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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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM_______________ TO _______________
FRANKLIN COVEY CO.
(Formerly Franklin Quest Co.)
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(Exact name of registrant as specified in its charter)
UTAH 1-11107 87-0401551
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
2200 WEST PARKWAY BOULEVARD
SALT LAKE CITY, UTAH 84119-2331
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(Address of principal executive offices, including zip code)
[X] Registrant's telephone number, including area code: (801) 975-1776
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which
Title of Each Class Registered
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Common Stock, $.05 Par Value New York Stock Exchange
[ ] Securities registered pursuant to Section 12(g) of the Act: None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant on November 18, 1997, based upon the closing sale price of the
Common Stock of $22.25 per share on that date, was approximately $457,945,139.
Shares of the Common Stock held by each officer and director and by each person
who may be deemed to be an affiliate of the Registrant have been excluded.
As of November 18, 1997, the Registrant had 24,780,928 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference in
Parts, II, III and IV of this Form 10-K: (1) Registrant's Annual Report to
Shareholders for the fiscal year ended August 31, 1997 (Parts II and IV), and
(2) Proxy Statement for Registrant's Annual Meeting of Shareholders which is
scheduled to be held on January 9, 1998 (Part III).
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INDEX TO FORM 10-K
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PART I ..................................................................................................... 1
Item 1. Business............................................................................................. 1
General.............................................................................................. 1
Franklin Covey's Products............................................................................ 2
Planners and Organizers....................................................................... 2
Kits ..................................................................................... 3
Binders ..................................................................................... 3
Software ..................................................................................... 3
Personal Development Products................................................................. 3
Training, Facilitation and Consulting Services....................................................... 3
Workshops..................................................................................... 4
Sales and Marketing.................................................................................. 5
Product ..................................................................................... 5
Catalog ............................................................................ 5
Retail Stores........................................................................ 6
Direct Product....................................................................... 6
Training Sales................................................................................ 6
Printing Services............................................................................. 7
Strategic Distribution Alliances..................................................................... 7
International Operations............................................................................. 7
Clients.............................................................................................. 7
Competition.......................................................................................... 8
Training ..................................................................................... 8
Consulting.................................................................................... 8
Products ..................................................................................... 8
Manufacturing........................................................................................ 8
Trademarks, Copyrights and Intellectual Property..................................................... 9
Employees............................................................................................ 9
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................. 12
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PART III ..................................................................................................... 13
Item 10. Directors and Executive Officers of the Registrant................................................... 13
Item 11. Executive Compensation............................................................................... 13
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 13
Item 13. Certain Relationships and Related Transactions....................................................... 13
PART IV ..................................................................................................... 14
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 14
(a) Documents Filed............................................................................... 14
1. Financial Statements................................................................. 14
2. Financial Statement Schedule......................................................... 14
(b) Reports on Form 8-K........................................................................... 16
(c) Exhibits...................................................................................... 16
(d) Financial Statement Schedule.................................................................. 16
SIGNATURES ..................................................................................................... 21
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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 which 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 fitness training services and
book and commercial printing services. To facilitate implementation of the
principles it teaches, the Company produces and markets its primary product, the
Franklin Covey System.
The basic Franklin Covey System consists of a paper-based, two-page per
day Franklin Covey Planner or 7 Habits Organizer, combined with a seven-ring
binder, and a variety of planning aids, weekly, monthly and annual calendars and
personal management sections. (The planner/organizer 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
Covey System. Franklin Covey markets the Franklin Covey System and accessory
products directly to organizations, and through its sales catalog and its retail
stores. At August 31, 1997, Franklin Covey had 110 domestic retail stores
located in 38 states and the District of Columbia. A significant percentage of
the users of the Franklin Covey System 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 and The Power Principle by Blaine Lee. 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 Covey System and
related products, accounted for approximately 70% of the Company's sales during
the fiscal year ended August 31, 1997.
Franklin Covey provides its effectiveness training materials to
business, industry and individuals. The Company sells its services to the
organization market through its own direct sales force. It delivers its training
services to organizations in one of three ways. 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. The Company also conducts public
seminars in over 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. 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 1997, the Company provided products and services to 82 of the
Fortune 100 and over 60% 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, and to educational institutions. The
Company also markets its services and products internationally outside the
United States and Canada (in 38 countries) through Company owned and/or licensed
operations.
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Professional services, including training presented by client
facilitators, accounted for approximately 25% of the Company's sales,
representing over 450,000 individuals trained, during the year ended August 31,
1997.
In April 1995, the Company acquired the assets of Time Systems, Inc.
("Time Systems"), a time management training and product company headquartered
in Phoenix, Arizona. In June 1995, the Company acquired the assets of LTS, Inc.,
a distributor of Time Systems products and training services located in Atlanta,
Georgia.
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, a training company headquartered in Salt Lake City, Utah. TrueNorth
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. ("Premier"), the leading
provider of academic and personal planners for students from kindergarten to
college age throughout the United States and Canada. Premier has a user base of
approximately ten million students. The combined guaranteed purchase price was
approximately $23 million and additional payments may be made based on Premier's
operating results over the three years following its acquisition.
Effective May 30, 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. In connection with the Merger, 5,030,894 shares of
the Company's Common Stock were issued to shareholders of Covey and $27 million
in cash was paid to Stephen R. Covey for certain license rights (the "License
Rights"). 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" and "Principal Centered
Leadership," 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 the Company 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 and its
telephone number is (801) 975-1776.
FRANKLIN COVEY'S PRODUCTS
Based upon its belief that organizational and individual productivity
require effective time management, the Franklin Covey System has been developed
as the basic tool for implementing the principles of Franklin Covey's time
management system. The Franklin Covey System consists of a paper-based Franklin
Covey Planner or 7 Habits Organizer, a binder in which to carry it, and various
planning aids, weekly, monthly and annual calendars and personal management
sections. Franklin Covey offers a broad line of planners, organizers and binders
for the Franklin Covey System, which are available in various sizes and styles.
During the fiscal year ended August 31, 1997, product sales, consisting
primarily of the Franklin Covey System and related products, amounted to
approximately $301 million and accounted for approximately 70% of Franklin
Covey's sales during the period.
PLANNERS AND ORGANIZERS. Renewal planners for the Franklin Covey System
are provided in five sizes and various styles. They consist of monthly
calendars, task lists and indexes, calendar pages for an entire year,
prioritized daily task lists, appointment schedules, daily expense records, a
daily record of events, and, in the 7 Habits Organizer, 52 weekly compass cards
for recording weekly roles and goals. The master planner pack adds address and
telephone directories, personal management sections, ready references, sections
for identifying values and goals, financial and key information pages, future
planning calendars for five years, colored tabs and dividers,
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and a pagefinder/ruler in a separate pack. The renewal planner ranges in price
from $19.00 to $37.00. The master planner pack is $6.00.
KITS. In connection with its training, facilitation and consulting
services, Franklin Covey sells content-based training products for use by time
management workshop facilitators and participants. Seminar kits include a vinyl
binder, master planner pack, renewal planner, storage binder and limited
training materials, personal assessment products called "profiles," and personal
application software. In addition, the Company sells a Standard Edition kit and
a Deluxe Edition kit which contain all of the materials in the seminar kit plus
a satellite notebook and additional training materials. Retail prices for the
Standard Edition kit and the Deluxe Edition kit range from $49.00 to $104.00.
Facilitator products include training videos, resource guides and presentation
aids. Participant products include course manuals, workbooks and organizers.
BINDERS. Franklin Covey offers ring binders in a variety of materials
and styles in each of the Franklin Covey System sizes. Binders are available in
heat-sealed or sewn vinyl, as well as in simulated leather, deluxe leather,
premium leather or tapestry covers. Binders are offered with or without a zipper
or snap closure and with a variety of pocketholders and inserts for calculators,
checkbooks, credit cards and writing instruments. The assortment of innovative
binder styles, colors and finishes offered by the Company has been designed by a
group of skilled in-house craftsmen to encourage existing clients to upgrade
their binders. Binders range in price from $11.95 to $225.00. A substantial
number of the Company's clients upgrade their binders from the original vinyl
binder generally received in a kit.
SOFTWARE. In 1991 the Company introduced its ASCEND(R) program, a
complete Personal Information Management ("PIM") system which can be used in
conjunction with the paper-based Franklin Covey Planner or used as a stand-alone
PIM system. ASCEND(R) permits users to generate and print data on Franklin Covey
paper which can be inserted directly into the Franklin Covey System. The
ASCEND(R) program operates in both the Windows(R) and Macintosh(R) environments.
Franklin Covey offers ASCEND(R) at a retail price of $99.95 which includes all
necessary software, related tutorials and reference manuals. Franklin Covey
offers ASCEND(R) through nationwide retail software stores, in its own retail
stores and catalog, and in a specially-designed "home user" version through
Sam's Club and Price Costco. Franklin Covey, through an alliance with Microsoft,
has developed and commenced distribution of the 7 Habits Organizer in an
electronic format known as 7 Habits Tools(TM). Microsoft has incorporated 7
Habits Tools into its popular scheduling software, Microsoft Schedule+. Franklin
Covey also provides 7 Habits Tools Add On(TM), a software product that features
advanced printing capabilities and other materials developed from The 7 Habits
of Highly Effective People. The Company has also coordinated its content with
the handheld PIM called The PalmPilot(TM), which is able to communicate with
ASCEND(R), Microsoft Schedule+ and 7 Habits Tools.
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 and other
topics. The Company also markets a variety of content-based personal development
products. These products include books, Priorities(TM) 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 addressing the 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 Covey System sizes.
TRAINING, FACILITATION AND CONSULTING SERVICES
Franklin Covey's training, facilitation and consulting services are
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.
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Franklin Covey currently employs 146 training consultants in major
metropolitan areas of the United States and 23 training consultants outside of
the United States. Training consultants are selected and trained 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 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: Stakeholder Information Systems(TM) ("SIS"), used to
assess client needs; the Performance Cycle(R) ("P-Cycle"), utilized for
organizational diagnosis and re-design; and the Principle-Centered Change
Process(TM) ("PCCP"), a rigorous methodology for organizational change
management. These consultants represent a significant resource and are an
integral part of the Company's approach to new product development and
curriculum design; many of these individuals have been contributors to, or
co-authors of books.
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 the
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.
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 four levels
of leadership needs: personal, interpersonal, managerial and organizational. In
addition, the Company believes each of its workshops must provide an impactful
experience, must generate additional business and must be profitable. During
1997, the Company trained more than 450,000 individuals 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 and deeper into the organization. Additionally, a three-day
Principle-Centered Leadership course, which focuses on managerial and
organization aspects of client needs is offered.
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 an din 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 entitled The 10 Natural Laws of Time and Life Management and First Things
First. Other single-day seminars and workshops include Presentation Advantage, a
seminar helping individuals and organizations make more effective business
presentations, Writing Advantage, a seminar that teaches better business writing
and communication skills, Planning for Results and Stress Management. The
Company's training consultants conduct these seminars and workshops for
employees of institutional clients and public seminar participants.
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In addition to providing consultants and presenters, Franklin Covey
also trains and certifies client facilitators to teach selected Company
workshops within the client 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, organizers 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 14,000 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. Frequency of the seminars in
each city or country depends on the concentration of Franklin Covey System
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 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 Franklin Covey Institute of Fitness (formerly the National
Institute of Fitness) provides on-site training to individuals in fitness,
exercise, nutrition and diet and has been recognized for its quality, economy
and service. The Franklin Covey Institute of Fitness offers single week or
multi-week training programs on-site at its fitness training complex located
near St. George, Utah. The Company has developed a special health and fitness
module to be a part of the Franklin Covey System, and clients at the Franklin
Covey Institute of Fitness are trained in the Franklin Covey System.
Sales of Training Services for the fiscal year ended August 31, 1997
were approximately $107 million and accounted for 25% of Franklin Covey's total
sales during the period.
SALES AND MARKETING
Franklin Covey believes that its control over the channels through
which its seminars and products are distributed has allowed it to maintain
prices consistent with their quality and value and to provide high levels of
client service. 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:
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1995 1996 1997
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Product Sales........................... $192,356 69.4% $236,039 71.1% $301,687 69.6%
Training Services....................... 68,168 24.6 70,812 21.3 107,417 24.8
Printing Services....................... 16,598 6.0 25,155 7.6 24,168 5.6
Total Sales........................ $277,122 100.0% $332,006 100.0% $433,272 100.0%
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PRODUCT. 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.
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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 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 650 client 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
adopted a strategy of locating retail stores in high-traffic retail centers,
primarily large shopping malls, to serve existing clients and to attract
increased numbers of walk-in clients. Franklin Covey believes that higher costs
associated with locating retail stores in these centers have been offset by
increased sales in these locations. Franklin Covey's retail stores, which
average approximately 2,000 square feet, are stocked almost entirely with
Franklin Covey products. The Company's retail stores strategy focuses on
providing exceptional client service at the point of sale which Franklin Covey
believes increases client satisfaction and frequency and volume of purchases. At
August 31, 1997, Franklin Covey had 110 domestic retail stores located in 38
states and the District of Columbia.
Franklin Covey attracts existing clients to its retail stores
by informing them of store openings through direct mail. 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
Covey System. 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 in the Franklin Covey System, 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.
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 Covey System is effective in communicating uniform marketing plans,
product information and procedures to large numbers of employees, sales
representatives and distributors.
Productivity Plus markets The Ultimate Organizer, a
paper-based refillable planner organizer, 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. The Company's training sales are largely made through its staff
of in-house sales professionals and marketing personnel.
Franklin Covey employs 214 sales professionals who service major
metropolitan areas throughout the United States and sell training services to
institutional clients. Franklin Covey employs an additional 50 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
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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 146 training consultants throughout the
United States who present institutional and public seminars in their respective
territories and 27 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 curricula 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 Covey System 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; Nightingale-Conant to market and distribute audio
and video tapes of the Company's book titles; and Skillpath to market and
present the Company's time management seminars.
INTERNATIONAL OPERATIONS
Franklin Covey provides its products and services internationally
through Company-owned operations and through non-exclusive license arrangements
with 18 foreign licensees operating 31 foreign offices. Franklin Covey has
direct operations in Great Britain, Canada, Hong Kong, Japan, Australia, Taiwan,
New Zealand, Mexico and Switzerland. Franklin Covey also operates retail stores
in Canada, Hong Kong 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.
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 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.
7
<PAGE> 11
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 $100 million range.
Based upon Franklin Covey's fiscal 1997 sales of approximately $107 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, Zenger Miller, Organizational Dynamics
Inc. and the Center for Creative Leadership.
CONSULTING. Franklin Covey's PCCP change management methodology, which
it initiated in 1996, is directly linked to culture change. Effective culture
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 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(R) 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
Covey System 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 Covey System 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 material 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.
Franklin Covey currently prints the various Franklin Covey 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.
8
<PAGE> 12
The planners, organizers 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. The Company believes that its knowledge and
experience in the manufacturing of binders allows it to better control the
quality and cost of binders manufactured by outside suppliers. Franklin Covey
believes it enjoys good relations with its suppliers and vendors and does not
anticipate any difficulty in obtaining the required binders and materials needed
in its business.
The Company has implemented special procedures to insure a high
standard of quality for its 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
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, video tapes, 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 over 100 trademarks in the United States and has
obtained registration in the United States and many foreign countries for many
of its trademarks, including TimeQuest, The 7 Habits of Highly Effective People,
First Things First, Principle-Centered Leadership, "What Matters Most?",
Franklin Covey Planner, Franklin Day Planner, Ascend, Values Quest, 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, organizers and the
text and other printed information provided in its training seminars, the
programs contained within ASCEND(R) and its instructional materials including
the Professional Consulting Group training materials. Franklin Covey has been
issued copyright registrations in the United States covering the Franklin Covey
System and its time management seminar. Franklin Covey believes it owns all
copyrights or is in the process of obtaining copyright registration of all
seminar and training materials comprising material components of its programs
and books. Franklin Covey places 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, 1997, Franklin Covey had 4,741 full and part-time
employees, including 2,274 in sales, marketing and training; 732 in client
service and product development; 948 in production operations and distribution;
and 783 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.
9
<PAGE> 13
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 primarily 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 $4.0 million as of August 31,
1997. 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, 1997, with leases
that terminate intermittently through the year 2009. Franklin Covey's 110 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; Hong Kong; Toronto; Vancouver; Montreal; Burlington; Brisbane,
Australia; Taipei, Taiwan; Monterrey, Mexico; Mexico City, Mexico; and Auckland,
New Zealand under leases which expire intermittently through the year 2004. In
connection with operation of the Franklin Covey Institute of Fitness, Franklin
Covey utilizes approximately 115,000 square feet of fitness and training
facilities located on 61 acres near St. George, Utah. In connection with the
acquisition of Time Systems, Franklin Covey assumed leases totaling
approximately 50,000 square feet in Phoenix, Arizona, which expire through
August 1998. All of Franklin's facilities are used exclusively by Franklin 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 fiscal year ended August 31, 1997.
10
<PAGE> 14
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, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED AUGUST 31, 1997:
First Quarter.................................. $21 3/8 $17 3/8
Second Quarter................................. 22 7/8 20 1/4
Third Quarter.................................. 24 20 5/8
Fourth Quarter................................. 28 1/4 24 1/8
FISCAL YEAR ENDED AUGUST 31, 1996:
First Quarter.................................. $25 5/8 $18 1/4
Second Quarter................................. 24 1/2 17 7/8
Third Quarter.................................. 29 1/8 19 3/4
Fourth Quarter................................. 20 18 1/4
</TABLE>
The Company did not pay or declare dividends on its Common Stock during
the fiscal years ended August 31, 1996 and 1997. 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 18, 1997, the Company had 24,780,928 shares of its
Common Stock outstanding, held by approximately 400 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 1997 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 25 through 29 of the Company's 1997 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to
pages 30 through 43 of the Company's 1997 Annual Report to Shareholders.
11
<PAGE> 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
12
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the sections entitled "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 9, 1998.
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 entitled "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 9, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the section entitled "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 9, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the section entitled "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 9, 1998.
13
<PAGE> 17
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, 1997 are incorporated by reference
in Item 8 hereof:
- Report of Arthur Andersen LLP, Independent Public
Accountants, for the year ended August 31, 1997 and
1996
- Consolidated Balance Sheets at August 31, 1997 and
1996
- Consolidated Statements of Income for the years ended
August 31, 1997, 1996 and 1995
- Consolidated Statements of Shareholders' Equity for
the years ended August 31, 1997, 1996 and 1995
- Consolidated Statements of Cash Flows for the years
ended August 31, 1997, 1996 and 1995
- Notes to Consolidated Financial Statements
Report of Price Waterhouse LLP, Independent Public
Accountants for the year ended August 31, 1995 (See
page 17 herein).
2. Financial Statement Schedule. The following Consolidated
Financial Statement Schedule for the three years ended August
31, 1997 is filed as part of this Report and should be read in
conjunction with the Company's Consolidated Financial
Statements and Notes thereto:
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants, on
Consolidated Financial Statement Schedule for the years ended
August 31, 1997 and 1996 18
Report of Price Waterhouse LLP, Independent Public Accountants, on
Consolidated Financial Statement Schedule for year ended August 31,
1995 19
II -- Valuation and Qualifying Accounts and Reserves 20
Financial statements and schedules other than those
listed are 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.
</TABLE>
14
<PAGE> 18
3. Exhibit List.
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED FILED
NO. EXHIBIT BY REFERENCE HEREWITH
- ------- ------------------------------------------------------------- ------------ --------
<S> <C> <C> <C>
3.1 Revised Articles of Incorporation of the Registrant (1)
3.2 Amended and Restated Bylaws of the Registrant (1)
4 Specimen Certificate of the Registrant's Common Stock, par
value $.05 per share (2)
10.1 Amended and Restated 1992 Employee Stock Purchase Plan (3)
10.2 First Amendment to Amended and Restated 1992 Stock
Incentive Plan (4)
10.3 Franklin 401(k) Profit Sharing Plan (1)
10.4 Forms of Nonstatutory Stock Options (1)
10.5 Shipley Acquisition Agreement (4)
10.6 Stock Exchange Agreement-- Publishers Press, Inc. (5)
10.9 Merger Agreement-- Covey Leadership Center, Inc. (6)
10.10 Lease Agreements, as amended and proposed to be amended, by and
between Covey Corporate Campus One, L.L.C. and Covey Corporate Campus
Two, LLC (Landlord) and Covey Leadership Center, Inc. (Tenant) which
were assumed by Franklin Covey Co. in the Merger
with Covey Leadership Center, Inc. (7)
13 Annual Report to Shareholders for the year ended August 31, 1997.
Certain portions of this exhibit are incorporated by reference into
Items 6 through 8 of this Annual Report on Form 10-K and, except as so
incorporated by reference, the Annual Report to Shareholders is not
deemed to be filed as part of this
Report. (7)
22 Subsidiaries of the Registrant (7)
23.1 Consent of Arthur Andersen LLP, independent public
accountants (7)
23.2 Consent of Price Waterhouse LLP, independent public
accountants (7)
27 Financial Data Schedule (7)
</TABLE>
- -----------------------
(1) Incorporated by reference to Registration Statement on Form S-1 filed with
the Commission on April 17, 1992, Registration No. 33-47283.
(2) Incorporated by reference to Amendment No. 1 to Registration Statement on
Form S-1 filed with the Commission on May 26, 1992, Registration No.
33-47283.
(3) Incorporated by reference to Form 10-K filed November 27, 1992, for the
fiscal year ended August 31, 1992.
15
<PAGE> 19
(4) Incorporated by reference to Registration Statement on Form S-1 filed with
the Commission on January 3, 1994, Registration No. 33-73728.
(5) Incorporated by reference to Reports on Form 8-K and Form 8-K/A dated
January 3, 1995 and February 28, 1995.
(6) Incorporated by reference to Report on Form 8-K dated June 3, 1997.
(7) Filed herewith and attached to this Report following page 22 hereof.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on June 3, 1997 to
report consummation of the Merger with Covey.
(c) Exhibits
Exhibits to this Report are attached following page 22 hereof.
(d) Financial Statement Schedule
See pages 18 through 20 herein.
16
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Franklin Covey Co.
Our audit of the consolidated financial statements referred to in our report
dated September 20, 1995 appearing on page 17 of this Annual Report on Form 10-K
of Franklin Covey Co. (which consolidated financial statements are incorporated
by reference in this Annual Report on Form 10- K) also included an audit of the
Financial Statement Schedule listed in Item 14 (a) of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
September 20, 1995
SEC 3130.63
17
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To Franklin Covey Co.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements as of August 31, 1997 and 1996,
and for the years then ended included in Franklin Covey Co.'s (formerly Franklin
Quest Co., a Utah Corporation) annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated September
26, 1997. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the index on page 14 is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The schedule data for the years ended August 31,
1997 and 1996 has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements as of August 31, 1997 and 1996 and
for the years then ended taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
September 26, 1997
18
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Franklin Covey Co.
In our opinion, the consolidated statements of income, of shareholders' equity
and of cash flows as of and for the year ended August 31, 1995 (appearing on
pages 31 through 43 of the Franklin Covey Co. 1997 Annual Report to shareholders
which has been incorporated by reference in this Form 10-K Annual Report)
present fairly, in all material respects, the results of operations and cash
flows of Franklin Covey Co. and its subsidiaries for the year ended August 31,
1995, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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 examination, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Franklin
Covey Co. for any period subsequent to August 31, 1995.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
September 20, 1995
SEC 5010.53
19
<PAGE> 23
SCHEDULE II
FRANKLIN COVEY CO.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED AUGUST 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------- ------------------- ------------------------------ ---------- ------------
ADDITIONS
------------------------------
CHARGED TO CHARGED
BALANCE AT COSTS AND TO OTHER BALANCE AT
DESCRIPTION BEGINNING OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ----------- ------------------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1995:
Allowance for doubtful
accounts $ 593 $ 348 $ 259(1) $ (528)(3) $ 672
Allowance for inventories 856 166(2) 1,022
------ ------ ------- ------- ------
$1,449 $ 348 $ 425 $ (528) $1,694
====== ====== ======= ======= ======
Year ended August 31, 1996:
Allowance for doubtful
accounts $ 672 $ 301 $ 12(1) $ (96)(3) $ 889
Allowance for inventories 1,022 7,267 62(2) (2,973)(4) 5,378
------ ------ ------- ------- ------
$1,694 $7,568 $ 74 $(3,069) $6,267
====== ====== ======= ======= ======
Year ended August 31, 1997:
Allowance for doubtful
accounts $ 889 $1,038 $ 1,322(1) $(1,318)(3) $1,931
Allowance for inventories 5,378 4,254 400(2) (5,557)(4) 4,475
------ ------ ------- ------- ------
$6,267 $5,292 $ 1,722 $(6,875) $6,406
====== ====== ======= ======= ======
</TABLE>
(1) Represents the addition of the allowances for doubtful accounts of acquired
companies.
