed test environment that does not
compromise current operations. Cross-functional processes include the
interaction of the Company's Financial, Supply Chain, Order-to-Collect and
Office Support systems. The Company expects that all critical systems will be
tested and certified as Y2K compliant prior to December 31, 1999.
The Company's telecommunications department has completed all testing
and analysis of equipment and services. Telecommunication vendor certification
has also been completed. The telecommunication systems support the Company's
call center and business voice systems, as well as data services connecting the
Company to outside services including Internet and point-to-point connections.
Cost to Address Y2K Issues
As of August 31, 1999, the Company has acquired $10.0 million of
hardware and $13.7 million of software in connection with the Project.
Consultants were also engaged to implement software modules and improve business
processes, but not necessarily to provide specific Y2K remediation services. The
Company does not expect to spend further material amounts for direct costs
related to the assessment and correction of potential Y2K issues.
Risk of the Company's Y2K Issues
The primary Y2K risk to the Company is from external vendors and
service providers. As part of its assessment of Y2K issues, the Company has
gathered information from its suppliers and other external vendors regarding
their Y2K compliance status. Based upon information received, the most
significant risk to the Company appears to be from certain critical
international suppliers that, despite their best efforts, may be affected by
utility outages and may not be able to meet delivery deadlines. The Company has
16
obtained Y2K compliance information from its two largest shipping service
providers and does not believe that Y2K issues will adversely affect product
shipments. Based upon inquiry responses, the Company does not anticipate any
significant problems from its utility, telephone and financial service
providers. Although the Company is not aware of any other external risks, the
Company has no means of ensuring that all external vendors and service providers
will be Y2K compliant. The inability of certain external vendors or service
providers to complete their Y2K remediation efforts in a timely manner could
materially affect the operations of the Company. However, the effect of Y2K
non-compliance by external vendors is not readily determinable.
The Company has also assessed Y2K compliance issues related to its
products available for sale and does not believe that Y2K presents a material
exposure to the Company related to its products.
Contingency Plans
The Company is finalizing contingency plans and testing manual process
scenarios for the critical functions within the business units. The plans are
expected to be complete prior to December 31, 1999.
The Company's plan to complete Y2K remediation efforts is based upon
management's best estimates, which are subject to numerous assumptions regarding
future events, including the availability of certain resources and other
circumstances beyond the control of management. Estimated completion dates and
total costs are based upon current levels of activity and specific efforts to
correct potential Y2K problems. However, there can be no guarantee that stated
estimates can be achieved and actual results may differ materially from current
expectations. Specific factors that may result in material differences include,
but are not limited to, availability of critical application corrections, the
availability of required hardware and other similar uncertainties.
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data and
other selected operating data expressed as percentages of total sales:
YEAR ENDED
AUGUST 31, 1999 1998 1997
- --------------------------- ------------ ---------- ----------
Sales 100.0% 100.0% 100.0%
Cost of sales 43.8 39.1 40.5
------------ ---------- ----------
Gross margin 56.2 60.9 59.5
------------ ---------- ----------
Operating expenses:
Selling, general and
administrative 42.4 40.5 37.9
Depreciation and
amortization 7.1 6.1 4.8
Merger related expenses 1.3
Restructuring costs 2.9
Loss on impaired assets 3.0
------------ ---------- ----------
Total operating expenses 55.4 46.6 44.0
------------ ---------- ----------
Income from operations 0.8 14.3 15.5
------------ ---------- ----------
Interest income 0.2 0.4 0.3
Interest expense (1.8) (1.5) (0.5)
------------ ---------- ----------
Net interest expense (1.6) (1.1) (0.2)
------------ ---------- ----------
(Loss) income before
provision for income
taxes and change in
accounting principle (0.8) 13.2 15.3
Provision for income
taxes (0.8) 5.5 6.3
------------ ---------- ----------
(Loss) income before
change in accounting
principle (1.6) 7.7 9.0
Cumulative effect of
change in accounting
principle, net of tax (0.4)
------------ ---------- ----------
Net (loss) income (1.6) 7.3 9.0
Preferred dividends (0.3)
------------ ---------- ----------
(Loss) income
available to common
shareholders (1.9)% 7.3% 9.0%
------------ ---------- ----------
17
Sales Data:
