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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _______________
FRANKLIN COVEY CO.
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(Exact name of registrant as specified in its charter)
Utah 001-11107 87-0401551
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 817-1776
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which
Title of Each Class Registered
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Common Stock, $.05 Par Value New York Stock Exchange
[ ] Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant on November 1, 1998, based upon the closing sale price of the
Common Stock of $19.75 per share on that date, was approximately $419,907,554.
Shares of the Common Stock held by each officer and director and by each person
who may be deemed to be an affiliate of the Registrant have been excluded.
As of November 1, 1998, the Registrant had 21,261,142 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference in Parts,
II, III and IV of this Form 10-K: (1) Registrant's Annual Report to
Shareholders, for the fiscal year ended August 31, 1998 (Parts II and IV), and
(2) Proxy Statement for Registrant's Annual Meeting of Shareholders which is
scheduled to be held on January 8, 1999 (Part III).
INDEX TO FORM 10-K
Page
PART I .............................................................................................1
Item 1. BUSINESS.....................................................................................1
General......................................................................................1
Franklin Covey Products......................................................................2
Planners .............................................................................2
Binders .............................................................................2
Software .............................................................................3
Personal Development Products.........................................................3
Training, Facilitation and Consulting Services...............................................3
Workshops.............................................................................4
Personal Coaching.....................................................................5
Sales and Marketing..........................................................................5
Products .............................................................................5
Catalog ....................................................................5
Retail Stores................................................................5
Direct Product...............................................................6
Training Sales........................................................................6
Printing Services.....................................................................7
Strategic Distribution Alliances.............................................................7
International Operations.....................................................................7
Clients......................................................................................8
Competition..................................................................................8
Training .............................................................................8
Consulting............................................................................8
Products .............................................................................8
Manufacturing................................................................................8
Trademarks, Copyrights and Intellectual Property.............................................9
Employees...................................................................................10
Item 2. PROPERTIES..................................................................................10
Item 3. LEGAL PROCEEDINGS...........................................................................10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................10
PART II .............................................................................................11
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS....................11
Item 6. SELECTED FINANCIAL DATA.....................................................................11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......11
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................11
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........11
PART III ............................................................................................12
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................12
Item 11. EXECUTIVE COMPENSATION......................................................................12
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................12
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................12
PART IV ............................................................................................13
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................13
(a) Documents Filed......................................................................13
1. Financial Statements........................................................13
2. Exhibit List................................................................14
(b) Reports on Form 8-K..................................................................15
(c) Exhibits.............................................................................15
(d) Financial Statement Schedule.........................................................15
SIGNATURES.............................................................................................16
1
PART I
Item 1. BUSINESS
GENERAL
Franklin Covey Co. (the "Company" or "Franklin Covey") is an international
professional services and leadership development firm dedicated to increasing
the effectiveness of individuals and organizations. To achieve that goal, the
Company provides consulting services, seminars and workshops, educational
materials, publications and products designed to empower individuals and
organizations to become more effective. The offerings include a comprehensive
time and life management system that enables individuals to better manage their
time by identifying goals and prioritizing the tasks necessary to achieve them.
The Company also provides training, consulting services and products designed to
improve written and oral business communication skills. Franklin Covey also
offers book and commercial printing services. To facilitate implementation of
the principles it teaches, the Company produces and markets its primary product,
the Franklin Planner(R).
The basic Franklin Planner consists of a paper-based, two-page per day
Franklin Covey planning system combined with a seven-ring binder, a variety of
planning aids, weekly, monthly and annual calendars and personal management
sections. The Franklin Planner can also be purchased in one-page per day or
two-page per week versions. The Company offers various forms and accessories
that allow users to expand and customize their Franklin Planner. Franklin Covey
markets the Franklin Planner and accessory products directly to organizations,
and through its sales catalog and retail stores. At August 31, 1998, Franklin
Covey had 120 domestic retail stores located in 36 states and the District of
Columbia. A significant percentage of the users of the Franklin Planner continue
to purchase a renewal planner each year, creating substantial recurring sales.
The principles taught in the Company's curriculum have also been published,
in many cases, in book and audio tape form. Books sold by the Company include
THE 7 HABITS OF HIGHLY EFFECTIVE PEOPLE, PRINCIPLE-CENTERED LEADERSHIP, FIRST
THINGS FIRST, and THE 7 HABITS OF HIGHLY EFFECTIVE FAMILIES, all by Stephen R.
Covey, THE 10 NATURAL LAWS OF TIME AND LIFE MANAGEMENT by Hyrum W. Smith, THE
POWER PRINCIPLE by Blaine Lee and THE 7 HABITS OF HIGHLY EFFECTIVE TEENS, by
Sean Covey. These books, as well as audio tape versions of many of these
products, are sold through general retail channels, as well as through the
Company's own catalog and retail stores.
Product sales, consisting primarily of the Franklin Planner and related
products, accounted for 62.9% of the Company's sales during the year ended
August 31, 1998.
Franklin Covey provides its effectiveness training materials to business,
industry, educational institutions, communities and individuals. The Company
sells its services to the organizational market through its own direct sales
force. The Company delivers its training services to organizations in one of
three ways:
1. Franklin Covey consultants provide on-site consulting or training classes
for organizations. In these situations, the Franklin Covey consultant can
tailor the curriculum to the client's specific business and objectives.
2. The Company also conducts public seminars in more than 200 cities
throughout the United States, where organizations can send their employees
in smaller numbers. These public seminars are also marketed directly to the
public through the Company's catalog, retail stores, and by direct mail.