(2) Represents the addition of the allowances for inventories of acquired
companies.
(3) Represents a write-off of accounts deemed uncollectible.
(4) Reduction in the allowance is due to a write-off of obsolete inventories.
20
<PAGE> 24
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 , 1997.
FRANKLIN COVEY CO.
By: /s/ JON H. ROWBERRY
-------------------------------
Jon H. Rowberry, President,
Chief Operating 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ HYRUM W. SMITH Chairman of the Board and Chief November 24, 1997
- ------------------------------------------------- Executive Officer
Hyrum W. Smith
/s/ STEPHEN R. COVEY Co-Chairman of the Board November 24, 1997
- -------------------------------------------------
Stephen R. Covey
/s/ JON H. ROWBERRY President, Chief Operating November 24, 1997
- ------------------------------------------------- Officer and Director
Jon H. Rowberry
/s/ STEPHEN M. R. COVEY Executive Vice President and November 24, 1997
- ------------------------------------------------- Director
Stephen M. R. Covey
/s/ JOHN L. THELER Executive Vice President and November 24, 1997
- ------------------------------------------------- Chief Financial Officer and
John L. Theler Director (Principal Financial and
Accounting Officer)
/s/ JAMES M. BEGGS Director November 24, 1997
- -------------------------------------------------
James M. Beggs
- ------------------------------------------------- Director November ___, 1997
Robert F. Bennett
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BEVERLY B. CAMPBELL Director November 22, 1997
- -------------------------------------------------
Beverly B. Campbell
/s/ ROBERT H. DAINES Director November 24, 1997
- -------------------------------------------------
Robert H. Daines
Director November ____, 1997
- -------------------------------------------------
E. J. "Jake" Garn
/s/ DENNIS G. HEINER Director November 21, 1997
- -------------------------------------------------
Dennis G. Heiner
/s/ DANIEL P. HOWELLS Director November 24, 1997
- -------------------------------------------------
Daniel P. Howells
/s/ THOMAS H. LENAGH Director November 24, 1997
- -------------------------------------------------
Thomas H. Lenagh
/s/ JOEL C. PETERSON Director November 24, 1997
- -------------------------------------------------
Joel C. Peterson
/s/ E. KAY STEPP Director November 24, 1997
- -------------------------------------------------
E. Kay Stepp
Director November ___, 1997
- -------------------------------------------------
Robert A. Whitman
</TABLE>
22
<PAGE> 1
EXHIBIT 10.10
LEASE AGREEMENT
LANDLORD: COVEY CORPORATE CAMPUS ONE, L.L.C.
TENANT: COVEY LEADERSHIP CENTER, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C> <C>
I. PREMISES 1
1.1 Description of Premises 1
1.2 Work of Improvement 2
1.3 Construction of Shell Building 2
II. TERM 2
2.1 Length of Term 2
2.2 Commencement Date; Obligation to Pay Rent 2
2.3 Construction of Leased Premises 3
2.4 Renewal Option 3
2.5 Acknowledgment of Commencement Date 3
III. BASIC RENTAL PAYMENTS 3
3.1 Basic Annual Rent 3
3.2 Additional Monetary Obligations 4
IV. ADDITIONAL RENT 4
4.1 Basic Annual Rent. 4
4.2 Report of Direct Costs and Statement of Estimated Costs 5
4.3 Payment of Costs 5
4.4 Resolution of Disagreement 6
4.5 Limitations 6
V. SECURITY DEPOSIT 6
VI. USE 7
6.1 Use of Leased Premises 7
6.2 Prohibition of Certain Activities or Uses 7
6.3 Affirmative Obligations with Respect to Use 7
6.4 Suitability 8
6.5 Personal Property Taxes 8
VII. UTILITIES AND SERVICE 8
7.1 Obligations of Property Manager 8
7.2 Tenant's Election 9
7.3 Tenant's Obligations 9
7.4 Additional Limitations 9
7.5 Limitation on Landlord's Liability 9
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C> <C>
VIII. MAINTENANCE AND REPAIRS; ALTERATIONS; ACCESS 9
8.1 Maintenance and Repairs by Property Manager 9
8.2 Maintenance and Repairs by Tenant 10
8.3 Alterations 10
8.4 Landlord's Access to Leased Premises 10
IX. ASSIGNMENT 11
9.1 Assignment Prohibited 11
9.2 Consent Required 11
9.3 Landlord's Right in Event of Assignment 11
X. INDEMNITY 12
10.1 Indemnification 12
10.2 Release of Landlord 12
10.3 Notice 12
10.4 Litigation 12
XI. INSURANCE 12
11.1 Fire and "All Risk" Insurance on Tenant's Personal Property and Fixtures 13
11.2 Liability Insurance 13
11.3 Subrogation 13
11.4 Lender 13
XII. DESTRUCTION 13
XIII. CONDEMNATION 14
13.1 Total Condemnation 14
13.2 Partial Condemnation 14
13.3 Landlord's Option to Terminate 14
13.4 Award 14
13.5 Definition 14
XIV. LANDLORD'S RIGHTS TO CURE 15
14.1 General Right 15
14.2 Mechanic's Lien 15
XV. FINANCING; SUBORDINATION 15
15.1 Subordination 15
15.2 Attornment 16
15.3 Financial Information 16
</TABLE>
ii
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<TABLE>
<CAPTION>
DESCRIPTION PAGE
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<S> <C> <C>
XVI. EVENTS OF DEFAULT; REMEDIES OF LANDLORD 16
16.1 Default by Tenant 16
16.2 Remedies 16
16.3 Past Due Sums; Penalty 17
XVII. PROVISIONS APPLICABLE AT TERMINATION OF LEASE 17
17.1 Surrender of Premises 17
17.2 Holding Over 17
XVIII. ATTORNEYS' FEES 17
XIX. ESTOPPEL CERTIFICATE 18
19.1 Landlord's Right to Estoppel Certificate 18
19.2 Effect of Failure to Provide Estoppel Certificate 18
XX. PARKING 18
XXI. SIGNS, AWNINGS, AND CANOPIES 18
XXII. MISCELLANEOUS PROVISIONS 18
22.1 No Partnership 19
22.2 Force Majeure 19
22.3 No Waiver 19
22.4 Notice 19
22.5 Captions; Attachments; Defined Terms 20
22.6 Recording 20
22.7 Partial Invalidity 20
22.8 Broker's Commissions 20
22.9 Tenant Defined: Use of Pronouns 20
22.10 Provisions Binding, Etc. 20
22.11 Entire Agreement, Etc. 21
22.12 Governing Law 21
</TABLE>
iii
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<TABLE>
<CAPTION>
DESCRIPTION PAGE
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<S> <C>
SIGNATURES 22
NOTARIES 23 & 24
</TABLE>
RIDER Yes [X] No [ ]
GUARANTY Yes [ ] No [ ]
EXHIBIT "A" DESCRIPTION OF REAL PROPERTY
EXHIBIT "B" FLOORPLAN OF LEASED PREMISES
EXHIBIT "C" WORK LETTER-CONSTRUCTION AND/OR FINISH OF
IMPROVEMENTS TO LEASED PREMISES
EXHIBIT "D" ACKNOWLEDGMENT OF COMMENCEMENT DATE &
ESTOPPEL CERTIFICATE
EXHIBIT "E" COST TO CONSTRUCT LEASED PREMISES
iv
<PAGE> 6
LEASE AGREEMENT
COVEY LEADERSHIP OFFICE BUILDING
THIS LEASE AGREEMENT (the "Lease") is made and entered into as of this
____ day of January, 1996 by and between COVEY CORPORATE CAMPUS ONE, L.L.C.
(the "Landlord"), and COVEY LEADERSHIP CENTER, INC. (the "Tenant"). THE BOYER
COMPANY, L. C. (the "Property Manager") is also a party to this Lease for the
limited purpose of providing the property management services described herein.
This Lease is made and entered into by Landlord and Tenant for the purpose of
fulfilling the terms of Section 1.06(b) of Landlord's First Amended Operating
Agreement dated July 7, 1995. This Lease is the "new lease" described therein;
it replaces and supersedes in its entirety the terms and provisions of that
certain Industrial lease Agreement the ("old lease") dated April 7, 1995; and
upon the execution and delivery of this Lease, the old lease shall have no
efficacy, validity, or enforceability whatsoever.
For and in consideration of the rental to be paid by tenant and of the
covenants and agreements herein set forth to be kept and performed by Tenant,
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, the
Leased Premises (as hereafter defined), at the rental and subject to and upon
all of the terms, covenants and agreements hereinafter set forth.
I. PREMISES
1.1 Description of Premises. Landlord does hereby
demise, lease and let unto Tenant, and Tenant does hereby take and
receive from Landlord the following:
(a) That certain floor area containing approximately
54,257 gross rentable square feet (the "Leased Premises"), on Floors
One, Two and Three (includes 4,270 square feet in the basement) of the
three- story office building (the "Building") being constructed at
approximately 300 West 4800 North, Provo, Utah, on the real property
(the "Property") described on Exhibit "A" attached hereto and by this
reference incorporated herein. The space occupied by Tenant consists
of the entire Building, as set forth on Exhibit "B" which is attached
hereto and by this reference incorporated herein.
(b) Such non-exclusive rights-of-way, easements and
similar rights with respect to the Building and Property as may be
reasonably necessary for access to and egress from, the Leased
Premises.
(c) The exclusive right to use those areas designated and
suitable for vehicular parking, including the exclusive right to the
use of Two Hundred Five (205) parking stalls.
1.2 Work of Improvement. The obligation of Landlord and
Tenant to perform the work and supply the necessary materials and
labor to prepare the Leased Premises for
<PAGE> 7
occupancy are described in detail on Exhibit "C". Landlord and Tenant
shall expend all funds and do all acts required of them as described
on Exhibit "C" and shall perform or have the work performed promptly
and diligently in a first class and workmanlike manner.
1.3 Construction of Shell Building. Landlord shall, at
its own cost and expense, construct and complete a three story 54,257
gross rentable square foot building and cause all of the construction
which is to be performed by it in completing the Building and
performing its work as set forth on Exhibit "C", to be substantially
completed as evidenced by a Certificate of Occupancy, and the Leased
Premises ready for Tenant to install its fixtures and equipment and to
perform its other work as described on Exhibit "C" as soon as
reasonably possible, but in no event later than January 1, 1997
("Target Date"). In the event that Landlord's construction of
obligation has not been fulfilled upon the expiration of the"Target
Date", Tenant shall have the right to exercise any right or remedy
available to it under this Lease, including the right to terminate
this Lease and the right to charge Landlord and cause Landlord to pay
any increased costs associated with Tenant's current leases due to
holding over in such space or moving to temporary space; provided that
under no circumstances shall Landlord be liable to Tenant resulting
from delay in construction covered by circumstances beyond Landlord's
direct control.
II. TERM
2.1 Length of Term. The term of this Lease shall be for
a period of twenty (20) years plus the partial calendar month, if any,
occurring after the Commencement Date (as hereinafter defined) if the
Commencement Date occurs other than on the first day of a calendar
month.
2.2 Commencement Date; Obligation to Pay Rent. The term
of this Lease and Tenant's obligation to pay rent hereunder shall
commence on the first to occur of the following dates ("Commencement
Date"):
(a) The date Tenant occupies the Premises and conducts
business.
(b) The date fifteen (15) days after the Landlord, or
Landlord's supervising contractor, notified Tenant in writing that
Landlord's construction obligations respecting the Leased Premises
have been fulfilled and/or that the Leased Premises are ready for
occupancy and/or performance of Tenant's work. Such notice shall be
accompanied by an occupancy permit and a certificate from the Building
Architect stating that remaining punchlist items can be completed
within fifteen (15) days and will not materially interfere with
Tenant's business. Prior to Commencement Date, it is contemplated
that Tenant shall be able to perform its construction obligation as
per Exhibit C II(H).
2.3 Construction of Leased Premises. Landlord shall
provide a budget prior to the commencement of construction of the
Leased Premises (see Exhibit "E"). Landlord shall
2
<PAGE> 8
itemize each part of the construction and its associated estimated
cost. Landlord shall pay an amount equal to $954,712.00 or $22.00 per
usable square foot (on 47,666 usable square feet excluding the
basement space of 4,270 square feet) of the cost listed (excluding
cost to construct Shell Building) and Tenant shall be obligated for
the remaining costs shown on Exhibit "E". Landlord shall not be
obligated to pay for any increase in the actual cost of construction
over and above the construction costs shown on Exhibit "E". Any
special decorator items, equipment, furniture or furnishings not
designated on Exhibit "E", as well as changes initiated by the Tenant
to the Leased Premises, shall be the sole cost of Tenant and shall
include the defined extras on Exhibit "E."
2.4 Renewal Option. If this Lease then remains in full
force and effect, Tenant shall have the option to renew this Lease for
two five year options commencing on the expiration date. Each option
must be exercised by written notice to Landlord one hundred and eighty
(180) days before the expiration of the previous term and once
exercised is irrevocable. Base rent during each renewal term shall be
determined pursuant to Section 3.1 below.
2.5 Acknowledgment of Commencement Date. Landlord and
Tenant shall execute a written acknowledgment of the commencement Date
in the form attached hereto as Exhibit "D".
III. BASIC RENTAL PAYMENTS
3.1 Basic Annual Rent. Tenant agrees to pay to Landlord
as basic annual rent (the "Basic Annual Rent") at such place as
Landlord may designate, without prior demand therefore and without any
deduction or set off whatsoever, the sum of Seven Hundred Ninety Five
Thousand Nine Hundred Two and no/100 Dollars ($795,902.00) which
includes the basement storage space. Said Basic Annual Rent shall be
due and payable in twelve (12) equal monthly installments to be paid
in advance on or before the first day of each calendar month during
the term of the Lease. Basic Annual Rent shall escalate at the
beginning of the 4th year and every three (3) years thereafter using a
3% annually compounded rate or the change in the All Urban Index,
whichever is higher. For purposes of this Lease the term "All Urban
Index" shall mean the Consumer Price Index for All Urban
Consumers-U.S. City Average-all Items (1982-1984 equals 100 base) as
published by the United States Bureau of Labor Statistics or any
successor agency or any other index hereinafter employed by the Bureau
of Labor Statistics in lieu of said index. The price index for the
3rd month preceding the month in which the Lease commences shall be
considered the Basic Price Index. Therefore, the beginning of the 4th
year and every three years thereafter, the Basic Annual Rental set
forth in Section 3.1 shall be adjusted by multiplying such rental by a
fraction, the numerator of which is the Price Index for the 3rd month
preceding the beginning of the 4th year and the denominator of which
is the Basic Price Index. The above not withstanding, the maximum
increase at the beginning of the 4th year shall be no more than 15.76%
which is 5% per year compounded, and likewise on every adjustment date
hereafter, the maximum increase shall be limited as described herein.
In no event shall Basic Annual Rent be reduced. In the event
the Commencement Date occurs on a day other than the first day of a
calendar month, then rent shall be paid on the Commencement
3
<PAGE> 9
Date for the initial fractional calendar month prorated on a per-diem
basis (based upon a thirty (30) day month).
3.2 Additional Monetary Obligations. Tenant shall also
pay as rental (in addition to the Basic Annual Rent) all other sums of
money as shall become due and payable by Tenant to Landlord under this
Lease. Landlord shall have the same remedies in the case of a default
in the payment of said other sums of money as are available to
Landlord in the case of a default in the payment of one or more
installments of Basic Annual Rent.
IV. ADDITIONAL RENT
4.1 Basic Annual Rent. It is the intent of both parties
that the Basic Annual Rent herein specified shall be absolutely net to
the Landlord throughout the term of this Lease, and that all costs,
expenses and obligations relating to Tenant's pro rata share of the
Building, Property and/or Building, Property and/or Leased Premises
which may arise or become due during the term shall be paid by Tenant
in the manner hereafter provided.
For purposes of this Part IV and the Lease in general, the
following words and phrases shall have the meanings set forth below:
(a) "Direct Costs" shall mean all actual costs and
expenses incurred by the Property Manager or Landlord in connection
with Landlord's ownership, operation, management and maintenance of
the Building and Property and related improvements located thereon
(the "Improvements"), including, but not limited to, all expenses
incurred by Landlord or the Property Manager as a result of their
compliance with any and all of their obligations under this Lease
other than the performance by Landlord of its work under Sections 1.2,
1.3 and 2.3 of this Lease. In explanation of the foregoing, and not
in limitation thereof, Direct Costs shall include: all real property
taxes and assessments (whether general or special, known or unknown,
foreseen or unforeseen) and any tax or assessment levied or charged in
lieu thereof, whether assessed against Landlord and/or Tenant and
whether collected from Landlord and/or Tenant; snow removal, dumpster
service, insurance, license, permit and inspection fees, cost of
services of independent contractors, cost of compensation (including
employment taxes and fringe benefits) of all persons who perform
regular and recurring duties connected with day-to-day operation,
maintenance, repair, and replacement of the Building, its equipment
and the adjacent walk, and landscaped area (including, but not limited
to gardening, security, parking, elevator, painting, plumbing,
electrical, mechanical, carpentry, structural and roof repairs and
reserves (the Property Manager may collect in advance up to one
percent (1%) of Direct Costs as a reserve), signing and advertising,
and rental expense or a reasonable allowance for depreciation of
personal property used in the maintenance, operation and repair of the
Building. Direct costs shall also include property management fees,
which property management fees shall be equal to a percentage of
Tenant's Basic Annual Rent and Estimated Costs, which percentage shall
not exceed two and one half percent (2 1/2%) of the sum of Basic
Annual Rent and Direct Costs and shall be paid to the Property
Manager. However, Tenant shall pay the actual costs of water, sewer,
gas and
4
<PAGE> 10
electrical power directly to the municipal supplier of same. Direct
Costs shall not include expenses incurred in connection with leasing,
renovating, or improving space for tenants or other occupants or
prospective tenants or occupants of the Building, expenses incurred
for repairs resulting from damage by fire, windstorm or other
casualty, to the extent such repairs are paid for by insurance
proceeds, expenses paid by any tenant directly to third parties, or as
to which Landlord is otherwise reimbursed by any third party or
Tenant; expenses which, by generally accepted accounting principles,
are treated as capital items except that if, as a result of
governmental requirements, laws or regulations, Landlord shall expend
monies directly or indirectly for improvements, additions or
alterations to the Building which, by generally accepted accounting
principles, are treated as a capital expenditures, the amortization of
such capital expenditures based on a life acceptable to the
appropriate taxing authority together with interest at the rate of 9%
per annum shall be considered Direct Costs. The foregoing
notwithstanding, Direct Costs shall not include depreciation on the
Building and Tenant Finish, and amounts paid toward principal or
interest of loans of Landlord.
(b) "Estimated Costs" shall mean the projected amount of
Tenant's Direct Costs, excluding the costs of electricity provided to
Tenant's Leased Premises. The Estimated Costs for the calendar year
in which the Lease commences are $172,700.00, and are not included in
the Basic Annual Rent. If the Estimated Costs as of the date Tenant
takes occupancy are greater than Tenant's Estimated Costs at the time
this Lease is executed, the Estimated Costs shall be increased to
equal the Estimated Costs as of the date of Tenant's occupancy.
4.2 Report of Direct Costs and Statement of Estimated
Costs.
(a) After the expiration of each calendar year occurring
during the term of this Lease, the Property Manager shall furnish
Tenant a written statement of Tenant's Direct Costs occurring during
the previous calendar year. The written statement shall specify the
amount by which Tenant's Direct Costs exceed or are less than the
amounts paid by Tenant during the previous calendar year pursuant to
Section 4.3(b) below.
(b) At the same time specified in Section 4.2(a) above,
Landlord shall furnish Tenant a written statement of the Estimated
Costs for the then current calendar year.
4.3 Payment of Costs. Tenant shall pay the Direct Costs
as follows:
(a) Each month Tenant shall pay to the Property Manager,
without offset or deduction, one-twelfth (l/12th) of the Estimated
Costs as defined in Sections 4.1(b) and 4.2(b) above.
(b) Within thirty (30) days after delivery of the written
statement referred to in section 4.2(a) above, Tenant shall pay to the
Property Manager the amount by which Tenant's Direct Costs, as
specified in such written statements, exceed and aggregate of such
costs actually paid by Tenant for the year at issue. Tenant shall
have the right to audit the Property Manager's books upon reasonable
notice. Tenant shall pay costs associated with the audit unless
Tenant finds that the Property Manager has inflated expenses by more
than ten percent
5
<PAGE> 11
(10%), in which case, the Property Manager will pay audit charges.
Payments by Tenant shall be made pursuant to this Section 4.3(b)
notwithstanding that a statement pursuant to Section 4.2(a) is
furnished to Tenant after the expiration of the term of this Lease.
(c) If the annual statement of costs indicates that the
Estimated Costs paid by Tenant pursuant to subsection (b) above for
any year exceeded Tenant's actual Direct Costs for the same year, the
Property Manager shall promptly pay the amount of such excess to
Tenant.
4.4 Resolution of Disagreement. Every statement given by
the Property Manager pursuant to Section 4.2 shall be conclusive and
binding upon Tenant unless within sixty (60) days after the receipt of
such statement Tenant shall notify the Property Manager that it
disputes the correctness thereof, specifying the particular respects
in which the statement is claimed to be incorrect. If such dispute
shall not have been settled by agreement, the parties hereto shall
submit the dispute to arbitration within ninety (90) days after
Tenant's receipt of statement. Pending the determination of such
dispute by agreement or arbitration as aforesaid, Tenant shall, within
thirty (30) days after receipt of such statement, pay in accordance
with the Property Manager's statement, and such payment shall be
without prejudice to Tenant's position. If the dispute shall be
determined in Tenant's favor, the Property Manager shall forthwith pay
Tenant the amount of Tenant's overpayment resulting from compliance
with the Property Manager's statement, including interest on disputed
amounts at prime plus two percent (2%). Landlord agrees to grant
Tenant reasonable access to the Property Manager's books and records
for the purpose of verifying Direct Costs for operating expenses
incurred by the Property Manager.
4.5 Limitations. Nothing contained in this Part IV shall
be construed at any time so as to reduce the monthly installments of
Basic Annual Rent payable hereunder below the amount set forth in
Section 3.1 of this Lease.
V. SECURITY DEPOSIT: NONE
VI. USE
6.1 Use of Leased Premises. The Leased Premises shall be
used and occupied by Tenant for general office purposes only and for
no other purpose whatsoever without the prior written consent of
Landlord.
6.2 Prohibition of Certain Activities or Uses. The
Tenant shall not do or permit anything to be done in or about, or
bring or keep anything in the Leased Premises which is prohibited by
this Lease or will, in any way or to any extent:
6
<PAGE> 12
(a) Adversely affect any fire, liability or other
insurance policy carried with respect to the Building, the Leased
Premises or any of the contents of the Building (except with
Landlord's express written permission, which will not be unreasonably
withheld, but which may be contingent upon Tenant's agreement to bear
any additional costs, expenses or liability for risk that may be
involved).
(b) Conflict with or violate any law, statute, ordinance,
rule, regulation or requirement of any governmental unit, agency or
authority (whether existing or enacted as promulgated in the future,
known or unknown, foreseen or unforeseen).
