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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, 2000
[ ] 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. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant on November 1, 2000, based upon the closing sale price of the
Common Stock of $8.25 per share on that date, was approximately $140,803,583.
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, 2000, the Registrant had 20,643,182 shares of Common
Stock outstanding.
Parts of the Registrant's Proxy Statement for the Registrant's Annual
Meeting of Shareholders, which is scheduled to be held on January 12, 2001, are
incorporated by reference in Part III of this Form 10-K.
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1
INDEX TO FORM 10-K
Page
PART I ................................................................................................ 3
Item 1. BUSINESS..................................................................................... 3
GENERAL ..................................................................................... 3
FRANKLIN COVEY PRODUCTS...................................................................... 5
Paper Planners ........................................................................... 5
Electronic Solutions .................................................................... 5
Agendas ................................................................................. 6
Binders .................................................................................. 6
Personal Development Products............................................................. 6
TRAINING, FACILITATION AND CONSULTING SERVICES............................................... 7
Training and Education Programs ...........................................................7
Personal Coaching .........................................................................8
SALES AND MARKETING.......................................................................... 9
Domestic Consumer Products ............................................................... 9
Domestic Training and Education Sales ....................................................10
International Operations .................................................................11
Other Revenues ...........................................................................11
STRATEGIC DISTRIBUTION ALLIANCES.............................................................12
CLIENTS .....................................................................................12
COMPETITION..................................................................................12
Training ................................................................................12
Consulting................................................................................12
Products ................................................................................12
MANUFACTURING AND DISTRIBUTION ..............................................................13
TRADEMARKS, COPYRIGHTS AND INTELLECTUAL PROPERTY.............................................14
EMPLOYEES....................................................................................14
Item 2. PROPERTIES...................................................................................14
Item 3. LEGAL PROCEEDINGS............................................................................15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................15
PART II ...............................................................................................16
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.....................16
Item 6. SELECTED FINANCIAL DATA......................................................................16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........17
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................32
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........61
PART III ..............................................................................................61
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........................................61
Item 11. EXECUTIVE COMPENSATION.......................................................................61
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................61
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................61
PART IV ...............................................................................................62
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..............................62
(a) Documents Filed.......................................................................62
1. Financial Statements.............................................................62
2. Exhibit List.....................................................................62
(b) Reports on Form 8-K...................................................................64
(c) Exhibits..............................................................................64
(d) Financial Statement Schedule..........................................................64
SIGNATURES .............................................................................................65
2
PART I
Item 1. BUSINESS
GENERAL
Franklin Covey Co. (the "Company" or "Franklin Covey") is an international
learning and performance solutions company dedicated to helping individuals and
organizations to become measurably more effective. To achieve that goal, the
Company provides training and education programs, consulting services,
educational materials, publications, assessment and measurement tools,
implementation processes, application tools and products designed to help
individuals and organizations to be measurably more effective. Franklin Covey
focuses its efforts on providing solutions in five main areas: Productivity,
Leadership, Communications, Education and Sales. The Company provides training
and education, consulting services and products designed to improve
organizational effectiveness, leadership skills, written and oral business
communication skills, sales skills, student achievement and performance skills.
The Company also measures the impact of training investments. Effectiveness
solutions are delivered through Company owned retail stores, its own catalog
operations, training seminars, computer-based training and planning services,
its own Internet sites, clients' and partners' Intranet sites, sales to
educational institutions and through consulting services. To facilitate
implementation of the principles it teaches, the Company produces and/or markets
a number of tools and curricula such as the Franklin Planner(R), PALM(R) and
other handheld electronic organizers, Agendas, What Matters Most and 7 Habits of
Highly Effective People training seminars, CD ROM's, Personal Coaching and
custom projects.
One of the mainstay staple tools that assists clients in implementing
effectiveness training is the Franklin Planning System. 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, through its catalog, its
retail stores, its e-commerce Internet site at www.franklincovey.com and through
third party channels. A significant percentage of the users of the original
Franklin Planner continue to purchase a renewal planner each year, creating
substantial recurring sales. The Company has also made the Franklin Planning
System available in desktop software and as an add-on to handheld organizers,
such as the popular PALM(R) Computing organizer and Compaq's(R) iPAQ(TM) Pocket
PC(R). The Company also provides an extension to Microsoft Outlook(R) that
incorporates Franklin Planning productivity principles into the Outlook calendar
system. An on-line version of the Franklin Planner has recently been introduced
at www.franklincoveyplanner.com that synchronizes voicemail, email, note-taking
and calendaring into both the paper-based system and the electronic handheld and
desktop versions of the 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 and What Matters Most 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,
its e-commerce web site www.franklincovey.com and its retail stores.
3
Domestic consumer product sales, consisting primarily of products relating
to the Franklin Planning System , accounted for 52 percent of the Company's
sales during the year ended August 31, 2000.
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 four 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 web-site, retail stores,
and by direct mail.
3. The Company's programs are also designed to be facilitated by licensed
professional trainers and managers in client organizations, reducing
dependence on the Company's professional presenters, and creating
continuing revenue as participant materials are purchased for trainees by
these facilitators.
4. Franklin Covey recently launched a new series of training modules known as
Productivity in the Digital Age Learning Library. These learning modules
are delivered in five ways: computer-based, on-line, in booklet form, audio
or live in new training centers installed in certain retail stores. They
are designed for individuals and to aid organizations in delivering
Franklin Covey effectiveness principles to individuals throughout their
organizations. The computer-based training provides on-demand modularized
learning and ties with the Company's personal productivity systems which
are integrated across various platforms and mediums.
In fiscal 2000, the Company provided products and services to 83 of the
Fortune 100 and more than 75 percent 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
numerous educational institutions.