3. The Company's programs are also designed to be facilitated by licensed
professional trainers and managers in client organizations, reducing
dependence on the Company's professional presenters, and creating
continuing revenue as participant materials are purchased for trainees by
these facilitators.
In fiscal 1998, the Company provided products and services to 80 of the
Fortune 100 and more than 75% of the Fortune 500. The Company also provides its
products and services to a number of U.S. and foreign governmental agencies,
including the U.S. Department of Defense, as well as educational institutions.
The Company also markets its services and products internationally outside the
United States and Canada (in 34 countries) through Company-owned direct
operations and/or licensed operations.
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Professional services, including training presented by client facilitators,
accounted for 32.0% of the Company's sales, representing more than 750,000
individuals trained, during the year ended August 31, 1998.
In December 1995, the Company acquired the assets of Productivity Plus,
Inc. ("Productivity Plus"), a time management company headquartered in Chandler,
Arizona. Productively Plus offers a paper-based, refillable planner/organizer
and accessories principally to customers in branches of the U.S. military.
Effective October 1, 1996, the Company acquired the assets of TrueNorth
Corporation ("Personal Coaching"), a training company headquartered in Salt Lake
City, Utah. Personal Coaching provides post-instruction personalized coaching to
corporations and individuals to augment the effectiveness and duration of
quality training curricula.
Effective March 4, 1997, the Company acquired the assets of Premier
Agendas, Inc., and Premier School Agendas, Ltd. (collectively, "Premier"), the
leading provider of academic and personal planners for students from
kindergarten to college throughout the United States and Canada. Premier has a
user base of approximately twelve million students.
Effective June 2, 1997, Covey Leadership Center, Inc. ("Covey") was merged
with and into the Company (the "Merger") and the name of the Company was changed
to Franklin Covey Co. Management believes that the Merger positions the Company
as a leading provider of products and training services designed to increase the
effectiveness of individuals and organizations. The Merger broadened the range
of products and services offered to include Covey's top-rated leadership
programs, "The 7 Habits of Highly Effective People(R)" and "Principle-Centered
Leadership(R)," increased the Company's capacity to develop and market new
programs and products and created the potential for significant efficiencies and
synergies as distribution and production facilities were combined.
Unless the context requires otherwise, all references to the "Company" or
to "Franklin Covey" herein refer to Franklin Covey Co. and each of its operating
divisions and subsidiaries. The Company's principal executive offices are
located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331 and its
telephone number is (801) 817-1776.
FRANKLIN COVEY PRODUCTS
Based upon its belief that organizational and individual productivity
require effective time management, the Franklin Planner has been developed as
the basic tool for implementing the principles of Franklin Covey's time
management system. The Franklin Planner consists of a paper-based Franklin Covey
planning system, a binder in which to carry it, various planning aids, weekly,
monthly and annual calendars as well as personal management sections. Franklin
Covey offers a broad line of renewal planners, forms and binders for the
Franklin Planner, which are available in various sizes and styles. During the
fiscal year ended August 31, 1998, product sales, consisting primarily of the
Franklin Planner and related products, amounted to $343.8 million and accounted
for 62.9% of Franklin Covey's sales during the period.
PLANNERS. Planners, forms, tabs, and retail kits generated more than $137
million in total sales during fiscal 1998. Planner renewals are available for
the Franklin Planner in five sizes and various styles and consist of daily or
weekly formats, appointment schedules, task lists, monthly calendars, daily
expense records, daily record of events, and personal management pages for an
entire year. Annual Renewal Planners range in price from $18.00 to $37.00. The
Master Pack, which includes personal management tabs, a guide to using the
planner, a pagefinder and weekly compass cards completes a Franklin Planner. The
Master Pack price ranges from $6.00 to $7.00.
BINDERS. Franklin Covey offers binders and accessories (briefcases,
portfolios, wallets/purses, leather care products, etc.) in a variety of
materials, styles and Franklin Planner sizes. These materials include high
quality leathers, fabrics, synthetics and vinyls in a variety of color and
design options. Binder styles include zipper closures, snap closures, and open
formats with pocket configurations to accommodate credit cards, business cards,
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checkbooks and writing instruments. Category products pricing ranges from $3.00
to $300.00.
SOFTWARE. The Company also offers its ASCEND(R) program, a complete
Personal Information Management ("PIM") system which can be used in conjunction
with the paper-based Franklin Planner or used as a stand-alone PIM system.
ASCEND permits users to generate and print data on Franklin Covey paper which
can be inserted directly into the Franklin Planner. The ASCEND program operates
in both the Windows(R) and Macintosh(R) environments. Franklin Covey offers
ASCEND at a retail price of $99.95 which includes all necessary software,
related tutorials and reference manuals. Franklin Covey offers ASCEND through
nationwide retail software stores, in its own retail stores and catalog, and a
specially-designed "home user" version through Sam's Club and Price Costco.
Franklin Covey is also an OEM provider of the PalmPilotTM which includes the
ASCEND software. The PalmPilot is a handheld electronic device manufactured by
3Com(R). The PalmPilot has become another successful planning tool offered by
the Company through its catalog and retail store operations. The Company has
introduced products that can add paper-based planning to the electronic planner
as well as binders and carrying cases specific to the PalmPilot.