(c) Adversely overload the floors or otherwise damage the
structural soundness of the Leased Premises or Building, or any part
thereof (except with Landlord's express written permission, which will
not be unreasonably withheld, but which may be contingent upon
Tenant's agreement to bear any additional costs, expenses or liability
for risk that may be involved).
6.3 Affirmative Obligations with Respect to Use.
(a) Tenant will comply with all governmental laws,
ordinances, regulations, and requirements, now in force or which
hereafter may be in force, of any lawful governmental body or
authorities having jurisdiction over the Leased Premises, will keep
the Leased Premises and every part thereof in a clean, neat, and
orderly condition, free of objectionable noise, odors, or nuisances,
will in all respects and at all times fully comply with all applicable
health and policy regulations, and will not suffer, permit, or commit
any waste.
(b) At all times during the term hereof, Tenant shall, at
Tenant's sole cost and expense, comply with all statutes, ordinances,
laws, orders, rules, regulations and requirements of all applicable
federal, state, county, municipal and other agencies or authorities,
now in effect or which may hereafter become effective, which shall
impose any duty upon Landlord or Tenant with respect to the use,
occupation or alterations of the Leased Premises (including, without
limitation, all applicable requirements of the Americans with
Disabilities Act of 1990 and all other applicable laws relating to
people with disabilities, and all rules and regulations which may be
promulgated thereunder from time to time and whether relating to
barrier removal, providing auxiliary aids and services or otherwise)
and upon request of Landlord shall deliver evidence thereof to
Landlord.
6.4 Suitability. The Leased Premises, Building and
Improvements (and each and every part thereof) shall be deemed to be
in satisfactory condition unless, within sixty (60) days after the
Commencement Date, Tenant shall give Landlord written notice
specifying, in reasonable detail, the respects in which the Leased
Premises, Building or Improvements are not in satisfactory condition.
Landlord further provides warranties as provided in Exhibit C II
paragraphs C and E.
6.5 Personal Property Taxes. Tenant shall pay all taxes,
assessments, charges, and fees which during the term hereof may be
imposed, assessed or levied by any governmental or public
7
<PAGE> 13
authority against or upon Tenant's use of the Leased Premises or any
personal property or fixture kept or installed therein by Tenant.
VII. UTILITIES AND SERVICE
7.1 Obligations of Property Manager. Except for the
specific services and costs described herein, the parties intend that
the Property Manager (as the Landlord's agent) shall provide all
services and pay for all costs associated with the normal operation
and maintenance of the Leased Premises at a level consistent with
services and maintenance provided by the Property Manager with respect
to similar buildings located in Provo, Utah. Therefore, during the
term of this Lease the Property Manager agrees to cause to be
furnished to the Lease Premises during normal operating hours the
general services described in Section 4.1(a) above, the cost and
expense of which shall be included in Direct Costs. For the purposes
of this Lease, normal operating hours for the Leased Premises are from
7:00 a.m. to 6:00 p.m., Monday through Friday. These services include
without limitation the following:
(a) Telephone connection to the building, but not
including telephone stations and equipment (it being expressly
understood and agreed that Tenant shall be responsible for the
ordering and installation of telephone lines and equipment which
pertain to the Leased Premises).
(b) Heating and air-conditioning during normal operating
hours to such extent and to such levels as is reasonably required for
the comfortable use and occupancy of the Leased Premises subject
however to any limitations imposed by any government agency.
(c) Security (including the lighting of common halls,
stairways, entries and restrooms) to such extent as is usual and
customary in similar buildings in Provo, Utah.
(d) Snow removal service.
(e) Landscaping and groundskeeping service.
(f) Elevator service.
(g) Dumpster service.
(h) Parking lot maintenance.
7.2 Tenant's Election. Tenant may at any time after the
first year of the lease term elect to reduce or to terminate
Landlord's and the Property Manager's obligation to provide the
services described in Section 7.1, by giving written notice of such
election to Landlord and to the Property Manager not less than sixty
(60) days before the date upon which such change is to be effective.
From and after the effective date of any election of termination,
Landlord and the Property Manager shall have no further obligation to
provide any service described in the first sentence of this Section
8
<PAGE> 14
7.1. Further, should Tenant elect to terminate Landlord's
and the Property Manager's obligation, the management fee as described
in Section 4.1(b) shall be reduced to 1% of Basic Annual Rent and shall
be paid to the Property Manager.
7.3 Tenant's Obligations. Tenant shall arrange for and
shall pay the entire cost and expense of (a) all telephone stations,
equipment and use charges, electric light bulbs (but not fluorescent
bulbs used in fixtures originally installed in the Leased Premises);
(b) janitorial services for the Leased Premises; water, sewer, gas and
electrical power for the Leased Premises; and (c) personal property
taxes (as provided in Section 6.5 above).
7.4 Additional Limitations. If and where heat generating
machines devices are used in the Leased Premises which affect the
temperature otherwise maintained by the air conditioning system,
Landlord reserves the right with Tenant's concurrence to install
additional or supplementary air conditioning units for the Leased
premises, and the entire cost of installing, operating, maintaining
and repairing the same shall be paid by Tenant to Landlord promptly
after demand by Landlord.
7.5 Limitation on Landlord's Liability. Landlord shall
not be liable for and Tenant shall not be entitled to terminate this
Lease or to effectuate any abatement or reduction of rent by reason of
Landlord's or the Property Manager's failure to provide or furnish any
of the foregoing utilities or services if such failure was reasonably
beyond the control of Landlord or the Property Manager. In no event
shall Landlord or the Property Manager be liable for loss or injury to
persons or property, however, arising or occurring in connection with
or attributable to any failure to furnish such utilities or services
even if within their control except in the event of their negligence.
VIII. MAINTENANCE AND REPAIRS; ALTERATIONS; ACCESS
8.1 Maintenance and Repairs by Property Manager. The
Property Manager at its sole cost shall maintain in good order,
condition and repair the structural components of the Leased Premises,
including without limitation roof, exterior walls and foundations, as
well as all repairs covered under construction warranties provided if
the Property Manager is required to make structural repairs by reason
of Tenant's negligent acts or omissions, Tenant shall pay the costs
for making such repairs.
8.2 Maintenance and Repairs by Tenant. Tenant, at
Tenant's sole cost and expense and without prior demand being made,
shall maintain the Leased Premises in good order, condition and
repair, and will be responsible for the painting, carpeting or other
interior design work of the Leased Premises beyond the initial
construction phase as specified in Section 2.3 and Exhibit "C" and "E"
of the Lease and shall maintain all equipment and fixtures installed
by Tenant. If repainting or recarpeting is required and authorized
by Tenant, the cost for such are the sole obligation of Tenant and
shall be paid for by Tenant immediately following the performance of
said work and a presentation of an invoice for payment.
8.3 Alterations. Tenant shall not make or cause to be
made any alterations, additions or improvements or install or cause to
be installed any fixtures, signs, floor coverings, interior or
9
<PAGE> 15
exterior lighting, plumbing fixtures, or shades or awnings, or make
any other changes to the Leased Premises without first obtaining
Landlord's written approval, which approval shall not be unreasonably
withheld. Tenant shall present to the Landlord plans and
specifications for such work at the time approval is sought. In the
event Landlord consents to the making of any alterations, additions,
or improvements to the Leased Premises by Tenant, the same shall be
made by Tenant at Tenant's sole cost and expense. All such work with
respect to any alterations, additions, and changes shall be done in a
good and workmanlike manner and diligently prosecuted to completion
such that, except as absolutely necessary during the course of such
work, the Leased Premises shall at all times be a complete operating
unit. Any such alterations, additions, or changes shall be performed
and done strictly in accordance with all laws and ordinances relating
thereto. In performing the work or any such alterations, additions,
or changes, Tenant shall have the same performed in such a manner as
not to obstruct access to any portion of the Building. Any
alterations, additions, or improvements to or of the Leased Premises,
including, but not limited to, wallcovering, paneling, and built-in
cabinet work, but excepting movable furniture and equipment, shall at
once become a part of the realty and shall be surrendered with the
Premises, unless Landlord and Tenant agree at any time that the
specific improvement may be removed by Tenant at the end of the Term
provided Tenant restores the premises to its original condition, wear
and tear excepted.
8.4 Landlord's Access to Leased Premises. Landlord shall
have the right to place, maintain, and repair all utility equipment of
any kind in, upon, and under the Leased Premises as may be necessary
for the servicing of the Leased Premises and other portion of the
Building. Landlord shall upon providing adequate notice to Tenant,
also have the right to enter the Leased Premises at all times to
inspect or to exhibit the same to prospective purchasers, mortgagees,
tenants, and lessees, and to make such repairs, additions,
alterations, or improvements as Landlord may deem desirable. Landlord
shall be allowed to take all material upon said Leased Premises that
may be required therefor without the same constituting an actual or
constructive eviction of Tenant in whole or in part and the rents
reserved herein shall in no wise abate while said work is in progress
by reason of loss or interruption of Tenant's business or otherwise,
and Tenant shall have no claim for damages unless due to Landlord
negligence. During the three (3) months prior to expiration of this
Lease or of any renewal term, Landlord may place upon the Leased
Premises "For Lease" or "For Sale" signs which Tenant shall permit to
remain thereon.
IX. ASSIGNMENT
9.1 Assignment Prohibited. Tenant shall not transfer,
assign, mortgage, or hypothecate this Lease, in whole or in part, or
permit the use of the Leased Premises by any person or persons other
than Tenant, or sublet the Leased Premises, or any part thereof,
without the prior written consent of Landlord in each instance, which
consent shall not be unreasonably withheld, provided sufficient
information is provided to Landlord to accurately represent the
financial condition of those to whom this Lease will be transferred,
assigned, mortgaged, or hypothecated. Such prohibition against
assigning or subletting shall include any assignment or subletting by
operation of law. Any transfer of this Lease from the Tenant by
merger, consolidation, transfer of assets, or liquidation shall
constitute an assignment for purposes of this Lease. In the event
that Tenant hereunder is a corporation, an unincorporated association,
or a partnership, the transfer, assignment, or
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hypothecation of any stock or interest in such corporation,
association, or partnership in the aggregate in excess of forty-nine
percent (49%) in any one-year period shall be deemed an assignment
within the meaning of this Section. The above prohibition of
assignment will not apply in the case of a registered offering of
shares by Tenant or the public trading of registered shares subsequent
to an initial offering.
9.2 Consent Required.
(a) Any assignment or subletting without Landlord's
consent shall be void, and shall constitute a default hereunder which,
at the option of Landlord, shall result in the termination of this
Lease or exercise of Landlord's other remedies hereunder. Consent to
any assignment or subletting shall not operate as a waiver of the
necessity for consent to any subsequent assignment or subletting, and
the terms of such consent shall be binding upon any person holding by,
under, or through Tenant.
(b) Landlord shall have no obligation to consent to the
proposed sublease or assignment if the proposed sublessee or assignee
or its business is or may be subject to compliance with additional
requirements of the law, including any related rules or regulations,
commonly known as the "Americans with Disabilities Act of l990" or
similar state or local laws relating to persons with disabilities
beyond those requirements which are applicable to the tenant desiring
to so sublease or assign".
9.3 Landlord's Right in Event of Assignment. If this
Lease is assigned or if the Leased Premises or any portion thereof are
sublet or occupied by any person other than the Tenant, Landlord may
collect rent and other charges from such assignee or other party, and
apply the amount collected to the rent and other charges reserved
hereunder, but such collection shall not constitute consent or waiver
of the necessity of consent to such assignment, subleasing, or other
transfer, nor shall such collection constitute the recognition of such
assignee, sublessee, or other party as the Tenant hereunder or a
release of Tenant from the further performance of all of the covenants
and obligations, including obligation to pay rent, of Tenant herein
contained. In the event that Landlord shall consent to a sublease or
assignment hereunder, Tenant shall pay to Landlord reasonable fees,
not to exceed $100.00, incurred in connection with processing of
documents necessary to the giving of such consent. In the event
Landlord consents to the assignment as provided by paragraph 9.1, then
Tenant shall be released from further performance of any covenant and
obligation under this Lease.
X. INDEMNITY
10.1 Indemnification. Tenant and Landlord shall indemnify
each other and save each other harmless from and against any and all
suits, actions, damage and claims, liability and expense in connection
with loss of life, bodily or personal injury, or property damage
arising from or out of any occurrence in, upon, at or from the Leased
Premises, or occasioned wholly or in part by any act or omission of
Tenant or Landlord, their agents, contractors, employees, servants,
invitees, licensees or concessionaires. For the purposes of this
Lease, the Property Manager is an agent of the Landlord. All
insurance policies carried by Tenant and/or Landlord shall include a
waiver of
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subrogation endorsement which specifies that the insurance carrier(s)
will waive any right of subrogation against Tenant and/or Landlord
arising out of any insurance claim.
10.2 Release of Landlord. Landlord shall not be
responsible or liable at any time for any loss or damage to Tenant's
personal property or to Tenant's business. Tenant shall store its
property in and shall use and enjoy the Leased Premises and all other
portions of the Building and Improvements at its own risk, and hereby
releases Landlord, to the full extent permitted by law, from all
claims of every kind resulting in loss of life, personal or bodily
injury, or property damage to or arising in connection with Tenant's
ownership of its personal property or the operation of Tenant's
business.
10.3 Notice. Tenant shall give prompt notice to Landlord
in case of fire or accidents in the Leased Premises or in the Building
of which the Leased Premises are a part or of defects therein or in
any fixtures or equipment.
10.4 Litigation. If any party to this Lease, without
fault on its part, shall be made a party to any litigation that names
either of the other two parties to this lease, those other parties
shall protect and hold harmless the party without fault and shall pay
all costs, expenses, and reasonable attorneys' fees, provided that the
party to be protected must first notify the other parties promptly in
writing of any such claim and further provided that the party or
parties to be charged shall be entitled to direct the defense or
settlement of such claim. No party to this Lease shall be responsible
for any settlement of compromise of any such claim without its prior
written consent.
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XI. INSURANCE
11.1 Fire and "All Risk" Insurance on Tenant's Personal
Property and Fixtures. At all times during the term of this Lease,
Tenant shall keep in force at its sole cost and expense, fire
insurance and "All Risk" (including vandalism and malicious mischief)
in companies acceptable to Landlord, equal to the replacement cost of
Tenant's fixtures, furnishings, equipment, and contents upon the
Leased Premises and all improvements or additions made by Tenant to
the Leased Premises. The Landlord shall be named as an additional
insured on all such policies.
11.2 Liability Insurance. Tenant shall, during the entire
term hereof, keep in full force and effect a policy of public
liability and property damage insurance to include contractual
coverage with respect to the Leased Premises and the business operated
by Tenant in the Leased Premises, with a combined single limit for
personal or bodily injury and property damage of not less than
$500,000.00. The policy shall name Landlord, any person, firms, or
corporations designated by Landlord, and Tenant as insureds, and shall
contain a clause that the insurer will not cancel or materially change
the insurance pertaining to the Leased Premises without first giving
Landlord ten (10) days written notice. Tenant shall at all times
during the term hereof provide Landlord with evidence of current
insurance coverage. All public liability, property damage, and other
liability policies shall be written as primary policies, not
contributing with coverage which Landlord may carry.
11.3 Subrogation. Tenant and Landlord each waive its
right of subrogation against each other for any reason whatsoever.
11.4 Lender. Any mortgage lender interest in any part of
the Building or Improvements may, at Landlord's option, be afforded
coverage under any policy required to be secured by Tenant hereunder,
by use of a mortgagee's endorsement to the policy concerned.
XII. DESTRUCTION
If the Leased Premises shall be partially damaged by any casualty
insured against under any insurance policy maintained by Landlord, Landlord
shall, upon receipt of the insurance proceeds, repair the Leased Premises and
until repair is complete the Basic Annual Rent and Additional Rent shall be
abated proportionately as to that portion of the Leased Premises rendered
untenantable. Notwithstanding the foregoing, if: (a) the Leased Premises by
reason of such occurrence are rendered wholly untenantable, or (b) the Leased
Premises should be damaged as a result of a risk which is not covered by
insurance, or (c) the Leased Premises should be damaged in whole or in part
during the last six (6) months of the term or of any renewal hereof, or (d) the
Leased Premises or the Building (whether the Leased Premises are damaged or
not) should be damaged to the extent of fifty percent (50%) or more of the
then-monetary value thereof, then and in any such events, Landlord may either
elect to repair the damage or may cancel this Lease by notice of cancellation
within Ninety (90) days after such event and thereupon this Lease shall expire,
and Tenant shall vacate and surrender the Leased Premises to Landlord.
Tenant's liability for rent upon the termination of this Lease shall cease as
of the day following Landlord's giving notice of cancellation. In the event
Landlord elects to repair any damage, any abatement of rent shall end five (5)
days after notice by Landlord to Tenant that the Leased Premises have been
repaired. If the damage is caused by the negligence of Tenant
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or its employees, agents, invitees, or concessionaires, there shall be no
abatement of rent. Unless this Lease is terminated by Landlord, Tenant shall
repair and refixture the interior of the Leased Premises to the extent of the
Tenant Finish in a manner and in at least a condition equal to that existing
prior to the destruction or casualty and the proceeds of all insurance carried
by Tenant on its property and fixtures shall be held in trust by Tenant for the
purpose of said repair and replacement.
XIII. CONDEMNATION
13.1 Total Condemnation. If the whole of the Leased
Premises shall be acquired or taken by condemnation proceeding, then
this Lease shall cease and terminate as of the date of title vesting
in such proceeding.
13.2 Partial Condemnation. If any part of the Leased
Premises shall be taken as aforesaid, and such partial taking shall
render that portion not so taken unsuitable for the business of
Tenant, then this Lease shall cease and terminate as aforesaid. If
such partial taking is not extensive enough to render the Leased
Premises unsuitable for the business of Tenant, then this Lease shall
continue in effect except that the Basic Annual Rent and Additional
Rent shall be reduced in the same proportion that the portion of the
Leased Premises (including basement, if any) taken bears to the total
area initially demised and Landlord shall, upon receipt of the award
in condemnation, make all necessary repairs or alterations to the
Building in which the Leased Premises are located, provided that
Landlord shall not be required to expend for such work an amount in
excess of the amount received by Landlord as damages for the part of
the Leased Premises to taken. "Amount received by Landlord" shall
mean that part of the award in condemnation which is free and clear to
Landlord of any collection by mortgage lenders for the value of the
diminished fee.
13.3 Landlord's Option to Terminate. If more than twenty
percent (20%) of the Building shall be taken as aforesaid, Landlord
may, by written notice to Tenant, terminate this Lease. If this Lease
is terminated as provided in this Section, rent shall be paid up to
the day that possession is so taken by public authority and Landlord
shall make an equitable refund of any rent paid by Tenant in advance.
13.4 Award. Tenant shall not be entitled to and expressly
waives all claim to any condemnation award for any taking, whether
whole or partial and whether for diminution in value of the leasehold
or to the fee, although Tenant shall have the right, to the extent
that the same shall not reduce Landlord's award, to claim from the
condemnor, but not from the Landlord, such compensation as may be
recoverable by Tenant in its own right for damages to Tenant's
business and fixtures.
13.5 Definition. As used in this Part XIII the term
"condemnation proceeding" means any action or proceeding in which any
interest in the Leased Premises is taken for any public or
quasi-public purpose by any lawful authority through exercise of
eminent domain or right of condemnation or by purchase or otherwise in
lieu thereof.
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XIV. LANDLORD'S RIGHTS TO CURE
14.1 General Right. In the event of breach, default, or
noncompliance hereunder by Landlord, Tenant shall, before exercising
any right or remedy available to it, give Landlord written notice of
the claimed breach, default, or noncompliance. If prior to its giving
such notice Tenant has been notified in writing (by way of Notice of
Assignment of Rents and Leases, or otherwise) of the address of a
lender which has furnished any of the financing referred to in Part XV
hereof, concurrently with giving the aforesaid notice to Landlord,
Tenant shall, by registered mail, transmit a copy thereof to such
lender. For the fifteen (15) days following the giving of the
notice(s) required by the foregoing portion of this section (or such
longer period of time as may be reasonably required to cure a matter
which, due to its nature, cannot reasonably be rectified within
fifteen (15) days), Landlord shall have the right to cure the breach,
default, or noncompliance involved. If Landlord has failed to cure a
default within said period, any such lender shall have an additional
fifteen (15) days within which to cure the same or, if such default
cannot be cured within that period, such additional time as may be
necessary if within such fifteen (15) day period said lender has
commenced and is diligently pursuing the actions or remedies necessary
to cure the breach default, or noncompliance involved (including, but
not limited to, commencement and prosecution of proceedings to
foreclose or otherwise exercise its rights under its mortgage or other
security instrument, if necessary to effect such cure), in which event
this Lease shall not be terminated by Tenant so long as such actions
or remedies are being diligently pursued by said lender.
14.2 Mechanic's Lien. Should any mechanic's or other lien
be filed against the Leased Premises or any part thereof by reason of
Tenant's acts or omissions or because of a claim against Tenant,
Tenant shall cause the effect of the same to be cancelled and
discharged or bonded over or otherwise within ten (10) days after
written notice by Landlord.
XV. FINANCING; SUBORDINATION
15.1 Subordination. Tenant acknowledges that it might be
necessary for Landlord or its successors or assigns to secure mortgage
loan financing or refinancing affecting the Leased Premises. Tenant
also acknowledges that the lender interested in any given loan may
desire that Tenant's interest under this Lease be either superior or
subordinate to the mortgage then held or to be taken by said Lender.
Accordingly, Tenant agrees that at the request of Landlord at any time
and from time to time Tenant shall execute and deliver to Landlord an
instrument, in form reasonably acceptable to Landlord, whereby Tenant
subordinates its interest under this Lease and in the Leased Premises
to such of the following encumbrances as may be specified by Landlord:
Any mortgage or trust deed and customary related instruments are
herein collectively referred to merely as a "Mortgage" and securing a
loan obtained by Landlord or its successors or assigns for the purpose
of enabling acquisition of the Building and/or construction of
additional improvements to provide permanent financing for the
Building, or for the purpose of refinancing any such construction,
acquisition, standing or permanent loan. Provided, however, that any
such instrument or subordination executed by Tenant shall provide that
so long as Tenant continues to perform all of its obligations under
this Lease its tenancy shall remain in full force and effect
notwithstanding Landlord's default in connection with the Mortgage
concerned or any resulting foreclosure or sale
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or transfer in lieu of such proceedings. Tenant shall not subordinate
its interests hereunder or in the Leased Premises to any lien or
encumbrance other than the Mortgages described in and specified
pursuant to this Section 15.1 without the prior written consent of
Landlord and of the lender interested under each mortgage then
affecting the Leased Premises. Any such unauthorized subordination by
Tenant shall be void and of no force or effect whatsoever.
15.2 Attornment. Any sale, assignment, or transfer of
Landlord's interest under this Lease or in the Leased Premises
including any such disposition resulting from Landlord's default under
a mortgage, shall be subject to this Lease and also Tenant shall
attorn to Landlord's successor and assigns and shall recognize such
successor or assigns as Landlord under this Lease, regardless of any
rule of law to the contrary or absence of privity of contract.
15.3 Financial Information. As a condition to Landlord's
acceptance of this Lease, Tenant shall provide financial information
sufficient to verify to Landlord the financial condition of Tenant.
Tenant hereby represents and warrants that none of such information
contains or will contain any untrue statement of material fact, nor
will such information omit any material fact necessary to make the
statements contained therein misleading or unreliable. Any financial
information provided by Tenant shall beheld in confidence and
distributed only to Landlord's investors or lenders for the Leased
Premises.
XVI. EVENTS OF DEFAULT; REMEDIES OF LANDLORD
16.1 Default by Tenant. Upon the occurrence of any of the
following events, Landlord shall have the remedies set forth in
Section 16.2:
(a) Tenant fails to pay any installment of Basic Annual
Rent or Estimated Costs or any other sum due hereunder within ten (10)
days after Tenant receives written notice of rent due.