Domestic training and education sales accounted for 37 percent of the
Company's sales, representing approximately 560,000 individuals trained, during
the year ended August 31, 2000.
The Company also provides products, consulting and training services
internationally, either through directly operated offices, or through licensed
providers. At August 31, 2000, Franklin Covey had direct operations in Canada,
Japan, Australia, New Zealand, Mexico, Belgium, Brazil and the United Kingdom.
The Company also had licensed operations in 31 countries. During the year ended
August 31, 2000, the total sales of the direct operations and royalties from the
licensed operations were $50 million and accounted for 9 percent of total
Company revenues.
4
In January 1999, the Company acquired the assets of Khalsa Associates, a
leading sales training company. In July 1999, Microsoft(R) 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.
In December 1999, Franklin Covey acquired a majority interest in
Daytracker.com, an on-line planning company. The Daytracker.com web-site has
been the basis for the current www.franklincoveyplanner.com planning web-site
the Company offers to its customers.
In February 2000, Franklin Covey sold assets of the commercial printing
division of Publishers Press to Mountain States Bindery of Salt Lake City, Utah.
The Company maintained the printing capabilities that print the Franklin Planner
and associated products.
In September 2000, the Company contributed the assets of Personal Coaching
to a new joint-venture entity called Franklin Covey Coaching, LLC. Franklin
Covey owns 50 percent of the new entity and will participate proportionately in
the revenues and earnings of the new partnership. The other 50 percent is owned
by AMS Direct, a major client of Franklin Covey Coaching, LLC.
Unless the context requires otherwise, all references to the "Company" or
to "Franklin Covey" herein refer to Franklin Covey Co. and each of its operating
divisions and subsidiaries. The Company's principal executive offices are
located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331 and its
telephone number is (801) 817-1776.
FRANKLIN COVEY PRODUCTS
An important principle taught in Franklin Covey productivity training is to
have only one personal productivity system and to have all of one's information
in that system. Based upon that belief for effective time management, the
Franklin Planner has been developed as one of the basic tools 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. For those who lead with technology
productivity systems, 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, 2000, domestic product sales, consisting
primarily of the Franklin Planner and related products, amounted to $302.9
million and accounted for 52 percent 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 and pages, 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.
ELECTRONIC SOLUTIONS. The Company also offers its time and life management
methodology within a complete Personal Information Management ("PIM") system
through Franklin Planner Software program. This system can be used in
conjunction with the paper-based Franklin Planner, electronic handheld
organizers or used as a stand-alone planning and information management system.
The Franklin Planner Software permits users to generate and print data on
5
Franklin Covey paper that can be inserted directly into the Franklin Planner.
The program operates in the Windows(R) 95, 98, 2000 and NT 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.
The Company also recently introduced a version of its Franklin Planner
Software that is designed to operate as an extension to Microsoft's Outlook(R)
software. This is intended especially for companies that have already
standardized on Microsoft(R) for group scheduling, but wish to make the Franklin
Planning System 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.
Franklin Covey is also an OEM provider of the PALM(R) Computing organizer
that includes the Franklin Planner Software when sold through Franklin Covey
channels. The PALM(R) 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(R). The Company also offers other electronic
organizers with the Franklin Planner software such as the iPAQ Pocket PC from
Compaq(R).
The company also recently introduced a new series of products that are part
of its Productivity in the Digital Age initiative. This initiative includes both
tools and training designed to measurably increase individual and organizational
effectiveness. These products include learning modules designed to deliver
Franklin Covey effectiveness principles to individuals and organizations,
including interactive PDA's, desktop applications, on-line tools and software
all designed to synchronize information across platforms and systems.
AGENDAS. Franklin Covey markets through its Premier School Agendas division
agendas to schools and school districts in order to help teachers and students
enhance the learning process. Premier sold more than 17 million agendas in
fiscal 2000, 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.
BINDERS. Franklin Covey offers binders and accessories (briefcases,
portfolios, wallets/purses, 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 $12.95 to
$275.00.
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, audio
learning systems such as multi-tape and workbook sets, CD-ROM software products,
calendars, posters and other specialty name brand items. The Company offers
numerous accessory forms through its Forms Wizard software, which allows
customization of 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.
6
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 115 training consultants in major
metropolitan areas of the United States with an additional 18 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 eight regional
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 a stimulating and behavior changing experience which frequently
generates additional business. During fiscal year 2000, more than 560,000
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 percent 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; and Project Management(TM), a seminar designed to help
individuals and organizations map and organize complex projects. The Company's
training consultants conduct these seminars and workshops for employees of
institutional clients and public seminar participants.
7
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
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 25 percent 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.
The company also recently introduced a new series of products that are part
of its Productivity in the Digital Age initiative. This initiative includes both
tools and training designed to measurably increase individual and organizational
effectiveness. These products include learning modules designed to deliver
Franklin Covey effectiveness principles to individuals and organizations,
including interactive PDA's, desktop applications, on-line tools and software
all designed to synchronize information across platforms and systems.
PERSONAL COACHING. Franklin Covey offers post-seminar training in the form
of personal coaching through a recently formed entity called Franklin Covey
Coaching, LLC. The entity employs 41 coaches that interact with clients on the
telephone to help them implement the training from the seminar they have taken.
The entity offers personal coaching for some the Company's curriculum as well as
seminars offered by other training companies.
Sales of training and education services for the year ended August 31, 2000
were $214.6 million and accounted for 37 percent of Franklin Covey's total sales
during the period.