PERSONAL DEVELOPMENT PRODUCTS. To supplement its principal products,
Franklin Covey offers a number of accessories and related products, including
books, video tapes and audio cassettes focused on time management, leadership,
personal improvement and other topics. The Company also markets a variety of
content-based personal development products. These products include books,
PrioritiesTM magazine, audio learning systems such as multi-tape and workbook
sets, CD-ROM software products, calendars, posters and other specialty name
brand items. The Company has also identified the home and family market for
development of principle-centered personal development products. Franklin Covey
published and launched Dr. Covey's latest book, THE 7 HABITS OF HIGHLY EFFECTIVE
FAMILIES, in October 1997. The Company offers numerous accessory forms,
including check registers, spread sheets, stationery, mileage logs, maps, menu
planners, shopping lists and other information management and project planning
forms. The Company's accessory products and forms are generally available in the
Franklin Planner sizes.
TRAINING, FACILITATION AND CONSULTING SERVICES
Franklin Covey's training, facilitation and consulting services are
marketed and delivered in the United States by the Company's Professional
Services Group, which consists of talented consultants selected through a
competitive and demanding process and highly qualified sales professionals.
Franklin Covey currently employs 144 training consultants in major
metropolitan areas of the United States and an additional 39 training
consultants outside of the United States. Training consultants are selected from
a large number of experienced applicants. These consultants generally have
several years of training and/or consulting experience and excellent
presentation skills. Once selected, the training consultant goes through a
rigorous training program including multiple live presentations. The training
program ultimately results in the Company's certification of the consultant.
Franklin Covey believes that the caliber of its training consultants has helped
build its reputation of providing high quality seminars. The Company's
Professional Services Group can also help organizational clients diagnose
inefficiencies in their organization and design the core components of a
client's organizational solutions. The efforts of the consultants are enhanced
by several proprietary consulting tools the Company has designed for their use:
Organizational Health Assessment(TM) ("OHA"), used to assess client needs; the
Organizational Effectiveness Cycle(TM) ("OE-Cycle(TM)"), utilized for
organizational diagnosis and re-design; and the Principle-Centered
Organizational Change Process(TM) ("PCOC Process(TM)"), a rigorous methodology
for organizational change management.
Franklin Covey's Professional Services Group is organized in sales teams in
order to assure that both the consultant and the client sales professional
participate in the development of new business and the assessment of client
needs. Consultants are then entrusted with the actual delivery of content,
seminars, processes and other solutions. Consultants follow up continuously with
client service teams, working with them to develop lasting client impact and
ongoing business opportunities.
4
WORKSHOPS. Franklin Covey offers a range of workshops designed to empower
organizations and individuals to effect principle-centered leadership and
change. The Company's workshops are oriented to address each of the four levels
of leadership needs: personal, interpersonal, managerial and organizational. In
addition, the Company believes each of its workshops provides an impactful
experience and frequently generates additional business. During fiscal 1998,
more than 750,000 individuals were trained using the Company's curriculum in its
single and multiple-day workshops and seminars.
Franklin Covey's workshops include its three-day 7 Habits workshop based
upon the material presented in THE 7 HABITS OF HIGHLY EFFECTIVE PEOPLE. The 7
HABITS workshop provides the foundation for continued client relationships and
generates more business as the Company's content and application tools are
delivered deeper into the organization. Additionally, a three-day
PRINCIPLE-CENTERED LEADERSHIP course is offered, which focuses on the managerial
aspects of client needs.
FRANKLIN COVEY LEADERSHIP WEEK, which management believes is one of the
premier leadership programs in the United States, consists of a five-day session
focused on materials from Franklin Covey's 7 HABITS OF HIGHLY EFFECTIVE PEOPLE
and PRINCIPLE-CENTERED LEADERSHIP courses. FRANKLIN COVEY LEADERSHIP WEEK is
reserved for executive level management. As a part of the week's agenda,
executive participants design strategies for long-term implementation of the
Company's principles and content within their organizations.
Franklin Covey's single-day TIMEQUEST seminar and FIRST THINGS FIRST
workshop are designed to complement other Company curricula and compete in the
time management industry. These time management seminars are conducted by the
Company's training consultants for employees of clients and in public seminars
throughout the United States and in many foreign countries. Public seminars and
workshops utilizing the FIRST THINGS FIRST curriculum are also conducted in the
United States by SkillPath, Inc. ("SkillPath"), a national provider of training
seminars and workshops, under a license arrangement between Franklin Covey and
SkillPath. These courses are conducted using the materials presented in the
books titled THE 10 NATURAL LAWS OF TIME AND LIFE MANAGEMENT and FIRST THINGS
FIRST. In October 1998, the Company launched a new time management seminar
titled "WHAT MATTERS MOST(R)." This new seminar includes content from both
pre-existing time management seminars and has added new material to create a new
and improved time management curriculum. Though there are still many licensed
trainers for TIMEQUEST and FIRST THINGS FIRST, the Company intends for the new
WHAT MATTERS MOST seminar to replace the other time management seminars. The
Company offers a number of other single-day seminars and workshops including
PRESENTATION ADVANTAGE(TM), a seminar helping individuals and organizations make
more effective business presentations; WRITING ADVANTAGE(R), a seminar that
teaches better business writing and communication skills; PLANNING FOR
RESULTS(TM); BUILDING TRUST(TM); and POWER OF UNDERSTANDING(TM). The Company's
training consultants conduct these seminars and workshops for employees of
institutional clients and public seminar participants.