(b) Tenant fails to perform any other term, condition, or
covenant to be performed by it pursuant to this Lease within ten (10)
days after written notice of such default shall have been given to
Tenant by Landlord or, if cure would reasonably require more than ten
(10) days to complete, if Tenant fails to commence performance within
the ten (10) day period or fails diligently to pursue such cure to
completion.
(c) Tenant shall become bankrupt or insolvent or file any
debtor proceedings or have taken against such party in any court
pursuant to state or federal statute, a petition in bankruptcy or
insolvency, reorganization, or appointment of a receiver or trustee;
or Tenant petitions for or enters into an arrangement; or suffers this
Lease to be taken under a writ of execution.
16.2 Remedies. In the event of any default by Tenant
hereunder, Landlord may at any time, without waiving or limiting any
other right or remedy available to it, terminate Tenant's rights under
this Lease by written notice, reenter and take possession of the
Premises by any lawful means
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(with or without terminating this Lease), or pursue any other remedy
allowed by law. Tenant agrees to pay to Landlord the cost of
recovering possession of the Premises, all costs of reletting, and
arising out of Tenant's default, including attorneys' fees.
Notwithstanding any reentry, the liability of Tenant for the rent
reserved herein shall not be extinguished for the balance of the Term,
and Tenant agrees to compensate Landlord upon demand for any
deficiency arising from reletting the Premises at a lesser rent than
applies under this Lease.
16.3 Past Due Sums; Penalty. If Tenant fails to pay, when
the same is due and payable, any Basic Annual Rent, Estimated Costs
and electrical charges within ten (10) days after the same is due and
payable, or other sum required to be paid by it hereunder, such unpaid
amounts shall bear interest from the due date thereof to the date of
payment at a fluctuating rate equal to two percent (2%) per annum
above the prime rate of interest charged by First Security Bank of
Utah, Salt Lake City, Utah. In addition thereto, Tenant shall pay a
sum of five percent (5%) of such unpaid amounts as a service fee.
Notwithstanding the foregoing, however, Landlord's right concerning
such interest and service fee shall be limited by the maximum amount
which may properly be charged by Landlord for such purposes under
applicable law.
XVII. PROVISIONS APPLICABLE AT TERMINATION OF LEASE
17.1 Surrender of Premises. At the expiration of this
Lease, except for changes made by Tenant that were approved by
Landlord, Tenant shall surrender the Leased Premises in the same
condition, less reasonable wear and tear, as they were in upon
delivery of possession thereto under this Lease and shall deliver all
keys to Landlord. Before surrendering the Leased Premises, Tenant
shall remove all of its personal property and trade fixtures and such
property or the removal thereof shall in no way damage the Leased
Premises, and Tenant shall be responsible for all costs, expenses and
damages incurred in the removal thereof. If Tenant fails to remove
its personal property and fixtures upon the expiration of this Lease,
the same shall be deemed abandoned and shall become the property of
Landlord.
17.2 Holding Over. Any holding over after the expiration
of the term hereof or of any renewal term shall be construed to be a
tenancy from month to month at such rates as Landlord may designate
and on the terms herein specified so far as possible. Landlord may not
in any event raise the rent above 110% of the last month's rent.
XVIII. ATTORNEYS' FEES
In the event that at any time during the term of this Lease any party
institutes any action or proceeding against any other party relating to the
provisions of this Lease or any default hereunder, then the unsuccessful party
in such action or proceeding agrees to reimburse the successful party for the
reasonable expenses of such action including reasonable attorneys' fees,
incurred therein by the successful party.
XIX. ESTOPPEL CERTIFICATE
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19.1 Landlord's Right to Estoppel Certificate. Tenant
shall, within fifteen (15) days after Landlord's request, execute and
deliver to Landlord a written declaration, in form and substance
similar to Exhibit "D", in recordable form: (1) ratifying this
Lease; (2) expressing the Commencement Date and termination date
hereof; (3) certifying that this Lease is in full force and effect
and has not been assigned, modified, supplemented or amended (except
by such writing as shall be stated); (4) that, if true, all
conditions under this Lease to be performed by Landlord have been
satisfied; (5) that there are no defenses or offsets against the
enforcement of this Lease by the Landlord, or stating those claimed by
Tenant; (6) the amount of advance rental, if any, (or none if such
is the case) paid by Tenant; (7) the date to which rental has been
paid; (8) the amount of security deposited with Landlord; and (9)
such other information as Landlord may reasonably request. Landlord's
mortgage lenders and/or purchasers shall be entitled to rely upon such
declaration.
19.2 Effect of Failure to Provide Estoppel Certificate.
Tenant's failure to furnish any Estoppel Certificate within fifteen
(15) days after request therefor shall be deemed a default hereunder
and moreover, it shall be conclusively presumed that: (a) this Lease
is in full force and effect without modification in accordance with
the terms set forth in the request; (b) that there are no unusual
breaches or defaults on the part of the Landlord; and (c) no more
than one (1) month's rent has been paid in advance.
XX. PARKING
Automobiles of Tenant and all visitors associated with Tenant shall be
parked only within parking areas designated by Landlord for parking. Landlord
or its agents shall, without any liability to Tenant or its occupants, have the
right to cause to be removed any automobile that may be wrongfully parked in a
prohibited or reserved parking area, and Tenant agrees to indemnify, defend and
hold Landlord harmless from and against any and all claims, losses, demands,
damages and liabilities asserted or arising with respect to or in connection
with any such removal of an automobile except due to Landlord's negligence.
Tenant shall from time to time, upon request of Landlord, supply Landlord with
a list of license plate numbers of all automobiles owned by Tenant or its
day-to-day occupant.
XXI. SIGNS, AWNINGS, AND CANOPIES
Tenant shall not place or suffer to be placed or maintained on any
exterior door, wall, or window of the Leased Premises, or elsewhere in the
Building, any sign, awning, marquee, decoration, lettering, attachment, or
canopy, or advertising matter or other thing of any kind, and will not place or
maintain any decoration, lettering, or advertising matter on the glass of any
window or door of the Leased Premises without obtaining the proper
authorization from Utah County prior to installing. Tenant will otherwise be
free to install signage of its choice.
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XXII. MISCELLANEOUS PROVISIONS
22.1 No Partnership. Neither Landlord nor the Property
Manager by this Lease, in any way or for any purpose, becomes a
partner or joint venturer of Tenant in the conduct of its business or
otherwise.
22.2 Force Majeure. Landlord and the Property Manager
shall be excused for the period of any delay in the performance of any
obligations hereunder when prevented from so doing by cause or causes
beyond their control, including labor disputes, civil commotion, war,
governmental regulations or controls, fire or other casualty,
inability to obtain any material or service, or acts of God.
22.3 No Waiver. Failure of any party to insist upon the
strict performance of any provision or to exercise any option
hereunder shall not be deemed a waiver of such breach. No provision
of this Lease shall be deemed to have been waived unless such waiver
be in writing signed by Landlord or the Property Manager or Tenant, as
the case may be.
22.4 Notice. Any notice, demand, request, or other
instrument which may be or is required to be given under this Lease
shall be (i) given by facsimile, (ii) delivered in person or (iii)
sent by United States certified or registered mail, postage prepaid
and shall be addressed (a) if to Landlord, at the place specified
for payment of rent, and (b) if to Tenant, either at the Leased
Premises or at any other current address for Tenant which is known to
Landlord. Either party may designate such other address as shall be
given by written notice or by facsimile transmission.
Landlord: COVEY CORPORATE CAMPUS ONE, L.L.C.
C/O THE BOYER COMPANY, L.C.
127 SOUTH 500 EAST, SUITE 310
SALT LAKE CITY, UTAH 84102
(801) 521-4781/FAX (801) 521-4793
ATTENTION: B. GREG GARDNER
Tenant: COVEY LEADERSHIP CENTER, INC.
300 WEST 4800 NORTH
PROVO, UTAH
AND
RICHARD L. HILL, ESQ.
JAMESTOWN SQUARE
3319 NORTH UNIVERSITY AVENUE
SUITE 200
PROVO, UTAH 84604
(801) 375-6600/FAX (801) 375-3865
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Property
Manager: THE BOYER COMPANY, L.C.
127 SOUTH 500 EAST, SUITE 310
SALT LAKE CITY, UTAH 84102
(801) 521-4781/FAX (801) 521-4793
22.5 Captions; Attachments; Defined Terms.
(a) The captions to the section of this Lease are for
convenience of reference only and shall not be deemed relevant in
resolving questions of construction or interpretation under this
Lease.
(b) Exhibits referred to in this Lease, and any addendums
and schedules attached to this Lease shall be deemed to be
incorporated in this Lease as though part thereof.
22.6 Recording. Tenant may record this Lease or a
memorandum thereof with the written consent of Landlord, which consent
shall not be unreasonably withheld. Landlord, at its option and at any
time, may file this Lease for record with the Recorder of the County
in which the Building is located.
22.7 Partial Invalidity. If any provision of this Lease
or the application thereof to any person or circumstance shall to any
extent be invalid, the remainder of this Lease or the application of
such provision to persons or circumstances other than those as to
which it is held invalid shall not be affected thereby and each
provision of this Lease shall be valid and enforced to the fullest
extent permitted by law.
22.8 Broker's Commissions. Tenant represents and warrants
that there are no claims for brokerage commissions or finder's fees in
connection with this Lease and agrees to indemnify Landlord against
and hold it harmless from all liabilities arising from such claim,
including any attorneys' fees connected therewith.
22.9 Tenant Defined: Use of Pronouns. The word "Tenant"
shall be deemed and taken to mean each and every person or party
executing this document as a Tenant herein. If there is more than one
person or organization set forth on the signature line as the Tenant,
their liability hereunder shall be joint and several. If there is
more than one Tenant, any notice required or permitted by the terms of
this Lease may be given by or to any one thereof, and shall have the
same force and effect as if given by or to all thereof. The use of
the neuter singular pronoun to refer to Landlord or Tenant shall be
deemed a proper reference even though Landlord or Tenant may be an
individual, a partnership, a corporation, or a group of two or more
individuals or corporation. The necessary grammatical changes
required to make the provisions of this Lease apply in the plural
sense where there is more than one Landlord or Tenant and to
corporations, associations, partnerships, or individuals, males or
females, shall in all instances be assumed as though in each case
fully expressed.
22.10 Provisions Binding, Etc. Except as otherwise
provided, all provisions herein shall be binding upon and shall inure
to the benefit of the parties, their legal representatives, heirs,
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successors, and assigns. Each provision to be performed by Tenant
shall be construed to be both a covenant and a condition, and if there
shall be more than one Tenant, they shall all be bound, jointly and
severally, by such provisions. In the event of any sale or assignment
(except for purposes of security or collateral) by Landlord of the
Building, the Leased Premises, or this Lease, Landlord shall, from and
after the Commencement Date (irrespective of when such sale or
assignment occurs), be entirely relieved of all of its obligations
hereunder.
22.11 Entire Agreement, Etc. This Lease and the Exhibits,
Riders, and/or Addenda, if any, attached hereto, constitute the entire
agreement between the parties. All Exhibits, riders, or addenda
mentioned in this Lease are incorporated herein by reference. Any
prior conversations or writings are merged herein and extinguished.
No subsequent amendment to this Lease shall be binding upon each party
unless reduced to writing and signed. Submission of this Lease for
examination does not constitute an option for the Leased Premises and
becomes effective as a lease only upon execution and delivery thereof
by Landlord to Tenant. If any provision contained in the rider or
addenda is inconsistent with a provision in the body of this Lease,
the provision contained in said rider or addenda shall control. The
captions and Section numbers appearing herein are inserted only as a
matter of convenience and are not intended to define, limit, construe,
or describe the scope or intent of any section or paragraph.
22.12 Governing Law. The interpretation of this Lease
shall be governed by the laws of the State of Utah. The parties
hereto expressly and irrevocably agree that either party may bring any
action or claim to enforce the provisions of this Lease in the State
of Utah, County of Utah, and each party irrevocably consents to
personal jurisdiction in the State of Utah for the purposes of any
such action or claim. Each party further irrevocably consents to
service of process in accordance with the provisions of the laws of
the State of Utah. Nothing herein shall be deemed to preclude or
prevent the parties hereto from bringing any action or claim to
enforce the provisions of this Lease in any other appropriate place or
forum.
21
<PAGE> 27
IN WITNESS WHEREOF, the Landlord and Tenant have executed this Lease
on the day first set forth above.
LANDLORD: COVEY CORPORATE CAMPUS ONE, L.L.C.
By ________________________________________
KEM C. GARDNER
MANAGER
By ________________________________________
STEPHEN M.R. COVEY
MANAGER
TENANT: COVEY LEADERSHIP CENTER, INC.
By ________________________________________
STEPHEN
M.R. COVEY
PRESIDENT AND CEO
PROPERTY MANAGER: THE BOYER COMPANY, L.C.
By ________________________________________
KEM C. GARDNER
PRESIDENT AND MANAGER
22
<PAGE> 28
NOTARY
STATE OF UTAH )
) ss
COUNTY OF SALT LAKE )
On this______ day of _____________________ , 1996, personally appeared
before me KEM C. GARDNER, who duly acknowledged to me that he executed the
foregoing Lease as the Manager of COVEY CORPORATE CAMPUS ONE, L.L.C.
My commission Expires: ___________________________________
Notary Public
4/28/97 Residing at SALT LAKE COUNTY
STATE OF )
) ss
COUNTY OF )
On this______ day of _____________________ , 1996, personally appeared
before me STEPHEN M.R. COVEY, who duly acknowledged to me that he executed the
foregoing Lease as the Manager of COVEY CORPORATE CAMPUS ONE, L.L.C.
___________________________________________
Notary Public
23
<PAGE> 29
STATE OF )
) ss
COUNTY OF )
The foregoing instrument was acknowledged before me on this ___ day of
January, 1996, by STEPHEN M.R. COVEY, the President and CEO of COVEY LEADERSHIP
CENTER, INC. STEPHEN M.R. COVEY stated that the foregoing instrument was
signed on behalf of said Corporation by authority (of its by-laws or pursuant
to a resolution of its board of directors) for the purposes and covenants
contained therein.
___________________________________________
Notary Public
STATE OF UTAH )
) ss
COUNTY OF SALT LAKE )
On this______ day of _____________________ , 19 , personally appeared
before me KEM C. GARDNER, who duly acknowledged to me that he executed the
foregoing Lease as the President and Manager of THE BOYER COMPANY, L. C., A
UTAH LIMITED LIABILITY COMPANY.
My commission Expires: ___________________________________________
Notary Public
4/28/97 Residing at SALT LAKE COUNTY
24
<PAGE> 30
THIS RIDER IS INCORPORATED INTO THE LEASE AGREEMENT AND MADE A PART THEREOF
A. TENANT'S RIGHT OF FIRST REFUSAL TO PURCHASE BUILDING
Landlord grants to Tenant the right of first refusal exercisable after
the Commencement Date during the term of the Lease to purchase the Building
(the "Right of First Refusal"). If at any time after the Commencement Date
during the term of this Lease Landlord shall desire to accept an offer from a
third person to purchase the Building, it shall provide written notice of such
intent to Tenant together with a copy of the offer. Tenant shall have twenty
(20) days to elect to purchase the Building strictly upon the terms and
conditions, including price, as set forth in the offer. If Tenant does not
timely exercise the Right of First Refusal, this Right of First Refusal shall
expire and Landlord may thereafter sell the Building upon terms and conditions,
including price, which are not more favorable to the buyer that is set forth in
the offer. This Right of First Refusal shall not apply to a foreclosure sale,
trustee's sale or deed in lieu of foreclosure by or to a mortgage lender in
respect of the Building.
B. TENANT'S OPTION TO PURCHASE BUILDING
1. Commencing as of the Commencement Date and continuing
throughout the term of the Lease, Tenant shall have the right
and option to purchase all of Landlord's right, title and
interest in the Building upon the terms and conditions set
forth in this portion of the Rider (the "Purchase Option").
To exercise this Purchase Option, tenant shall give written
notice of exercise to Landlord in the manner provided in the
Lease. Tenant may exercise the Purchase Option only if no
default, or circumstance which with the giving of notice
and/or the passage of time would constitute a default, is then
existing.
2. The Purchase Price which Tenant shall pay to Landlord for its
entire right, title and interest in the Building (the
"Purchase Price") shall be the sum of the following:
(a) The amount of any prepayment fee, premium or similar
charge incurred by Landlord in discharging any lien
or encumbrance which secures any monetary obligation
on the Building.
(b) the Fair Market Value (as defined below)
3. For purposes of this Purchase Option, the following terms
shall have the meanings set forth:
(a) "Fair Market Value" means the value of the Building
as agreed upon in writing by Landlord and Tenant or,
if the Landlord and Tenant cannot agree upon such
value within thirty (30) days after the Tenant
exercises
R-1
<PAGE> 31
the Purchase Option, then either Landlord or Tenant
may nominate three (3) qualified, independent
appraisers to appraise the Building, each of whom
shall:
(i) be a member in good standing of the Utah
Chapter of the Appraisal Institute;
(ii) be state certified under the Utah Real Estate
Appraiser Registration and Certification Act;
and
(iii) shall have not less than five (5) years of
experience valuing office buildings in Utah
County, Utah.
The other party shall then select one (1) of the
nominated appraisers to perform an appraisal to
determine the Fair Market Value of the Building. The
costs and fees of the appraiser shall be paid in
equal shares by Landlord and Tenant. In determining
the Fair Market Value it shall be assumed that all
liens and encumbrances securing obligations to pay
loans or other fixed or determinable sums have been
discharged.
4. The closing, pursuant to the Purchase Option, shall occur
thirty (30) days after the Purchase Price is determined. At
the closing:
(a) Tenant shall pay the Purchase Price in cash.
(b) Landlord shall convey title to the Building to Tenant
by special warranty deed and shall be obligated to
provide at Landlord's cost a standard owner's policy
of title insurance.
(c) Landlord shall discharge all liens and encumbrances
securing obligations to pay loans or other fixed or
determinable sums or obligations owing to mechanics
or materialmen. Tenant shall take the Building
subject to all other encumbrances and exceptions of
record.
(d) Landlord shall represent and warrant to the best of
its knowledge as to customary matters involving the
condition of the Building.
(e) Each of the parties shall bear its costs and
attorneys' fees in connection with the exercise and
closing under the Purchase Option; provided, Landlord
shall pay the premium on the policy of title
insurance delivered to Tenant, and Landlord and
Tenant shall each pay one-half ( 1/2) of the fees of
the escrow agent.
R-2
<PAGE> 32
5. If the Tenant exercises the Purchase Option but timely fails
to close for any reason other than the fault of Landlord, the
Purchase Option shall thereafter expire and shall no longer be
enforceable.
R-3
<PAGE> 33
AMENDMENT TO LEASE AGREEMENT
_________THIS LEASE AMENDMENT is made and entered into this 1st day of May 24,
1996 by and between COVEY CORPORATE CAMPUS ONE, L.L.C., hereinafter referred to
as the "Landlord" and COVEY LEADERSHIP CENTER, INC., hereinafter referred to as
the "Tenant."
RECITALS:
WHEREAS, on the 1st day of January 1996 Landlord and Tenant entered
into a certain Lease Agreement providing for the lease by Landlord to Tenant of
office space located in a three-story office building (the "Building"), being
constructed at approximately 300 West 4800 North, Provo, Utah, for the rental
and on terms and conditions more particularly set forth in said Lease; and
WHEREAS, the parties hereto desire to amend the Lease in certain
respects.
NOW THEREFORE, for and in consideration of the mutual promises herein
contained, the parties hereto agree that the said Lease Agreement shall be and
is hereby amended as follows:
1. ARTICLE 1.1(a): The first sentence of Article 1.1(a) of the
Lease is hereby amended and restated in its entirety to read
as follows:
(a) That certain floor area consisting of approximately
56,245 gross rentable square feet (the "Leased Premises"),
consisting of 17,567 gross rentable square feet on floor one,
17,350 gross rentable square feet on floor two, 17,058 gross
rentable square feet on floor three and 4,270 gross rentable
square feet in the basement, in the three-story office
building (the "Building") being constructed at approximately
300 West 4800 North, Provo, Utah, on the real property (the
"Property") described on Exhibit "A" attached hereto and by
this reference incorporated herein.
2. ARTICLE 1.3, CONSTRUCTION OF SHELL BUILDING: The first
sentence of Article 1.3 is hereby amended and restated in its
entirety to read as follows:
Landlord shall at its own cost and expense construct and
complete a three-story, 56,245 gross rentable square foot
building and cause all of the construction which is to be
performed by it in completing the building and performing its
work as set forth on Exhibit "C" to be substantially completed
as evidenced by a Certificate of Occupancy, and the Lease
Premises ready for Tenant to install its fixtures and
equipment and perform its other work as described on Exhibit
"C" as soon as reasonably possible but in no event later than
January 1, 1997 (the "Target Date").
<PAGE> 34
3. ARTICLE 2.3, CONSTRUCTION OF LEASE PREMISES: The third
sentence of Article 2.3 is hereby amended and restated in its
entirety to read as follows:
Landlord shall pay $973,896.00 ($22.00 per usable square feet
multiplied by 44,268 usable square feet as determined by
architect) of the cost listed (excluding cost to construct
shell building) and tenant shall be obligated for the
remaining costs shown on Exhibit "E".
4. ARTICLE 3.1, BASIC ANNUAL RENT: The first sentence of Article
3.1 is hereby amended and restated in its entirety to read as
follows:
Tenant agrees to pay the Landlord as Basic Annual Rent (the
"Basic Annual Rent") at such place as Landlord may designate
the sum of Eight Hundred Ninety Nine Thousand Nine Hundred
Twenty and no/100 Dollars ($899,920.00), which includes the
basement storage space.
5. ARTICLE 4.1(c): The second sentence of Article 4.1(c) is
hereby amended and restated in its entirety to read as
follows:
The estimated costs for the calendar year in which the Lease
Commencement commences is $179,028.00, and are not included in
the Basic Annual Rent.
6. EXHIBIT "C", WORK LETTERS, SECTION I, PARAGRAPH 8: The fourth
sentence of Paragraph IA of Exhibit "C" is hereby amended and
restated in its entirety to read as follows:
Without limiting the generality of the foregoing, preliminary
plans shall provide for a three-story building containing
56,245 rentable square feet of space and shall be generally
consistent with the Conceptual Plans and Drawings attached
hereto as Exhibit "B" and incorporated herein (the "Conceptual
Drawings")
7. EXHIBIT "C", WORK LETTERS, SECTION II, PARAGRAPH F: The first
sentence of Paragraph IIF of Exhibit "C" is hereby amended and
restated in its entirety to read as follows:
Landlord shall pay a tenant finish allowance of $973,896.00 or
$22.00 per usable square foot which shall be applied toward
the total construction cost of the tenant finish.
8. EXHIBIT "E": Exhibit "E" is hereby modified by changing the
square footage on the third line of Exhibit "E" from 43,396 to
44,268 and the Landlord Allowance shall be changed from
$954,712.00 to $973,896.00.
<PAGE> 35
The Lease shall remain in full force and effect as therein stated
except as herein modified or amended by this Amendment to Lease Agreement.
IN WITNESS WHEREOF, this Amendment Lease Agreement has been executed
the day and year first hereinabove written.
LANDLORD: COVEY CORPORATE CAMPUS ONE, L.L.C.
By_____________________________________
Kem C. Gardner
Manager
By_____________________________________
Stephen M.R. Covey
Manager
TENANT: COVEY LEADERSHIP CENTER, INC.
By_____________________________________
Stephen M.R. Covey
President and CEO
<PAGE> 36
SECOND AMENDMENT TO LEASE AGREEMENT
(BUILDING NO. 1)
THIS SECOND AMENDMENT TO LEASE AGREEMENT (the "Second Amendment") is
made effective the 21st day of March, 1997, by and between COVEY CORPORATE
CAMPUS ONE, L.L.C., a Utah limited liability company (the "Landlord"), FRANKLIN
COVEY CO., a Utah corporation (the "Tenant") and THE BOYER COMPANY, L.C., a Utah
limited liability company (the "Property Manager").
