INDEX TO FORM 10–K

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 organizations, individuals and students 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 and application tools. Franklin Covey focuses its efforts on providing solutions in five main areas: Productivity, Leadership, Communications, Education and Sales. The Company is organized to focus it efforts to serve three customer segments; organizations, individual consumers and schools. The Company also measures the impact of training investments. Effectiveness solutions are delivered through Company owned retail stores, 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®, PALM® and other handheld electronic organizers, wireless communication 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 Company’s mainstay staple tools that assists clients in implementing effectiveness training is the Franklin Planning System. The Franklin Planning System typically implements training and learning by using tools such as the Franklin Planner. The original Franklin Planner consists of a paper–based, two–page per day 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. 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® Computing organizer, Compaq’s® iPAQ™ Pocket PC®, Handspring’s™ Visor® and wireless communication and planning devices. The Company also provides an extension to Microsoft Outlook® that incorporates Franklin Planning productivity principles into the Outlook calendar system. An online version of the Franklin Planner is also available at www.franklinplanner.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. Franklin Covey markets the Franklin Planner and accessory products directly to organizations and individuals, through its catalog, its retail stores, its e-commerce Internet site at www.franklincovey.com and through third party channels.

        The principles taught in the Company’s curriculum have also been published in book and audiotape 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, What Matters Most and The Modern Gladiator 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 audiotape and CD audio 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 more than 160 retail stores.

        Franklin Covey provides its effectiveness solutions to organizations in business, industry, government entities, communities, to schools and educational institutions, and to individuals. The Company sells its services to organizations and schools through its own direct sales force. The Company delivers its training services to organizations, schools and individuals in one of four ways:

        In fiscal 2001, 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. Approximately 600,000 individuals were trained during the year ended August 31, 2001.

        The Company also provides products, consulting and training services internationally, either through directly operated offices, or through licensed providers. At August 31, 2001, Franklin Covey had direct operations in Canada, Japan, Australia, Mexico, Brazil and the United Kingdom. The Company also had licensed operations in 31 countries.

Recent Acquisitions and Divestitures

        In January 1999, the Company acquired the assets of Khalsa Associates, a leading sales training company. In July 1999, Microsoft® announced that it had signed an agreement with Franklin Covey to train its worldwide 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.

        In November 2001, the Company signed an agreement to sell the stock of Premier School Agendas, a Bellingham, Washington based wholly owned subsidiary, for approximately $165 million to School Specialty (NASDAQ: SCHS) of Greenville, Wisconsin. The transaction is subject to regulatory approval and other customary closing conditions. The Company expects the sale to be completed during the second quarter of fiscal year 2002.

        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 ones’ information in that one 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.

        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 $15.00 to $47.00. 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 $6.75 to $8.25.

        Electronic Solutions.   The Company also offers its time and life management methodology within a complete Personal Information Management (“PIM”) system through the 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 Franklin Covey paper that can be inserted directly into the Franklin Planner. The program operates in the Windows® 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 offers 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® Computing organizer that includes the Franklin Planner Software when sold through Franklin Covey channels. The PALM® has become another successful planning tool offered by the Company through all of its channels. The Company has introduced products that can add paper-based planning to the electronic planner as well as binders and carrying cases specific to the PALM®. The Company also offers other electronic organizers with the Franklin Planner software such as the iPAQ™ Pocket PC from Compaq® and the Visor™ by Handspring®.

        Franklin Covey also offers planning capabilities over the Internet at www.franklinplanner.com. The Company’s Web site allows customers to synchronize with other planning software as well as handheld organizers. Like the Franklin Planner Software, it also allows users to print planner pages from the Web site to fit in the various Franklin Planner sizes. The Web version allows users to pull information from various other Internet sites to customize the site to the customer’s interests.

        The Company also provides a 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 computer-based or on-line training, live training as well as audio and printed materials. Productivity in the Digital Age effectiveness tools include 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 Agendas division agendas to schools and school districts in order to help teachers and students enhance the learning process. Premier sold more than 20 million agendas in fiscal 2001, mostly in the United States and Canada. 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 between the student, the parents and the teacher. Most agendas are customized to include the individual school’s rules, regulations, administrators and scheduled events. Franklin Planner Agendas are also sold in the Company’s retail stores, e-commerce website and through the catalog for $7.95. In November 2001, the Company signed an agreement to sell the stock of Premier Agendas to School Specialty for approximately $165 million. Pursuant to a license from Franklin Covey, Premier will continue to expose over 20 million K-12 students to Franklin Covey’s world-renowned 7 Habits content. In addition, School Specialty will feature select Franklin Covey products in its catalogs. Franklin Covey will retain its educator leadership and effectiveness training portion of Premier’s business. The transaction is subject to regulatory approval and other customary closing conditions. The Company expects the sale to be completed during the second quarter of fiscal year 2002.

         Binders.  Franklin Covey offers binders and electronic organizer 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, electronic devices and writing instruments. The Company’s binder products range in price from $15.00 to $265.00.

         Personal Development and Accessory Products.   To supplement its principal products, Franklin Covey offers a number of accessories and related products, including books, videotapes and audiocassettes 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, CD’s 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.

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 Organizational Solutions Group (OSG), which consists of talented consultants, selected through a competitive and demanding process, and highly qualified sales professionals.

        Franklin Covey currently employs 101 training consultants in major metropolitan areas of the United States with an additional 43 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 OSG 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™ (“OHA”), used to assess client needs; the Organizational Effectiveness Cycle™ (“OE-Cycle™”), utilized for organizational diagnosis and re-design; and the Principle-Centered Organizational Change Process™ (“PCOC Process™”), a rigorous methodology for organizational change management.

        Franklin Covey’s OSG is organized in five 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 2001, more than 600,000 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. The Company offers a number of other single–day seminars and workshops including Presentation Advantage™, a seminar helping individuals and organizations make more effective business presentations; Writing Advantage®, a seminar that teaches effective business writing and communication skills; and Project Management™, 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.

        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.

        In addition to providing consultants and presenters, Franklin Covey also trains and certifies client facilitators to teach selected Company workshops within the client’s organization. Franklin Covey believes client–facilitated training is important to its fundamental strategy to create recurring client revenue streams. After having been certified, clients can purchase manuals, profiles, planners and other products to conduct training workshops within their organization, generally without the Company repeating the sales process. This creates an annuity–type business, providing recurring revenue, especially when combined with the fact that curriculum content in one course leads the client to additional participation in other Company courses. Since 1988, Franklin Covey has trained more than 19,000 client facilitators. Client facilitators are certified only after graduating from one of Franklin Covey’s certification workshops and completing post–course certification requirements.

        Franklin Covey regularly sponsors public seminars in cities throughout the United States and in several foreign countries. The frequency of seminars in each city or country depends on the concentration of Franklin Covey clients, the level of promotion and resulting demand, and generally ranges from semi–monthly to quarterly. Smaller institutional clients often utilize the public seminars to train their employees.

        In fiscal 1996, Franklin Covey introduced the Franklin Covey Leadership Library series of video workshops. The Franklin Covey Leadership Library is a series of stand-alone video workshops that can be used in informal settings as discussion starters, in staff meetings or as part of an in-house leadership development program.

        The Company also offers a series of learning modules 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 computer-based or on-line training, live training as well as audio and printed materials. Productivity in the Digital Age effectiveness tools include PDA’s, desktop applications, on-line tools and software all designed to synchronize information across various platforms and systems.

        Personal Coaching.   Franklin Covey offers post-seminar training in the form of personal coaching through a joint-venture entity called Franklin Covey Coaching, LLC. The entity employs 41 coaches that interact with clients on the telephone to help them implement the training principles learned 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 and Marketing

        The following table sets forth, for the periods indicated, the Company’s revenue for each of its principal distribution channels:

                                             2001       2000        1999
                                             ----       ----        ----

      Retail Stores ...................   $151,943   $163,305   $140,850

      Catalog / e-commerce ............     90,450    110,543    102,335

      Organizational Solutions Group...     84,723     85,977     77,496

      Educational. ....................     91,037     85,348     70,798

      International ...................     51,851     50,870     50,611

      Other ...........................     55,329    106,942    129,506
                                          --------   --------   --------
      Total ...........................   $525,333   $602,985   $571,596
                                          ========   ========   ========

         Franklin Covey uses retail stores, catalogs, its own Web site, organizational and educational sales forces and other distribution channels to market its products to organizations, schools and individuals domestically and internationally.

        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 from 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, 2001, Franklin Covey had 164 domestic retail stores located in 37 states and the District of Columbia and 10 international stores.

        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–in 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 and to test-market new products. 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.

         Catalog/e-Commerce.   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.

        During fiscal 2001, entered into a long-term contract with EDS to provide a large part of its customer relationship management (CRM) in servicing its Catalog and e-Commerce customers. Franklin Covey uses EDS to maintain 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 a 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 more than 350 customer service representatives has the authority to immediately solve any client service problem.

        The integrated CRM system provided by EDS allows orders from customers to be processed quickly through its warehousing and distribution systems. Client information stored within the order entry system is also used for additional purposes, including target marketing of specific products to existing clients and site selection for Company retail stores. Franklin Covey believes that its order entry system helps assure client satisfaction through both rapid delivery and accurate order shipment.

        Organizational Solutions Group.   Franklin Covey’s sales professionals market the Company’s training, consulting and measurement services to institutional clients and public seminar clients.