In addition to providing consultants and presenters, Franklin Covey also
trains and certifies client facilitators to teach selected Company workshops
within the client's organization. Franklin Covey believes client-facilitated
training is important to its fundamental strategy to create recurring client
revenue streams. After having been certified, clients purchase manuals,
profiles, planners and other products to conduct training workshops within their
organization, generally without the Company repeating the sales process. This
creates an annuity-type business, providing recurring revenue, especially when
combined with the fact that curriculum content in one course leads the client to
additional participation in other Company courses. Since 1988, Franklin Covey
has trained more than 19,000 client facilitators. Client facilitators are
certified only after graduating from one of Franklin Covey's certification
workshops and completing post-course certification requirements.
Franklin Covey regularly sponsors public seminars in cities throughout the
United States and in several foreign countries. The frequency of seminars in
each city or country depends on the concentration of Franklin Covey clients, the
level of promotion and resulting demand, and generally ranges from semi-monthly
to quarterly. Smaller institutional clients often utilize the public seminars to
train their employees.
5
In fiscal 1996, Franklin Covey introduced the Franklin Covey Leadership
Library series of video workshops. The Franklin Covey Leadership Library is a
series of stand-alone video workshops that can be used in informal settings as
discussion starters, in staff meetings or as part of an in-house leadership
development program.
PERSONAL COACHING. Franklin Covey offers post-seminar training in the form
of personal coaching. The Company employs 41 coaches that interact with clients
on the telephone to help them implement the training from the seminar they have
taken. The Company offers personal coaching for some of its own curriculum as
well as seminars offered by other training companies.
Sales of training services for the year ended August 31, 1998 were $174.9
million and accounted for 32.0% of Franklin Covey's total sales during the
period.
SALES AND MARKETING
The following table sets forth, for the periods indicated, the Company's
sales and percentage of total sales for each of its principal distribution
channels:
Year Ended August 31,
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1998 1997 1996
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Product Sales........................... $343,832 62.9% $301,687 69.6% $236,039 71.1%
Training Services....................... 174,927 32.0 107,417 24.8 70,812 21.3
Printing Services....................... 27,853 5.1 24,168 5.6 25,155 7.6
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Total Sales........................ $546,612 100.0% $433,272 100.0% $332,006 100.0%
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PRODUCTS. Franklin Covey uses catalogs, retail stores and a direct product
sales force to market its products to organizations and individuals.
CATALOG. Franklin Covey periodically mails catalogs to its clients,
including a reference catalog, holiday catalog, catalogs timed to coincide with
planner renewals and catalogs related to special events, such as store openings
or new product offerings. Catalogs may be targeted to specific geographic areas
or user groups as appropriate. Catalogs are typically printed in full color with
an attractive selling presentation highlighting product benefits and features.
Franklin Covey maintains a client service department which clients may
call toll-free, 24 hours a day, Monday through Saturday, to inquire about a
product or to place an order. Through Franklin Covey's computerized order entry
system, client representatives have access to client preferences, prior orders,
billings, shipments and other information on a real-time basis. Each of the
Company's more than 375 customer service representatives has the authority to
immediately solve any client service problem.
Franklin Covey utilizes a zone picking system for processing orders.
This system enables the Company to respond rapidly to client orders. Client
information stored within the order entry system is also used for additional
purposes, including target marketing of specific products to existing clients
and site selection for Company retail stores. Franklin Covey believes that its
order entry system helps assure client satisfaction through both rapid delivery
and accurate order shipment.
RETAIL STORES. Beginning in late 1985, Franklin Covey began opening
retail stores in areas of high client density. The initial stores were generally
located in lower traffic destination locations. The Company has since adopted a
strategy of locating retail stores in high-traffic retail centers, primarily
large shopping malls, to serve existing clients and to attract increased numbers
of walk-in clients. Franklin Covey believes that higher costs associated with
locating retail stores in these centers have been offset by increased sales in
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these locations. Franklin Covey's retail stores, which average approximately
2,000 square feet, are stocked almost entirely with Franklin Covey products. The
Company's retail stores strategy focuses on providing exceptional client service
at the point of sale that Franklin Covey believes increases client satisfaction
as well as the frequency and volume of purchases. At August 31, 1998, Franklin
Covey had 120 domestic retail stores located in 36 states and the District of
Columbia.
Franklin Covey attracts existing clients to its retail stores by
informing them of store openings through direct mail advertising. The Company
believes that its retail stores encourage walk-through traffic and
impulse-buying and that store clients are a source of participants for Franklin
Covey's public seminars. The stores have also provided the Company with an
opportunity to assess client reaction to new product offerings.
Franklin Covey believes that its retail stores have a high-end image
consistent with its marketing strategy. Franklin Covey's products are generally
grouped in sections supporting the different sizes of the Franklin Planner.
Products are attractively presented and displayed with an emphasis on
integration of related products and accessories. Stores are staffed with a
manager, an assistant manager and additional sales personnel as needed. Franklin
Covey employees have been trained to use the Franklin Planner, enabling them to
assist and advise clients in selection and use of the Company's products. During
peak periods, additional personnel are added to promote prompt and courteous
client service.
In November 1998, the Company completed an agreement to sell selected
Franklin Planners and binders through Office Depot, a mass-market retail
operation with approximately 580 stores. The agreement allows Office Depot to
market and sell selected Franklin Planners, renewal planners, master packs,
binders and accessories in a four-foot retail shelf location in their stores.
The Company anticipates that this relationship will allow its products to become
more readily available to its current customer base as well as attract new
customers to the planning system. The Company believes that additional
anticipated revenues will more than offset the anticipated lower margins from
selling product through this channel.