8
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)
--------------------------------------------------------------------------------
2000 1999 1998
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Domestic Consumer Products $302,944 51.8% $264,333 47.6% $258,973 47.4%
Domestic Training and Education 214,646 36.7 210,621 38.0 207,015 37.9
International 49,995 8.5 50,535 9.1 45,068 8.2
All Other 17,654 3.0 29,434 5.3 35,556 6.5
--------------------------------------------------------------------------------
Total Sales 585,199 100.0% $554,923 100.0% $546,612 100.0%
================================================================================
DOMESTIC CONSUMER PRODUCTS SALES. 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 350 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
9
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,
2000, Franklin Covey had 135 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. Portions of Franklin Covey's
Productivity In The Digital Age training modules are taught within the stores.
Some of the retail stores have been remodeled to accommodate small groups taking
these modularized training programs.
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. The Company has 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 140 sales professionals located in eight major
metropolitan areas throughout the United States who sell training services to
institutional clients. Franklin Covey employs an additional 58 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.
10
Franklin Covey also employs 115 training consultants throughout the United
States who present institutional and public seminars in their respective
territories and an additional 18 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.
The Company markets through its Premier School Agendas division agendas to
schools and school districts in order to help teachers and students enhance the
learning process. Premier sold more than 17 million agendas in fiscal 2000,
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 SALES 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, Brazil,
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, Thailand, South Africa, Chile,
Panama, 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.
The international operations of the Company generated $50.0 million in
revenue in the year ended August 31, 2000. Training and education services
generated 54 percent of the revenue, consumer product generated 44 percent, 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 $72.1 million.
OTHER REVENUES. 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. Effective February 28, 2000,
the Company sold the commercial printing services of Publishers Press while
maintaining its in-house printing capabilities. Publishers Press provided book
and commercial printing to clients in the western United States. The commercial
printing operations accounted for substantially all of the $17.7 million of
other sales in fiscal year 2000.
11
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; Franklin Covey
Coaching, LLC, a partnership with American Marketing Systems to deliver personal
coaching to clients; and PALM(R) Computing to serve as the official training
organization for their PALM(R) 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 2000 domestic training
and education sales of approximately $214 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.
12
Franklin Covey also competes, to a lesser extent, with companies that market
substitutes for paper-based products, such as electronic organizers, software
PIMs and hand-held computers. 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 on-line planning services with PALM(R)
Computing and Compaq's(R) iPAQ Pocket PC, Software, web-based 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 material 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. The Company has also
developed partner printers, both domestically and internationally, 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 are 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.
13
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, 2000, Franklin Covey had 3,988 full and part-time
associates, including 1,491 in sales, marketing and training; 1,597 in customer
service and retail; 641 in production operations and distribution; and 259 in
administration and support staff. None of Franklin Covey's associates are
represented by a union or other collective bargaining group. Management believes
that its relations with its associates are good. Franklin Covey does not
currently foresee a shortage in qualified personnel needed to operate the
Company's business.
ITEM 2. PROPERTIES
Franklin Covey's principal business operations and executive offices are
located in Salt Lake City, Utah and Provo, Utah. The Company's Salt Lake City
facilities currently consist of 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. Franklin Covey owns all of the Company's Salt Lake City
facilities, subject to mortgages of approximately $2.9 million as of August 31,
2000. The Company's Provo, Utah operations consisted of four buildings located
within a fifteen-mile area. As part of its restructuring plan, the Company
exited its leased office space located in two of the Provo buildings, totaling
approximately 119,000 square feet, during fiscal 2000. The Company entered into
a sublease agreement for the majority of the remaining life of the Company's
14
lease obligation on the office space. The sublease agreement specifies base
rental rates and requires the subleasee to pay all direct costs incurred by the
Company, including taxes and maintenance. The Company occupies all or a portion
of the remaining two buildings located in Provo, with total leased space of
approximately 54,000 square feet as of August 31, 2000. These two buildings
house a call center and additional office space used by certain divisions of the
Company. Lease contracts on the Provo buildings terminate intermittently through
the year 2009. Also in connection with its restructuring plan, the Company has
moved its sales and marketing functions for the training and education business
from the Provo facilities to eight leased regional sales offices located in New
York, Chicago, Los Angeles, San Francisco, Columbus, Ohio, Dallas, Atlanta, and
Washington, D.C. The regional offices were fully operational as of August 31,
2000.
Franklin Covey also currently operates 135 retail stores under operating
leases, with remaining terms of up to ten years. Certain of these store leases
include provisions for contingent 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 Cambridge, Calgary, Ottawa, Tokyo, London, Brussels,
Toronto, Vancouver, Montreal, Sydney, Brisbane, Mexico City, Guadalajara, and
Monterrey. The Toronto office is company owned, subject to a mortgage of $1.0
million at August 31, 2000. All other international offices are subject to
operating leases that expire intermittently through the year 2006. The Company
believes its facilities are adequate and suitable for its current business
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 contenplated.
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, 2000.
15
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,
2000 and 1999, respectively.
High Low
--------- ----------
Fiscal Year Ended August 31, 2000:
Fourth Quarter....................... $ 8 1/4 $ 6 3/8
Third Quarter........................ 11 3/16 6 7/8
Second Quarter....................... 10 3/16 6 13/16
First Quarter........................ 8 11/16 7
Fiscal Year Ended August 31, 1999:
Fourth Quarter....................... $ 9 1/2 $ 6 1/16
Third Quarter........................ 13 1/16 9
Second Quarter....................... 18 3/4 11 7/8
First Quarter........................ 20 3/16 17 1/2
The Company did not pay or declare dividends on its common stock during the
fiscal years ended August 31, 2000 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 dividends
in the foreseeable future.