Consumer Products 47.6% 47.4% 51.5%
Training and Education 38.0 37.9 35.7
International 9.1 8.2 5.5
Other 5.3 6.5 7.3
FISCAL 1999 COMPARED WITH FISCAL 1998
Sales
The Company's sales, by reportable segment, were as follows (in thousands):
YEAR ENDED AUGUST 31,
- ------------------------- ----------- ------------ -----------
1999 1998 1997
- ------------------------- ----------- ------------ -----------
Consumer Products $ 264,333 $ 258,973 $ 223,135
Training and Education 210,621 207,015 154,595
International 50,535 45,068 23,927
Other 29,434 35,556 31,615
----------- ------------ -----------
$ 554,923 $ 546,612 $ 433,272
----------- ------------ -----------
Consumer Products sales increased $5.4 million, or 2%, compared to the
prior year. Sales increases from the Company's retail stores, contract stationer
channels, and the Internet were offset by decreased sales from catalog
operations and government products. Retail store sales increased due to five
additional stores and a 2% increase in comparable store sales. At August 31,
1999, the Company was operating 125 retail stores compared to 120 stores at
August 31, 1998. Comparable store sales growth was primarily attributable to
increased sales of technology-related products such as the Palm V(TM) by 3Com(R)
bundled with the Company's new Franklin Planner(TM) software, as well as the
introduction of limited edition planners such as the Hallmark(R) and Shoebox(R)
planners. The Company also had increased sales from contract stationer channels
due to increased demand from new marketing and distribution agreements. Sales
from the Internet channel have increased due to general changes in consumer
buying habits and ongoing enhancements to the Company's electronic commerce
infrastructure. Increased sales from these channels were partially offset by
decreased sales from the government products group and the Company's catalog
operations. Product sales to the U.S. government continued to be adversely
affected by changes in the government procurement process. Sales growth in other
distribution channels, including retail stores, contract stationers and the
Internet, continue to have an adverse affect on catalog sales. Price increases
did not have a material effect on sales growth between the periods.
Training and Education sales increased by $3.6 million, or 2%,
compared to the prior year. Sales increases from Premier, Personal Coaching and
direct product channels were partially offset by sales decreases in core
training programs and a decline in book royalties. Premier continues to expand
its share of the school agenda market and recognized a 22% increase in sales,
primarily from new customers. New business in both Personal Coaching and the
direct-products channel resulted in increased sales during fiscal 1999. These
increases in training and education sales were partially offset by decreased
sales in core training sales, primarily from corporate/on-site and facilitated
programs for leadership training. In response to disappointing sales performance
in core training programs, the Company is relocating its sales force to eight
regional sales offices. These sales offices are designed to bring customers and
the sales force closer together to achieve deeper market penetration and growth.
The field offices are expected to become fully operational during fiscal 2000.
In connection with the move to regional sales offices and other restructuring
activities, the Company anticipates that training program sales performance in
fiscal 2000 may be adversely affected. The Company anticipates the benefits
associated with the restructuring of its sales force to favorably impact sales
performance beginning in late fiscal 2000. In addition, book royalties decreased
due to the decline in royalties received from The 7 Habits of Highly Effective
Families book that was released in fiscal 1998.
International sales increased by $5.5 million, or 12%, compared to the
prior year. The increase was primarily due to the acquisition of a former
18
licensee in Japan, which occurred during the fourth quarter of fiscal 1998.
Partially offsetting this increase were decreased sales in Canada and the Middle
East. The Company's Canadian operations were adversely affected as a result of
labor disputes at one of its largest clients. Also during fiscal 1999, the
Company converted its Middle Eastern direct office into a licensee operation.
Although this conversion reduced expenses and certain other business risks, the
Company only receives licensee royalties on qualifying sales. Other geographic
regions recorded nominal sales fluctuations compared to the prior year.
Other sales, which consist of the Company's commercial printing
services and fitness training sales, decreased $6.1 million, or 17%, compared to
the prior year. The decrease was due to the sale of the Company's Institute of
Fitness, which recognized sales of $6.8 million during fiscal 1998, but was sold
during the fourth quarter of fiscal 1998. The decrease resulting from the
Institute of Fitness sale was partially offset by increased commercial printing
sales at Publishers' Press.