        Franklin Covey employs 135 sales professionals located in five major metropolitan areas throughout the United States who sell training services to institutional clients. Franklin Covey employs an additional 69 sales professionals outside of the United States in 8 countries. Sales professionals must have significant selling experience prior to employment by the Company and are trained and evaluated at Franklin Covey and in their respective sales territories during the first six months of employment. Sales professionals typically call upon persons responsible for corporate employee training, such as corporate training directors or human resource officers. Sales professionals work closely with training consultants in their territories to schedule and tailor seminars and workshops to meet specific objectives of institutional clients.

        Franklin Covey also employs 101 training consultants throughout the United States who present institutional and public seminars in their respective territories and an additional 43 training consultants outside of the United States. Training consultants work with sales professionals and institutional clients to incorporate a client’s goals, 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.

        Educational Sales.   The Company markets through its Premier Agendas division agendas to schools and school districts in order to help teachers and students enhance the learning process. Premier sold more than 20 million agendas in fiscal 2001, mostly in the United States and Canada. 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. Franklin Covey also markets through its Education division its Student Achievement Workshop. Based on upon the 7 Habits of Highly Effective Teens book, it helps to teach students, teachers, and parents better studying skills, learning habits, and interpersonal development. In November 2001, the Company signed an agreement to sell the stock of Premier Agendas to School Specialty for approximately $165 million. Pursuant to a license from Franklin Covey, Premier will continue to expose over 20 million K-12 students to Franklin Covey’s world-renowned 7 Habits content. In addition, School Specialty will feature select Franklin Covey products in its catalogs. Franklin Covey will retain its educator leadership and effectiveness training portion of Premier’s business. The transaction is subject to regulatory approval and other customary closing conditions. The Company expects the sale to be completed during the second quarter of fiscal year 2002.

        International Sales.   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 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 $51.9 million in revenue in the year ended August 31, 2001. After grossing up royalties from licensed operations to their actual sales level, total sales generated in the international operations were $71.7 million.

        Other Channels.   TheCompany has an alliance with the At-A-Glance group to sell its products through the 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. 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 $17.7 million of other sales in fiscal year 2000 and no revenues during fiscal 2001.

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® Computing to serve as the official training organization for their PALM® Computing products.

         In fiscal 2001, Franklin Covey and EDS signed a joint go-to-market strategy agreement. In the agreement Franklin Covey and EDS will develop, co-brand and market online versions of Franklin Covey’s learning and performance solutions, including The 7 Habits of Highly Effective People® and the Franklin Covey Planning System® for time and information management, to their respective clients. This joint go-to-market strategy will provide new, innovative ways for Franklin Covey and EDS clients to access Franklin Covey’s learning and performance intellectual property, and will increase accessibility to this capital through EDS’ Digital Learning technology, hosting and learning management offerings.

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 and education 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 2001 domestic training and education sales of approximately $228 million, the Company believes it is a leading competitor in the organizational training and education market. Other significant competitors in the 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 cultural 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 cultural change is distinguishable from the approach taken by more traditional change management and re-engineering firms, as Franklin Covey’s approach complements, rather than competes with, the offerings of such firms.

         Products.   The paper-based time management and personal organization products market is intensely competitive and subject to rapid change. Franklin Covey competes directly with other companies that manufacture and market calendars, planners, personal organizers, appointment books, diaries and related products through retail, mail order and other direct sales channels. In this market, several competitors have widespread name recognition. The Company believes its principal competitors include DayTimer, At–A–Glance and Day Runner. Franklin Covey also competes, to a lesser extent, with companies that market substitutes for paper-based products, such as electronic organizers, software PIMs and hand-held computers. The Company’s Franklin Planner Software competes directly with numerous other PIMs. Many of Franklin Covey’s competitors have significant marketing, product development, financial and other resources. An emerging potential source of competition is the appearance of calendars and event-planning services available at no charge on the Web. There is no indication that the current level of features has proven to be attractive to the traditional planner customer as a stand-alone service, but as these products evolve and improve, they are likely to pose a competitive threat. In response, Franklin Covey intends to combine online planning services with PALM® Computing and Compaq’s® 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 operations of Franklin Covey consist primarily of printing, collating, assembling and packaging components used in connection with the Franklin Covey product line. Franklin Covey operates its central manufacturing services out of Salt Lake City. At that location, the Company prints and packages its products for its worldwide customers. 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 ensure consistent quality of production materials and to control costs and maintain efficiencies. By operating in this fashion, Franklin Covey has gained greater control of production costs, schedules and quality control of printed materials.

        During fiscal 2001, Franklin Covey entered into a long-term contract with EDS to provide warehousing and distribution services of the Company’s product line. EDS maintains a facility at the Company’s headquarters as well as numerous other locations throughout the world.

        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 ensure 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.

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 audiotapes and videotapes. 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, 2001, Franklin Covey had 3,247 full and part–time associates, including 1,277 in sales, marketing and training; 1,326 in customer service and retail; 452 in production operations and distribution; and 192 in administration and support staff. During fiscal 2001, the Company outsourced a significant part of its information technology services, customer service, distribution and warehousing operations to EDS. A number of the Company’s employees involved in these operations are now employed by EDS to provide those services to Franklin Covey. Additionally, the associates of Franklin Covey Coaching, LLC are not included in the associate numbers. 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 six Company owned and occupied buildings containing approximately 380,000 square feet and are subject to mortgages of $0.9 million as of August 31, 2001. The Company is also leasing 140,000 square feet near its Salt Lake City Campus for warehousing and additional office space. These leases expire in 2003 and 2016. The Company currently owns one building containing approximately 80,000 square feet for manufacturing that is leased to an external party. During the fourth quarter of fiscal 2001, the Company sold two buildings on its Salt Lake City campus that were used for warehousing and distribution operations as part of its outsourcing agreement with EDS.

         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 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 60,000 square feet as of August 31, 2001. These three 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 consulting business from the Provo facilities to eight leased regional sales offices located in New York, Chicago, Los Angeles, San Francisco, Columbus, Dallas, Atlanta, and Washington, D.C.

         Franklin Covey also currently operates 164 retail stores currently under operating leases, with remaining terms of up to eleven 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, Monterrey, and Sao Paulo. The Toronto office is company owned and subject to a mortgage of $0.9 million at August 31, 2001. All other international offices are subject to operating leases that expire intermittently through the year 2006.

Item 3.    Legal Proceedings

         The Company is not a party to, nor is any of its property subject to, any material pending legal proceedings, nor are any such proceedings known to the Company to be contemplated.

Item 4.    Submission of Matters to a Vote of Security Holders

         No matters were submitted to a vote of security holders during the fourth quarter of the year ended August 31, 2001.

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, 2001 and 2000, respectively.

        The Company did not pay or declare dividends on its common stock during the fiscal years ended August 31, 2001 and 2000. 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, 2001, the Company had 19,881,531 shares of its common stock outstanding, held by approximately 350 shareholders of record.

Item 6.   Selected Financial Data

FINANCIAL HIGHLIGHTS

August 31,                              2001         2000         1999         1998        1997 
                                       --------    ---------    ---------    ---------   ---------
In thousands, except per share data

INCOME STATEMENT DATA:
Sales ...........................   $ 525,333    $ 602,985    $ 571,596    $ 565,360   $ 448,544
Net Income (Loss)................     (11,083)      (4,409)      (8,772)      40,058      38,865
Income (Loss) Attributable to
   Common Shareholders ..........     (19,236)     (12,414)     (10,647)      40,058      38,865
Diluted Earnings Per Share ......       (0.95)       (0.61)       (0.51)        1.62        1.76


BALANCE SHEET DATA:
Total Assets ....................   $ 535,069    $ 592,479    $ 623,303    $ 597,277   $ 572,187
Long-Term Obligations ...........      93,271       65,790        6,543      126,413      94,144
Shareholders' Equity ............     309,882      374,053      378,434      341,654     355,405

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.franklinplanner.com. The Company’s best known products include the Franklin Planner^TM and the best-selling book, The 7 Habits of Highly Effective People.

        The following is a summary of recent business acquisitions and divestitures by the Company:

        On November 13, 2001, the Company signed a definitive agreement to sell Premier Agendas (“Premier”), a wholly owned subsidiary that provides productivity and learning solutions to the educational industry. The sales price is $152.5 million in cash. In addition, the Company will retain approximately $13.0 million of Premier’s working capital. The transaction is subject to regulatory approval and other customary closing conditions. The Company expects to recognize a gain from the sale of Premier and anticipates that the sale will be completed during the second quarter of fiscal 2002.

        During April 2001, the Company purchased the Project Consulting Group for $1.5 million in cash. The Project Consulting Group provides project consulting, project management, and project methodology training services.

        Effective September 1, 2000, the Company entered into a joint venture with American Marketing Systems (“AMS”) to form Franklin Covey Coaching, LLC. Under terms of the joint venture agreement, the Company and AMS each own 50 percent of Franklin Covey Coaching, LLC and are equally represented in the management of the new company. The Company contributed substantially all of the assets of its personal coaching division to form Franklin Covey Coaching, LLC.

        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.franklinplanner.com.

        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 in cash. Khalsa Associates is a leading provider of sales training seminars and products.