As of November 1, 2000, the Company had 20,643,182 shares of its common
stock outstanding, held by approximately 350 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
August 31, 2000 1999 1998 1997 1996
- --------------------------------------- ------------------------------------------------------------------------------------
In thousands, except per share data
INCOME STATEMENT DATA:
Sales $ 585,199 $ 554,923 $ 546,612 $ 433,272 $ 332,006
Net Income (4,409) (8,772) 40,058 38,865 34,239
Income (loss) Available to Common
Shareholders (12,414) (10,647) 40,058 38,865 34,239
Diluted Earnings Per Share (0.61) (0.51) 1.62 1.76 1.53
BALANCE SHEET DATA:
Total Assets $ 592,479 $ 623,303 $ 597,277 $ 572,187 $ 268,445
Long-Term Obligations 65,790 6,543 126,413 94,144 5,500
Shareholders' Equity 374,053 378,434 341,654 355,405 231,835
16
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 designed 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 available in electronic or paper-based
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 and www.franklincoveyplanner.com. The Company recently
released a new series of training curricula designed to enhance the productivity
of people who regularly use electronic communication tools such as e-mail, voice
mail, and the Internet. Each of the modules in the series can be taught in a
variety of environments, ranging from classes in the Company's new productivity
centers, located in certain retail stores, to computer-based and on-line
presentations. These new products are the latest additions to a variety of
products and services that include the Company's well known 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
The Company is currently in the process of restructuring its operations and
expects to report financial information under the new structure in fiscal 2001.
Although the Company has substantially completed restructuring its operations,
the above SBUs represent the primary management measurement tool until the new
reporting structure is implemented. The consumer products SBU is responsible for
distribution of the Company's products through its retail stores, catalog
operations, wholesale channels (including contract stationers), government
channels, 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 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 operation, which was
sold during fiscal 2000, 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.
The following is a summary of recent business acquisitions by the Company:
In December 1999, the Company purchased a majority interest in
DayTracker.com, an on-line provider of scheduling and calendar services.
The total purchase price was $11.0 million in cash and notes payable. The
acquired web site and its on-line scheduling and organizational services
can be accessed on the Internet at www.franklincoveyplanner.com.
17
During September 1999, the Company acquired the assets of the
Professional Resources Organization (the Jack Phillips Group) for $1.5
million in cash. 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 published 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. During fiscal 2000, the remaining earnout period was
canceled in consideration for $0.4 million in cash.
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 were 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
restructuring was also intended to lay strategic, operational, organizational,
and financial foundations for profitable growth. In connection with the
restructuring plan, the Company recorded a 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 were costs to
provide severance and related benefits to former employees, as well as costs to
formally exit the leased office space. The restructuring plan was substantially
completed as of August 31, 2000.
As part of the restructuring, the Company provided severance and related
benefits to employees affected by the changes. The cost to provide these
benefits under the restructuring plan was estimated to be $11.7 million and
covered a reduction of approximately 600 employees across all areas of the
business. At August 31, 2000, the remaining accrued severance costs were
reviewed and reduced based upon estimates of remaining liability for the
severance program. The adjustment was primarily due to favorable economic
conditions that reduced the average time necessary for terminated employees to
find new employment. Remaining accrued severance costs are expected to be
sufficient for remaining payments related to the severance plan.
Also included in the restructuring provision was a charge to exit the
majority of the Company's leased office space in Provo, Utah. These facilities
contained 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 were 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 were moved to the
Company's corporate headquarters located in Salt Lake City, Utah. The Company
anticipated the costs to exit the facilities and sublease the space to be
approximately $4.6 million. During fiscal 2000, the office space was subleased
and the exit accrual was reduced by $0.4 million to reflect favorable building
transition costs. The remaining building exit accrual at August 31, 2000
represents the difference between base rental charges and the offsetting
expected sublease revenue receipts. The remaining accrual is expected to be
sufficient to complete the building exit plan.
18
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, 2000 1999 1998
- --------------------------- ------------ ---------- ----------
Sales 100.0% 100.0% 100.0%
Cost of sales 43.4 43.8 39.1
-------- ------- -------
Gross margin 56.6 56.2 60.9
-------- ------- -------
Operating expenses:
Selling, general and administrative 46.0 42.4 40.5
Stock option purchase and relocation costs 1.9
Depreciation and amortization 7.7 7.1 6.1
Restructuring costs (0.8) 2.9
Loss on impaired assets 3.0
-------- ------- -------
Total operating expenses 54.8 55.4 46.6
-------- ------- -------
Income from operations 1.8 0.8 14.3
-------- ------- -------
Interest income 0.3 0.2 0.4
Interest expense (1.1) (1.8) (1.5)
-------- ------- -------
Net interest expense (0.8) (1.6) (1.1)
-------- ------- -------
Income (loss) before provision
(benefit) for income taxes and change
in accounting principle 1.0 (0.8) 13.2
Provision (benefit) for income taxes 1.7 (0.8) 5.5
-------- ------- -------
(Loss) income before change in accounting
principle (0.7) (1.6) 7.7
Cumulative effect of change in accounting
principle, net of tax (0.4)
-------- ------- -------
Net (loss) income (0.7) (1.6) 7.3
Preferred dividends (1.4) (0.3)
-------- ------- -------
(Loss) income available to common
shareholders (2.1)% (1.9)% 7.3%
===== ===== ====
Sales Data:
Consumer Products 51.8% 48.5% 47.4%
Training and Education 36.7 37.1 37.9
International 8.5 9.1 8.2
Other 3.0 5.3 6.5
19
FISCAL 2000 COMPARED WITH FISCAL 1999
SALES
The Company's sales, by reportable segment, were as follows (in thousands):
YEAR ENDED AUGUST 31,
2000 1999 1998
- ------------------------- ----------- ------------ -----------
Consumer Products $ 302,944 $ 269,285 $ 258,973
Training and Education 214,646 205,669 207,015
International 49,955 50,513 45,068
Other 17,654 29,456 35,556
----------- ------------ -----------
$ 585,199 $ 554,923 $ 546,612
----------- ------------ -----------
Consumer product sales increased $33.7 million, or 13 percent, compared to
the prior year. Increased sales from the Company's retail stores, wholesale
channels, and the Internet were partially offset by decreased sales from the
catalog, mass markets, and government products channels. Retail store sales
increased as a result of 10 new stores and a 13 percent increase in comparable
store sales. At August 31, 2000, the Company was operating 135 stores compared
to 125 stores at August 31, 1999. Comparable store sales growth during the year
was primarily fueled by increased sales of handheld electronic devices, such as
the Palm V(TM) by Palm, Inc., bundled with the Company's Franklin Planner(TM)
software, as well as sales of related accessories. Sales of handheld electronic
devices and accessories represented a significantly larger percentage of total
consumer product sales during fiscal 2000. As the popularity of handheld
electronic devices continues to grow, the Company anticipates further sales
growth from these devices in future periods. However, future sales growth is
dependent upon a number of factors, including the availability of products from
manufacturers, changes in technology and consumer preferences, and the
introduction of new products from competitors. The Company also had increased
sales from its wholesale channels (including the contract stationer channel)
primarily due to increased demand from existing sales and marketing agreements,
the successful introduction of new products, and the addition of new marketing
and distribution agreements. Increased Internet sales were the result of
continued changes in general consumer buying habits, ongoing improvements to the
Company's electronic commerce infrastructure, and special promotions advertised
in the Company's catalogs and on its web site at www.franklincovey.com.