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 56.2% of
sales for fiscal 1999, compared to 60.9% in the prior year. The Company's gross
margin was adversely affected during fiscal 1999 by inventory write-offs,
changes in product mix, channel pricing, decreased core training volume and
declining book royalties. The Company's product mix continues to be affected by
an overall decrease in high-margin planner sales and an increase in lower-margin
technology-related product sales. Increased sales from the contract stationer
channel also adversely affected gross margin due to contracted pricing terms
that have resulted in higher unit sales volume, but at reduced margins. Core
training programs offered by the Company have gross margins that are generally
higher than the Company's gross margin on product sales. Continued declining
sales of these higher-margin programs resulted in a lower total gross margin for
the Company during fiscal 1999. Additionally, book royalties received in the
prior year reflect the impact of The 7 Habits of Highly Effective Families,
which was released in fiscal 1998 and had declining sales during the year, thus
directly impacting the Company's gross margin in fiscal 1999.
Operating Expenses
Selling, general and administrative ("SG&A") expenses increased $13.7
million, to 42.4% of sales, compared to 40.5% in the prior year. The increase
was primarily due to the development of electronic-based products and electronic
commerce channels, increased promotional spending during the fourth quarter and
the acquisition of King Bear. In addition, SG&A expenses increased due to the
opening of five new stores during fiscal 1999. During the year, the Company
invested heavily to develop and market new electronic-based products, such as
the Franklin Planner for Microsoft OutlookTM. The Company has also spent
significant amounts to improve its electronic commerce infrastructure to meet
changing consumer preferences and has committed significant resources to
development of its Internet web site and other on-line products and services.
During the fourth quarter, the Company increased its promotional spending,
primarily for catalogs and direct mailings, to advertise new products, such as
the Millennium edition of the Franklin Planner, and to improve training program
sales performance. Increased SG&A expenses can also be attributed to the
19
acquisition of King Bear during fiscal 1998, which added $5.9 million of
incremental expenses to fiscal 1999. These increases were partially offset by
the sale of the Institute of Fitness, which recorded $3.8 million of SG&A
expenses prior to its sale in fiscal 1998.
Depreciation charges increased by $3.5 million over the prior year
primarily due to new computer software and hardware purchased in conjunction
with the Project and the addition of leasehold improvements for new stores.
Equipment and software purchased in connection with the Project are depreciated
over estimated useful lives of three to five years. Amortization charges
increased by $3.0 million due to amortization of contingent earnout payments
made during the second quarter of fiscal 1999 and the amortization of certain
Project costs.
Restructuring Costs
During the fourth quarter of fiscal 1999, the Company initiated a
restructuring plan designed to restructure the Company's operations, reduce its
workforce and formally exit the majority of its leased office space located in
Provo, Utah. As part of the restructuring plan, the Company intends to reduce
its workforce from 4,200 employees to approximately 3,600 employees. The cost to
provide severance and related benefits is estimated to be $11.7 million. As of
October 31, 1999, 176 employees had left the Company as part of the
restructuring plan. Also included in the restructuring provision is a charge to
exit certain leased office space in Provo, Utah. These facilities currently
accommodate sales, marketing and other functions primarily aligned with the
Training and Education SBU. The Company anticipates the costs to exit the
facilities and sublease the space to be $4.6 million. The restructuring plan is
expected to be completed by the end of fiscal 2000 and other restructuring costs
may be incurred in order to complete the plan.
Loss on Impaired Assets
At each balance sheet date, the Company reviews its goodwill, other
intangible assets and other long-term assets to determine whether events or
circumstances may have occurred which indicate possible impairment. As part of
the restructuring plan initiated during the fourth quarter, all programs,
products and curriculum were evaluated to determine their future value in the
restructured Company. As a result of this evaluation, certain products, services
and curricula were discontinued. Other intangible and long-term assets were also
reviewed for future value using undiscounted cash flows or other appropriate
valuation methodologies. Based upon the results of its most recent analysis, the
Company recognized a $16.6 million loss on impaired long-lived assets for the
year ended August 31, 1999.
Interest Expense
Interest expense increased $1.6 million, primarily due to increased
borrowing on the Company's long-term line of credit to purchase treasury stock
during fiscal 1999.
Income Taxes
During fiscal 1999, the Company recognized income tax expense of $4.5
million. Although the Company had a loss before income taxes of $4.2 million,
non-deductible goodwill amortization from the Merger and other acquisitions,
foreign income tax expense and losses in foreign countries resulted in a net
taxable position for the year. The effect of foreign losses is primarily
comprised of losses sustained in Japan for which no offsetting tax benefit could
be recognized due to uncertain future taxable income to offset such losses.