Results of Operations

         The following table sets forth consolidated statement of operations data and other selected operating data expressed as percentages of total sales:

YEAR ENDED
AUGUST 31,                     2001         2000        1999
- --------------------------- ------------ ----------- -----------
Sales .....................    100.0%       100.0%      100.0%
Cost of sales .............     43.2         45.6        45.9
                            ------------ ----------- -----------
Gross margin ..............     56.8         54.4        54.1
                            ------------ ----------- -----------
Operating expenses:
Selling, general and
   administrative .........     49.5         44.1        40.6
Stock option purchase
   and relocation costs....                   1.9
Depreciation ..............      5.0          4.0         3.6
Amortization ..............      3.7          3.5         3.3
Restructuring costs........                  (0.8)        2.8
Loss on impaired  assets...                               3.0
                            ------------ ----------- -----------
Total operating expenses...     58.2         52.7        53.3
                            ------------ ----------- -----------
Income (loss) from
   operations .............     (1.4)         1.7         0.8
Equity in earnings of
   unconsolidated
   subsidiary .............      0.4
Interest income ...........      0.7          0.3         0.2
Interest expense ..........     (1.7)        (1.1)       (1.7)
                            ------------ ----------- -----------
Net interest expense ......     (1.0)        (0.8)       (1.5)
                            ------------ ----------- -----------
Income (loss) before
   provision for income
   taxes ..................     (2.0)         0.9        (0.7)
Provision for income
   taxes ..................      0.1          1.6         0.8
                            ------------ ----------- -----------
Net loss ..................     (2.1)        (0.7)       (1.5)
Preferred dividends .......     (1.6)        (1.4)       (0.4)
                            ------------ ----------- -----------
Loss attributable to
   common shareholders ....     (3.7)%       (2.1)%     (1.9)%
                            ============ =========== ===========

Sales Data:
Retail stores .............     28.9%        27.1%       24.6%
Catalog and eCommerce .....     17.2         18.3        17.9
OSG .......................     16.1         14.3        13.6
Educational ...............     17.3         14.2        12.4
International..............     10.0          8.4         8.8
Other......................     10.5         17.7        22.7

Fiscal 2001 Compared With Fiscal 2000

Sales

        In general, the Company’s sales were affected by the adoption of the Emerging Issues Task Force (“EITF”) Issue No. 00-10, which requires all shipping and handling costs to be recorded as sales. Previously, the Company recorded amounts billed to customers for shipping and handling as a component of cost of sales to offset the corresponding shipping and handling expense. All periods presented have been restated for enhanced comparability. The Company’s sales, by reportable segment, were as follows (in thousands):

YEAR ENDED AUGUST 31,         2001         2000        1999
- ------------------------- ----------- ------------ -----------
Retail stores ..........   $ 151,943   $ 163,305    $ 140,850
Catalog/eCommerce ......      90,450     110,543      102,335
OSG ....................      84,723      85,977       77,496
Educational ............      91,037      85,348       70,798
International ..........      51,851      50,870       50,611
Other ..................      55,329     106,942      129,506
                          ----------- ------------ -----------
                           $ 525,333   $ 602,985    $ 571,596
                          =========== ============ ===========

        Retail store sales decreased primarily due to reduced consumer traffic during fiscal 2001, combined with strong prior year sales of handheld electronic planning devices and related accessories. The Company attributes the decline in consumer traffic to deteriorating general economic conditions in the United States that began in late 2000, cannibalization of existing store sales by newly opened stores, and slowing demand for various handheld electronic planning devices and accessories. These factors combined to produce a 17 percent decrease in comparable store sales, which was partially offset by the addition of 29 new stores during fiscal 2001. The Company was operating 164 stores at August 31, 2001. Catalog/eCommerce sales declined primarily due to decreased call volume in the Company’s catalog operations. However, sales through the Company’s web site at www.franklincovey.com continued to increase compared to the prior year and partially offset decreased catalog sales. Sales through the Company’s Organizational Sales Group (“OSG”) decreased due to reduced on-site corporate leadership and productivity seminars, as well as reduced sales of associated training products. The Company attributes the decline in corporate seminars to economic conditions that appear to have adversely affected corporate training spending during fiscal 2001. Educational sales, which include the sales of Premier, increased primarily due to an increase in the number of schools that use Premier’s products and services. Premier, which provides productivity and leadership solutions to students, teachers, and others in the education market, records the majority of its sales during the Company’s fourth fiscal quarter. Increased international sales in Mexico and Europe were partially offset by decreases in Australia, Canada, New Zealand, and at various licensee operations. Other sales consist primarily of personal coaching, wholesale, government, and public seminar sales. Other sales decreased primarily due to the shift of personal coaching services to a joint venture, decreased wholesale sales, and decreased public seminar sales. As a result of the formation of the joint venture, the Company no longer recognizes the sales of the Personal Coaching division, but only recognizes its share of net income from the joint venture. Sales through the wholesale channel were adversely affected by decreased demand, primarily for paper-based products, from contract stationer and other related distributors. Public seminar sales declined due to an overall decline in the number of participants attending the Company’s public programs.

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.

        During fiscal 2001, the Company’s gross margin improved to 56.8 percent, compared to 54.4 percent in the prior year. The Company’s gross margin improved primarily due to increased Premier sales, reduced inventory adjustments due to improved procedures, the sale of the commercial division of Publishers Press, and price increases on certain planner products and seminars. Premier sales, which have higher margins than many other products and services sold by the Company, increased as a percentage of total sales during fiscal 2001. The current year did not include sales and corresponding costs from the commercial printing division of Publishers Press, which was sold effective February 28, 2000. Commercial printing sales had significantly lower margins than the majority of the Company’s other products and services. Partially offsetting these factors was the formation of Franklin Covey Coaching, LLC, which reduced the Company’s overall gross margin due to financial reporting requirements that exclude the favorable gross margins of the personal coaching business from the Company’s financial statements.

Operating Expenses

        Selling, general and administrative (“SG&A”) expenses decreased by $6.2 million, net of stock option purchase and relocation costs in fiscal 2000, compared to the prior year. However, due to reduced sales volume, SG&A expenses increased as a percent of sales to 49.5 percent, compared to 44.1 percent in fiscal 2000. The decrease was primarily due to the formation of Franklin Covey Coaching, LLC, reduced catalog and related promotion costs, reduced associate costs, decreased international operating expenses, and cost reduction efforts in various areas of the Company. Due to accounting guidelines required by the formation of the Franklin Covey Coaching, LLC joint venture, the Company no longer includes the operating expenses of its Personal Coaching division, which totaled $10.8 million in fiscal 2000, in its consolidated results. During fiscal 2001, the Company reduced certain catalog and promotional expenses to improve the overall profitability of its catalog/eCommerce operation. Due to declining sales volumes experienced during fiscal 2001, the Company also implemented numerous cost saving initiatives in various operating areas of the Company. These initiatives were generally successful and the Company realized significant SG&A expense savings, especially in its third and fourth fiscal quarters. Partially offsetting these reductions were increased operating expenses resulting from the Company’s 29 retail stores that were opened during fiscal 2001 and increased operating expenses at Premier, which were necessary to support current and expected sales growth.

        During the fourth quarter of fiscal 2001, the Company entered into a long-term outsourcing agreement with Electronic Data Systems (“EDS”) to provide warehousing, distribution, information systems, and call center operations. Under the terms of the agreement, EDS will operate the Company’s primary call center, support the Company’s information systems, and provide warehousing and distribution services. Although the Company did not recognize significant cost savings during fiscal 2001 primarily due to one-time transition charges, the Company believes that the agreement with EDS will reduce operating costs for the outsourced operations over the life of the agreement. The outsourcing agreement with EDS expires in 2016.

        Depreciation expense increased by $2.0 million over the prior year primarily due to the addition of leasehold improvements and fixtures in new stores, the purchase of computer hardware and software, and the purchase of manufacturing equipment. Amortization charges decreased $1.3 million, primarily due to the contribution of personal coaching intangible assets to the newly formed Franklin Covey Coaching, LLC, joint venture.

Equity in Earnings of Unconsolidated Subsidiary

        Effective September 1, 2000, the Company entered into a joint venture agreement with AMS to form Franklin Covey Coaching, LLC. Each partner owns 50 percent of the joint venture and participates equally in its management. The Company accounts for its investment in Franklin Covey Coaching, LLC using the equity method of accounting and reports its share of the joint venture’s net income as equity in earnings of an unconsolidated subsidiary. The Company’s share of the joint venture’s earnings totaled $2.1 million during fiscal 2001.

Interest Income and Expense

        In general, interest income and expense was affected by Company performance during fiscal 2001, which resulted in higher debt balances and lower cash balances. In addition, interest expense increased due to larger debt balances resulting from the Company’s new line of credit agreement signed during the fourth quarter of fiscal 2001. The new line of credit agreement included the management stock loan participant’s debt, which was previously guaranteed by the Company. As a result, the Company paid interest to the bank on amounts borrowed to acquire the loans. Interest is not due from the participants of the management stock loan program until the loans mature in March 2005. Accordingly, the Company recognized $2.5 million of additional interest income, which is recorded as a receivable from the loan participants.

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 resulting from the merger with Covey Leadership Center and other acquisitions was not deductible for income tax purposes and had an adverse effect on the Company’s effective tax rate.