RECITALS:
On the 1st day of January, 1996, Landlord and Covey Leadership Center,
Inc., a Utah corporation ("CLC") as tenant, entered into a certain Lease
Agreement providing for the lease by Landlord to Tenant of office space located
in a three-story office building, at approximately 360 West 4800 North, Provo,
Utah, for the rental and on terms and conditions more particulary set forth in
said Lease. The original Lease Agreement was modified and amended by a written
instrument dated May 24, 1996. (The Lease Agreement as modified by the Amendment
is collectively referred to in this Second Amendment as the "Existing Lease
Agreement".) Effective June 2, 1997, Franklin Covey Co. became the successor in
interest to CLC by merger. The parties desire to amend the Existing Lease
Agreement as follows:
AGREEMENT:
For and in consideration of the mutual promises herein contained, the
receipt and sufficiency of which are hereby acknowledged, the parties agree that
the Existing Lease Agreement shall be and is hereby amended as follows:
1. Amendment of Recitals. Delete the third sentence of introductory
paragraph of the Existing Lease Agreement (i.e., the sentence that commences
with the words "This Lease is made" and ends with the words "July 7, 1995").
2. Amendment to Section 1.1(c). Section 1.1(c) of the Existing Lease
Agreement is hereby amended and restated as follows:
(c) The non-exclusive right to use those areas on the Property
and on the Adjacent Property (as defined in Section 16 of this Second
Amendment) which are designated and suitable for vehicular parking.
Landlord represents that One Hundred and Ninety Eight (198) parking
stalls are located on the Property and Two Hundred Sixty (260) parking
stalls are located on the Adjacent Property. Landlord covenants that Two
Hundred and Five (205) parking stalls shall always be available on
either the Property or the Adjacent Property for use in connection with
the Building by Tenant, its guests, employees and visitors, and that the
total number of parking stalls on the Property and the Adjacent Property
shall not be less than Four Hundred and Fifty-Six (456) parking stalls.
<PAGE> 37
3. Amendment to Section 2.1. The text of Article 2.1 of the Existing
Lease Agreement is hereby amended and restated in its entirety as follows:
2.1 Length of Term. The term of this Lease shall be for a period which
commences as of the Commencement Date and shall continue until November
30, 2009 (the "Expiration Date").
4. Amendment to Section 4.1. Section 4.1(a) of the Existing Lease
Agreement is amended as follows:
(a) In line 17 of Section 4.1(a), insert a closing parentheses
between "gardening" and before the next comma.
(b) In Line 19, insert the words "per annum" after the words "one
percent (1%)" and before the words "of Direct Costs."
(c) In line 33, insert the words "described in Section 8.1"
between the words "expenses" and "which."
5. Amendment of Section 6.2(c). Section 6.2(c) of the Existing Lease
Agreement is amended in its entirety to read as follows:
(c) Adversely overload the floors or otherwise damage the
structural soundness of the Leased Premises or Building or any
part thereof.
6. Amendment of Section 7.1 of Existing Lease Agreement. The first
paragraph of Section 7.1 of the Existing Lease Agreement is hereby amended in
its entirety to read as follows:
7.1 Obligations of Landlord. Except for the specific services and
costs described herein, Landlord shall provide all services and pay for
all costs associated with the normal operation and maintenance of the
Leased Premises at a level consistent with services and maintenance
provided by lessors with respect to similar buildings located in Provo,
Utah. Therefore, during the term of this Lease the Landlord shall cause
to be furnished to the Leased Premises during normal operating hours the
general services described in Section 4.1(a) above, the cost and expense
of which shall be included in Direct Costs. For the purposes of this
Lease, normal operating hours for the Leased Premises are from 7:00 a.m.
to 6:00 p.m., Monday through Friday. These services include without
limitation the following:
The balance of Section 7.1, consisting of subsections (a) through (h), is not
altered.
7. Amendment of Section 7.2 of Existing Lease Agreement. Section 7.2 of
the Existing Lease Agreement is hereby amended in its entirety to read as
follows:
2
<PAGE> 38
7.2 Tenant's Election. Tenant may at any time after the first
year of the lease term elect to reduce or to terminate Landlord's
obligation to provide the services described in Section 7.1 by giving
written notice of such election to Landlord not less than sixty (60)
days before the date upon which such change is to be effective. From and
after the effective date of any election of termination, Tenant shall
provide all services described in Section 7.1 in a good and workmanlike
manner, consistent with property management practices for similar
buildings in the same geographic area, and Landlord shall have no
further obligation to provide any service described in the first
sentence of this Section 7.1. Further, should Tenant elect to terminate
Landlord's obligation to provide the services described in Section 7.1,
the management fee as described in Section 4.1(a) shall be reduced to
one percent (1%) per annum of Basic Annual Rent and shall be paid to the
Property Manager; provided, if upon exercise of remedies by a Mortgagee,
The Boyer Company, L.C. is no longer the Property Manager, the fee shall
be equal to a reasonable management fee for services then provided by
Landlord not to exceed two percent (2%) per annum.
8. Amendment of Section 8.1 of Existing Lease Agreement. Section 8.1 of
the Existing Lease Agreement is hereby amended in its entirety to read as
follows:
8.1 Maintenance and Repairs by Landlord. The Landlord shall
maintain in good order, condition and repair the structural components
of the Leased Premises including, without limitation, roof, exterior
walls and foundations, as well as all repairs covered under construction
warranties; provided if the Landlord is required to make structural
repairs by reason of Tenant's negligent acts or omissions, Tenant shall
pay the costs for making such repairs.
9. Amendment of Section 10.1 of Existing Lease Agreement. Section 10.1
of the Existing Lease Agreement is hereby amended in its entirety as follows:
10.1 Indemnification. Tenant shall indemnify, defend and hold
harmless Landlord from and against any and all suits, actions, damages,
claims, liabilities and expenses (the "Claims") in connection with loss
of life, bodily or personal injury or property damage occurring in, on
or about the Leased Premises except for Claims arising from the acts or
omissions of Landlord or the agents, representatives or employees of
Landlord. Landlord shall indemnify, defend and hold harmless Tenant from
and against any Claims arising from the acts or omissions of Landlord or
the agents, representatives or employees of Landlord. Notwithstanding
the provisions of this Section, neither party shall be liable to the
other to the extent Claims are paid by insurance proceeds. All insurance
policies maintained by Landlord and Tenant shall include a waiver of
subrogation endorsement which specifies that the insurance carried shall
waive any right of subrogation against Tenant or Landlord, as the case
may be.
3
<PAGE> 39
10. Amendment of Section 11.2 of the Existing Lease Agreement. Section
11.2 of the Existing Lease Agreement is amended to provide that the limit of
coverage of the insurance policy provided by Tenant shall be not less than
$2,000,000.00.
11. New Section 11.5 of Existing Lease Agreement. A new Section 11.5 is
added to the Existing Lease Agreement which shall read as follows:
11.5 Insurance. Landlord shall obtain and maintain all insurance
Landlord deems appropriate for the Building and the premiums for such
insurance shall constitute a Direct Cost.
12. Amendment of Section 13.2 of Existing Lease Agreement. The third
line of Section 13.2 of the Existing Lease Agreement is amended to insert the
words "as reasonably determined by Tenant" after the words "business of Tenant"
and before the next comma.
13. Amendment of Section 15.3 of Existing Lease Agreement. Section 15.3
of the Existing Lease Agreement is amended to provide that Tenant shall furnish
to Landlord and Mortgagee such information as Landlord or any Mortgagee may
reasonably request to verify the financial condition of Tenant including balance
sheets, income and cash flows. Such statements shall be provided to Landlord and
any Mortgagee on a quarterly and annual basis. Annual statements shall be
audited by an independent certified public accountant. Notwithstanding the
foregoing, during such periods as Tenant is a reporting company under the
Securities Exchange Act of 1934, the Tenant shall be exempt from the foregoing
requirements but in lieu thereof shall provide its most current annual report to
Landlord and any Mortgagee promptly after the same is released.
14. Amendment of Section 17.1 of Existing Lease Agreement. Section 17.1
of the Existing Lease Agreement is amended in its entirety to read as follows:
17.1 Surrender of Premises. At the expiration of this Lease,
except for changes made by Tenant that were approved by Landlord, Tenant
shall surrender the Leased Premises in the same condition, less
reasonable wear and tear, as they were in upon delivery of possession
thereto under this Lease and shall deliver all keys to Landlord. Before
surrendering the Leased Premises, Tenant shall remove all of its
personal property and trade fixtures and such property or the removal
thereof shall in no way damage the Leased Premises, and Tenant shall be
responsible for all costs, expenses and damages incurred in the removal
thereof. If Tenant fails to remove its personal property and fixtures
upon the expiration of this Lease, then, at Landlord's election:
(a) the same shall be deemed abandoned and shall become
the property of Landlord; or
4
<PAGE> 40
(b) Landlord may remove for the account and benefit of
Tenant such personal property and fixtures at the cost and
expense of Tenant and store the same at Tenant's cost and
expense.
15. Amendment of Right of First Refusal Rider. The right of first
refusal set forth as Part A of the Rider to the Existing Lease Agreement shall
not be exercisable with respect to any of the following proposed conveyances or
transfers:
(a) A judicial foreclosure sale or trustee's sale with respect
to a Mortgage; or
(b) A deed-in-lieu of judicial foreclosure or trustee's sale with
respect to a Mortgagee.
16. Amendment of Option. The option set forth as Part B of the Rider to
the Existing Lease Agreement shall be exercised only if Tenant simultaneously
exercises the similar option granted Tenant under that certain Lease Agreement
dated October 29, 1996 between Landlord and Tenant providing for the lease by
Landlord to Tenant of office space located in a three-story office building
adjacent to the Building at approximately 466 West 4800 North, Provo, Utah (the
"Adjacent Property"). In addition, such option shall be exercised only if Tenant
is not in default under the Existing Lease Agreement.
17. Assumption by Franklin Covey Co. Franklin Covey Co. assumes the
obligations of "Tenant" under the Existing Lease Agreement as amended by this
Second Amendment.
18. Master Declaration. The following new Section 6.3(c) is added to the
Existing Lease Agreement:
The terms of the Original Lease Agreement shall be subject in all
respects to, and the Tenant shall comply with, the provisions of that
certain Master Declaration of Protective Covenants and Restrictions for
Riverwoods Research and Business Park recorded October 24, 1991, as
Entry No. 42273, in Book 2847, at Page 618 of the official records of
Utah County (the "Master Declaration") any applicable Supplementary
Declaration, the Articles, the Bylaws and the Association Rules (as all
of those terms are defined in the Master Declaration). Any failure of
Tenant to so comply shall constitute a default hereunder.
19. Substitution of Exhibit "A". The "Legal Description of Property" set
forth on Exhibit "A" attached to the Existing Lease Agreement is amended and
replaced in its entirety as follows:
Beginning at a point which is South 2546.19 feet, and West 1534.50 feet,
from the Northeast Corner of Section 13, Township 6 South, Range 2 East,
Salt Lake Base and Meridian; thence South 72(degree)15'49" West 265.89
feet; thence South 72(degree)27'59" West 175.99 feet; thence due North
425.36 feet; thence North 72(degree)15'49" East 450.77 feet; thence
South 10(degree)19'19" West 126.40 feet; thence on a 428.00 foot
5
<PAGE> 41
radius curve to the left 121.29 feet, having a central angle of
16(degree)14'15" and whose long chord bears South 02(degree)12'12" West
120.89 feet; thence South 05(degree)54'56" East 184.49 feet to the point
of beginning.
20. Ratification. In the event of any inconsistency between this Second
Amendment and the Existing Lease Agreement, the provisions of this Second
Amendment shall control. Except as amended by this Second Amendment, the
Existing Lease Agreement is ratified and affirmed.
6
<PAGE> 42
IN WITNESS WHEREOF, this Second Amendment to the Existing Lease
Agreement has been executed the day and year first hereinabove written.
"LANDLORD"
COVEY CORPORATE CAMPUS ONE, L.L.C.,
a Utah limited liability company
By
---------------------------------------
Kem C. Gardner
Manager
By
---------------------------------------
Stephen M.R. Covey
Manager
"TENANT"
FRANKLIN COVEY CO., a Utah corporation
By
---------------------------------------
Val John Christensen
Executive Vice President
"PROPERTY MANAGER"
THE BOYER COMPANY, L.C., a Utah limited
liability company
By
---------------------------------------
Kem C. Gardner
Its President and Manager
7
<PAGE> 43
LEASE AGREEMENT
LANDLORD: COVEY CORPORATE CAMPUS TWO, L.L.C.
TENANT: COVEY LEADERSHIP CENTER, INC.
<PAGE> 44
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C> <C>
I. PREMISES 1
1.1 Description of Premises 1
1.2 Work of Improvement 1
1.3 Construction of Shell Building 2
II. TERM 2
2.1 Length of Term 2
2.2 Commencement Date; Obligation to Pay Rent 2
2.3 Construction of Leased Premises 2
2.4 Renewal Option 3
2.5 Acknowledgment of Commencement Date 3
III. BASIC RENTAL PAYMENTS 3
3.1 Basic Annual Rent 3
3.2 Additional Monetary Obligations 4
IV. ADDITIONAL RENT 4
4.1 Basic Annual Rent. 4
4.2 Report of Direct Costs and Statement of Estimated Costs 5
4.3 Payment of Costs 5
4.4 Resolution of Disagreement 6
4.5 Limitations 6
V. SECURITY DEPOSIT 6
VI. USE 6
6.1 Use of Leased Premises 6
6.2 Prohibition of Certain Activities or Uses 6
6.3 Affirmative Obligations with Respect to Use 7
6.4 Suitability 7
6.5 Personal Property Taxes 8
VII. UTILITIES AND SERVICE 8
7.1 Obligations of Property Manager 8
7.2 Tenant's Election 8
7.3 Tenant's Obligations 9
7.4 Additional Limitations 9
7.5 Limitation on Landlord's Liability 9
</TABLE>
i
<PAGE> 45
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C> <C>
VIII. MAINTENANCE AND REPAIRS; ALTERATIONS; ACCESS 9
8.1 Maintenance and Repairs by Property Manager 9
8.2 Maintenance and Repairs by Tenant 9
8.3 Alterations 10
8.4 Landlord's Access to Leased Premises 10
IX. ASSIGNMENT 10
9.1 Assignment Prohibited 10
9.2 Consent Required 11
9.3 Landlord's Right in Event of Assignment 11
X. INDEMNITY 11
10.1 Indemnification 11
10.2 Release of Landlord 12
10.3 Notice 12
10.4 Litigation 12
XI. INSURANCE 13
11.1 Fire and "All Risk" Insurance on Tenant's Personal Property and Fixtures 13
11.2 Liability Insurance 13
11.3 Subrogation 13
11.4 Lender 13
XII. DESTRUCTION 13
XIII. CONDEMNATION 14
13.1 Total Condemnation 14
13.2 Partial Condemnation 14
13.3 Landlord's Option to Terminate 14
13.4 Award 14
13.5 Definition 14
XIV. LANDLORD'S RIGHTS TO CURE 15
14.1 General Right 15
14.2 Mechanic's Lien 15
XV. FINANCING; SUBORDINATION 15
15.1 Subordination 15
15.2 Attornment 16
15.3 Financial Information 16
</TABLE>
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<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C> <C>
XVI. EVENTS OF DEFAULT; REMEDIES OF LANDLORD 16
16.1 Default by Tenant 16
16.2 Remedies 16
16.3 Past Due Sums; Penalty 17
XVII. PROVISIONS APPLICABLE AT TERMINATION OF LEASE 17
17.1 Surrender of Premises 17
17.2 Holding Over 17
XVIII. ATTORNEYS' FEES 17
XIX. ESTOPPEL CERTIFICATE 18
19.1 Landlord's Right to Estoppel Certificate 18
19.2 Effect of Failure to Provide Estoppel Certificate 18
XX. PARKING 18
XXI. SIGNS, AWNINGS, AND CANOPIES 18
XXII. MISCELLANEOUS PROVISIONS 18
22.1 No Partnership 19
22.2 Force Majeure 19
22.3 No Waiver 19
22.4 Notice 19
22.5 Captions; Attachments; Defined Terms 20
22.6 Recording 20
22.7 Partial Invalidity 20
22.8 Broker's Commissions 20
22.9 Tenant Defined: Use of Pronouns 20
22.10 Provisions Binding, Etc. 20
22.11 Entire Agreement, Etc. 21
22.12 Governing Law 21
</TABLE>
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<TABLE>
<CAPTION>
DESCRIPTION PAGE
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<S> <C>
SIGNATURES 22
NOTARIES 23 & 24
</TABLE>
RIDER Yes [X] No [ ]
GUARANTY Yes [ ] No [ ]
EXHIBIT "A" DESCRIPTION OF REAL PROPERTY
EXHIBIT "B" FLOORPLAN OF LEASED PREMISES
EXHIBIT "C" WORK LETTER-CONSTRUCTION AND/OR FINISH OF
IMPROVEMENTS TO LEASED PREMISES
EXHIBIT "D" ACKNOWLEDGMENT OF COMMENCEMENT DATE &
ESTOPPEL CERTIFICATE
EXHIBIT "E" COST TO CONSTRUCT LEASED PREMISES
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<PAGE> 48
LEASE AGREEMENT
COVEY LEADERSHIP OFFICE BUILDING II
THIS LEASE AGREEMENT (the "Lease") is made and entered into as of this
______ day of October, 1996 by and between COVEY CORPORATE CAMPUS TWO, L.L.C.
(the "Landlord"), and COVEY LEADERSHIP CENTER, INC. (the "Tenant"). THE BOYER
COMPANY, L. C. (the "Property Manager") is also a party to this Lease for the
limited purpose of providing the property management services described herein.
For and in consideration of the rental to be paid by tenant and of the
covenants and agreements herein set forth to be kept and performed by Tenant,
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, the
Leased Premises (as hereafter defined), at the rental and subject to and upon
all of the terms, covenants and agreements hereinafter set forth.
I. PREMISES
1.1 Description of Premises. Landlord does hereby
demise, lease and let unto Tenant, and Tenant does hereby take and
receive from Landlord the following:
(a) That certain floor area containing approximately
62,916 gross rentable square feet (the "Leased Premises"), on Floors
One, Two and Three (includes 4,719 square feet in the basement) of the
three-story office building (the "Building") being constructed at
approximately 350 West 4800 North, Provo, Utah, on the real property
(the "Property") described on Exhibit "A" attached hereto and by this
reference incorporated herein. The space occupied by Tenant consists
of the entire Building, as set forth on Exhibit "B" which is attached
hereto and by this reference incorporated herein.
(b) Such non-exclusive rights-of-way, easements and
similar rights with respect to the Building and Property as may be
reasonably necessary for access to and egress from, the Leased
Premises.
(c) The exclusive right to use those areas designated and
suitable for vehicular parking, including the exclusive right to the
use of Two Hundred Fifty-one (251) parking stalls.
1.2 Work of Improvement. The obligation of Landlord and
Tenant to perform the work and supply the necessary materials and
labor to prepare the Leased Premises for occupancy are described in
detail on Exhibit "C". Landlord and Tenant shall expend all funds and
do all acts required of them as described on Exhibit "C" and shall
perform or have the work performed promptly and diligently in a first
class and workmanlike manner.
<PAGE> 49
1.3 Construction of Shell Building. Landlord shall, at
its own cost and expense, construct and complete a three story 62,916
gross rentable square foot building and cause all of the construction
which is to be performed by it in completing the Building and
performing its work as set forth on Exhibit "C", to be substantially
completed as evidenced by a Certificate of Occupancy, and the Leased
Premises ready for Tenant to install its fixtures and equipment and to
perform its other work as described on Exhibit "C" as soon as
reasonably possible, but in no event later than July 1, 1997 ("Target
Date"). In the event that Landlord's construction of obligation has
not been fulfilled upon the expiration of the"Target Date", Tenant
shall have the right to exercise any right or remedy available to it
under this Lease, including the right to terminate this Lease and the
right to charge Landlord and cause Landlord to pay any increased costs
associated with Tenant's current leases due to holding over in such
space or moving to temporary space; provided that under no
circumstances shall Landlord be liable to Tenant resulting from delay
in construction covered by circumstances beyond Landlord's direct
control.
II. TERM
2.1 Length of Term. The term of this Lease shall be for
a period of twenty (20) years plus the partial calendar month, if any,
occurring after the Commencement Date (as hereinafter defined) if the
Commencement Date occurs other than on the first day of a calendar
month.
2.2 Commencement Date; Obligation to Pay Rent. The term
of this Lease and Tenant's obligation to pay rent hereunder shall
commence on the first to occur of the following dates ("Commencement
Date"): (Projected to be July 1, 1997)
(a) The date Tenant occupies the Premises and conducts
business.
(b) The date fifteen (15) days after the Landlord, or
Landlord's supervising contractor, notified Tenant in writing that
Landlord's construction obligations respecting the Leased Premises
have been fulfilled and/or that the Leased Premises are ready for
occupancy and/or performance of Tenant's work. Such notice shall be
accompanied by an occupancy permit and a certificate from the Building
Architect stating that remaining punchlist items can be completed
within fifteen (15) days and will not materially interfere with
Tenant's business. Prior to Commencement Date, it is contemplated
that Tenant shall be able to perform its construction obligation as
per Exhibit C II(H).
2.3 Construction of Leased Premises. Landlord shall
provide a budget prior to the commencement of construction of the
Leased Premises (see Exhibit "E"). Landlord shall itemize each part
of the construction and its associated estimated cost. Landlord shall
pay an amount equal to $1,099,010 or $22.00 per usable square foot (on
49,955 usable square feet excluding the basement space of 4,719 square
feet) of the cost listed (excluding cost to construct Shell Building)
and Tenant shall be obligated for the remaining costs shown on
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<PAGE> 50
Exhibit "E". Landlord shall not be obligated to pay for any increase
in the actual cost of construction over and above the construction
costs shown on Exhibit "E". Any special decorator items, equipment,
furniture or furnishings not designated on Exhibit "E", as well as
changes initiated by the Tenant to the Leased Premises, shall be the
sole cost of Tenant and shall include the defined extras on Exhibit
"E."
2.4 Renewal Option. If this Lease then remains in full
force and effect, Tenant shall have the option to renew this Lease for
two five year options commencing on the expiration date. Each option
must be exercised by written notice to Landlord one hundred and eighty
(180) days before the expiration of the previous term and once
exercised is irrevocable. Base rent during each renewal term shall be
determined pursuant to Section 3.1 below.
2.5 Acknowledgment of Commencement Date. Landlord and
Tenant shall execute a written acknowledgment of the commencement Date
in the form attached hereto as Exhibit "D".
III. BASIC RENTAL PAYMENTS
3.1 Basic Annual Rent. Tenant agrees to pay to Landlord
as basic annual rent (the "Basic Annual Rent") at such place as
Landlord may designate, without prior demand therefore and without any
deduction or set off whatsoever, the sum of One Million Six Thousand
Six Hundred Fifty-Six and no/100 Dollars ($1,006,656.00) which
includes the basement storage space. Said Basic Annual Rent shall be
due and payable in twelve (12) equal monthly installments to be paid
in advance on or before the first day of each calendar month during
the term of the Lease. Basic Annual Rent shall escalate at the
beginning of the 4th year and every three (3) years thereafter using a
3% annually compounded rate or the change in the All Urban Index,
whichever is higher. For purposes of this Lease the term "All Urban
Index" shall mean the Consumer Price Index for All Urban
Consumers-U.S. City Average-all Items (1982-1984 equals 100 base) as
published by the United States Bureau of Labor Statistics or any
successor agency or any other index hereinafter employed by the Bureau
of Labor Statistics in lieu of said index. The price index for the
3rd month preceding the month in which the Lease commences shall be
considered the Basic Price Index. Therefore, the beginning of the 4th
year and every three years thereafter, the Basic Annual Rental set
forth in Section 3.1 shall be adjusted by multiplying such rental by a
fraction, the numerator of which is the Price Index for the 3rd month
preceding the beginning of the 4th year and the denominator of which
is the Basic Price Index. The above not withstanding, the maximum
increase at the beginning of the 4th year shall be no more than 15.76%
which is 5% per year compounded, and likewise on every adjustment date
hereafter, the maximum increase shall be limited as described herein.