Based upon anticipated taxable income, the Company expects to incur an effective
tax rate of approximately 45.1% during fiscal 2000. The increase over prior
20
years is primarily due to additional non-deductible goodwill generated from the
final Premier contingent earnout payment.
Preferred Stock Dividends
During fiscal 1999, the Company issued 750,000 shares of Series A
Preferred Stock (the "Preferred Stock") for $75.0 million in cash to a private
investor. The Preferred Stock dividends accrue at an annual rate of 10% and are
payable quarterly in cash or additional shares of Preferred Stock until July 1,
2002. Accordingly, the Company accrued $1.9 million in Preferred Stock dividends
as of August 31, 1999. Subsequent to August 31, 1999, the Company paid the
Preferred Stock dividend with the issuance of additional shares of Preferred
Stock.
FISCAL 1998 COMPARED WITH FISCAL 1997
Sales
Total sales for the fiscal year ended August 31, 1998 increased $113.3
million, or 26%, 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. Price
increases did not have a material effect on increased sales between the periods
Consumer Products sales increased $35.8 million, or 16%, compared to
the prior year. Increased sales from the Company's retail stores, catalog
operation and wholesale channel were partially offset by decreased sales at the
government products group (formerly Productivity Plus). Retail store sales
increased $17.1 million over the prior year, primarily as a result of 10 new
stores that were opened during fiscal 1998. In addition, comparable store sales
increased 3.0% compared to the prior year. At the end of fiscal 1998, the
Company operated 120 retail stores. Catalog sales increased $9.7 million
compared to the prior year due to the Merger and new customers. The Company's
wholesale channel recognized increased sales due to the addition of new
marketing agreements. Product sales to the U.S. government decreased due to
changes in the government's procurement process.
Training and Education sales increased $52.4 million, or 34%, as
compared to the prior year. The increase was primarily attributable to
additional training program sales related to the Merger. In addition, school
agenda sales through Premier increased $10.3 million compared to the prior year
due to increased unit sales in the U.S. Sales from the Personal Coaching
division also increased compared to the prior year due to new customers.
Partially offsetting these increases were decreased sales through the Company's
direct products channel. The decrease in direct product business was primarily
due to the loss of a large customer in that channel.
International sales increased $21.1 million, or 88% compared to fiscal
1997. The increase was primarily due to the Merger and the fourth quarter
acquisition of King Bear, a former Covey licensee, which operates in Japan.
Other sales increased $3.9 million, or 12%, compared to the prior year
due to increased commercial sales at the Company's printing services subsidiary.
Gross Margin
Gross margin was 60.9% compared to 59.5% for the prior year. The
increase was primarily due to an increase in higher margin training program
sales resulting from the Merger. Generally, training sales have a higher gross
margin than product sales, and during fiscal 1998, training program sales, which
represent a significant portion of total Training and Education SBU sales,
increased compared to the prior year.
21
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 and Australia. 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 Personal
Coaching during fiscal 1998.
Interest Expense
Interest expense increased $6.0 million compared to the prior year
primarily due to increased debt used to purchase treasury stock 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.
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.
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, 1999
- ------------------ ---------- ---------- ---------- ----------
Q1 Q2 Q3 Q4
- ------------------ ---------- ---------- ---------- ----------
In thousands, except per share amounts
Sales $ 140,362 $137,089 $109,267 $168,205
Gross margin 86,431 79,128 58,522 87,710
Restructuring
costs 16,282
Loss on impaired
assets 16,559
Income (loss)
before
provision for
income taxes 18,815 11,305 (7,922) (26,424)
Net income
(loss) 10,913 6,557 (4,595) (21,647)
Preferred
dividends 1,875
Income (loss)
available to
common
shareholders 10,913 6,557 (4,595) (23,522)
Diluted income
(loss) per share .50 .31 (.22) (1.15)
22
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)
Income
available to
common
hareholders 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
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 and Education sales are moderately seasonal
because of the timing of corporate training, which is not typically scheduled
during holiday and vacation periods and the timing of Premier's sales, which
occur primarily in the Company's fourth quarter. 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, second and fourth quarters, with declines in sales and income
occurring during the third quarter of each fiscal year. The Company believes
that the seasonal pattern of sales and earnings during its fiscal year will
continue as in the past, exclusive of restructuring and other similar charges.