DIRECT PRODUCT. As part of its strategy to adapt Franklin Covey's
services and products to additional market segments, the Company develops and
markets customized forms, pagefinders, tabs, binders and sales and training
materials for specific applications such as for use by salespersons, real estate
professionals and government employees. Franklin Covey believes that the
Franklin Planner is effective in communicating uniform marketing plans, product
information and procedures to large numbers of employees, sales representatives
and distributors.
In January 1998, the Company formed an alliance with the At-A-Glance
group to sell its products through the category contract stationer channel.
At-A-Glance wholesales other products to contract stationer businesses such as
Boise Cascade, Office Express and Staples, which in turn sell office products
through catalog order entry systems to businesses and organizations. The Company
signed an agreement to have At-A-Glance represent a selected Franklin Planner
product line through this office products channel. The Company believes that
additional anticipated revenues will more than offset the anticipated lower
margins from selling product through this channel.
Premier markets agendas to schools and school districts in order to
help teachers and students enhance the learning process. Premier sold more than
12 million agendas in fiscal 1998 mostly in the United States and Canada.
Premier has a direct sales force of 115 sales professionals. An agenda consists
of a wire-bound notebook with dated pages to help the student keep track of
assignments and due dates. Most agendas are customized to include the individual
school's rules, regulations, administrators and scheduled events.
Productivity Plus markets The Ultimate Organizer(TM), an undated,
paper-based planner, together with annual renewal calendars and accessories.
Approximately 85% of Ultimate Organizer sales are to customers within branches
of the U.S. military.
TRAINING SALES. Franklin Covey's sales professionals market the Company's
training and consulting services to institutional clients and public seminar
clients.
7
Franklin Covey employs 219 sales professionals who service major
metropolitan areas throughout the United States and sell training services to
institutional clients. Franklin Covey employs an additional 63 sales
professionals outside of the United States. Sales professionals must have
significant selling experience prior to employment by the Company and are
trained and evaluated at Franklin Covey and in their respective sales
territories during the first six months of employment. Sales professionals
typically call upon persons responsible for corporate employee training, such as
corporate training directors or human resource officers. Sales professionals
work closely with training consultants in their territories to schedule and
tailor seminars and workshops to meet specific objectives of institutional
clients.
Franklin Covey also employs 144 training consultants throughout the United
States who present institutional and public seminars in their respective
territories and an additional 39 training consultants outside of the United
States. Training consultants work with sales professionals and institutional
clients to incorporate a client's policies and objectives in seminars and
present ways that employee goals may be aligned with those of the institution.
Public seminars are planned, implemented and coordinated with training
consultants by a staff of marketing and administrative personnel at the
Company's corporate offices. These seminars provide training for the general
public and are also used as a marketing tool for attracting corporate and other
institutional clients. Corporate training directors are often invited to attend
public seminars to preview the seminar content prior to engaging Franklin Covey
to train in-house employees. Smaller institutional clients often enroll their
employees in public seminars when a private seminar is not cost effective. In
the public seminars, attendees are also invited to provide names of potential
persons and companies who may be interested in Franklin Covey's seminars and
products. These referrals are generally used as prospects for Franklin Covey's
sales professionals.
PRINTING SERVICES. Through the acquisition of Publishers Press in December
1994, Franklin Covey acquired greater control over printing of the materials for
the Franklin Planner and of other related products. Publishers Press also
provides book and commercial printing services to clients in the western United
States.
STRATEGIC DISTRIBUTION ALLIANCES
Franklin Covey has pursued an aggressive strategy to create strategic
alliances with innovative and respected organizations in an effort to develop
effective distribution of its products and services. The principal distribution
alliances currently maintained by Franklin Covey are: SIMON & SCHUSTER and
GOLDEN FAMILY ENTERTAINMENT in publishing books for the Company; MICROSOFT to
market the 7 Habits name in software; WYNCOM to promote and facilitate Dr.
Covey's personal appearances and teleconferences; NIGHTINGALE-CONANT to market
and distribute audio and video tapes of the Company's book titles; SKILLPATH to
market and present the Company's public time management seminars; and
AT-A-GLANCE to market and distribute selected Franklin Planners and accessories
through catalog office supply channels.
INTERNATIONAL OPERATIONS
The Company provides products, training and printing services
internationally through Company-owned and licensed operations. Franklin Covey
has Company-owned operations and offices in Australia, Belgium, Canada, Japan,
Mexico, New Zealand and the United Kingdom. These international offices serve
organizations and individuals in more than 30 countries. The Company also
markets its products and training services to more than 75 countries through
licensee and copyright agreements. Franklin Covey operates retail operations in
Australia, Canada, Japan and Mexico. Franklin Covey's four most popular books,
THE 7 HABITS OF HIGHLY EFFECTIVE PEOPLE, PRINCIPLE-CENTERED LEADERSHIP, THE 10
NATURAL LAWS OF TIME AND LIFE MANAGEMENT and FIRST THINGS FIRST are currently
published in multiple languages.
8
CLIENTS
Franklin Covey has developed a broad base of institutional and individual
clients. The Company has more than 8,000 institutional clients consisting of
corporations, governmental agencies, educational institutions and other
organizations. The Company believes its products, workshops and seminars
encourage strong client loyalty. Employees in each of Franklin Covey's
distribution channels focus on providing timely and courteous responses to
client requests and inquiries. Institutional clients frequently receive
assistance in designing and developing customized forms, tabs, pagefinders and
binders necessary to satisfy specific needs.