In no event shall Basic Annual Rent be reduced. In the event
the Commencement Date occurs on a day other than the first day of a
calendar month, then rent shall be paid on the Commencement Date for
the initial fractional calendar month prorated on a per-diem basis
(based upon a thirty (30) day month).
3.2 Additional Monetary Obligations. Tenant shall also
pay as rental (in addition to the Basic Annual Rent) all other sums of
money as shall become due and payable by Tenant to Landlord
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<PAGE> 51
under this Lease. Landlord shall have the same remedies in the case
of a default in the payment of said other sums of money as are
available to Landlord in the case of a default in the payment of one
or more installments of Basic Annual Rent.
IV. ADDITIONAL RENT
4.1 Basic Annual Rent. It is the intent of both parties
that the Basic Annual Rent herein specified shall be absolutely net to
the Landlord throughout the term of this Lease, and that all costs,
expenses and obligations relating to Tenant's pro rata share of the
Building, Property and/or Building, Property and/or Leased Premises
which may arise or become due during the term shall be paid by Tenant
in the manner hereafter provided.
For purposes of this Part IV and the Lease in general, the
following words and phrases shall have the meanings set forth below:
(a) "Direct Costs" shall mean all actual costs and
expenses incurred by the Property Manager or Landlord in connection
with Landlord's ownership, operation, management and maintenance of
the Building and Property and related improvements located thereon
(the "Improvements"), including, but not limited to, all expenses
incurred by Landlord or the Property Manager as a result of their
compliance with any and all of their obligations under this Lease
other than the performance by Landlord of its work under Sections 1.2,
1.3 and 2.3 of this Lease. In explanation of the foregoing, and not
in limitation thereof, Direct Costs shall include: all real property
taxes and assessments (whether general or special, known or unknown,
foreseen or unforeseen) and any tax or assessment levied or charged in
lieu thereof, whether assessed against Landlord and/or Tenant and
whether collected from Landlord and/or Tenant; snow removal, dumpster
service, insurance, license, permit and inspection fees, cost of
services of independent contractors, cost of compensation (including
employment taxes and fringe benefits) of all persons who perform
regular and recurring duties connected with day-to-day operation,
maintenance, repair, and replacement of the Building, its equipment
and the adjacent walk, and landscaped area (including, but not limited
to gardening, security, parking, elevator, painting, plumbing,
electrical, mechanical, carpentry, structural and roof repairs and
reserves (the Property Manager may collect in advance up to one
percent (1%) of Direct Costs as a reserve), signing and advertising,
and rental expense or a reasonable allowance for depreciation of
personal property used in the maintenance, operation and repair of the
Building. Direct costs shall also include property management fees,
which property management fees shall be equal to a percentage of
Tenant's Basic Annual Rent and Estimated Costs, which percentage shall
not exceed two and one half percent (2 1/2%) of the sum of Basic
Annual Rent and Direct Costs and shall be paid to the Property
Manager. However, Tenant shall pay the actual costs of water, sewer,
gas and electrical power directly to the municipal supplier of same.
Direct Costs shall not include expenses incurred in connection with
leasing, renovating, or improving space for tenants or other occupants
or prospective tenants or occupants of the Building, expenses incurred
for repairs resulting from damage by fire, windstorm or other
casualty, to the extent such repairs are paid for by insurance
proceeds, expenses paid by any tenant directly to third parties, or
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<PAGE> 52
as to which Landlord is otherwise reimbursed by any third party or
Tenant; expenses which, by generally accepted accounting principles,
are treated as capital items except that if, as a result of
governmental requirements, laws or regulations, Landlord shall expend
monies directly or indirectly for improvements, additions or
alterations to the Building which, by generally accepted accounting
principles, are treated as a capital expenditures, the amortization of
such capital expenditures based on a life acceptable to the
appropriate taxing authority together with interest at the rate of 9%
per annum shall be considered Direct Costs. The foregoing
notwithstanding, Direct Costs shall not include depreciation on the
Building and Tenant Finish, and amounts paid toward principal or
interest of loans of Landlord.
(b) "Estimated Costs" shall mean the projected amount of
Tenant's Direct Costs, excluding the costs of electricity provided to
Tenant's Leased Premises. The Estimated Costs for the calendar year
in which the Lease commences are $200,072.00, and are not included in
the Basic Annual Rent. If the Estimated Costs as of the date Tenant
takes occupancy are greater than Tenant's Estimated Costs at the time
this Lease is executed, the Estimated Costs shall be increased to
equal the Estimated Costs as of the date of Tenant's occupancy.
4.2 Report of Direct Costs and Statement of Estimated
Costs.
(a) After the expiration of each calendar year occurring
during the term of this Lease, the Property Manager shall furnish
Tenant a written statement of Tenant's Direct Costs occurring during
the previous calendar year. The written statement shall specify the
amount by which Tenant's Direct Costs exceed or are less than the
amounts paid by Tenant during the previous calendar year pursuant to
Section 4.3(b) below.
(b) At the same time specified in Section 4.2(a) above,
Landlord shall furnish Tenant a written statement of the Estimated
Costs for the then current calendar year.
4.3 Payment of Costs. Tenant shall pay the Direct Costs
as follows:
(a) Each month Tenant shall pay to the Property Manager,
without offset or deduction, one-twelfth (1/12th) of the Estimated
Costs as defined in Sections 4.1(b) and 4.2(b) above.
(b) Within thirty (30) days after delivery of the written
statement referred to in section 4.2(a) above, Tenant shall pay to the
Property Manager the amount by which Tenant's Direct Costs, as
specified in such written statements, exceed and aggregate of such
costs actually paid by Tenant for the year at issue. Tenant shall
have the right to audit the Property Manager's books upon reasonable
notice. Tenant shall pay costs associated with the audit unless
Tenant finds that the Property Manager has inflated expenses by more
than ten percent (10%), in which case, the Property Manager will pay
audit charges. Payments by Tenant shall be made pursuant to this
Section 4.3(b) notwithstanding that a statement pursuant to Section
4.2(a) is furnished to Tenant after the expiration of the term of this
Lease.
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<PAGE> 53
(c) If the annual statement of costs indicates that the
Estimated Costs paid by Tenant pursuant to subsection (b) above for
any year exceeded Tenant's actual Direct Costs for the same year, the
Property Manager shall promptly pay the amount of such excess to
Tenant.
4.4 Resolution of Disagreement. Every statement given by
the Property Manager pursuant to Section 4.2 shall be conclusive and
binding upon Tenant unless within sixty (60) days after the receipt of
such statement Tenant shall notify the Property Manager that it
disputes the correctness thereof, specifying the particular respects
in which the statement is claimed to be incorrect. If such dispute
shall not have been settled by agreement, the parties hereto shall
submit the dispute to arbitration within ninety (90) days after
Tenant's receipt of statement. Pending the determination of such
dispute by agreement or arbitration as aforesaid, Tenant shall, within
thirty (30) days after receipt of such statement, pay in accordance
with the Property Manager's statement, and such payment shall be
without prejudice to Tenant's position. If the dispute shall be
determined in Tenant's favor, the Property Manager shall forthwith pay
Tenant the amount of Tenant's overpayment resulting from compliance
with the Property Manager's statement, including interest on disputed
amounts at prime plus two percent (2%). Landlord agrees to grant
Tenant reasonable access to the Property Manager's books and records
for the purpose of verifying Direct Costs for operating expenses
incurred by the Property Manager.
4.5 Limitations. Nothing contained in this Part IV shall
be construed at any time so as to reduce the monthly installments of
Basic Annual Rent payable hereunder below the amount set forth in
Section 3.1 of this Lease.
V. SECURITY DEPOSIT: NONE
VI. USE
6.1 Use of Leased Premises. The Leased Premises shall be
used and occupied by Tenant for general office purposes only and for
no other purpose whatsoever without the prior written consent of
Landlord.
6.2 Prohibition of Certain Activities or Uses. The
Tenant shall not do or permit anything to be done in or about, or
bring or keep anything in the Leased Premises which is prohibited by
this Lease or will, in any way or to any extent:
(a) Adversely affect any fire, liability or other
insurance policy carried with respect to the Building, the Leased
Premises or any of the contents of the Building (except with
Landlord's express written permission, which will not be unreasonably
withheld, but which may be contingent upon Tenant's agreement to bear
any additional costs, expenses or liability for risk that may be
involved).
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<PAGE> 54
(b) Conflict with or violate any law, statute, ordinance,
rule, regulation or requirement of any governmental unit, agency or
authority (whether existing or enacted as promulgated in the future,
known or unknown, foreseen or unforeseen).
(c) Adversely overload the floors or otherwise damage the
structural soundness of the Leased Premises or Building, or any part
thereof (except with Landlord's express written permission, which will
not be unreasonably withheld, but which may be contingent upon
Tenant's agreement to bear any additional costs, expenses or liability
for risk that may be involved).
6.3 Affirmative Obligations with Respect to Use.
(a) Tenant will comply with all governmental laws,
ordinances, regulations, and requirements, now in force or which
hereafter may be in force, of any lawful governmental body or
authorities having jurisdiction over the Leased Premises, will keep
the Leased Premises and every part thereof in a clean, neat, and
orderly condition, free of objectionable noise, odors, or nuisances,
will in all respects and at all times fully comply with all applicable
health and policy regulations, and will not suffer, permit, or commit
any waste.
(b) At all times during the term hereof, Tenant shall, at
Tenant's sole cost and expense, comply with all statutes, ordinances,
laws, orders, rules, regulations and requirements of all applicable
federal, state, county, municipal and other agencies or authorities,
now in effect or which may hereafter become effective, which shall
impose any duty upon Landlord or Tenant with respect to the use,
occupation or alterations of the Leased Premises (including, without
limitation, all applicable requirements of the Americans with
Disabilities Act of 1990 and all other applicable laws relating to
people with disabilities, and all rules and regulations which may be
promulgated thereunder from time to time and whether relating to
barrier removal, providing auxiliary aids and services or otherwise)
and upon request of Landlord shall deliver evidence thereof to
Landlord.
6.4 Suitability. The Leased Premises, Building and
Improvements (and each and every part thereof) shall be deemed to be
in satisfactory condition unless, within sixty (60) days after the
Commencement Date, Tenant shall give Landlord written notice
specifying, in reasonable detail, the respects in which the Leased
Premises, Building or Improvements are not in satisfactory condition.
Landlord further provides warranties as provided in Exhibit C II
paragraphs C and E.
6.5 Personal Property Taxes. Tenant shall pay all taxes,
assessments, charges, and fees which during the term hereof may be
imposed, assessed or levied by any governmental or public authority
against or upon Tenant's use of the Leased Premises or any personal
property or fixture kept or installed therein by Tenant.
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VII. UTILITIES AND SERVICE
7.1 Obligations of Property Manager. Except for the
specific services and costs described herein, the parties intend that
the Property Manager (as the Landlord's agent) shall provide all
services and pay for all costs associated with the normal operation
and maintenance of the Leased Premises at a level consistent with
services and maintenance provided by the Property Manager with respect
to similar buildings located in Provo, Utah. Therefore, during the
term of this Lease the Property Manager agrees to cause to be
furnished to the Lease Premises during normal operating hours the
general services described in Section 4.1(a) above, the cost and
expense of which shall be included in Direct Costs. For the purposes
of this Lease, normal operating hours for the Leased Premises are from
7:00 a.m. to 6:00 p.m., Monday through Friday. These services include
without limitation the following:
(a) Telephone connection to the building, but not
including telephone stations and equipment (it being expressly
understood and agreed that Tenant shall be responsible for the
ordering and installation of telephone lines and equipment which
pertain to the Leased Premises).
(b) Heating and air-conditioning during normal operating
hours to such extent and to such levels as is reasonably required for
the comfortable use and occupancy of the Leased Premises subject
however to any limitations imposed by any government agency.
(c) Security (including the lighting of common halls,
stairways, entries and restrooms) to such extent as is usual and
customary in similar buildings in Provo, Utah.
(d) Snow removal service.
(e) Landscaping and groundskeeping service.
(f) Elevator service.
(g) Dumpster service.
(h) Parking lot maintenance.
7.2 Tenant's Election. Tenant may at any time after the
first year of the lease term elect to reduce or to terminate
Landlord's and the Property Manager's obligation to provide the
services described in Section 7.1, by giving written notice of such
election to Landlord and to the Property Manager not less than sixty
(60) days before the date upon which such change is to be effective.
From and after the effective date of any election of termination,
Landlord and the Property Manager shall have no further obligation to
provide any service described in the first sentence of this Section
7.1. Further, should Tenant elect to terminate Landlord's and the
Property Manager's obligation, the management fee as described in
Section 4.1(b) shall be reduced to 1% of Basic Annual Rent and shall
be paid to the Property Manager.
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7.3 Tenant's Obligations. Tenant shall arrange for and
shall pay the entire cost and expense of (a) all telephone stations,
equipment and use charges, electric light bulbs (but not fluorescent
bulbs used in fixtures originally installed in the Leased Premises);
(b) janitorial services for the Leased Premises; water, sewer, gas and
electrical power for the Leased Premises; and (c) personal property
taxes (as provided in Section 6.5 above).
7.4 Additional Limitations. If and where heat generating
machines devices are used in the Leased Premises which affect the
temperature otherwise maintained by the air conditioning system,
Landlord reserves the right with Tenant's concurrence to install
additional or supplementary air conditioning units for the Leased
premises, and the entire cost of installing, operating, maintaining
and repairing the same shall be paid by Tenant to Landlord promptly
after demand by Landlord.
7.5 Limitation on Landlord's Liability. Landlord shall
not be liable for and Tenant shall not be entitled to terminate this
Lease or to effectuate any abatement or reduction of rent by reason of
Landlord's or the Property Manager's failure to provide or furnish any
of the foregoing utilities or services if such failure was reasonably
beyond the control of Landlord or the Property Manager. In no event
shall Landlord or the Property Manager be liable for loss or injury to
persons or property, however, arising or occurring in connection with
or attributable to any failure to furnish such utilities or services
even if within their control except in the event of their negligence.
VIII. MAINTENANCE AND REPAIRS; ALTERATIONS; ACCESS
8.1 Maintenance and Repairs by Property Manager. The
Property Manager at its sole cost shall maintain in good order,
condition and repair the structural components of the Leased Premises,
including without limitation roof, exterior walls and foundations, as
well as all repairs covered under construction warranties provided if
the Property Manager is required to make structural repairs by reason
of Tenant's negligent acts or omissions, Tenant shall pay the costs
for making such repairs.
8.2 Maintenance and Repairs by Tenant. Tenant, at
Tenant's sole cost and expense and without prior demand being made,
shall maintain the Leased Premises in good order, condition and
repair, and will be responsible for the painting, carpeting or other
interior design work of the Leased Premises beyond the initial
construction phase as specified in Section 2.3 and Exhibit "C" and "E"
of the Lease and shall maintain all equipment and fixtures installed
by Tenant. If repainting or recarpeting is required and authorized
by Tenant, the cost for such are the sole obligation of Tenant and
shall be paid for by Tenant immediately following the performance of
said work and a presentation of an invoice for payment.
8.3 Alterations. Tenant shall not make or cause to be
made any alterations, additions or improvements or install or cause to
be installed any fixtures, signs, floor coverings, interior or
exterior lighting, plumbing fixtures, or shades or awnings, or make
any other changes to the Leased Premises without first obtaining
Landlord's written approval, which approval shall not be unreasonably
withheld. Tenant shall present to the Landlord plans and
specifications for such work at the time approval is sought. In the
event Landlord consents to the making of any alterations,
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additions, or improvements to the Leased Premises by Tenant, the same
shall be made by Tenant at Tenant's sole cost and expense. All such
work with respect to any alterations, additions, and changes shall be
done in a good and workmanlike manner and diligently prosecuted to
completion such that, except as absolutely necessary during the course
of such work, the Leased Premises shall at all times be a complete
operating unit. Any such alterations, additions, or changes shall be
performed and done strictly in accordance with all laws and ordinances
relating thereto. In performing the work or any such alterations,
additions, or changes, Tenant shall have the same performed in such a
manner as not to obstruct access to any portion of the Building. Any
alterations, additions, or improvements to or of the Leased Premises,
including, but not limited to, wallcovering, paneling, and built-in
cabinet work, but excepting movable furniture and equipment, shall at
once become a part of the realty and shall be surrendered with the
Premises, unless Landlord and Tenant agree at any time that the
specific improvement may be removed by Tenant at the end of the Term
provided Tenant restores the premises to its original condition, wear
and tear excepted.
8.4 Landlord's Access to Leased Premises. Landlord shall
have the right to place, maintain, and repair all utility equipment of
any kind in, upon, and under the Leased Premises as may be necessary
for the servicing of the Leased Premises and other portion of the
Building. Landlord shall upon providing adequate notice to Tenant,
also have the right to enter the Leased Premises at all times to
inspect or to exhibit the same to prospective purchasers, mortgagees,
tenants, and lessees, and to make such repairs, additions,
alterations, or improvements as Landlord may deem desirable. Landlord
shall be allowed to take all material upon said Leased Premises that
may be required therefor without the same constituting an actual or
constructive eviction of Tenant in whole or in part and the rents
reserved herein shall in no wise abate while said work is in progress
by reason of loss or interruption of Tenant's business or otherwise,
and Tenant shall have no claim for damages unless due to Landlord
negligence. During the three (3) months prior to expiration of this
Lease or of any renewal term, Landlord may place upon the Leased
Premises "For Lease" or "For Sale" signs which Tenant shall permit to
remain thereon.
IX. ASSIGNMENT
9.1 Assignment Prohibited. Tenant shall not transfer,
assign, mortgage, or hypothecate this Lease, in whole or in part, or
permit the use of the Leased Premises by any person or persons other
than Tenant, or sublet the Leased Premises, or any part thereof,
without the prior written consent of Landlord in each instance, which
consent shall not be unreasonably withheld, provided sufficient
information is provided to Landlord to accurately represent the
financial condition of those to whom this Lease will be transferred,
assigned, mortgaged, or hypothecated. Such prohibition against
assigning or subletting shall include any assignment or subletting by
operation of law. Any transfer of this Lease from the Tenant by
merger, consolidation, transfer of assets, or liquidation shall
constitute an assignment for purposes of this Lease. In the event
that Tenant hereunder is a corporation, an unincorporated association,
or a partnership, the transfer, assignment, or hypothecation of any
stock or interest in such corporation, association, or partnership in
the aggregate in excess of forty-nine percent (49%) in any one-year
period shall be deemed an assignment within the meaning of this
Section. The above prohibition of assignment will not apply in the
case of a
10
<PAGE> 58
registered offering of shares by Tenant or the public trading of
registered shares subsequent to an initial offering.
9.2 Consent Required.
(a) Any assignment or subletting without Landlord's
consent shall be void, and shall constitute a default hereunder which,
at the option of Landlord, shall result in the termination of this
Lease or exercise of Landlord's other remedies hereunder. Consent to
any assignment or subletting shall not operate as a waiver of the
necessity for consent to any subsequent assignment or subletting, and
the terms of such consent shall be binding upon any person holding by,
under, or through Tenant.
(b) Landlord shall have no obligation to consent to the
proposed sublease or assignment if the proposed sublessee or assignee
or its business is or may be subject to compliance with additional
requirements of the law, including any related rules or regulations,
commonly known as the "Americans with Disabilities Act of l990" or
similar state or local laws relating to persons with disabilities
beyond those requirements which are applicable to the tenant desiring
to so sublease or assign".
9.3 Landlord's Right in Event of Assignment. If this
Lease is assigned or if the Leased Premises or any portion thereof are
sublet or occupied by any person other than the Tenant, Landlord may
collect rent and other charges from such assignee or other party, and
apply the amount collected to the rent and other charges reserved
hereunder, but such collection shall not constitute consent or waiver
of the necessity of consent to such assignment, subleasing, or other
transfer, nor shall such collection constitute the recognition of such
assignee, sublessee, or other party as the Tenant hereunder or a
release of Tenant from the further performance of all of the covenants
and obligations, including obligation to pay rent, of Tenant herein
contained. In the event that Landlord shall consent to a sublease or
assignment hereunder, Tenant shall pay to Landlord reasonable fees,
not to exceed $100.00, incurred in connection with processing of
documents necessary to the giving of such consent. In the event
Landlord consents to the assignment as provided by paragraph 9.1, then
Tenant shall be released from further performance of any covenant and
obligation under this Lease.
X. INDEMNITY
10.1 Indemnification. Tenant and Landlord shall indemnify
each other and save each other harmless from and against any and all
suits, actions, damage and claims, liability and expense in connection
with loss of life, bodily or personal injury, or property damage
arising from or out of any occurrence in, upon, at or from the Leased
Premises, or occasioned wholly or in part by any act or omission of
Tenant or Landlord, their agents, contractors, employees, servants,
invitees, licensees or concessionaires. For the purposes of this
Lease, the Property Manager is an agent of the Landlord. All
insurance policies carried by Tenant and/or Landlord shall include a
waiver of subrogation endorsement which specifies that the insurance
carrier(s) will waive any right of subrogation against Tenant and/or
Landlord arising out of any insurance claim.
11
<PAGE> 59
10.2 Release of Landlord. Landlord shall not be
responsible or liable at any time for any loss or damage to Tenant's
personal property or to Tenant's business. Tenant shall store its
property in and shall use and enjoy the Leased Premises and all other
portions of the Building and Improvements at its own risk, and hereby
releases Landlord, to the full extent permitted by law, from all
claims of every kind resulting in loss of life, personal or bodily
injury, or property damage to or arising in connection with Tenant's
ownership of its personal property or the operation of Tenant's
business.
10.3 Notice. Tenant shall give prompt notice to Landlord
in case of fire or accidents in the Leased Premises or in the Building
of which the Leased Premises are a part or of defects therein or in
any fixtures or equipment.
10.4 Litigation. If any party to this Lease, without
fault on its part, shall be made a party to any litigation that names
either of the other two parties to this lease, those other parties
shall protect and hold harmless the party without fault and shall pay
all costs, expenses, and reasonable attorneys' fees, provided that the
party to be protected must first notify the other parties promptly in
writing of any such claim and further provided that the party or
parties to be charged shall be entitled to direct the defense or
settlement of such claim. No party to this Lease shall be responsible
for any settlement of compromise of any such claim without its prior
written consent.
12
<PAGE> 1
EXHIBIT 13
FRANKLIN COVEY CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Effective June 2, 1997, Franklin Quest Co. ("Franklin") and Covey Leadership
Center, Inc. ("Covey") merged (the "Merger") to form Franklin Covey Co. (the
"Company"). Franklin has been in the business of teaching time management
seminars since the Company's inception in 1983 and has been selling the Franklin
Day Planner since its introduction in February 1984. Covey has been providing
educational materials, training services and publications since its inception in
1980. The combined Company is uniquely positioned to provide educational and
time management products and services to improve the productivity, leadership
and effectiveness of both individuals and organizations. The Company's best
known products include the Franklin Day Planner as well as the best-selling
book, 7 Habits of Highly Effective People. Increases in sales during the periods
reported have resulted from the incremental revenues of Covey and other acquired
companies and have also been generated by teaching an increasing number of time
management seminar participants and selling an increasing number of Franklin
Covey Planners and Organizers and related products. Currently, the Company
derives its sales principally from three areas: (1) product sales including
planners, books, tapes and related products sold primarily through retail,
catalog and direct channels; (2) training, consulting and coaching services,
primarily in the areas of leadership, time management and personal improvement,
provided through institutional and public programs; and (3) printing and tabbing
services. The Company's results of operations have been seasonal in nature,
resulting primarily from customer buying habits for calendar-related products.
As a result of the Merger and corporate acquisitions during fiscal 1997, the
quarterly fluctuation in sales is expected to decrease.
The Company opened 20 new retail stores during fiscal 1997. Retail store sales
as a percentage of total product sales have increased as the Company has
continued its strategy of opening new stores in geographic areas where there is
a concentration of existing customers, which has resulted in some shifting from
catalog sales to retail store sales. During 1997, comparable store sales growth
was approximately 7%.