During the fourth quarter of fiscal 1999, the Company initiated a
restructuring plan that resulted in a $16.3 million charge to operations. In
connection with the restructuring plan and upon review of certain goodwill,
intangibles and other long-term assets, the Company also recognized a loss on
impaired assets totaling $16.6 million. Also during the fourth quarter of fiscal
1999, the Company issued 750,000 shares of Preferred Stock for $75.0 million.
The Preferred Stock dividends accrue at an annual rate of 10% and are payable
quarterly in cash or additional shares of Preferred Stock until July 1, 2002. At
August 31, 1999 the Company had accrued $1.9 million of Preferred Stock
dividends which were paid subsequent to August 31, 1999 with the issuance of
additional shares of Preferred Stock.
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. During the fourth
quarter of fiscal 1999, the Company issued 750,000 shares of Series A Preferred
Stock for $75.0 million in cash to a private investor. The Preferred Stock
dividends accrue at an annual rate of 10%, and are payable quarterly, at the
Company's option, in additional shares of Preferred Stock until July 1, 2002.
Subsequent to that date, all Preferred Stock dividends must be paid in cash.
23
Accrued Preferred Stock dividends at August 31, 1999 totaling $1.9 million were
subsequently paid with issuance of additional shares of Preferred Stock.
Net cash provided by operating activities during fiscal years 1999 and
1998 was $36.0 million and $74.1 million, respectively. During fiscal 1999,
adjustments to net loss included $43.5 million of amortization and depreciation,
$16.6 million for losses on impaired assets and a net increase of $10.5 million
in deferred tax assets. The change in deferred taxes primarily represents an
increase in current deferred tax assets generated in fiscal 1999. The primary
uses of cash for operations were increases in inventory of $12.0 million and
increased receivables of $8.9 million. Inventories increased primarily due to an
increase in the number of Franklin Planner designs, new binder models in stock
and higher costs associated with electronic products. Accounts receivable
increased due to increased sales at Premier, which has seasonal sales that occur
primarily during the Company's fourth quarter. In connection with its
restructuring plan, the Company recorded a $16.2 million accrual for expected
costs to reduce the workforce and exit certain leased office space. Cash outlays
for restructuring costs are expected to occur throughout fiscal 2000. Cash used
to pay income taxes is the result of quarterly payments on expected taxable
earnings that exceeded actual taxable income for the year. The increase in
payables and accrued liabilities is primarily due to the timing of goods and
services received and corresponding payments. During fiscal 1998, adjustments to
net income included $38.6 million of depreciation and amortization charges. The
Company used $26.5 million to finance an increase in accounts receivable from
seasonal sales by Premier, an increase in other assets and a decrease in
accounts payable and accrued liabilities. A decrease in inventory and an
increase in income taxes payable provided approximately $20.3 million of cash to
operations.
Net cash used for investing activities during fiscal years 1999 and
1998 was $40.7 million and $43.8 million, respectively. During fiscal 1999, the
Company paid $14.8 million in contingent earnout payments in connection with
certain acquisitions. An additional $4.2 million was spent to acquire other
businesses during the year, including Khalsa Associates, a sales training
company. The Company also received $1.3 million in cash from the sale of certain
land and a non-business related building. In fiscal 1998, $11.9 million was paid
as contingent payments related to the acquisitions of Premier and Personal
Coaching, and $4.9 million of cash was used to acquire King Bear, a former
licensee located in Japan. During fiscal 1998, the Company also sold its
Institute of Fitness and certain consulting business units. The net cash
received for these divestitures was $12.1 million. Funds invested in property,
plant and equipment during fiscal years 1999 and 1998 were $23.0 million and
$39.2 million, respectively. Capital expenditures during 1999 consisted
primarily of an addition to one of the Company's buildings, new store leasehold
improvements, computer hardware and software, and other manufacturing equipment.
Fiscal 1998 expenditures were primarily for new computer hardware and software
in connection with the Project, new store leasehold improvements, printing
presses and other manufacturing equipment.