COMPETITION
TRAINING. Competition in the organizational training industry is highly
fragmented with few large competitors. Franklin Covey estimates that the
industry represents more than $6 billion in annual revenues and that the largest
traditional organizational training firms have sales in the $200 million range.
Based upon Franklin Covey's fiscal 1998 sales of approximately $175 million, the
Company believes it is a leading competitor in the organizational training
market. Other significant competitors in the leadership training market are
Development Dimensions International, Achieve Global (formerly Zenger Miller),
Organizational Dynamics Inc., Provant, and the Center for Creative Leadership.
CONSULTING. Franklin Covey's PCOC change management methodology, which it
initiated in 1996, is directly linked to organization and culture change.
Effective change is achieved through creating a principle-centered foundation
within an organization and by aligning systems and structures with that
foundation. Franklin Covey believes its approach to organization and culture
change is distinguishable from the approach taken by more traditional change
management and re-engineering firms, as Franklin Covey's approach complements
rather than competes with the offerings of such firms.
PRODUCTS. The paper-based time management and personal organization
products market is intensely competitive and subject to rapid change. Franklin
Covey competes directly with other companies that manufacture and market
calendars, planners, personal organizers, appointment books, diaries and related
products through retail, mail order and other direct sales channels. In this
market, several competitors have widespread name recognition. The Company
believes its principal competitors include Day-Timer, At-A-Glance and Day
Runner. Franklin Covey also competes, to a lesser extent, with companies that
market substitutes for paper-based products, such as electronic organizers,
software PIMs and hand-held computers. Franklin Covey's ASCEND software competes
directly with numerous other PIMs. Many of Franklin Covey's competitors have
significant marketing, product development, financial and other resources.
Given the relative ease of entry in Franklin Covey's product markets, the
number of competitors could increase, many of whom may imitate the Company's
methods of distribution, products and seminars, or offer similar products and
seminars at lower prices. Some of these companies may have greater financial and
other resources than the Company. Franklin Covey believes that the Franklin
Planner and related products compete primarily on the basis of user appeal,
client loyalty, design, product breadth, quality, price, functionality and
client service. Franklin Covey also believes that the Franklin Planner has
obtained market acceptance primarily as a result of the high quality of
materials, innovative design, the Company's attention to client service, and the
strong loyalty and referrals of its existing clients. Franklin Covey believes
that its integration of training services with products has become a competitive
advantage. Moreover, management believes that the Company is a market leader in
the United States among a small number of integrated providers of time
management products and services. Increased competition from existing and future
competitors could, however, have a materially adverse effect on the Company's
sales and profitability.
MANUFACTURING
The manufacturing operations of Franklin Covey consist primarily of
printing, assembling, packaging and shipping components used in connection with
the Franklin Covey product line.
9
Franklin Covey currently prints the various Franklin Planners and other related
forms and tabs. The Company believes the acquisition of its own internal
printing capacity has enabled it to control production costs of printed
materials, exercise greater control over production schedules and timing of
inventories, increase quality control and reduce risks associated with
dependence on outside suppliers.
Franklin Covey obtains its high-quality paper from a supplier in Wisconsin
that is a subsidiary of a Fortune 500 company. The paper is manufactured in two
separate facilities to reduce the risk of a supply disruption. The Company
believes there are several alternative suppliers available to meet Franklin
Covey's paper needs. If Franklin Covey were required to obtain paper from
another source, any resulting delay or disruption is not expected to have an
adverse effect on its long-term business or financial condition.
The planners and other forms printed internally are cut, collated and
finished in the Company's facilities. The products are then assembled and
packaged for placement into inventory. Franklin Covey generally maintains three
to four months of inventory. Franklin Covey primarily uses UPS, along with
Federal Express and common carriers to ship its products to clients and to the
Franklin Covey retail stores. Automated production, assembly and material
handling equipment is used in the manufacturing process to insure consistent
quality of production materials and to control costs and maintain efficiencies.
Binders used for Franklin Covey's products are produced from either
leather, simulated leather, tapestry or vinyl materials. All of the vinyl
binders are produced by multiple and alternative product suppliers. The
tapestry, leather and simulated leather binders are manufactured by both third
party and by Franklin Covey. Franklin Covey believes it enjoys good relations
with its suppliers and vendors and does not anticipate any difficulty in
obtaining the required binders and materials needed in its business.
The Company has implemented special procedures to insure a high standard of
quality for its leather binders, most of which are manufactured by suppliers in
the United States, Canada, Korea and China. Representatives of the Company
attend leather shows and supervise the buying process by leather binder
suppliers who purchase and inventory leather before producing and selling the
finished binders to Franklin Covey.
Franklin Covey also purchases numerous accessories, including pens, books,
videotapes, calculators and other products, from various suppliers for resale to
its clients. These items are manufactured by a variety of outside contractors
located in the United States and abroad. The Company does not believe that it is
dependent on any one or more of such contractors and considers its relationships
with such suppliers to be good.
TRADEMARKS, COPYRIGHTS AND INTELLECTUAL PROPERTY
Franklin Covey seeks to protect its intellectual property through a
combination of trademarks, copyrights and confidentiality agreements. The
Company claims rights for more than 120 trademarks in the United States and has
obtained registration in the United States and many foreign countries for many
of its trademarks, including Franklin Covey, TimeQuest, The 7 Habits of Highly
Effective People, First Things First, Principle-Centered Leadership, What
Matters Most, Franklin Planner, Ascend, Writing Advantage, and The Seven Habits.