Increased sales in these channels were partially offset by decreased sales from
the catalog, mass markets and government products channel. The Company's catalog
operation continues to be adversely affected by increased Internet sales, which
the Company attributes to continuing changes in consumer buying preferences.
Although catalog sales declined during fiscal 2000, catalog sales combined with
Internet sales increased nine percent compared to the prior year. Sales through
the mass-market channel decreased due to the termination of an agreement with a
mass-market distributor. Government product sales continued to be adversely
affected by uncertainties surrounding the potential closure of GSA depots and
service centers.
20
Training and education sales increased by $9.0 million, or four percent,
compared to fiscal 1999. Increased sales from Premier Agendas, sales
effectiveness, and leadership programs were partially offset by decreased sales
from productivity seminars and personal coaching. Premier Agendas, which
provides leadership and productivity solutions to students and others in the
education market, increased sales by 20 percent over the prior year. The
increase was primarily due to an increase in the number of schools that use
Premier's products and services. Increased sales effectiveness revenue was due
to new contracts and increased demand for seminars taught by Khalsa Associates,
which was acquired by the Company during fiscal 1999. Increased leadership
program sales were primarily due to improved organizational sales, especially
for custom programs, and related business development program sales.
Productivity program sales decreased primarily due to the timing of specialized
product orders in the prior year and a decline in public seminar revenues.
During fiscal 2000, the Company restructured its public seminar operations,
which resulted in marketing and program delivery changes designed to improve
public seminar profitability. During fiscal 2000, training sales in general were
adversely affected by the relocation of certain sales associates to new regional
sales offices. Personal coaching sales were adversely affected by decreased
demand for coaching from one of its major clients. In response, the Company
entered into a joint venture with American Marketing Systems, Inc., a major
customer of the Personal Coaching division, effective September 1, 2000. The new
company, Franklin Covey Coaching, LLC, will continue to provide personal
coaching services for the Company and other existing clients. The Company
anticipates that the new venture will broaden the curriculum and services
currently offered in order to grow the personal coaching business over the
long-term while maintaining a substantial portion of the Company's earnings from
coaching activities in current periods.
International sales decreased $0.6 million, or one percent, compared to the
prior year. Increased sales in Canada, Mexico, and Brazil were offset by
decreased sales in Australia, Japan, the Middle East, and New Zealand. Sales in
Canada increased primarily due to improved training sales resulting from
additional sales personnel hired during fiscal 2000 to expand Company operations
in Canada. Increased sales in Mexico were primarily due to two new retail
stores, increased catalog sales, and the Company purchasing the Mexico licensee
and combining its operations with the Company's direct office already
established in Mexico. In May 2000, the Company opened a direct office in Brazil
and has since recognized increased sales in that country. Prior to May 2000, all
sales (primarily product sales) were serviced through the corporate office.
Decreased sales performance in Australia was due to decreased training sales at
one of Australia's largest customers, reorganization of the sales force, and the
timing of speaking engagements by Stephen R. Covey, which increased training
sales in the prior year. Sales in Japan decreased due to sales force
restructuring and declining book sales. In fiscal 1999, The 7 Habits of Highly
Effective Families book was released, while no new major publications were
released during fiscal 2000. Decreased sales in the Middle East were due to the
Company changing its business strategy in the region from a direct office to
licensee operations. As a result, the Company receives a royalty based upon a
percentage of the licensee's sales rather than recognizing 100 percent of sales
generated in the Middle East. Sales decreased in New Zealand due to closure of
the New Zealand office during fiscal 2000. Future sales and business activity in
New Zealand will be serviced through the Australian office.
Other sales, which consist primarily of the Company's commercial printing
and tabbing operations, decreased $11.8 million, or 40 percent, compared to
fiscal 1999. The decrease was due to the sale of the commercial printing
division of Publishers Press, which was effective February 28, 2000.
21
GROSS MARGIN
Gross margin consists of sales less cost of sales. The Company's 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 56.6 percent of sales compared to 56.2 percent in fiscal 1999. The
Company's gross margin improved primarily due to product write-offs related to
the restructuring plan which were expensed in fiscal 1999, and to new inventory
procurement and management procedures, which reduced the amount of product
write-offs during fiscal 2000. Partially offsetting these improvements were the
adverse effects of product mix changes, decreased sales of certain training
programs and increased wholesale channel sales. During fiscal 1999, the Company
began a restructuring plan that examined all aspects of the business. In
connection with this review, certain products and curricula were discontinued.