The Company had net cash proceeds of $2.4 million from financing
activities for the year ended August 31, 1999. During fiscal 1999, the Company
used $40.7 million for payments on long-term debt, primarily on its long-term
line of credit. In addition, the Company used $32.7 million to purchase
2,126,000 shares of its common stock during fiscal 1999. At August 31, 1999, the
Company had approximately 1,000,000 shares remaining under Board authorized
treasury stock purchase plans. The primary source of cash from financing
activities during fiscal 1999 was the issuance of 750,000 shares of Series A
Preferred Stock for $75.0 million. During fiscal 1998, the Company used $21.6
million of cash for financing activities. Fiscal 1998 financing activity was the
result of $120.0 million received from the issuance of unsecured senior notes
24
and borrowings on the Company's long-term line of credit, combined with payments
of $87.2 million on long-term debt instruments, and $57.0 million used to
purchase treasury stock.
At August 31, 1999, the Company had unsecured bank lines of credit
available for working capital needs totaling $75.0 million. The Company's lines
of credit consisted of a $10.0 million short-term line of credit and a $65.0
million long-term credit facility. On August 31, 1999, the Company had $1.4
million outstanding on the short-term line of credit with interest at the lesser
of the prime rate less .75% or the LIBOR rate plus 1.00%. No amounts were
outstanding on the long-term line of credit at August 31, 1999. The line of
credit agreement required the Company to maintain certain financial ratios and
working capital levels. As a result of restructuring charges and losses on
impaired assets, the Company was not in compliance with certain covenants of the
line of credit agreement at August 31, 1999. Subsequent to August 31, 1999, the
Company obtained a new line of credit agreement with existing lenders that
maintained the $10.0 million short-term line of credit and increased the
long-term line of credit to $100.0 million. The new line of credit requires the
Company to maintain certain financial ratios and minimum net worth levels,
excluding the financial impact of 1999 restructuring charges. Interest on the
new line of credit agreement is at the lesser of the prime rate or the LIBOR
rate plus 1.50%. The new line of credit agreement expires October 1, 2001.
During fiscal 1998, the Company privately issued $85.0 million of
unsecured senior notes payable (the "Notes Payable"). The Notes Payable were due
May 4, 2008 with interest at a fixed rate of 6.6%. The Notes Payable purchase
agreement required the Company to maintain certain financial ratios and net
worth levels until the Notes Payable are paid in full. As a result of the
restructuring charge, the Company was not in compliance with certain terms of
the Notes Payable at August 31, 1999. The Company did not obtain a waiver on the
terms of the debt covenants, and subsequent to August 31, 1999, the Company
retired the $85.0 million notes payable at par plus accrued interest. The
Company utilized its expanded long-term line of credit to retire the Notes
Payable.
Subsequent to August 31, 1999, the Company announced that it had filed
a registration statement with the Securities and Exchange Commission ("SEC")
related to a subscription offering for up to an additional 750,000 shares of
Series A Preferred Stock. Shareholders of record on November 8, 1999 will
receive a non-transferable right to purchase one share of Series A Preferred
stock for every 27 common shares owned at a subscription price of $100 per
share. The subscription offering is expected to expire on November 30, 1999.
This offering is being made in connection with the issuance of Preferred Stock
to a private investor during the Company's fourth quarter of fiscal 1999. The
Preferred Stock shares being offered to shareholders are substantially identical
to the Preferred Stock issued to the private investor. The Company's Board of
Directors is making no recommendation as to whether shareholders should exercise
or restrain from exercising their subscription rights.
Going forward, the Company will continue to incur costs necessary for
the development of electronic commerce channels, retail store buildouts and
renovations, regional office leasehold improvements and other costs related to
the growth of the business. Cash provided by operations, available lines of
credit and other financing alternatives will be used for these expenditures.
Management anticipates that its existing capital resources will be sufficient to
enable the Company to maintain its current level of operations and its planned
internal growth for the foreseeable future. The Company also continues to pursue
additional financing alternatives as it repositions itself for future growth.
25
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, 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.
MARKET RISK OF FINANCIAL INSTRUMENTS
The Company has exposure to market risk from foreign currency exchange
rates and changes in interest rates. To manage the volatility related to
currency exchange rates, the Company entered into limited derivative
transactions to manage well-defined foreign exchange risks during fiscal 1999.
However, at August 31, 1999 the Company did not have any derivative instruments
outstanding. Corresponding gains and losses on derivative contracts were also
immaterial for the year ended August 31, 1999. As the Company continues to
expand internationally, the Company's use of foreign exchange contracts may grow
in order to manage the foreign currency risks to the Compa