Preferred Stock Dividends

        Preferred stock dividends increased over the prior year due to the issuance of additional shares of preferred stock as payment for accrued dividends. The Company may, at its option, pay accrued dividends with cash or additional shares of preferred stock until July 1, 2002. Subsequent to that date, preferred stock dividends must be paid in cash.

Fiscal 2000 Compared With Fiscal 1999

Sales

        Retail store sales increased due to a 13 percent increase in comparable store sales and the opening of 10 new stores during fiscal 2000. At August 31, 2000, the Company was operating 135 stores compared to 125 stores at August 31, 1999. Comparable store sales growth during fiscal 2000 was primarily fueled by increased sales of handheld electronic planning and organizational devices, as well as sales of related accessories. Although catalog/eCommerce sales increased compared to the prior year, the Company’s catalog operation continued to be adversely affected by increased Internet (or eCommerce) sales, which the Company attributed to general changes in consumer buying preferences. Sales through the Company’s web site at www.franklincovey.com were also favorably affected by special promotions advertised in the Company’s catalogs and on its web site as well as by ongoing improvements to the Company’s electronic commerce infrastructure. OSG sales increased primarily due to improved sales effectiveness and leadership training sales. 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. During fiscal 2000, training sales in general were adversely affected by the relocation and transition of certain sales associates to new regional sales offices. Educational sales increased due to a 20 percent increase in sales from Premier. International sales increased in Canada, Mexico, and Brazil and were offset by decreased sales in Australia, Japan, the Middle East, and New Zealand. Other sales, which consist primarily of personal coaching, commercial printing and tabbing operations, wholesale, government, and public seminar sales, decreased $22.5 million compared to fiscal 1999. The decrease was primarily due to the sale of the commercial printing division of Publishers Press, which was effective February 28, 2000. Additionally, personal coaching sales declined due to reduced demand for coaching services from one of its major customers. Government sales continued to be adversely affected by uncertainties surrounding the potential closure of GSA depots and service centers. Public seminar sales also decreased due to reduced enrollment in the Company’s public seminar programs. Partially offsetting these decreases were increased wholesale sales primarily resulting from increased demand from existing sales and marketing agreements, the successful introduction of new products, and the addition of new marketing and distribution agreements.

Gross Margin

        Gross margin was 54.4 percent of sales compared to 54.1 percent in fiscal 1999. The Company’s gross margin improved primarily due to product write-offs related to the restructuring plan that 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. Partially offsetting these improvements were significantly increased sales of handheld electronic planning devices during fiscal 2000. Although increased demand for handheld electronic devices favorably affected sales performance, these electronic devices have gross margins that are lower than the majority of the Company’s other products and services. 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 continued to unfavorably affect the Company’s gross margin through contracted pricing terms that produced increased sales volume, but at lower margins.

Operating Expenses

        Selling, general and administrative expenses increased $34.0 million to 44.1 percent of sales compared to 40.6 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, online 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 online products and services, such as www.franklinplanner.com. 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 deemed necessary to support expected growth. The purchases of the Professional Resources Organization and DayTracker.com, which were acquired during fiscal 2000, 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 were engaged to assist the Company with projects such as improving brand recognition, improving accounts receivable collections, and expanding European operations.

        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 options 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. The associated costs were included as a separate expense component in the accompanying consolidated statement of operations for the fiscal year ended August 31, 2000.

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 focused 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 was included in the Company’s statement of operations 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 during fiscal 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 training and education sales. 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. 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.

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 was adversely affected by non-deductible goodwill amortization, the effect of foreign losses, and the magnified effects of certain 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. The increase in preferred stock dividends during fiscal 2000 was due to the full-year impact of previously issued shares and the subscription offering that closed during fiscal 2000.

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, 2001
- ---------------------- ----------- ----------- ----------- ------------
                           Q1          Q2          Q3           Q4
- ---------------------- ----------- ----------- ----------- ------------
In thousands, except per share amounts

Sales ................ $ 129,121   $ 133,366    $  90,610    $172,236
Gross margin .........    77,614      74,407       49,671      96,881

Income (loss)before
   provision for
   income taxes ......     2,837      (1,715)     (26,522)     14,584
Net income (loss) ....     1,330        (804)     (14,587)      2,978
Preferred dividends ..     2,028       2,028        2,027       2,070
Income (loss)
   available to common
   shareholders....... $    (698)  $  (2,832)   $ (16,614)   $    908

Diluted income
   (loss) per share .. $    (.03)  $    (.14)   $    (.84)   $    .05


YEAR ENDED AUGUST 31, 2000
- ---------------------- ----------- ----------- ----------- ----------
                           Q1          Q2         Q3           Q4
- ---------------------- ----------- ----------- ----------- ----------
In thousands, except per share amounts

Sales ................ $ 148,879   $ 149,365   $  113,732   $191,009
Gross margin .........    85,053      83,098       57,710    101,997
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

        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. OSG sales are moderately seasonal because of the timing of corporate training, which is not typically scheduled during holiday and vacation periods. Educational sales are primarily affected by the timing of Premier’s sales, which occur nearly exclusively in the Company’s fourth fiscal quarter. 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.

        During fiscal 2000, the Company incurred and expensed $11.2 million for other costs related to its restructuring plan that 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.

        Quarterly fluctuations may also be affected by other factors including the sale of business units, 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 and to existing shareholders through a subscription offering that closed during fiscal 2000. The preferred stock issued to shareholders was substantially identical to the 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 2001 was $35.7 million compared to $50.6 million in fiscal 2000. Adjustments to net loss in fiscal 2001 included $47.9 million of depreciation and amortization charges. The Company also received $3.4 million of cash from its investment in Franklin Covey Coaching, LLC, an unconsolidated joint venture operation. In addition, the Company paid $2.2 million of interest on amounts borrowed to acquire the management loan program notes. Interest is not due from the participants of the management stock loan program until the loans mature in March 2005. The primary sources of cash from operations were the collection of accounts receivable and reduced inventories. The Company has improved various policies and procedures related to the collection of accounts receivable and has been able to reduce its receivable balance in spite of continued fourth quarter sales growth at Premier. The Company also continues to pursue optimal inventory levels, which have been reduced due to improved inventory procedures and decreased sales levels during fiscal 2001. The primary uses of cash in fiscal 2001 were payments on accounts payable and accrued liabilities in the normal course of business, and for items related to the Company’s restructuring plan, including severance benefits. For the fiscal year ended August 31, 2000, adjustments to net loss included $48.8 million of amortization and depreciation. The primary sources of cash from operations during fiscal 2000 were collection of accounts receivable and reduced inventory balances. In addition, the Company utilized certain income tax benefits and various tax strategies to minimize required income tax payments throughout the year, which resulted in a net cash benefit to the Company. The primary uses of cash for operations included payments for severance and building exit costs related to the Company’s restructuring plan and for stock options that were purchased by the Company.

        Net cash used for investing activities during fiscal years 2001 and 2000 was $16.4 million and $38.9 million, respectively. During fiscal 2001, the Company spent $27.0 million on purchases of property and equipment. These capital expenditures were used primarily for leasehold improvements and fixtures in new and remodeled retail stores and to purchase computer hardware and software. Partially offsetting these cash outflows for new property and equipment was the sale of the Company’s warehouse and distribution facilities located in Salt Lake City, Utah, which were sold for net cash proceeds of $15.1 million. These facilities were sold in connection with the Company’s warehousing and distribution outsourcing agreement, which was completed during the fourth quarter of fiscal 2001. 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 also used $16.3 million to pay contingent earnout payments to the former owners of Premier 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.

        Net cash used for financing activities during fiscal 2001 was $25.0 million, compared to $18.0 million in fiscal 2000. The primary uses of cash for financing activities during fiscal 2001 included the reduction of short-term line-of-credit borrowing by $8.1 million, purchases of treasury stock totaling $7.5 million, and payment of preferred stock dividends for $6.1 million. During fiscal 2000, 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. The Company used existing cash and its lines of credit to retire the Notes Payable. Also during the first quarter of fiscal 2000, the Company obtained a new line of credit from existing lenders that maintained the Company’s short-term line of credit, but expanded its long-term line of credit. During fiscal 2000, the Company also purchased $5.5 million of its common stock for treasury and paid $6.0 million for preferred stock dividends.

        During the fourth quarter of fiscal 2001, the Company entered into a new credit agreement with its lenders. The new credit agreement is comprised of a $69.0 million term loan and a $45.6 million revolving credit facility, which expires in May 2004. Combined with an existing $17.0 million line of credit facility that expires in December 2001, the Company had lines of credit available for working capital needs totaling $62.6 million, of which $17.3 million was available at August 31, 2001.

        The line of credit agreements require the Company to maintain certain financial ratios and working capital levels, excluding the impact of loan loss reserves on the management stock loan program that were recorded during fiscal 2001. As of August 31, 2001, the Company was in compliance with the terms of the line of credit agreements. However, based upon operating results recorded during the first two months of the first quarter of fiscal 2002, the Company expects to not be in compliance with the terms of the line of credit agreements at the end of the first quarter of fiscal 2002. In addition, the long-term credit facility is subject to a borrowing base calculation that determines the available borrowing amount. At August 31, 2001, the borrowing base calculation did not limit the amount available to the Company.