On December 1, 1994, the Company acquired Publishers Press, Inc. ("Publishers").
Publishers, a Utah corporation, prints Franklin Covey Planners and Organizers
and related accessory products and provides book and commercial printing
services to clients in the western United States.
Effective as of April 1, 1995, the Company acquired the assets of Time Systems,
Inc. ("Time Systems"), a time management training and product company
headquartered in Phoenix, Arizona. Time Systems markets a combination of time
management training and planner products to corporate and individual customers.
The cash purchase price was $8.6 million.
Effective as of December 1, 1995, the Company acquired the assets of
Productivity Plus, Inc. ("PPI"), a provider of time management products sold
primarily to the military. PPI is headquartered in Phoenix, Arizona. The initial
cash purchase price was approximately $7.9 million, plus additional payments
based on the operating results of PPI over the three years following its
acquisition. During fiscal 1997, the first year's additional payment was made in
the amount of $3.0 million.
Effective October 1, 1996, the Company acquired the assets of TrueNorth
Corporation ("TrueNorth"). TrueNorth, a Utah Corporation, is
<PAGE> 2
a provider of post-instructional personal coaching to corporations and
individuals. TrueNorth develops and delivers one-on-one personalized coaching
which is designed to augment the effectiveness and duration of training
curricula. The purchase price was $10.0 million in cash plus additional
payments, based on the operating results of TrueNorth over the five years
following its acquisition. The payment accrued for fiscal 1997 was $1.5 million.
On March 1, 1997, the Company acquired Premier Agendas, Inc. and Premier School
Agendas, Ltd., located in Bellingham, Washington and Abbotsford, British
Columbia, respectively (collectively, "Premier"). Premier manufactures and
markets academic and personal planners for students from kindergarten to college
throughout the U.S. and Canada. Premier's business is seasonal in nature and
nearly all of its revenue is recognized in the Company's fourth fiscal quarter.
The combined cash purchase price was $23.2 million with additional contingent
payments being made over the next three years based upon Premier's operating
performance over that same time period. The payment accrued for fiscal 1997 was
$7.0 million.
In the Merger with Covey, the Company issued 5,030,894 shares of its common
stock, valued at $22.16 per share, in exchange for all of the issued and
outstanding capital stock of Covey. All outstanding options to purchase Covey
common stock were converted into 382,100 options to purchase the Company's
common stock, exerciseable at $5.97 per share. In connection with the Merger,
the Company acquired certain license rights from Stephen R. Covey for $27.0
million in cash.
The Company has reviewed its information systems and does not believe they are
affected by any significant problems related to the "year 2000" computer date
issue. However, the Company could be impacted by "year 2000" issues affecting
the information processing systems of vendors and other organizations with which
the Company does business.
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data and other
selected operating data expressed as percentages of total sales.
Income Statement Data:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total sales 100.0% 100.0% 100.0%
Cost of sales 40.5 44.0 39.8
----- ----- -----
Gross margin 59.5 56.0 60.2
----- ----- -----
Operating expenses:
Selling, general and administrative 37.9 35.1 34.6
Depreciation and amortization 4.8 3.8 3.4
Merger related expenses 1.3
----- ----- -----
Total operating expenses 44.0 38.9 38.0
----- ----- -----
Income from operations 15.5 17.1 22.2
----- ----- -----
Interest income 0.3 0.6 1.0
Interest expense (0.5) (0.2) (0.2)
Other income 0.2
----- ----- -----
Total other income (expense) (0.2) 0.4 1.0
----- ----- -----
Income before provision for income taxes 15.3 17.5 23.2
Provision for income taxes 6.3 7.2 9.2
----- ----- -----
NET INCOME 9.0% 10.3% 14.0%
===== ===== =====
Sales Data:
Product sales 69.6% 71.1% 69.4%
Training sales 24.8 21.3 24.6
Printing services 5.6 7.6 6.0
sales
</TABLE>
<PAGE> 3
FISCAL 1997 COMPARED WITH FISCAL 1996
SALES
Sales for the year ended August 31, 1997, increased $101.3 million, or 30.5%,
over the same period in 1996 as a result of the acquisition of Premier and
TrueNorth, the Merger with Covey, an increase in the number of Franklin Covey
Planners and Organizers sold, and an increase in the number of time management
seminar participants. Product sales (direct product sales, catalog sales and
retail store sales) increases of $65.6 million accounted for 65% of the increase
and training sales increases of $36.6 million accounted for 36% of the increase,
while printing services sales decreased by $1.0 million, causing an offsetting
decrease in sales of 1.0%. Price increases had no material effect on increased
sales between the periods. Retail store sales increased $16.1 million over the
previous year as a result of 20 additional store openings and included an
increase of 7% in comparable store sales. The Merger and the two acquisitions
completed during fiscal 1997 accounted for $76.1 million of the increase in
total revenues.
GROSS MARGIN
Gross margin consists of sales less cost of sales. Costs include materials used
in the production of the planners and related products, commissions of training
consultants, direct costs of conducting seminars, assembly and manufacturing
labor, freight and overhead costs. Gross margin may be affected by, among other
things, changes in product discount levels, prices of materials, labor rates,
production efficiency, training consultant commissions, product mix and freight
costs. Gross margin was 59.5% of revenues for the year ended August 31, 1997,
compared to 56.0% for the same period in 1996. For fiscal 1997, Covey, Premier
and TrueNorth all had gross profit margins, as a percentage of sales, which were
larger than those of the Company, taken as a whole. This was caused by differing
markups on their products and the mix between revenue for products and services.
Excluding the effect of the Merger and these two acquisitions during fiscal
1997, gross margin for the year would have been 57.9%.
OPERATING EXPENSES AND OTHER EXPENSES
Selling, general and administrative expenses increased 2.8% as a percentage of
sales during the year ended August 31, 1997 (37.9% compared to 35.1% in fiscal
1996). The increase reflects the higher operating expenses, as a percentage of
sales, of Covey and TrueNorth, as well as overall increases in operating
expenses for the Company as a whole.
Depreciation charges were higher by $3.4 million. Of this amount, $1.2 million
of the increase was a result of assets acquired in the Merger and the
acquisition of TrueNorth and Premier. Further, store expansions, information
systems and related equipment also contributed significantly to the increase.
Amortization charges increased by $4.8 million as a result of the amortization
of intangible assets acquired in the Merger and acquisition activity during the
fiscal year.
INCOME TAXES
Income taxes were accrued using an effective rate of 41.4% for fiscal 1997
compared to 41.2% for the prior fiscal year. The increase was due primarily to
non-deductible goodwill generated from the Merger and acquisitions.
FISCAL 1996 COMPARED WITH FISCAL 1995
SALES
Sales for the year ended August 31, 1996, increased $54.9 million, or 19.8% over
the same period in 1995 as a result of an increase in the number of Franklin Day
Planners sold, an increase in the number of time management
<PAGE> 4
seminar participants, and the acquisition of new companies. Product sales
(direct product sales, catalog sales, retail store sales, and commercial
printing sales) increases of $52.2 million accounted for 95% of the increase and
training sales increases of $2.6 million accounted for 5% of the increase.
Direct Product sales increased by $9.0 million as a result of the acquisition of
PPI on December 1, 1995 and by $8.0 million due to the full year inclusion of
Publishers Press, purchased on December 1, 1994. Price increases had no material
effect on increased sales between the periods. The Company continued to
experience periodic fluctuations in direct product sales due to irregular volume
and timing of sales to network marketing clients. Catalog sales growth continued
to moderate as the retail store chain expanded and accounted for $7.7 million of
the product sales increase during 1996. Retail store sales increased $22.7
million over the previous year as a result of 20 additional store openings and
included an increase of 6% in comparable store sales (stores are included in the
calculation from the first anniversary of their opening date).
GROSS MARGIN
Gross margin consists of sales less cost of sales. Costs include materials used
in the production of the Franklin Day Planner, commissions of training
consultants, direct costs of conducting seminars, assembly and manufacturing
labor, freight and overhead costs. Gross margin may be affected by, among other
things, changes in product discount levels, prices of materials, labor rates,
production efficiency, training consultant commissions, product mix and freight
costs. Gross margin was 56.0% of sales for the year ended August 31, 1996,
compared to 60.2% for the same period in 1995. In addition to reduction due to
fluctuation in the factors noted above, the gross margin was substantially
reduced by a one-time write-off of inventory in the fourth quarter of the year.
OPERATING EXPENSES AND OTHER EXPENSES
Selling, general and administrative expenses increased 0.5% as a percentage of
sales during the year ended August 31, 1996 (35.1% compared to 34.6% in fiscal
1995). About half of the increase in percentage was due to a fourth quarter
increase in customer service allowances. The balance of the increase resulted
from additional levels of investment in systems, marketing, and catalog
distribution. Because a significant portion of these expenses are selling
expenses, including certain variable expenses such as commissions and salary
expense related to sales volume, the Company has experienced increases in these
expenses associated with increases in the level of sales.
Depreciation charges were higher by $1.9 million much of which was due to the
completion and occupancy of the new headquarters building at the beginning of
the second quarter of fiscal 1996. The remaining increase was primarily due to
the additional manufacturing equipment and improvements in the 20 new stores.
Amortization charges increased by $1.2 million as a result of the amortization
of intangible assets acquired during fiscal 1995 and fiscal 1996.
INCOME TAXES
Income taxes were accrued using an effective rate of 41.2% for fiscal 1996
compared to 39.7% for the prior fiscal year. The increase from the prior year
was due partly to non-deductible goodwill generated from the Publishers
acquisition and partly to non-deductible losses incurred in foreign countries.
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly consolidated
financial data for the most recent eight quarters. The quarterly consolidated
financial data reflects, in the opinion of
<PAGE> 5
Management, all adjustments necessary to fairly present the results of
operations for such periods. Results of any one or more quarters are not
necessarily indicative of continuing trends. Quarterly Financial Information:
YEAR ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Q1 Q2 Q3 Q4
- --------------------------------------------------------------------------------
In thousands, except per share amounts
<S> <C> <C> <C> <C>
Sales $102,377 $105,598 $79,840 $145,097
Gross margin 59,102 62,892 46,228 89,448
Income
before
provision
for income 21,796 21,831 5,234 17,502
taxes
Net income 13,024 13,044 3,127 9,670
Net income
per share .62 .63 .15 .37
</TABLE>
YEAR ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Q1 Q2 Q3 Q4
- --------------------------------------------------------------------------------
In thousands, except per share amounts
<S> <C> <C> <C> <C>
Sales $91,880 $93,593 $72,465 $74,068
Gross margin 52,553 53,490 41,604 38,137
Income
before
provision
for income 21,709 21,616 10,634 4,283
taxes
Net income 13,004 12,778 6,285 2,172
Net income
per share .57 .57 .28 .10
</TABLE>
The Company's quarterly results of operations reflect seasonal trends that are
primarily the result of customers who renew their Franklin Covey Planner or
Organizer on a calendar year basis. Seminar sales are moderately seasonal
because of the reluctance of corporate training directors to schedule seminars
during holiday and vacation periods. In the Company's experience, catalog sales,
retail store sales and income from operations tend to be lower during the third
and fourth quarters of each fiscal year. The seasonality of the Company's
operations has resulted in slightly higher sales and significantly higher
operating margins during the first two quarters, with declines in sales and
income in the third quarter of each fiscal year. The Company believes that as a
result of the Merger and acquisitions during fiscal 1997, the seasonal patterns
of sales and earnings will experience roughly similar patterns for the first
three quarters as in the past. However, consistent with the results of the
fourth quarter of fiscal 1997, the Company believes the acquisition of Premier
will result in increased sales and earnings in the fourth quarter of future
years.
During the fourth quarter of fiscal 1997, the Company recorded a charge for
integration costs related to the Merger with Covey. The amount of the charge,
net of related tax effects, was $3.2 million. During the fourth quarter of 1996,
the Company took a one-time write-off primarily related to inventory and
customer service allowances. The amount of the write-off, net of related tax
effect, was $3.1 million.
Quarterly fluctuations may also be affected by other factors including the
operating results of recent acquisitions, the addition of new institutional
customers and introduction of new products, the timing of large institutional
orders, and the opening of retail stores.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of capital have been net cash
provided by operating activities, long-term borrowing, capital lease financing
and proceeds from sale of common stock. Working capital requirements have also
been financed through short-term borrowing.
Net cash provided by operating activities during fiscal 1997 and 1996 was $45.7
million and $45.4 million, respectively. In fiscal 1997, $38.9 million was used
to finance increases in inventory, accounts receivable and other assets, while
$18.8 million was provided by increases in accounts payable and accrued
liabilities. The most notable use of cash was represented by the increase in
receivables from seasonally heavy fourth quarter sales by Premier. In fiscal
1996, $3.6 million was provided by decreases in inventory and accounts
receivable.
<PAGE> 6
Net cash used in investing activities in fiscal 1997 and 1996 was $80.0 million
and $26.9 million, respectively. During fiscal 1997, $33.2 million of cash was
used to purchase TrueNorth and Premier. In addition, $27.0 million of cash was
used to acquire license rights in connection with the Merger. During fiscal
1996, PPI was purchased for an initial cash outlay of approximately $7.9
million, using cash provided from operations. Funds invested in property and
equipment in fiscal 1997 and 1996 were $20.2 million and $19.5 million,
respectively and included new store leasehold improvements, additional
manufacturing equipment and upgrades to the Company's core computer systems.
Going forward, the Company will incur buildout and inventory costs for
additional retail stores as well as normal equipment additions related to the
growth of the business, all of which it expects to finance from cash provided by
operations. During fiscal 1997, the Company began a project to replace its
current information systems with newer integrated systems to support Company
growth. As part of this project, the Company is also reengineering business
processes to improve the efficiency of operations. The costs of this project
will be provided jointly by cash provided by operations or from the Company's
borrowing facilities.
Financing activities provided cash of $30.7 million in 1997 and used cash of
$29.2 million in 1996. In 1997, the primary source of cash was proceeds from
long-term debt and line of credit. The primary use of cash was the purchase of
common stock for the treasury for both fiscal 1997 and 1996.
Management anticipates that its existing capital resources will enable it to
maintain its current level of operations and its planned internal growth for the
foreseeable future. This includes any purchase of Company shares that may be
made under the remaining 795,000 shares authorized for purchase by the Board of
Directors. The Company has unsecured bank lines of credit available for working
capital needs totaling $104.0 million at August 31, 1997. On August 31, 1997,
the Company had $86.0 million outstanding on the $100.0 million line of credit
with interest at the lesser of the prime rate less .50% or the LIBOR rate plus
.75%. The $100.0 million line of credit agreement which expires in October 2001,
requires the maintenance of certain financial ratios and working capital levels.
As of August 31, 1997, the Company was in compliance with these borrowing
covenants.
The Company is registered in all states that have a sales tax and collects and
remits sales or use tax on retail sales made through its stores and catalog
sales. Compliance with environmental laws or regulations has not had any
material effect on the Company's operations. Inflation has not had a material
effect on the Company's operations. However, in the future inflation may have an
impact on the price of materials used in the planners and related products,
including paper and leather materials. The Company may not be able to pass on
such increased costs to its customers.
<PAGE> 7
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. These forward-looking statements
are based on management's expectations as of the date hereof, and the Company
does not undertake any responsibility to update any of these statements in the
future. Actual future performance and results could differ from that contained
in or suggested by these forward-looking statements as a result of the factors
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, the Business Risks described in the Company's Report
on form 10-K for the year ended August 31, 1997 and elsewhere in the Company's
filings with the Securities and Exchange Commission.
<PAGE> 8
FRANKLIN COVEY CO.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Franklin Covey Co.:
We have audited the accompanying consolidated balance sheets of Franklin Covey
Co. (formerly Franklin Quest Co., a Utah corporation) and subsidiaries as of
August 31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements of Franklin Covey Co. and
subsidiaries for the year ended August 31, 1995, were audited by other auditors
whose report dated September 20, 1995 expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Franklin Covey Co. and
subsidiaries as of August 31, 1997 and 1996, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
September 26, 1997
1
<PAGE> 9
FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1997 1996
- -----------------------------------------------------------------------------------------------
In thousands, except share data
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,389 $ 24,041
Accounts receivable, less allowance for doubtful
accounts of $1,931 and $889 71,840 28,706
Inventories 55,748 49,463
Income taxes receivable 6,094 5,064
Other assets 15,672 5,743
--------- ---------
Total current assets 169,743 113,017
Property and equipment, net 119,768 102,063
Goodwill and other intangibles, net 269,219 51,115
Other assets 13,457 2,250
--------- ---------
$ 572,187 $ 268,445
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,611 $ 12,585
Accrued compensation 13,349 8,029
Accrued acquisition earnouts 9,000
Other accrued liabilities 28,324 7,157
Current portion of long-term debt 3,644 906
Current portion of capital lease obligations 975
--------- ---------
Total current liabilities 86,903 28,677
Line of credit 86,000
Deferred income taxes 35,735 2,433
Long-term debt, less current portion 5,870 5,500
Capital lease obligations, less current portion 2,274
--------- ---------
Total liabilities 216,782 36,610
--------- ---------
Commitments and contingencies (Notes 7, 9 and 14)
Shareholders' equity:
Preferred stock, no par value; 4,000,000 shares
authorized, no shares issued or outstanding
Common stock, $.05 par value; 40,000,000 shares
authorized, 27,055,894 and 22,025,000 shares issued 1,353 1,101
Additional paid-in capital 239,699 132,959
Retained earnings 169,714 130,849
Deferred compensation (1,495) (1,240)
Cumulative translation adjustment (934) (940)
Treasury stock, 2,373,223 and 1,497,407 shares, at cost (52,932) (30,894)
--------- ---------
Total shareholders' equity 355,405 231,835
--------- ---------
$ 572,187 $ 268,445
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 10
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
In thousands, except per share data
<S> <C> <C> <C>
Sales:
Product $ 301,687 $ 236,039 $ 192,356
Training 107,417 70,812 68,168
Printing services 24,168 25,155 16,598
--------- --------- ---------
Total sales 433,272 332,006 277,122
--------- --------- ---------
Cost of sales:
Product 126,419 104,486 77,459
Training 31,283 22,475 19,525
Printing services 17,900 19,261 13,160
--------- --------- ---------
Total cost of sales 175,602 146,222 110,144
--------- --------- ---------
Gross margin 257,670 185,784 166,978
Selling, general and administrative 164,057 116,362 95,802
Depreciation and amortization 20,800 12,739 9,625
Merger and integration costs 5,450
--------- --------- ---------
Income from operations 67,363 56,683 61,551
Interest income 1,344 2,188 2,513
Interest expense (2,344) (630) (578)
Other income 744
--------- --------- ---------
Income before provision for income taxes 66,363 58,241 64,230
Provision for income taxes 27,498 24,002 25,484
--------- --------- ---------
NET INCOME $ 38,865 $ 34,239 $ 38,746
========= ========= =========
NET INCOME PER SHARE $ 1.76 $ 1.53 $ 1.71
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 22,117 22,328 22,692
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 11
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
---------------- ----------------
TOTAL
ADDITIONAL DEFERRED CUMULATIVE SHARE-
PAID-IN RETAINED COMPEN- TRANSLATION HOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SATION ADJUSTMENT SHARES AMOUNT EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
In thousands
Balance at
August 31, 1994 22,025 $ 1,101 $ 106,783 $ 57,864 $ $ (520) (1,209) $ (3,143) $ 162,085
Tax benefit from
exercise of affiliate
stock options 1,571 1,571
Issuance of common
stock from treasury 21,987 1,065 2,670 24,657
Purchase of treasury
shares (110) (2,673) (2,673)
Deferred
compensation 887 (740) 147
Cumulative
translation
adjustment (191) (191)
Net income 38,746 38,746
----------------------------------------------------------------------------------------------------
Balance at
August 31, 1995 22,025 1,101 131,228 96,610 (740) (711) (254) (3,146) 224,342
Tax benefit from
exercise of affiliate
stock options 287 287
Issuance of common
stock from treasury 654 132 371 1,025
Purchase of treasury
shares (1,375) (28,119) (28,119)
Deferred
compensation 790 (500) 290
Cumulative
translation
adjustment (229) (229)
Net income 34,239 34,239
----------------------------------------------------------------------------------------------------
Balance at
August 31, 1996 22,025 1,101 132,959 130,849 (1,240) (940) (1,497) (30,894) 231,835
Issuance of common
stock in connection
with merger 5,031 252 111,246 111,498
Value of options
granted in merger 4,331 4,331
Tax benefit from
exercise of affiliate
stock options 1,654 1,654
Issuance of common
stock from treasury (11,340) 844 14,340 3,000
Purchase of treasury
shares (1,720) (36,378) (36,378)
Deferred
compensation 849 (255) 594
Cumulative
translation
adjustment 6 6
Net income 38,865 38,865
----------------------------------------------------------------------------------------------------
Balance at
August 31, 1997 27,056 $ 1,353 $ 239,699 $ 169,714 $(1,495) $ (934) (2,373) $(52,932) $ 355,405
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 12
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38,865 $ 34,239 $ 38,746
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,576 16,217 11,745
Provision for losses on accounts receivable 349 244 103
Deferred compensation 594 290 147
Loss (gain) on sale of assets 8 187 (377)
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in accounts receivable (19,332) 1,671 (3,179)
Decrease (increase) in inventories (1,068) 1,889 (5,256)
Decrease (increase) in other assets (18,462) (1,928) 286
(Decrease) increase in accounts payable
and accrued liabilities 18,783 (3,515) (3,098)
Increase (decrease) in income taxes 2,352 (3,903) 1,669
----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 45,665 45,391 40,786
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses (33,188) (7,608) (10,060)
Purchase of license rights (27,000)
Purchase of property and equipment, net of effects from
acquisitions (20,189) (19,463) (32,523)
Proceeds from sale of property and equipment 366 148 3,287
----------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (80,011) (26,923) (39,296)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 3,256 316 (363)
Payments on short-term borrowings (398)
Proceeds from long-term debt and line of credit, net of effects
from acquisitions 64,419 121
Payments on long-term debt and capital leases (3,211) (2,834) (15,166)
Purchases of common stock for treasury (36,378) (28,119) (2,673)
Proceeds from treasury stock issuances 3,000 1,312 2,224
----------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 30,688 (29,204) (15,978)
----------------------------------
Effect of foreign exchange rates 6 (229) (211)
----------------------------------
Net decrease in cash and cash equivalents (3,652) (10,965) (14,699)
Cash and cash equivalents at beginning of year 24,041 35,006 49,705
----------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,389 $ 24,041 $ 35,006
==================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 13
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective June 2, 1997, Franklin Quest Co. merged (the "Merger") with Covey
Leadership Center, Inc. ("Covey") to form Franklin Covey Co. (the "Company").
The Company provides training seminars and manufactures and distributes products
designed to improve organization and individual effectiveness through proven
leadership and productivity principles. The Company's best known products
include the Franklin Day Planner as well as the best-selling book, 7 Habits of
Highly Effective People. The Company operates principally in the education and
personal organizer industry.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. For
property and equipment placed in service prior to fiscal 1994, other than
buildings, depreciation is computed using declining-balance methods over the
estimated useful lives of the assets, ranging from three to seven years.
Effective September 1, 1993, the Company began depreciating newly acquired
equipment using the straight-line method, which conforms to prevailing industry
practice. Depreciation is calculated based upon the expected useful lives of the
assets as follows:
<TABLE>
<CAPTION>
Description Useful Lives
- ------------------------------------------------------------------------------
<S> <C>
Machinery and equipment 3-7 years
Furniture and fixtures 7 years
Buildings and improvements 15-39 years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as incurred.
Gains and losses on sale of property and equipment are recorded in current
operations.
Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be
6
<PAGE> 14
Disposed of." SFAS No. 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the book
value of the asset may not be recoverable. The Company evaluates at each balance
sheet date whether events and circumstances have occurred which indicate
possible impairment. SFAS No. 121 was adopted in fiscal 1997 and did not have a
material impact on the Company's financial position or results of operations.