Additionally, the Company actively sought to optimize inventory levels through
improved policies and procedures. These improved procedures had a favorable
effect on the Company's gross margin during fiscal 2000. As previously
described, the Company experienced significantly increased sales of handheld
electronic devices during fiscal 2000. Although handheld electronic devices have
favorably affected sales performance, these electronic devices have gross
margins that are lower than the majority of the Company's other products and
services. As sales of handheld electronic devices continue to grow, and increase
as a percentage of total Company sales, further gross margin erosion may occur.
In addition, decreased sales of higher margin training program revenues,
primarily productivity programs and personal coaching, also adversely affected
the Company's gross margin. Increased sales through wholesale channels continues
to unfavorably affect the Company's gross margin through contracted pricing
terms that have produced increased sales volume, but at lower margins.
OPERATING EXPENSES
Selling, general and administrative ("SG&A") costs increased $34.3 million
to 46.0 percent of sales compared to 42.4 percent of sales during fiscal 1999.
Increased SG&A expenses were primarily due to ongoing development of
electronic-based products and services, electronic commerce channels, spending
to support expected growth in the Premier business, newly acquired businesses,
increased promotional expenses, the addition of 10 new retail stores, and
increased consulting costs associated with projects related to the Company's
restructuring plan. The increases were partially offset by a decrease in core
employee costs as a result of headcount reduction efforts. Throughout fiscal
2000, the Company aggressively invested in the development and marketing of new
electronic-based products, on-line training programs, and various application
tools. Due to the significant increase in handheld electronic devices and
related accessories, the Company increased its customer support services for
these products. Additionally, the Company continued to invest in improvements to
its electronic commerce infrastructure to meet changing consumer preferences and
committed significant resources to the development of its Internet web site and
other on-line products and services, such as www.franklincoveyplanner.com. The
Company believes that the development of on-line products and services, combined
with an efficient e-commerce base will enable it to achieve a competitive
advantage in the future by providing a variety of tools in various formats to
enable organizations and individuals to craft effective solutions to meet their
needs. Premier, which develops and produces planners and other solutions for the
educational market, increased its SG&A spending as a result of a new regional
office and additional headcount necessary to support expected growth in fiscal
2000 and beyond. The purchases of the Professional Resources Organization and
DayTracker.com, which were acquired during fiscal 2000, have also resulted in
increased total SG&A expenses compared to the prior year. The Company also
increased its promotional spending, primarily for catalogs and direct mailings,
to advertise new products and to improve public program sales. As part of the
Company's restructuring plan, consultants have been engaged to assist the
Company with projects such as improving brand recognition, improving accounts
receivable collections, expanding European operations, and other related
projects that are designed to position the Company for profitable growth in the
future.
22
Depreciation expense increased by $3.4 million compared to the prior year
primarily due to purchases of computer hardware and software, office furniture
and fixtures, manufacturing equipment, and the addition of leasehold
improvements in new stores and regional sales offices. Amortization charges
increased by $2.2 million primarily due to the amortization of goodwill related
to contingent earnout payments made to the former owners of Premier and Personal
Coaching, and the acquisition of DayTracker.com.
STOCK OPTION PURCHASE AND RELOCATION COSTS
During fiscal 2000, the Company expensed $11.2 million of additional costs
primarily to reacquire outstanding stock options and to relocate the majority of
its sales associates to new regional offices. In an effort to reduce the
potentially dilutive effect of outstanding options on the Company's capital
structure, the Company actively sought to reacquire outstanding stock options
from both current and former employees. The majority of option purchase costs
were incurred in connection with a tender offer made by the Company during its
third fiscal quarter to purchase all outstanding options with an exercise price
of $12.25 or higher. As a result of the tender offer and previous purchases of
option shares, the Company acquired 3,294,476 option shares for a total cost of
$8.7 million. The remaining $2.5 million was spent primarily to relocate certain
sales associates to new regional offices. At August 31, 2000 all regional sales
offices were operating and the Company expects to see increased training sales
in future periods from this new strategy. These costs have been included as a
separate expense component in the accompanying consolidated statement of income
for the fiscal year ended August 31, 2000.
INTEREST EXPENSE
Interest expense decreased $3.7 million primarily due to lower long-term
debt balances during fiscal 2000. Long-term debt decreased due to the retirement
of $85.0 million of notes payable during October 1999. The notes payable were
retired using existing cash balances and the Company's expanded lines of credit.
INCOME TAXES
The Company's effective income tax rate continues to be adversely affected
by non-deductible goodwill amortization, the effect of foreign losses, and the
magnified effects of other non-deductible items resulting from decreased taxable
income. Amortization of goodwill primarily generated from the merger with Covey
Leadership Center and certain other acquisitions is not deductible for income
tax purposes and had an adverse effect on the Company's effective tax rate.
During fiscal 2000, the effect of foreign losses was primarily comprised of
losses sustained in Japan, Australia, and New Zealand for which no offsetting
tax benefit could be recognized due to uncertain future taxable income to offset
such losses.
PREFERRED STOCK DIVIDENDS
In connection with the issuance of 750,000 shares of preferred stock in the
fourth quarter of fiscal 1999, the Company completed a subscription offering for
up to an additional 750,000 shares of preferred stock during fiscal 2000. The
subscription offering closed during the Company's second quarter of fiscal 2000
with 42,338 shares purchased under terms of the offering. As a result, the
increase in preferred stock dividends was due to the full-year impact of
previously issued shares and the subscription offering that closed during fiscal
2000.