        On November 13, 2001, the Company signed a definitive agreement to sell Premier Agendas for $152.5 million in cash. In addition, the Company will retain approximately $13.0 million of Premier’s working capital. The final purchase price is based upon actual balances at the closing date, which is expected to be during December 2001. The Company anticipates utilizing the majority of the proceeds of the sale to pay the term loan and revolving line of credit in full, settle the $4.6 million interest rate swap liability, and to fund a tender offer for shares of the Company’s common stock. Although a definitive agreement has been signed for the sale of Premier, there can be no assurance that the sale will be completed for the disclosed price and during the expected timeframe.

        During fiscal 2000, the Company implemented an incentive-based compensation program that included a loan program from external lenders to certain management personnel for the purpose of purchasing shares of the Company’s common stock. The program gave 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 loan program closed during fiscal 2001 with 3,825,000 shares purchased for a total cost of $33.6 million. The loans and accrued interest are due in March 2005. As part of the credit agreement obtained in fiscal 2001 (described above), the Company recorded the notes receivable from participants of the program as a component of shareholders’ equity in its August 31, 2001 consolidated balance sheet. Under terms of the new credit agreement, the Company will now be the lender on these full-recourse notes from the participants of the loan program. The corresponding liability was included as a component of the term loan payable in the Company’s new credit agreement. At August 31, 2001, the participant loans exceeded the value of the common stock held by the participants by $18.9 million. All participants have agreed to repay the Company for any loss incurred on their loans. In fiscal 2001, the Company established a reserve on these notes by recording a non-cash charge of $1.1 million, which was included in the operating results of the Company for fiscal 2001.

        On November 26, 2001, the Company filed a tender offer statement with the Securities and Exchange Commission to purchase up to 7,333,333 shares of its common stock at a purchase price of $6.00 per share. The tender offer is subject to the completion of the sale of Premier and subsequent retirement of the Company’s existing credit facilities as described above, as well as other customary conditions set forth in the tender offer statement.

        Going forward, the Company will continue to incur costs necessary for the development of online products, electronic commerce channels, strategic acquisitions and joint ventures, retail store growth and renovations, and other costs related to the growth of the business. Cash provided by operations, asset sales, 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 will also continue to pursue additional financing alternatives as it positions itself for future growth and capital requirements.

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 completion of the proposed sale of Premier, the integration of acquired or merged businesses, management of costs in connection with reduced revenues, unanticipated costs, delays or outcomes relating to the Company’s restructuring plans, availability of financing sources, dependence on products or services, the rate and consumer acceptance of new product introductions, competition, the number and nature of customers and their product orders, pricing, pending and threatened litigation, and other risk factors which may be detailed from time to time in the Company’s press releases, reports to shareholders and in filings with the Securities and Exchange Commission (“SEC”).

        While the Company has a broad customer base, it is subject to variables over which it has no direct control such as innovations in competing products, the general transition from paper-based products to electronic or Internet based products, changing corporate policies on the part of the Company’s customers, and competition from others in the industry. In addition, the Company is subject to changes in costs of supplies necessary to produce its products and distribution of those products. The Company’s business is subject to seasonal variations and including international sales. Sales outside the United States potentially present additional risks such as political, social, and economic instability.

        The market price of the Company’s common stock has been and may remain volatile. In addition, the stock markets in general have recently experienced increased volatility. Factors such as quarter-to-quarter variations in revenues and earnings or the failure of the Company to meet analysts’ expectations could have a significant impact on the market price of the Company’s common stock. In addition, the price of the common stock can change for reasons unrelated to the performance of the Company.

        These forward-looking statements are based on management’s expectations as of the date hereof, and the Company does not undertake any responsibility to update any of these statements in the future. Actual future performance and results will differ and may differ materially from that contained in or suggested by these forward-looking statements as a result of the factors set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in the Company’s filings with the SEC.

Item 7a.   Quantitative and Qualitative Disclosures About Market Risk

Market Risk of Financial Instruments

        The principal risks to which the Company is exposed are fluctuations in foreign currency rates and interest rates. The Company utilizes certain derivative instruments to enhance its ability to manage risk. Derivative instruments are entered into for periods consistent with related underlying exposures and do not constitute positions that are independent of those exposures. In addition, the Company does not enter into derivative instruments for speculative purposes, nor is the Company party to any leveraged derivative instrument.

Foreign Exchange Sensitivity

        Due to the nature of the Company’s global operations, the Company is involved in transactions that are denominated in currencies other than the U.S. dollar, which creates exposure to currency exchange rate risk. The Company utilizes a foreign currency forward contract to manage the volatility of certain intercompany transactions denominated in Japanese Yen. This forward contract did not meet specific hedge accounting requirements and corresponding gains and losses have been recorded as a component of current operations, which offset gains and losses on the underlying transaction. The notional amount of the Company’s foreign currency forward contract was $6.0 million at August 31, 2001.

Interest Rate Sensitivity

        The Company is exposed primarily to fluctuations in U.S. interest rates and as a result of its borrowing activities. The following table summarizes the Company’s debt obligations at August 31, 2001. For presentation purposes, the reported interest rates represent weighted average rates, with the period end rate used for variable rate debt obligations (dollars in thousands).

                                                          Maturity (Fiscal Year)
                          ---------- ----------- ----------- ----------- ----------- ------------
Debt                           2002        2003       2004        2005         2006    Thereafter
- ------------------------  ---------- ----------- ----------- ----------- ----------- ------------

Fixed rate .............   $  4,801   $    292    $    274    $     90    $     94    $  1,167
Average interest rate ..       8.00%      7.88%       7.91%       8.27%       8.32%       8.37%
- ------------------------  ---------- ----------- ----------- ----------- ----------- ------------

Variable rate ..........     18,243      8,023      45,576      33,000
Average interest rate ..       5.67%      6.29%       6.40%       6.29%
- ------------------------  ---------- ----------- ----------- ----------- ----------- ------------

        Generally, under interest rate swaps, the Company agrees with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts calculated by reference to a contracted notional amount. The Company designates interest rate swap agreements as hedges of risks associated with specific assets, liabilities or future commitments, and these contracts are monitored to determine whether the underlying agreements remain effective hedges. The interest rate differential on interest rate swaps is recognized as a component of interest expense or income over the term of the agreement.

        In connection with the management loan program initiated in fiscal 2000, the Company entered into an interest rate swap agreement to lock an interest rate for loan participants. As a result of the credit agreement obtained in fiscal 2001, the notes receivable from loan participants, corresponding debt, and interest rate swap agreement were recorded on the Company’s consolidated balance sheet. The interest rate swap agreement allows the Company to pay a fixed rate and receive a floating rate from the counterparty through the term of agreement, which expires in March 2005. At August 31, 2001, the fair value of this swap agreement was a liability of $4.6 million.

Euro Conversion

        On January 1, 1999, the European Monetary Union (“EMU”), which is comprised of 11 out of the 15 member countries of the European Union, introduced a new common currency, the “Euro.” During the transition period between January 1, 1999 and January 1, 2002, both the Euro and national currencies will coexist. The national currencies will remain legal tender until at least January 1, 2002, but not later than July 1, 2002. The Company currently transacts business in EMU countries using the national currencies and translates the financial results of those countries in accordance with current accounting pronouncements. The Company has not experienced, nor does it expect to experience, a material adverse impact on its financial condition, results of operations, or liquidity as a result of the Euro conversion.

Item 8.    Financial Statements and Supplementary Data

FRANKLIN COVEY CO.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Franklin Covey Co.:

We have audited the accompanying consolidated balance sheets of Franklin Covey Co. (a Utah corporation) and subsidiaries as of August 31, 2001 and 2000, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended August 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Franklin Covey Co. and subsidiaries as of August 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2001 in conformity with accounting principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Salt Lake City, Utah
October 4, 2001 (except for Note 20, as to
which the date is November 26, 2001)

AUGUST 31,                                                                           2001          2000
- -------------------------------------------------------------------------------    --------     ---------
In thousands, except share data

ASSETS
     Current assets:
         Cash and cash equivalents ............................................   $  14,864    $  21,242
         Accounts receivable, less allowance for doubtful accounts
            of $2,052 and $3,350, respectively ................................      78,827       84,747
         Inventories ..........................................................      45,173       53,599
         Deferred income taxes ................................................      10,182       12,916
         Other assets .........................................................      16,631       20,531
                                                                                  ---------    ---------
              Total current assets ............................................     165,677      193,035

     Property and equipment, net ..............................................     104,876      121,556
     Goodwill and other intangibles, net ......................................     225,805      258,475
     Investment in unconsolidated subsidiary ..................................      16,910
     Other assets .............................................................      21,801       19,413
                                                                                  ---------    ---------
                                                                                  $ 535,069    $ 592,479
                                                                                  =========    =========

LIABILITIES AND SHAREHOLDERS' EQUITY
     Current liabilities:
         Lines of credit ......................................................   $   9,750    $  17,884
         Accounts payable .....................................................      26,671       28,251
         Accrued compensation .................................................      10,910       13,598
         Other accrued liabilities ............................................      37,261       47,906
         Income taxes payable .................................................       2,808        4,645
         Current portion of long-term debt ....................................      13,294        6,873
         Current portion of capital lease obligations .........................         380          540
                                                                                  ---------    ---------
              Total current liabilities .......................................     101,074      119,697

     Line of credit ...........................................................      35,576       55,000
     Long-term debt, less current portion .....................................      49,940        7,125
     Capital lease obligations, less current portion ..........................                      380
     Other liabilities ........................................................       7,755        3,285
     Deferred income taxes ....................................................      30,842       32,939
                                                                                  ---------    ---------
              Total liabilities ...............................................     225,187      218,426
                                                                                  ---------    ---------