Franklin Covey considers its trademarks and other proprietary rights to be
important and material to its business. Each of the marks set forth in italics
above is a registered mark or a mark for which protection is claimed.
Franklin Covey owns all copyrights on its planners, books, manuals, text
and other printed information provided in its training seminars, the programs
contained within ASCEND and its instructional materials, and its software and
electronic products, including audio tapes and video tapes. Franklin Covey
licenses rather than sells all facilitator workbooks and other seminar and
training materials in order to limit its distribution and use. Franklin Covey
places trademark and copyright notices on its instructional, marketing and
advertising materials. In order to maintain the proprietary nature of its
product information, Franklin Covey enters into written confidentiality
agreements with certain executives, product developers, sales professionals,
training consultants, other employees and licensees. Although Franklin Covey
believes its protective measures with respect to its proprietary rights are
important, there can be no assurance that such measures will provide significant
protection from competitors.
10
EMPLOYEES
As of August 31, 1998, Franklin Covey had 4,247 full and part-time
associates, including 1,707 in sales, marketing and training; 1,332 in customer
service and retail; 891 in production operations and distribution; and 317 in
administration and support staff. None of Franklin Covey's associates are
represented by a union or other collective bargaining group. Management believes
that its relations with its associates are good. Franklin Covey does not
currently foresee a shortage in qualified personnel needed to operate the
Company's business.
Item 2. PROPERTIES
Franklin Covey's principal business operations and executive offices are
located in Salt Lake City, Utah and Provo, Utah. The Company's Salt Lake City
facilities currently consist of approximately 800,000 square feet, including
approximately 491,000 square feet for manufacturing, distribution and
warehousing, and approximately 309,000 square feet for administration. All of
Franklin Covey's Salt Lake City facilities are owned by the Company, subject to
mortgages of approximately $3.6 million as of August 31, 1998. The four
buildings in Provo are located in a fifteen mile area. Franklin Covey occupies
all or a portion of each of these buildings, with total leased space of
approximately 173,000 square feet as of August 31, 1998, with leases that
terminate intermittently through the year 2009. Franklin Covey's 120 retail
stores are operated under leases with remaining terms of up to seven years; some
of these leases include rentals based on a percentage of sales. The Company also
maintains sales, administrative and/or warehouse facilities in or near Salt Lake
City; Phoenix; Atlanta; Dallas; Washington, D.C.; Bellingham, Washington; Tokyo;
London; Brussels, Belgium; Toronto; Vancouver; Montreal; Burlington; Brisbane,
Australia; Monterrey, Mexico; Mexico City, Mexico; and Auckland, New Zealand
under leases which expire intermittently through the year 2004. All of Franklin
Covey's facilities are used exclusively by Franklin Covey and its divisions and
are believed to be adequate and suitable for its current needs.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to, any
material pending legal proceedings, nor are any such proceedings known to the
Company to be contemplated.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended August 31, 1998.
11
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is listed and traded on the New York Stock
Exchange ("NYSE") under the symbol "FC." The following table sets forth, for the
periods indicated, the high and low sale prices for the Company's common stock,
as reported on the NYSE Composite Tape, for the fiscal years ended August 31,
1998 and 1997, respectively.
High Low
----------- -----------
Fiscal Year Ended August 31, 1998:
Fourth Quarter................................ $ 21 1/8 $ 18 9/16
Third Quarter................................. 25 3/4 19 1/4
Second Quarter................................ 24 11/16 20 3/4
First Quarter................................. 28 1/8 21 1/8
Fiscal Year Ended August 31, 1997:
Fourth Quarter................................ $ 28 1/4 $ 24 1/8
Third Quarter................................. 24 20 5/8
Second Quarter................................ 22 7/8 20 1/2
First Quarter................................. 21 3/8 17 3/8
The Company did not pay or declare dividends on its common stock during the
fiscal years ended August 31, 1997 and 1998. The Company currently anticipates
that it will retain all available funds to finance its future growth and
business expansion. The Company does not presently intend to pay cash dividends
in the foreseeable future.
As of November 1, 1998, the Company had 21,220,813 shares of its common
stock outstanding, held by approximately 360 shareholders of record.
Item 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page
1 of the Company's 1998 Annual Report to Shareholders.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to pages
6 through 11 of the Company's 1998 Annual Report to Shareholders.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages
13 through 26 of the Company's 1998 Annual Report to Shareholders.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
12
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
sections titled "Election of Directors," "Executive Officers" and "Executive
Compensation" in the Company's definitive Proxy Statement for the annual meeting
of shareholders which is scheduled to be held on January 8, 1999. The definitive
Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections titled "Election of Directors--Director Compensation" and "Executive
Compensation" in the Company's definitive Proxy Statement for the annual meeting
of shareholders which is scheduled to be held on January 8, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section titled "Principal Holders of Voting Securities" in the Company's
definitive Proxy Statement for the annual meeting of shareholders which is
scheduled to be held on January 8, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section titled "Certain Relationships and Related Transactions" in the Company's
definitive Proxy Statement for the annual meeting of shareholders which is
scheduled to be held on January 8, 1999.