23
FISCAL 1999 COMPARED WITH FISCAL 1998
SALES
Consumer products sales increased $10.3 million, or four percent, 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 two percent 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, 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 decreased by $1.3 million, or one percent,
compared to the prior year. Sales increases from Premier, personal coaching, and
direct product channels were 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 percent increase in sales, primarily
from new customers. New business from both personal coaching and the
direct-products channel resulted in increased sales during fiscal 1999. These
increases in training and education sales were offset by decreased core training
sales, primarily from corporate/on-site and facilitated programs for leadership
training. 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 $5.4 million, or 12 percent, compared to
the prior year. The increase was primarily due to the acquisition of a former
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 percent, 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 was 56.2 percent of sales for fiscal 1999, compared to 60.9
percent 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
24
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 expenses increased $13.7 million, to
42.4 percent of sales, compared to 40.5 percent 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 Outlook(TM). The Company also spent
significant amounts to improve its electronic commerce infrastructure to meet
changing consumer preferences and committed significant resources to the
development of its Internet web site and other on-line products and services.
During the fourth quarter of fiscal 1999, 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
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 Company's business transformation project and the addition of leasehold
improvements for new stores. Equipment and software purchased in connection with
the business transformation 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 business transformation 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 intended to reduce
its workforce from 4,200 employees to approximately 3,600 employees. The cost to
provide severance and related benefits was estimated to be $11.7 million. Also
included in the restructuring provision is a charge to exit certain leased
office space in Provo, Utah. These facilities formerly accommodated sales,
marketing, and other functions primarily aligned with the training and education
SBU.
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 of fiscal 1999, 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 this analysis,
the Company recognized a $16.6 million loss on impaired long-lived assets for
the year ended August 31, 1999.
25
INTEREST EXPENSE
Interest expense increased $1.6 million, primarily due to increased
borrowing on the Company's long-term line of credit to purchase shares of the
Company's common 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 with Covey Leadership
Center 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.
PREFERRED STOCK DIVIDENDS
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 percent 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 accrued
dividend with additional shares of preferred stock.
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, 2000
---------- ---------- ---------- ----------
Q1 Q2 Q3 Q4
---------- ---------- ---------- ----------
In thousands, except per share amounts
Sales $ 144,078 $ 145,023 $ 110,759 $ 185,339
Gross margin 85,053 83,098 57,710 105,130
Restructuring costs (402) (4,544)
Stock option purchase and
relocation costs 491 1,668 8,361 707
Income (loss) before
provision for income taxes 13,093 5,430 (27,701) 14,731
Net income (loss) 7,188 2,819 (18,834) 4,418
Preferred dividends 1,914 2,036 2,028 2,027
Income (loss) available to
common shareholders $ 5,274 $ 783 $(20,862) $ 2,391
Diluted income (loss) per share $ .26 $ .04 $ (1.02) $ .12
26
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)
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 Agenda's sales,
which occur primarily in the Company's fourth quarter. In the Company's
experience, catalog sales, retail store sales, and net 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 fiscal 2000, the Company incurred and expensed $11.2 million for
other costs related to its restructuring plan which were not specific to
severance or leased office space exit costs. These costs were primarily
comprised of charges resulting from a stock option tender offer and other
purchases of outstanding stock options, and to relocate sales associates to new
regional sales offices. These costs have been classified as a separate component
of operating expenses. In an effort to reduce the potentially dilutive effect of
stock options on the Company's capital structure, the Company was actively
engaged in purchasing stock options from current and former employees. As part
of this strategy, the Company filed a tender offer statement with the SEC that
closed during the Company's third quarter of fiscal 2000. Under terms of the
offer, the Company paid cash for the outstanding option shares, which were
priced using a market value methodology. As a result of the tender offer and
previous purchases of option shares, the Company reacquired 3,294,476 option
shares for $8.7 million in cash. The remaining $2.5 million was primarily used
to relocate the Company's sales force to eight new regional offices that were
opened during fiscal 2000.
During the fourth quarter of fiscal 1999, the Company initiated a
restructuring plan that resulted in a $16.3 million charge to operations.
Included in the restructuring charge were costs necessary to reduce the
Company's workforce by approximately 600 employees and to exit the majority of
leased office space in Provo, Utah. The Company reassessed the severance portion
27
of the restructuring accrual during the fourth quarter of fiscal 2000 and
reduced the remaining accrual by $4.5 million. The adjustment was primarily due
to favorable economic conditions that allowed former employees to find new jobs
more quickly than expected and resulted in reduced severance costs. Also during
fiscal 2000, the Company exited the leased office space located in Provo, Utah
and obtained a subleasee for the property. After an assessment of the sublease
terms, the Company adjusted its restructuring accrual by $0.4 million during the
third quarter of fiscal 2000 to reflect lower than expected building transition
costs. As of August 31, 2000, accrued severance costs consisted of expected
remaining severance and benefit payments for affected employees. Remaining
accrued leased office space exit costs consisted of items such as the difference
between the base rental charge and sublease revenues over time and tenant
improvements. As of August 31, 2000, the restructuring plan was substantially
complete and the Company expects that the remaining restructuring accrual will
be sufficient to complete its restructuring plan.
As part of its restructuring plan, and upon review of certain goodwill,
intangibles, and other long-term assets, the Company recognized a loss on
impaired assets totaling $16.6 million during the fourth quarter of fiscal 1999.
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 borrowing, and line-of-credit
financing. Working capital requirements have also been financed through
short-term borrowing and line-of-credit financing. In addition to these sources,
the Company issued preferred stock to a private investor in the fourth quarter
of fiscal 1999, and to existing shareholders through a subscription offering
during fiscal 2000. The subscription offering closed on November 30, 1999 with
42,338 shares of preferred stock purchased under terms of the offering. The
preferred stock issued to shareholders was substantially identical to preferred
shares previously issued to the private investor. Net proceeds from the
subscription offering were $4.1 million.