     Commitments and contingencies (Notes 5, 6, 7, 8, 17, and 20)

     Shareholders' equity:
         Preferred stock - Series A, no par value; convertible into common
            stock at $14 per share; liquidation preference totaling $85,206 at
            August 31, 2001; 4,000,000 shares authorized, 831,365 shares and
            811,088 shares issued, respectively, at $100 per share ............      82,995       80,967
         Common stock, $.05 par value; 40,000,000 shares
            authorized, 27,055,894 shares issued ..............................       1,353        1,353
         Additional paid-in capital ...........................................     223,898      225,748
         Retained earnings ....................................................     167,475      186,711
         Notes and interest receivable from sales of common
            stock to related parties ..........................................     (35,977)        (894)
         Restricted stock deferred compensation ...............................                      (58)
         Accumulated other comprehensive loss .................................      (5,467)        (122)
         Treasury stock at cost, 7,215,363 and 6,439,329
            shares, respectively ..............................................    (124,395)    (119,652)
                                                                                  ---------    ---------
              Total shareholders' equity ......................................     309,882      374,053
                                                                                  ---------    ---------
                                                                                  $ 535,069    $ 592,479
                                                                                  =========    =========

YEAR ENDED AUGUST 31,                                                 2001         2000         1999
- ---------------------------------------------------------------- ------------- ------------ -------------
In thousands, except per share data

Sales ..........................................................   $ 525,333    $ 602,985    $ 571,596
Cost of sales (exclusive of stock option purchase
   costs totaling $2,113 in fiscal 2000) .......................     226,760      275,127      262,640
                                                                   ---------    ---------    ---------
     Gross margin ..............................................     298,573      327,858      308,956

Selling, general, and administrative (exclusive of stock option
   purchase and relocation costs totaling $9,114 in fiscal 2000)     259,987      266,170      232,168
Stock option purchases and relocation costs ....................                   11,227
Depreciation ...................................................      26,181       24,190       20,799
Amortization ...................................................      19,698       20,977       18,740
Restructuring costs ............................................                   (4,946)      16,282
Loss on impaired assets ........................................                                16,559
                                                                   ---------    ---------    ---------
     Income (loss) from operations .............................      (7,293)      10,240        4,408

Equity in earnings of unconsolidated subsidiary ................       2,088
Interest income ................................................       3,467        1,665        1,278
Interest expense ...............................................      (9,078)      (6,178)      (9,912)
Other expense, net .............................................                     (174)
                                                                   ---------    ---------    ---------
     Income (loss) before provision for income taxes ...........     (10,816)       5,553       (4,226)
Provision for income taxes .....................................         267        9,962        4,546
                                                                   ---------    ---------    ---------
     Net loss ..................................................     (11,083)      (4,409)      (8,772)
Preferred stock dividends ......................................       8,153        8,005        1,875
                                                                   ---------    ---------    ---------
     Net loss attributable to common shareholders ..............   $ (19,236)   $ (12,414)   $ (10,647)
                                                                   =========    =========    =========


Basic and diluted net loss per share ...........................   $    (.95)   $    (.61)   $    (.51)
                                                                   =========    =========    =========


Basic and diluted weighted average number of common
   and common equivalent shares ................................      20,199       20,437       20,881
                                                                   =========    =========    =========



COMPREHENSIVE LOSS:

Net loss attributable to common shareholders ...................   $ (19,236)   $ (12,414)   $ (10,647)
Market value of interest rate swap agreement, net of tax .......      (2,786)
Foreign currency translation adjustments .......................        (732)         660        1,468
                                                                   ---------    ---------    ---------
Comprehensive loss .............................................   $ (22,754)   $ (11,754)   $  (9,179)
                                                                   =========    =========    =========

                                      SERIES A                                                                                      ACCUMULATED      TREASURY STOCK
                              PREFERRED STOCK          COMMON STOCK        ADDITIONAL                NOTES AND                   OTHER         --------------        TOTAL
                                 ---------------         ---------------       PAID-IN     RETAINED     INTEREST     DEFERRED   COMPREHENSIVE                        SHAREHOLDERS'
                                 SHARES      AMOUNT      SHARES      AMOUNT      CAPITAL     EARNINGS    RECEIVABLE  COMPENSATION     LOSS        SHARES      AMOUNT      EQUITY
- ---------------------------------------- ----------- ------------ ----------- ------------ ------------ ------------- ------------ ------------- ----------- ----------- ------------
In thousands

Balance at August 31, 1998 ...           $               27,056    $  1,353    $ 238,052    $ 209,772    $           $    (843)   $  (2,250)      (4,813)  $(104,430)  $ 341,654

Issuance of Series A
   Preferred Stock............      750     75,000                                                                                                                        75,000

Preferred stock dividends ....                                                                 (1,875)                                                                    (1,875)

Tax benefit from exercise of
   affiliate stock options ...                                                     1,320                                                                                   1,320

Issuance of common stock
   from treasury .............                                                    (3,740)                                                            263       5,566       1,826

Purchase of treasury shares ..                                                                                                                    (2,126)    (32,710)    (32,710)

Deferred compensation ........                                                                                             523                                               523

Cumulative translation
   adjustment ................                                                                                                        1,468                                1,468

Net loss .....................                                                                 (8,772)                                                                    (8,772)
                               ---------  ---------    ---------   ---------   ---------    ---------    ---------   ---------    ---------    ---------    ---------   ---------
Balance at August 31, 1999          750     75,000       27,056       1,353      235,632      199,125                     (320)        (782)      (6,676)   (131,574)    378,434

Issuance of Series A
   Preferred Stock ...........       42      4,092                                                                                                                         4,092

Preferred stock dividends ....                                                                 (8,005)                                                                    (8,005)

Tax benefit from exercise
   of affiliate stock options.                                                       557                                                                                     557

Issuance of common stock
   from treasury .............                                                   (10,441)                                                            925      17,404       6,963

Purchase of treasury shares...                                                                                                                      (688)     (5,482)     (5,482)

Issuance of note
   receivable from sale of
   common stock ..............                                                                              (894)                                                           (894)

Deferred compensation ........                                                                                             262                                               262

Cumulative translation
   adjustment ................                                                                                                          660                                  660

Dividends on preferred
   stock paid with
   additional shares
   of preferred stock ........       19      1,875                                                                                                                         1,875

Net loss .....................                                                                 (4,409)                                                                    (4,409)
                              ---------  ---------    ---------   ---------    ---------    ---------   ---------    ---------    ---------    ---------    ---------  ---------
Balance at August 31, 2000          811     80,967       27,056       1,353      225,748      186,711       (894)          (58)        (122)      (6,439)    (119,652)   374,053

Preferred stock dividends ...                                                                  (8,153)                                                                    (8,153)

Tax benefit from exercise
   of affiliate stock options                                                         25                                                                                      25

Issuance of common stock
   from treasury .............                                                    (1,875)                                                            165        2,712        837

Purchase of treasury shares                                                                                                                         (941)      (7,455)    (7,455)

Deferred compensation ........                                                                                              58                                                58

Cumulative translation
   adjustment ................                                                                                                         (732)                                (732)

Purchase of notes
   receivable and accrued
   interest receivable
   from sales of common
   stock, net ................                                                                           (35,083)                                                        (35,083)

Dividends on preferred
   stock paid with
   additional shares
   of preferred stock ........       20      2,028                                                                                                                         2,028

Valuation of derivative
   financial instrument ......                                                                                                       (4,613)                              (4,613)

Net loss .....................                                                                (11,083)                                                                   (11,083)
                              ---------  ---------    ---------   ---------    ---------    ---------  ---------    ---------     ---------    ---------    ---------   ---------
Balance at August 31, 2001          831  $  82,995       27,056   $   1,353    $ 223,898    $ 167,475  $ (35,977)    $            $  (5,467)       7,215    $(124,395) $ 309,882
                              =========  =========    =========   =========    =========    =========  =========    =========     =========    =========    =========   =========

YEAR ENDED AUGUST 31,                                                         2001          2000        1999
- -----------------------------------------------------------------------   -----------  -----------  -----------
In thousands