13
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed
1. Financial Statements. The following Consolidated Financial
Statements of the Company and Report of Independent Public
Accountants included in the Annual Report to Shareholders for the
year ended August 31, 1998, are incorporated by reference in Item
8 hereof:
Report of Arthur Andersen LLP, Independent Public Accountants,
for the years ended August 31, 1998, 1997 and 1996
Consolidated Balance Sheets at August 31, 1998 and 1997
Consolidated Statements of Income for the years ended August 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years
ended August 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended August
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
14
2. Exhibit List.
Exhibit Incorporated Filed
No. Exhibit by Reference Herewith
-------- --------------------------------------------------------------- ------------- ----------
3.1 Revised Articles of Incorporation of the Registrant (1)
3.2 Amended and Restated Bylaws of the Registrant (1)
4 Specimen Certificate of the Registrant's Common Stock, par (2)
value $.05 per share
10.1 Amended and Restated 1992 Employee Stock Purchase Plan (3)
10.2 First Amendment to Amended and Restated 1992 Stock Incentive (4)
Plan
10.3 Franklin 401(k) Profit Sharing Plan (1)
10.4 Forms of Nonstatutory Stock Options (1)
10.5 Merger Agreement-- Covey Leadership Center, Inc. (5)
10.6 Lease Agreements, as amended and proposed to be amended, by (6)
and between Covey Corporate Campus One, LLC and Covey
Corporate Campus Two, LLC (Landlord) and Covey Leadership
Center, Inc. (Tenant) which were assumed by Franklin Covey
Co. in the Merger with Covey Leadership Center, Inc.
10.7 Notes Payable Purchase Agreement for $85.00 million of 6.6% (7)
unsecured senior notes payable due 2008
13 Annual Report to Shareholders for the year ended August 31, (8)
1998. Certain portions of this exhibit are incorporated by
reference into Items 6 through 8 of this Annual Report on
Form 10-K and, except as so incorporated by reference, the
Annual Report to Shareholders is not deemed to be filed as
part of this Report.
22 Subsidiaries of the Registrant (8)
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants (8)
27 Financial Data Schedule (8)
99.1 Report of Arthur Andersen LLP, Independent Public (8)
Accountants, on Consolidated Financial Statement
Schedule for the years ended August 31, 1998, 1997
and 1996
99.2 Valuation and Qualifying Accounts and Reserves. Financial
statements and schedules other than those listed are (8)
omitted for the reason that they are not required or are
not applicable, or the required information is shown in the
Financial Statements or Notes thereto, or contained
in this Report.
- -----------------------
(1) Incorporated by reference to Registration Statement on Form S-1 filed with
the Commission on April 17, 1992, Registration No. 33-47283.
(2) Incorporated by reference to Amendment No. 1 to Registration Statement on
Form S-1 filed with the Commission on May 26, 1992, Registration No.
33-47283.
(3) Incorporated by reference to Form 10-K filed November 27, 1992, for the
year ended August 31, 1992.
(4) Incorporated by reference to Registration Statement on Form S-1 filed with
the Commission on January 3, 1994, Registration No. 33-73728.
(5) Incorporated by reference to Reports on Form 8-K dated June 3, 1997.
(6) Incorporated by reference to Report of Form 10-K filed December 1, 1997,
for the year ended August 31, 1997.
(7) Incorporated by reference to Report of Form 10-Q filed July 14, 1998, for
the quarter ended May 31, 1998.
(8) Filed herewith and attached to this Report following page 22 hereof.
(b) Reports on Form 8-K
None.
(c) Exhibits
Exhibits to this Report are attached following hereof.
(d) Financial Statement Schedule
See herein.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 24, 1998.
FRANKLIN COVEY CO.
By: /s/ JON H. ROWBERRY
---------------------------
Jon H. Rowberry, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ HYRUM W. SMITH
- --------------------------------------
Hyrum W. Smith Chairman of the Board November 24, 1998
/s/ STEPHEN R. COVEY Co-Chairman of the Board November 24, 1998
- --------------------------------------
Stephen R. Covey
/s/ JON H. ROWBERRY President, Chief Executive November 24, 1998
- --------------------------------------
Jon H. Rowberry Officer and Director
/s/ STEPHEN M. R. COVEY Executive Vice President and November 24, 1998
- --------------------------------------
Stephen M. R. Covey Director
/s/ JOHN L. THELER Executive Vice President and November 24, 1998
- --------------------------------------
John L. Theler Chief Financial Officer
/s/ J. SCOTT NIELSEN Chief Accounting Officer November 24, 1998
- --------------------------------------
J. Scott Nielsen
16
/s/ STEVEN C. WHEELWRIGHT Director November 24, 1998
- --------------------------------------
Steven C. Wheelwright
/s/ ROBERT F. BENNETT Director November 24, 1998
- --------------------------------------
Robert F. Bennett
/s/ BEVERLY B. CAMPBELL Director November 24, 1998
- --------------------------------------
Beverly B. Campbell
/s/ ROBERT H. DAINES Director November 24, 1998
- --------------------------------------
Robert H. Daines
/s/ E. J. "JAKE" GARN Director November 24, 1998
- --------------------------------------
E. J. "Jake" Garn
/s/ DENNIS G. HEINER Director November 24, 1998
- --------------------------------------
Dennis G. Heiner
/s/ THOMAS H. LENAGH Director November 24, 1998
- --------------------------------------
Thomas H. Lenagh
/s/ JOEL C. PETERSON Director November 24, 1998
- --------------------------------------
Joel C. Peterson
/s/ E. KAY STEPP Director November 24, 1998
- --------------------------------------
E. Kay Stepp
/s/ ROBERT A. WHITMAN Director November 24, 1998
- --------------------------------------
Robert A. Whitman