Net cash provided by operating activities during fiscal 2000 and 1999 was
$50.6 million and $36.0 million, respectively. Adjustments to net loss for
fiscal 2000 included $48.5 million of depreciation and amortization charges. The
primary sources of cash from operations resulted from improved collections of
accounts receivable and reduced inventories. In contrast with recent fiscal
years, the collection of accounts receivable resulted in a net source of cash to
the Company in spite of continued fourth quarter sales growth at Premier
Agendas. During fiscal 2000, the Company implemented new accounts receivable
collection policies and procedures at its core operations, which reduced the
number of receivable days outstanding and improved cash flows. The Company also
implemented new inventory procedures designed to optimize inventory levels,
which contributed to reduced inventory levels compared with the prior year.
Additionally, the Company utilized certain income tax benefits and various tax
strategies to minimize required income tax payments throughout the year. The
primary uses of cash in fiscal 2000 were payments related to the Company's
restructuring plan for severance and building exit costs, and the purchase of
stock options and payments for sales associate relocation expenses. For the
fiscal year ended August 31, 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 operational activities
were increases in inventory of $12.0 million and increased receivables totaling
$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 in fiscal 1999 for expected costs to
reduce the workforce and exit certain leased office space, which is included as
a component of cash flows from operations. Cash used to pay income taxes is the
28
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.
Net cash used for investing activities during fiscal years 2000 and 1999
was $38.9 million and $40.7 million, respectively. For the year ended August 31,
2000, the Company used $24.5 million of cash to purchase computer hardware and
software, manufacturing equipment, leasehold improvements, and other property
and equipment. The Company used $16.3 million to pay contingent earnout payments
to the former owners of Premier Agendas and personal coaching. In addition, the
operations of Professional Resources Organization and Daytracker.com were
acquired during fiscal 2000 for $4.5 million in cash. The Company also sold the
assets of the commercial division of Publishers Press, a printing services
subsidiary, for $11.0 million in cash and a $2.4 million secured note
receivable. Net cash proceeds to the Company from the sale totaled $6.4 million.
During fiscal 1999, the Company paid $14.8 million in contingent earnout
payments and spent an additional $4.2 million to acquire other businesses during
the year, including Khalsa Associates, a sales training company. Capital
expenditures during fiscal 1999 totaled $23.0 million and consisted primarily of
an addition to one of the Company's buildings, new store leasehold improvements,
computer hardware and software, and other manufacturing equipment. The Company
also received $1.3 million in cash from the sale of certain land and a
non-business related building.
Net cash used for financing activities during fiscal 2000 was $18.0
million, compared to net cash proceeds of $2.4 million in fiscal 1999. The
primary source and use of cash was related to the expansion of the Company's
line of credit and the retirement of certain notes payable. At August 31, 1999,
the Company had $85.0 million of senior unsecured notes payable (the "Notes
Payable") outstanding. The Notes Payable required the Company to maintain
certain financial ratios and net worth levels until the Notes Payable were paid
in full. Due to restructuring charges in the fourth quarter of fiscal 1999, the
Company was not in compliance with the terms of the Notes Payable. The Company
did not obtain a waiver of the terms of the Notes Payable, and during the first
quarter of fiscal 2000, the Notes Payable were retired at par plus accrued
interest. Also during the first quarter of fiscal 2000, the Company obtained a
new line of credit from existing lenders that maintained the Company's $10.0
million short-term line of credit, but expanded the long-term line to $100.0
million. The $100.0 million long-term line was subsequently scaled back to $73.0
million as a result of the Company's guarantee related to the management stock
loan program. The Company used existing cash and its expanded line of credit to
retire the Notes Payable. 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. The primary source of cash from financing
activities during fiscal 1999 was the issuance of 750,000 shares of preferred
stock to a private investor for $75.0 million.
At August 31, 2000, the Company had unsecured bank lines of credit
available for working capital needs totaling $103.0 million. The Company's lines
of credit consisted of a $10.0 million short-term line of credit, a $20.0
million short-term line of credit, and a $73.0 million long-term credit
facility. On August 31, 2000, the Company had $17.9 million outstanding on the
short-term lines of credit and $55.0 million outstanding on the long-term line
of credit. The line of credit agreements require the Company to maintain certain
financial ratios and working capital levels, excluding the impact of stock
option repurchases during fiscal 2000. At August 31, 2000, the Company was in
compliance with the terms of the line of credit agreements. The Company's line
of credit agreements expire on December 1, 2001.
29
During fiscal 2000, the Company announced the implementation of an
incentive based compensation program that includes a loan program from external
lenders to certain managers for the purpose of purchasing shares of the
Company's common stock. The program gives management of the Company the
opportunity to purchase shares of the Company's common stock on the open market,
and from shares purchased by the Company, by borrowing on a full-recourse basis
from the external lenders. The Company has facilitated the loans by providing a
guarantee to the lenders. The program will total approximately $33.0 million and
the Company has facilitated the purchase of open-market shares to ensure
compliance with appropriate SEC trading rules and regulations. As of August 31,
2000, the Company had facilitated the purchase of 3,559,000 shares with a cost
of $30.0 million for the loan program.
Going forward, the Company will continue to incur costs necessary for the
development of on-line products, electronic commerce channels, strategic
acquisitions and joint ventures, 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 positions itself for future growth.
REGULATORY COMPLIANCE
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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. Such uncertainties include, but
are not limited to, unanticipated developments in any one or more of the
following areas: the integration of acquired or merged businesses, management of
growth, unanticipated costs, delays or outcomes relating to the Company's
restructuring plan, availability of financing sources, dependence on products or
services, the rate and consumer acceptance of new pro