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss .........................................................   $ (11,083)   $  (4,409)   $  (8,772)
     Adjustments to reconcile net loss to net cash
        provided by operating activities:
           Depreciation and amortization ..............................      47,873       48,805       44,220
           Cash distribution of earnings from unconsolidated
                subsidiary ............................................       3,354
           Equity in earnings of unconsolidated subsidiary ............      (2,088)
           Provision for losses on management stock loan program ......       1,052
           Loss on impaired assets ....................................                                16,559
           Deferred income taxes ......................................         637        1,562      (10,503)
           Restricted stock deferred compensation amortization ........          58          262          522
           Payments for interest on management loan program ...........      (2,229)
           Changes in assets and liabilities, net of effects from
              acquisitions:
                Decrease (increase) in accounts receivable ............       5,610        4,639       (8,879)
                Decrease (increase) in inventories ....................       8,303        3,943      (11,981)
                Increase in other assets and other long-term
                   liabilities, net ...................................        (494)      (8,056)      (3,868)
                Increase (decrease) in accounts payable
                   and accrued liabilities ............................     (10,814)       5,804       10,966
                Increase (decrease) in accrued restructuring costs ....      (2,648)     (11,040)      16,200
                Increase (decrease) in income taxes payable ...........      (1,811)       9,113       (8,491)
                                                                          ---------    ---------    ---------
         Net cash provided by operating activities ....................      35,720       50,623       35,973
                                                                          ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisition of businesses, including earnout payments ............      (4,432)     (21,444)     (19,025)
     Purchases of property and equipment, net of effects from
        acquisitions ..................................................     (27,027)     (24,523)     (22,996)
     Proceeds from sale of property and equipment, net ................      15,096        7,032        1,288
                                                                          ---------    ---------    ---------
         Net cash used for investing activities .......................     (16,363)     (38,935)     (40,733)
                                                                          ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Net (decrease) increase in short-term line of credit borrowings ..      (8,134)      16,488       (2,229)
     Proceeds from long-term debt and line of credit, net of effects
        from acquisitions .............................................      33,951       76,308        1,142
     Payments on long-term debt and capital lease obligations .........     (38,323)    (109,502)     (40,652)
     Proceeds from issuance of Series A Preferred Stock, net ..........                    4,092       75,000
     Purchases of common stock for treasury ...........................      (7,455)      (5,483)     (32,710)
     Proceeds from issuance of treasury stock .........................       1,042        6,069        1,826
     Payment of preferred stock dividends .............................      (6,084)      (5,977)
                                                                          ---------    ---------    ---------
         Net cash (used for) provided by financing activities .........     (25,003)     (18,005)       2,377
                                                                          ---------    ---------    ---------

     Effect of foreign currency exchange rates ........................        (732)         778        1,404
                                                                          ---------    ---------    ---------

     Net decrease in cash and cash equivalents ........................      (6,378)      (5,539)        (979)
     Cash and cash equivalents at beginning of the year ...............      21,242       26,781       27,760
                                                                          ---------    ---------    ---------
     Cash and cash equivalents at end of the year .....................   $  14,864    $  21,242    $  26,781
                                                                          =========    =========    =========

Description                                      Useful Lives
- ---------------------------------------------- -----------------

Buildings                                        15-39 years
Computer hardware and software                     3   years
Machinery and equipment                           3-7  years
Furniture, fixtures and leasehold
   improvements                                   5-7  years

Goodwill and other intangibles                  $     8,234
Other long-term assets                                6,772
Property and equipment                                1,553
                                             ----------------
                                                $    16,559
                                             ================

AUGUST 31,                 2001      2000
- ------------------------ -------- ---------
Finished goods ......... $31,616   $38,363
Work-in-process ........   2,408     2,803
Raw materials ..........  11,149    12,433
                         -------   -------
                         $45,173   $53,599
                         =======   =======

AUGUST 31,                              2001         2000
- ---------------------------------- ------------- -------------
Land and improvements ............   $   4,982    $   7,634
Buildings ........................      34,238       49,623
Computer hardware and software ...      71,599       69,261
Machinery and equipment ..........      41,702       42,554
Furniture, fixtures and
   leasehold improvements ........      60,216       50,994
                                     ---------    ---------
                                       212,737      220,066
Less accumulated depreciation and
   amortization ..................    (107,861)     (98,510)
                                     ---------    ---------
                                     $ 104,876    $ 121,556
                                     =========    =========

AUGUST 31,                          2001          2000
- -------------------------------- ------------- -------------
Goodwill .......................   $ 120,274    $ 142,755
License rights .................      27,000       27,000
Curriculum rights ..............      62,431       61,778
Trade names and other ..........      94,838       92,517
                                   ---------    ---------
                                     304,543      324,050
Less accumulated amortization ..     (78,738)     (65,575)
                                   ---------    ---------
                                   $ 225,805    $ 258,475
                                   =========    =========

                                     Useful Lives
                                   -----------------

Goodwill                              5-30 years
License rights                         40  years
Curriculum rights                    14-30 years
Trade names and other                 4-40 years

$17.0 million current line of credit with
interest at LIBOR plus 1.5%, secured by
inventories and receivables                     $   9,750

$45.6 million long-term credit facility
with interest at LIBOR plus 2.5%,
secured by real estate, inventory,                 35,576
and receivables
                                              -------------

Total borrowings under lines of credit         $   45,326
                                              =============

AUGUST 31,                               2001         2000
- ------------------------------------ ------------ ------------
Term note payable to bank, payable
as described below with interest
at LIBOR plus 2.5%, secured by
real estate, inventories, and
receivables ........................  $ 56,211      $

Note payable in annual
installments of $3,000 plus
interest at 8% through December
2001, unsecured ....................     3,000       6,000

Note payable on demand, plus
interest at 8.0%, unsecured,
payable to related parties .........     1,481       1,396

Mortgage payable in monthly
installments of $14 CDN, including
interest at 7.2% through January
2015, secured by real estate .......       907         997

Note payable to bank, payable in
monthly installments of $20,
including interest at 7.8% through
August 2004, secured by equipment...       615         802

Mortgage payable in monthly
installments of $8 including
interest at 9.9% through October
2014, secured by real estate .......       665         688

Note payable to bank, payable in
monthly installments of $23, plus
interest at prime plus .5% payable
through September 2002, secured by
real estate ........................       305         587

Note payable in quarterly
installments of $574 including
interest at 5.0% through April
2001, paid in full .................                 1,679

Mortgage payable in monthly
installments of $18 including
interest at 8.5% through August
2016, paid in full due to sale of
property in fiscal 2001 ............                 1,619

Other mortgages and notes, payable
in monthly installments, interest
ranging from 2.0% to 8.8%, due at
various dates through 2002,
secured by equipment ...............        50         230
                                      --------    --------
                                        63,234      13,998

Less current portion ...............   (13,294)     (6,873)
                                     --------    --------
Long-term debt, less current
portion ............................  $ 49,940    $  7,125
                                      ========    ========

YEAR ENDING
AUGUST 31,
- ------------------------------------ --------------
2002                                    $   13,294
2003                                         8,316
2004                                         7,274
2005                                        33,090
2006                                            94
Thereafter                                   1,166
                                     --------------
                                        $   63,234
                                     ==============

YEAR ENDING
AUGUST 31,
- ----------------------------------------------------------
2002                                           $      392
Less amount representing interest                     (12)
                                              ------------
Present value of future minimum lease
   payments                                           380
Less current portion                                 (380)
                                              ------------
                                               $
                                              ============

YEAR ENDING
AUGUST 31,
- ----------------------------------------------------------
2002                                           $    15,329
2003                                                14,489
2004                                                13,021
2005                                                 9,939
2006                                                 6,732
Thereafter                                          22,951
                                              ------------
                                               $    82,461
                                              ============

YEAR ENDING
AUGUST 31,
- -----------------------------------------------------------
2002                                           $     1,845
2003                                                 1,901
2004                                                 1,958
2005                                                 2,017
2006                                                 2,077
Thereafter                                           1,232
                                              ------------
                                               $    11,030
                                              ============

  
                        Number of     Weighted Avg.
                         Options     Exercise Price
- --------------------------------------------------
Outstanding at
   August 31, 1998 ..   3,669,730    $   21.89

Granted .............   2,058,825        12.02
Exercised ...........    (231,931)        3.59
Forfeited ...........    (212,459)       18.89
                        ---------
Outstanding at
   August 31, 1999 ..   5,284,165        19.05

Granted .............     354,685         7.59
Exercised ...........     (22,334)        4.38
Repurchased .........  (3,294,476)       22.54
Forfeited ...........    (574,033)       15.69
                        ---------
Outstanding at
   August 31, 2000 ..   1,748,007        11.59

Granted:
   At market value...     203,000         7.44
   To the CEO .......   1,602,000        14.00
Exercised ...........     (19,861)        5.97
Forfeited ...........     (93,117)        9.31
                        ---------
Outstanding at
   August 31, 2001 ..   3,440,029    $   12.56
                        =========

AUGUST 31,                     2001         2000        1999
- ------------------------   ----------- ------------ -----------

Exercisable options ...      1,039,672    757,656     2,683,966

Weighted average
   exercise price per
   share ..............      $ 13.27     $ 14.83      $ 23.87

YEAR ENDED
AUGUST 31,                        2001         2000         1999
- ----------------------------  -----------  -----------  ------------

Net loss attributable to
   common shareholders
   as reported ...........  $  (19,236)   $  (12,414)   $  (10,647)
Net loss attributable to
   common shareholders
   pro forma .............     (21,302)      (11,404)      (16,181)
Diluted loss per share as
   reported ..............        (.95)         (.61)         (.51)
Diluted loss per share
   pro forma .............       (1.10)         (.57)         (.80)

YEAR ENDED AUGUST 31,           2001    2000    1999
- ---------------------------     ----    ----   -----
Dividend yield ............     None    None    None
Volatility ................    55.3%   55.3%   55.8%
Expected life (years)......     6.9     4.4     4.3
Risk free rate of return ..     5.7%    5.3%    5.3%

YEAR ENDED AUGUST 31,         2001        2000        1999
- ------------------------- ----------- ------------ -----------
Current:
    Federal ............   $ (3,259)   $  7,131    $ 12,545
    State ..............        207       1,698       2,046
    Foreign  ...........      2,753       2,907       2,077
Deferred:
    Federal ............        460      (1,440)    (10,422)
    State ..............        106        (334)     (1,700)
                           --------    --------    --------
                           $    267    $  9,962    $  4,546
                           ========    ========    ========

YEAR ENDED AUGUST 31,          2001      2000     1999
- ---------------------------  --------  -------  --------
Federal statutory
   tax rate ................  (35.0)%    35.0%   (35.0)%
State income taxes, net
   of federal effect .......    0.9       4.9     (3.5)
Goodwill amortization ......   21.0      56.4     44.6
Effect of foreign losses
   and tax rate differential    6.0      53.3     63.9
Other ......................    9.6      29.8     37.6
                              -----     -----    -----
                                2.5%    179.4%   107.6%
                              =====     =====    =====

AUGUST 31,                             2001        2000
- ---------------------------------   ------------ ------------
Deferred income tax assets:
    Inventory and bad debt
        reserves ..................   $  4,767    $  4,700
    Sales returns and
        contingencies .............      2,732       3,648
    Restructuring cost accruals ...        975       2,058
    Vacation and other accruals ...      1,637       2,495
    Deferred compensation .........      1,340       1,310
    Interest and other
        capitalization ............        463         362
    Other .........................        864         141
                                      --------    --------
Total deferred income tax  assets..     12,778      14,714
                                      --------    --------

Deferred income tax liabilities:
    Intangibles and fixed
       asset step-up ..............    (27,833)    (29,342)
    Depreciation and
       amortization ...............     (2,412)     (1,455)
    Other .........................     (3,193)     (3,940)
                                      --------    --------
Total deferred income tax
    liabilities ...................    (33,438)    (34,737)
                                      --------    --------
Net deferred income tax
    liabilities ...................   $(20,660)   $(20,023)
                                      ========    ========

YEAR ENDED
AUGUST 31,                         2001        2000        1999
- -----------------------------  ----------- ----------- -----------
Net loss ....................   $(11,083)   $ (4,409)   $ (8,772)
Preferred stock dividends ...      8,153       8,005       1,875
                                --------    --------    --------
Net loss attributable to
   common shareholders ......   $(19,236)   $(12,414)   $(10,647)
                                ========    ========    ========
Basic and diluted weighted-
   average shares outstanding     20,199      20,437      20,881
                                ========    ========    ========
Basic and diluted net loss
   per share ................   $   (.95)   $   (.61)   $   (.51)
                                ========    ========    ========

YEAR ENDED
AUGUST 31,                            2001        2000       1999
- --------------------------------  ----------- ----------- -----------

Number of preferred shares
   on an "as converted" basis ..   5,829,689   5,793,529   1,339,286
Common stock equivalents
   from the assumed exercise
   of stock options ............      55,692      82,144     171,929
                                   ---------   ---------   ---------
Total antidilutive shares
   excluded from the EPS
   calculation .................   5,885,381   5,875,673   1,511,215
                                   =========   =========   =========

                                                  Leased
                                                  Office
                                    Severance   Space Exit
                                      Costs        Costs       Total
                                  ----------- ------------ -----------

Accrued restructuring
   costs at August 31, 2000 ...    $  2,415    $  2,745     $  5,160
Restructuring costs paid ......      (2,114)       (534)      (2,648)
                                   --------    --------     --------
Accrued restructuring
   costs at August 31, 2001 ...    $    301    $  2,211     $  2,512
                                   ========    ========     ========

YEAR ENDED AUGUST 31,         2001       2000        1999
- ---------------------      --------    --------    --------
Cash paid for:
    Income taxes ....      $  1,140    $   (250)   $ 22,701
    Interest ........         5,927       7,353       9,219
                           --------    --------    --------

    Fair value of
       assets acquired     $  4,432    $ 21,444    $ 19,025
    Cash paid for
       net assets ......     (4,432)    (21,444)    (19,025)
                           --------    --------    --------
    Liabilities
       assumed from
       acquisitions ....   $   --      $   --      $   --
                           --------    --------    --------

Tax effect of
   exercise of affiliate
   stock options .......   $     25    $    557    $  1,320
                           --------    --------    --------

SEGMENT INFORMATION
(in thousands)
                                                         Reportable Segments
                              ---------------------------------------------------------------------------
                                                                                                          Corporate,
                                                                                                          Adjustments
Year ended                      Retail      Catalog/                                                          and
August 31, 2001                 Stores     eCommerce       OSG      Educational  International  Other     Eliminations Consolidated
- ----------------------------- ----------- ------------- ----------- ------------ ----------- ------------ ------------ ------------

Sales to external customers   $ 151,943    $  90,450    $  84,723   $  91,037   $  51,851   $  55,329                 $ 525,333
Intersegment sales ........                                                                    16,957    $ (16,957)
Gross margin ..............      77,027       50,922       58,690      51,842      34,484      28,438       (2,830)     298,573
EBITDA ....................      22,093       26,233       16,742      17,743       6,164      (5,952)     (42,349)      40,674
Depreciation ..............       8,283          513        1,297       1,432       1,044       2,685       10,927       26,181
Amortization ..............         114                     2,524       4,301         536       3,710        8,513       19,698

Capital expenditures ......      16,305          575        1,402       2,162       1,318       3,334        1,931       27,027
Segment assets ............      30,807          347       14,949     114,316      24,137      62,224      288,289      535,069

Year ended
August 31, 2000
- ---------------------------   ---------    ---------    ---------   ---------   ---------   ---------    ---------    ---------

Sales to external customers   $ 163,305    $ 110,543    $  85,977   $  85,348   $  50,870   $ 106,942                 $ 602,985
Intersegment sales ........                                                                    25,718    $ (25,718)
Gross margin ..............      86,021       54,248       58,205      48,146      32,729      45,484        3,025      327,858
Stock option purchase and
   relocation costs .......                                                                                 11,227       11,227
EBITDA ....................      39,840       25,049       16,352      16,777       2,080      (3,388)     (46,249)      50,461
Depreciation ..............       6,304          293          780       1,102         890       2,601       12,220       24,190
Amortization ..............         607          324        2,600       4,188         686       4,467        8,105       20,977
Significant non-cash items:
   Restructuring charge
   reversals ..............                                                                                 (4,946)      (4,946)

Capital expenditures ......       5,505          365        1,373       2,262       2,488       2,578        9,952       24,523
Segment assets ............      24,189          414       14,895     113,771      24,245      75,584      339,381      592,479

Year ended
August 31, 1999
- ---------------------------   ---------    ---------    ---------   ---------   ---------   ---------    ---------    ---------

Sales to external customers   $ 140,850    $ 102,335    $  77,496   $  70,798   $  50,611   $ 129,506                 $ 571,596
Intersegment sales ........                                                                    33,669    $ (33,669)
Gross margin ..............      77,374       57,530       52,894      41,042      30,922      49,694         (500)     308,956
EBITDA ....................      35,879       36,617       15,586      17,568       3,233       6,651      (38,746)      76,788
Depreciation ..............       5,688          328          483         736         744       2,459       10,361       20,799
Amortization ..............       1,412                     2,431       3,221       1,318       3,503        6,855       18,740
Significant non-cash items:
   Restructuring charge ...                                                                                 16,282       16,282
   Loss on impaired assets                                  1,555                   2,180       6,172        6,652       16,559

Capital expenditures ......       4,178           29          671       1,596       2,647         895       12,980       22,996
Segment assets ............      20,373          361       15,173      96,080      22,249      73,472      395,595      623,303

YEAR ENDED AUGUST 31,          2001         2000        1999
- ----------------------    ----------- ------------ -----------
Reportable segment
   EBITDA ..............   $  83,023    $  96,710    $ 115,534
Corporate expenses .....     (42,349)     (35,408)     (37,701)
Reserve on management
   common stock loan
   program .............       1,052
Stock option purchase
   and relocation costs                   (11,227)
Intercompany rent
   charges .............       5,712        6,652        6,844
   Other ...............      (6,764)      (6,266)      (7,889)
                           ---------    ---------    ---------
Consolidated EBITDA ....   $  40,674    $  50,461    $  76,788
                           =========    =========    =========

YEAR ENDED AUGUST 31,          2001        2000        1999
- ------------------------- ----------- ------------ -----------
Reportable segment
   assets ..............    $246,780    $253,098     $227,708
Corporate assets .......     321,359     350,475      444,296
Intercompany
   accounts receivable..     (33,070)    (11,094)     (48,702)
                          ----------- ------------ -----------
Consolidated assets ....    $535,069    $592,479     $623,302
                          =========== ===========  ===========

YEAR ENDED
AUGUST 31,                   2001       2000       1999
- -----------------------  ---------- ----------- ----------
Sales:
    United States .....   $462,943   $541,250   $511,484
    Americas ..........     30,799     29,153     24,804
    Japan/Greater China     16,567     14,585     16,692
    Europe/Middle East       8,704      8,446      8,515
    Australia .........      3,108      7,032      6,737
    Others ............      3,212      2,519      3,364
                          --------   --------   --------
                          $525,333   $602,985   $571,596
                          ========   ========   ========

Long-Lived Assets:
    United States .....   $347,895   $379,323   $393,354
    Americas ..........     14,033     11,434      9,722
    Japan/Greater China      6,142      7,038      6,346
    Europe/Middle East         396        503        558
    Australia .........        926      1,146      1,677
                          --------   --------   --------
                          $369,392   $399,444   $411,657
                          ========   ========   ========