Foreign Currency Translation
The balance sheet accounts of the Company's foreign subsidiaries are translated
into U.S. dollars using the current exchange rate. Revenues and expenses are
translated using an average exchange rate. The resulting translation gains or
losses are recorded as a cumulative translation adjustment in shareholders'
equity.
Revenue Recognition
Revenue is recognized upon shipment of product and presentation of training
seminars. As part of the time management seminar, the Company provides a seminar
kit to each participant which includes a Franklin Day Planner.
Net Income Per Share
Net income per share is computed using the weighted average number of common and
common equivalent shares outstanding during the year. Common equivalent shares
consist of the Company's common stock issuable upon exercise of stock options,
determined using the treasury stock method.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of
temporary differences between the tax bases of assets or liabilities and their
reported amounts in the financial statements.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
Fair Value of Financial Instruments
The book value of the Company's financial instruments approximates fair value.
The estimated fair values have been determined using appropriate market
information and valuation methodologies.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." This statement specifies requirements for the
computation, presentation and disclosure of earnings per share ("EPS") for all
periods ending after December 15, 1997. Early adoption is prohibited and upon
adoption, all prior period EPS data must be restated. SFAS No. 128 simplifies
the standards for computing EPS and replaces the presentations of Primary EPS
and Fully Diluted EPS with Basic EPS and Diluted EPS. The Company will adopt
SFAS No. 128 in fiscal 1998 and believes it will not have a material impact.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
Under current reporting requirements, extraordinary and non-recurring gains and
losses are excluded from income from current operations. SFAS No. 130 requires
an "all-inclusive" approach which
7
<PAGE> 15
specifies that all revenues, expenses, gains and losses recognized during the
period be reported in income, regardless of whether they are considered to be
results of operations of the period. The statement is effective for fiscal years
beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements. The statement specifies disclosure requirements about
the products and services of a company, the geographic areas in which it
operates, and their major customers. The objectives of SFAS No. 131 are to help
users of financial statements better understand the enterprise's performance,
better assess its prospects for future cash flows and make more informed
judgments about the enterprise as a whole. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997 with comparative information from past
years to be restated.
Reclassifications
Certain reclassifications have been made in the prior periods' consolidated
financial statements to conform with the current year presentation.
2. STATEMENTS OF CASH FLOWS
The following supplemental disclosures are provided for the Consolidated
Statements of Cash Flows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
- -----------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
CASH PAID FOR:
Income taxes $ 27,916 $ 27,973 $ 24,279
Interest 2,042 616 1,025
Fair value of
assets acquired 88,208 11,336 51,126
Cash paid for net
assets (33,188) (7,608) (32,523)
------------- -------------- -------------
Liabilities
assumed from
acquisitions 55,020 3,728 18,603
------------- -------------- -------------
Tax effect of exercise of
affiliate stock options 1,654 287 1,571
</TABLE>
Effective June 2, 1997, Franklin and Covey merged to form Franklin Covey Co. In
the Merger, the Company issued 5,030,894 shares of its common stock in exchange
for all of the issued and outstanding capital stock of Covey. The total value of
the stock exchanged was approximately $111.5 million. The stock issued in the
exchange was valued at $22.1625 per share, which represents the average of the
per share closing price of Franklin common stock on the New York Stock Exchange
for the twenty consecutive trading days ended May 28, 1997. In connection with
the forgoing exchange, the Company issued 382,100 stock options valued at
approximately $4.3 million in exchange for all of the outstanding options to
purchase Covey stock.
In connection with recording the tax effects of the above Merger and the
acquisition of Premier Agendas, Inc. (See Note 14), the Company recognized
approximately $29.4 million of net deferred tax liabilities with a corresponding
increase to goodwill.
On May 30, 1997, the Company received 84,779 shares of common stock with a fair
market value of approximately $1.9 million as consideration for 684,000 stock
options exercised at $2.78 per share. The common stock issued from treasury
related to the options exercised had a weighted average cost of $20.35 per
share.
8
<PAGE> 16
During the fiscal year ended August 31, 1997, the Company accrued $9.0 million
for anticipated earnout payments related to the acquisition of certain entities
(See Note 14).
3. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
- -----------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 40,955 $ 36,156
Work-in-process 7,286 4,969
Raw materials 7,507 8,338
------------- -------------
$ 55,748 $ 49,463
============= =============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
- -------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 11,301 $ 11,124
Buildings 50,978 50,038
Machinery and equipment 68,106 48,992
Furniture and fixtures 45,496 29,788
Construction in progress 12 223
------------- -------------
175,893 140,165
Less accumulated depreciation
(56,125) (38,102)
------------- -------------
$ 119,768 $ 102,063
============= =============
</TABLE>
Certain real estate represents collateral for debt obligations (See Note 6).
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 88,685 $ 31,001
License rights 27,000
Curriculum rights 64,019 11,990
Trade names and other 109,375 17,889
------------- -------------
289,079 60,880
Less accumulated amortization
(19,860) (9,765)
------------- -------------
$ 269,219 $ 51,115
============= =============
</TABLE>
Goodwill is amortized over 10 to 30 years on a straight-line basis. Other
intangible assets are amortized on a straight-line basis over expected useful
lives ranging from 4 to 40 years. At each balance sheet date, the Company
evaluates its goodwill and other intangible assets to determine whether events
or circumstances may have occurred which indicate possible impairment. Based
upon its most recent analysis, the Company believes that no material impairment
of goodwill or other intangibles exists at August 31, 1997.
6. DEBT
LINES OF CREDIT
The Company has unsecured bank lines of credit available for working capital
needs totaling $104.0 million at August 31, 1997. On August 31, 1997, the
Company had $86.0 million outstanding on a $100.0 million line of credit with
interest at the lesser of the prime rate less .50% or the LIBOR rate plus .75%.
The $100.0 million line of credit agreement requires the maintenance of certain
financial ratios and working capital levels and expires in October 2001. The
Company was in compliance with the terms of the agreement at
9
<PAGE> 17
August 31, 1997. The Company also has a $4.0 million line of credit with
interest at .75% above prime. No borrowings were outstanding under this line of
credit at August 31, 1997.
LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
- -----------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Note payable on demand, plus interest
at 8% $ 2,834 $
Mortgage payable in monthly
installments of $18 including
interest at 9.9% through August
2016, secured by real estate 1,834 1,895
Note payable to bank, payable
in monthly installments of $23
plus interest at prime plus .5%
payable through September
2002, secured by real estate 1,432 1,714
Note payable due in January
1999, plus interest at 6.0% 1,000 1,000
Mortgage payable in monthly
installments of $8 including
interest at 9.9% through
October 2014, secured by real
estate
747 763
Other mortgages and notes,
payable in monthly
installments, interest ranging
from 6.0% to 15.1%, due at
various dates through 2002,
secured by real estate,
equipment, inventories and
accounts receivable 1,667 1,034
-------------------------
9,514 6,406
Less current portion (3,644) (906)
-------------------------
LONG-TERM DEBT, LESS CURRENT PORTION
$ 5,870 $ 5,500
==========================
</TABLE>
Future maturities of long-term debt at August 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
AUGUST 31,
- ---------------------------------------------------------------------
<S> <C>
1998 $ 3,644
1999 2,043
2000 671
2001 563
2002 451
Thereafter 2,142
-----------
$ 9,514
===========
</TABLE>
7. LEASE OBLIGATIONS
CAPITAL LEASES
Future minimum lease payments for equipment held under capital lease
arrangements as of August 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
AUGUST 31,
- ---------------------------------------------------------------------
<S> <C>
1998 $ 1,200
1999 951
2000 669
2001 592
2002 391
-----------
Total future minimum lease payments
3,803
Less amount representing interest (554)
-----------
Present value of future minimum lease payments
3,249
Less current portion (975)
-----------
$ 2,274
===========
</TABLE>
Total assets held under capital lease arrangements were approximately $4.9
million with accumulated amortization of approximately $1.8 million as of August
31, 1997. Amortization of capital lease assets is included in depreciation and
amortization.
10
<PAGE> 18
OPERATING LEASES
The Company leases certain retail store and office locations under noncancelable
operating lease agreements with remaining terms of one to eight years. The
following summarizes future minimum lease payments under operating leases at
August 31, 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
AUGUST 31,
- ---------------------------------------------------------------
<S> <C>
1998 $10,197
1999 8,031
2000 6,500
2001 4,715
2002 3,905
Thereafter 17,636
-------
$50,984
=======
</TABLE>
Rental expense for leases under operating lease terms was $11.7 million, $8.9
million and $5.6 million for the years ended August 31, 1997, 1996 and 1995,
respectively.
8. ADVERTISING
Costs for newspaper, television, radio and other advertising are expensed as
incurred and were approximately $18.9 million, $15.6 million and $10.9 million
for the years ended August 31, 1997, 1996 and 1995, respectively. Direct
response advertising costs consist primarily of catalog preparation and printing
costs which are charged to expense over the period of projected benefit, not to
exceed twelve months. Prepaid catalog costs reported in other current assets
were approximately $4.1 million and $1.0 million at August 31, 1997 and 1996,
respectively.
9. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
As of August 31, 1997, the Company had purchase commitments for information
systems improvements and printing presses totaling approximately $21.4 million.
As of August 31, 1996, the Company had purchase commitments for various capital
expenditures which totaled approximately $0.4 million.
LEGAL MATTERS
The Company is the subject of certain legal actions, which it considers routine
to its business activities. As of August 31, 1997, management believes that,
after discussion with its legal counsel, any potential liability to the Company
under such actions will not materially affect the Company's financial position
or results of operations.
10. RELATED PARTY TRANSACTIONS
On August 11, 1997, the Company repurchased 750,000 shares of its common stock,
at the existing fair market value, from the Chief Executive Officer and Chairman
of the Board of the Company for $18.0 million in cash.
On May 13, 1997, the Company repurchased, for $2.4 million in cash, 110,000
shares of its common stock from a former officer and director of the Company.
Premier Agendas, a subsidiary of the Company, has trade accounts payable to
various companies which are partially owned by certain former owners of Premier
totaling $3.0 million. In addition, Premier has notes payable to key employees
totaling $2.8 million at August 31, 1997 (See Note 6). The notes payable were
used for working capital, are due upon demand and
11
<PAGE> 19
have interest rates which approximate prevailing market rates.
The Company, under a long-term agreement, leases buildings from a partnership
which is partially owned by the Co-Chairman of the Board of Directors who is
also a shareholder of the Company. Rental expense paid to the partnership
totaled approximately $0.7 million during fiscal 1997.
The Company pays the Co-Chairman of the Board of Directors a percentage of the
proceeds received for seminars which are presented by the Co-Chairman. During
fiscal 1997, the Company expensed approximately $0.2 million related to this
arrangement.
11. CAPITAL TRANSACTIONS
CAPITAL STOCK
The Company's Board of Directors and shareholders have authorized 4,000,000
shares of preferred stock, no par value; of which none has been issued. The
Board of Directors is authorized to determine the designation, powers,
preferences, rights and limitations of any series of preferred stock and the
number of shares constituting any such series.
TREASURY STOCK
The Company sold 844,342, 132,021 and 309,045 shares of its common stock held in
treasury as a result of the exercise of options and the purchase of shares under
the Company's employee stock purchase plan for the years ended 1997, 1996 and
1995, respectively. These shares were sold for a total of approximately $4.9
million, $1.0 million and $2.2 million and had a cost of approximately $14.3
million, $0.4 million and $0.8 million for the years ended 1997, 1996 and 1995,
respectively. In November 1994, the Company exchanged 738,000 of its shares held
in treasury for all of the outstanding shares of Publishers Press, Inc. (See
Note 14). In January 1995, March 1996 and September 1996, the Company's Board of
Directors approved the repurchase of up to 1,000,000 shares, 1,000,000 shares
and 2,000,000 shares, respectively, of the Company's common stock. During fiscal
1997, 1996 and 1995, the Company repurchased 1,720,000 shares at a cost of
approximately $36.4 million, 1,375,000 shares at a cost of approximately $28.1
million and 110,000 shares at a cost of approximately $2.7 million,
respectively.
TAX BENEFIT FROM EXERCISE OF AFFILIATE STOCK OPTIONS
During fiscal 1997, 1996 and 1995, certain employees exercised affiliate stock
options (stock options received from principal shareholders of the Company)
which resulted in tax benefits to the Company of approximately $1.7 million,
$0.3 million and $1.6 million, respectively, which were recorded as increases to
additional paid-in capital.
DEFERRED COMPENSATION
Deferred compensation represents restricted stock granted to key executives. The
stock vests in full four years from the date of grant and was recorded at the
fair market value at the date of grant. Compensation expense is recognized
ratably over the four year period.
STOCK OPTIONS
The Company's Board of Directors has approved an incentive stock option plan
whereby 5,000,000 shares of common stock has been reserved for issuance to key
employees at a price not less than the fair market value of the Company's common
stock at the date of grant. The term, not to exceed ten years, and exercise
period of each incentive stock option awarded under the plan are determined by a
committee appointed by the Company's Board of Directors. Unoptioned
12
<PAGE> 20
shares available for granting under the incentive stock option plan at August
31, 1997, are 936,434.
A summary of nonqualified and incentive stock option activity is set forth
below:
<TABLE>
<CAPTION>
Year Ended Number of Weighted Avg.
August 31, 1995 Options Exercise Price
- ------------------------------------------------------------------
<S> <C> <C>
Outstanding at
September 1, 1994 3,089,550 $ 16.17
Granted 174,500 24.78
Exercised (269,071) 4.49
Forfeited (29,550) 9.91
---------
Outstanding at
August 31, 1995 2,965,429 17.76
---------
Exercisable 2,279,000 11.62
Year Ended
August 31, 1996
- ------------------------------------------------------------------
Granted 838,500 $ 19.19
Exercised (41,950) 2.32
Forfeited (23,825) 27.72
---------
Outstanding at
August 31, 1996 3,738,154 18.36
---------
Exercisable 2,214,073 15.40
Year Ended
August 31, 1997
- ------------------------------------------------------------------
Granted:
At market value 747,340 $ 19.03
In connection with
merger 382,100 5.97
Exercised (838,092) 4.32
Forfeited (127,574) 22.91
=========
Outstanding at
August 31, 1997 3,901,928 20.24
=========
Exercisable 2,269,399 22.04
</TABLE>
The Company applies Accounting Principles Board ("APB") Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock option plans or employee stock
purchase plan. Had compensation cost for the Company's stock option plans and
employee stock purchase plan been determined in accordance with the provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
- ----------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Net income as reported $38,865 $34,239
Net income pro forma 30,514 30,410
Earnings per share as reported $ 1.76 $ 1.53
Earnings per share pro forma 1.38 1.36
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to September 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The following information applies to options outstanding and exercisable at
August 31, 1997: 799,070 of the options outstanding have exercise prices between
$1.11 and $11.83, with a weighted average exercise price of $4.21 and a weighted
average remaining contractual life of 6.1 years of which 416,970 are exercisable
at August 31, 1997. 2,125,608 of the options have exercise prices between $15.50
and $26.82, with a weighted average exercise price of $19.90 and a weighted
average remaining contractual life of 7.5 years of which 1,050,728 are
exercisable at August 31, 1997. The remaining 977,250 options outstanding have
exercise prices between $29.38 and $34.50, with a weighted average exercise
price of $34.19 and a weighted average remaining contractual life of 6.7 years
of which 801,701 are exercisable at August 31, 1997.
The weighted average fair value of options granted under the Company's stock
option plans during fiscal year ended August 31, 1997 was estimated at $11.23
for options granted at the market price and $15.08 for options granted below the
market price in connection with the Merger. The
13
<PAGE> 21
weighted average fair value of options granted for the fiscal year ended August
31, 1996 was $10.73. The Black-Scholes option-pricing model was used to
calculate the weighted average fair value of options using the following
assumptions for grants in 1997 and 1996, respectively: dividend yield of 0%,
expected volatility of 61.5%, and expected life of 2.5 years for both years and
a risk-free rate of return of 6.05% and 5.88%, respectively. The estimated fair
value of options granted is subject to the assumptions made and if the
assumptions were to change, the estimated fair value amounts could be
significantly different. The weighted average fair value of options exercised
during fiscal 1997 and 1996 was $4.41 and $2.44, respectively.
12. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLANS
The Company has defined contribution profit sharing plans which qualify under
Section 401(k) of the Internal Revenue Code. The plans provide retirement
benefits for employees meeting minimum age and service requirements.
Participants may contribute up to 15% of their gross wages, subject to certain
limitations. The plans provide for matching contributions by the Company. The
matching contributions expensed in the years ended August 31, 1997, 1996 and
1995 were approximately $1.4 million, $1.2 million and $1.0 million,
respectively.
EMPLOYEE STOCK PURCHASE PLAN
In April 1992, the Company adopted an employee stock purchase plan which
reserved up to 300,000 shares of common stock for issuance under the plan.
Accordingly, shares of common stock can be purchased by qualified employees at a
price equal to 85% of the fair market value of common stock at time of purchase.
Shares totaling 42,527, 47,574, and 30,974, have been issued under this plan for
the years ended August 31, 1997, 1996 and 1995. Shares available for issuance
under this plan at August 31, 1997, are 129,717. The Company accounts for its
employee stock purchase plan under the provisions of APB Opinion 25 and related
interpretations.
13. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
- -----------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 24,103 $ 19,960 $ 20,943
State 5,755 3,886 4,447
Foreign 790 778 307
Deferred:
Federal (2,544) (548) (191)
State (606) (74) (22)
------------- -------------- -------------
$ 27,498 $ 24,002 $ 25,484
============= ============== =============
</TABLE>
The differences between income taxes at the statutory federal income tax rate
and income taxes reported in the consolidated statements of income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
- -----------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory
tax rate 35.0% 35.0% 35.0%
State income
taxes, net of
federal benefit 5.0 4.8 4.7
Goodwill
amortization .8 .3 .2
Other .6 1.1 (.2)
------------------------------------------
41.4% 41.2% 39.7%
==========================================
</TABLE>
14
<PAGE> 22
Significant components of the Company's deferred tax assets and liabilities are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
AUGUST 31,
- -----------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets:
Sales returns and
contingencies $ 2,822 $
Inventory and bad debt
reserves 2,435 1,352
Vacation and other
accruals 1,461 926
Other 666 41
-------- --------
Total current deferred tax
assets 7,384 2,319
-------- --------
Long-term deferred tax assets and
(liabilities):
Interest and other
capitalization 593 440
Intangibles and fixed
asset step-up (33,316) (1,365)
Depreciation and
amortization (2,286) (1,272)
Other (726) (236)
-------- --------
Net long-term deferred tax
liabilities (35,735) (2,433)
-------- --------
NET DEFERRED INCOME TAX LIABILITY
$(28,351) $ (114)
======== ========
</TABLE>
Current deferred tax assets are reported as a component of other current assets.
14. MERGER AND ACQUISITIONS
Effective June 2, 1997, Franklin and Covey merged to form Franklin Covey Co. In
the Merger, the Company issued 5,030,894 shares of its common stock in exchange
for all of the issued and outstanding capital stock of Covey. The Company's
shares were valued at $22.1625 per share, which was the average of the per share
closing sales price of the Company's common stock on the New York Stock Exchange
for the twenty consecutive trading days ended May 28, 1997. All outstanding
options to purchase Covey common stock were converted into 382,100 options to
purchase the Company's common stock, exercisable at $5.97 per share. In
connection with the Merger, the Company acquired certain license rights from
Stephen R. Covey for $27.0 million in cash.
The Merger was accounted for using the purchase method of accounting and
generated approximately $175.6 million of intangible assets which are being
amortized over estimated useful lives ranging from 12 to 40 years. In connection
with recording the tax effects of the Merger, the Company recognized a net
deferred tax liability totaling $24.0 million with a corresponding increase to
goodwill which is being amortized over 30 years.
The following unaudited pro forma combined financial data presents the results
of operations of the Company as if the Merger had been effective September 1,
1995 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
AUGUST 31,
- -----------------------------------------------------------------------
1997 1996
(Unaudited)
<S> <C> <C>
Revenue $515,567 $421,064
Operating income 73,672 62,838
Net income 40,885 35,142
Net income per share 1.56 1.29
</TABLE>
The foregoing unaudited pro forma results of operations reflect the effect of
certain pro forma adjustments including (1) the amortization of the goodwill and
other intangibles resulting from the Merger, (2) the recognition of increased
interest expense resulting from the assumption of Covey liabilities and the cash
payment for license rights from Stephen R. Covey, (3) the adjustment of income
taxes to reflect a combined effective federal and state income tax rate and (4)
the effect on earnings per share of the shares exchanged in
15
<PAGE> 23
the Merger having been outstanding for the periods presented.
On March 1, 1997, the Company acquired Premier Agendas, Inc. and Premier School
Agendas, Ltd., located in Bellingham, Washington and Abbotsford, British
Columbia, respectively (collectively, "Premier"). The combined cash purchase
price was $23.2 million with additional contingent payments being made over the
next three years based upon Premier's operating performance over that same time
period. As of August 31, 1997, $7.0 million has been accrued as an anticipated
earnout payment under terms of the purchase agreement. Premier manufactures and
markets academic and personal planners for students from kindergarten to college
throughout the U.S. and Canada. Premier's business is seasonal in nature and
nearly all of its revenue is recognized in the Company's fourth fiscal quarter.
Premier's revenues for the twelve months ended December 31, 1996 were
approximately $35.4 million.
The Premier acquisition was accounted for using the purchase method of
accounting and generated $27.6 million of intangible assets which are being
amortized over an estimated useful life of 15 years. In connection with
recording the tax effects of the Premier acquisition, the Company recognized a
deferred tax liability totaling $5.4 million with a corresponding increase to
goodwill which is being amortized over 15 years.
Effective October 1, 1996, the Company acquired the net assets of TrueNorth
Corporation ("TrueNorth"). TrueNorth, a Utah Corporation, is a provider of
post-instructional personal coaching to corporations and individuals. TrueNorth
develops and delivers one-on-one personalized coaching which is designed to
augment the effectiveness and duration of training curricula. The purchase price
was $10.0 million in cash. In addition, contingent payments may be made over the
next five years based on TrueNorth's operating performance. As of August 31,
1997, $1.5 million has been accrued as an anticipated earnout payment under
terms of the purchase agreement. TrueNorth had sales for the twelve months ended
July 31, 1996 of approximately $16.0 million.
The acquisition of TrueNorth was accounted for using the purchase method of
accounting and generated $9.3 million of intangible assets which are being
amortized over an estimated useful life of 15 years.
Effective December 1, 1995, the Company acquired the assets of Productivity
Plus, Inc. ("PPI"), a provider of time management products sold primarily to the
military. The company is headquartered in Phoenix, Arizona. The cash purchase
price was approximately $7.9 million, and additional payments may be made, based
on the operating results of the company over the three years following its
acquisition. During fiscal 1997, $3.0 million was paid to PPI for favorable
operating results under terms of the purchase agreement. PPI had sales for the
year ended November 30, 1995, of approximately $12.5 million.
The acquisition of PPI was accounted for using the purchase method of accounting
and generated intangible assets totaling $6.6 million which are being amortized
over estimated useful lives of eight to ten years. The $3.0 million contingent
payment which was paid during fiscal 1997 is being amortized over nine years
which is the remaining useful life of goodwill generated by the acquisition.
In April 1995, the Company acquired the assets of Time Systems, Inc. ("Time
Systems"), a time management training and product company headquartered in
Phoenix, Arizona. The cash price was $8.6 million. Time Systems markets a
combination of time management training and planner products to corporate and
individual customers. The acquisition was accounted for as a purchase. Time
Systems had sales for the year ended December 31, 1994, of approximately $14.9
16
<PAGE> 24
million. The acquisition resulted in intangibles of $5.5 million, which are
being amortized over periods ranging from 4 to 30 years.
In June 1995, the Company acquired the assets of LTS, Inc. ("LTS"). LTS is
headquartered in Atlanta, Georgia, and distributed exclusively Time Systems
products and services. The cash purchase price was $1.9 million. At August 31,
1997, an additional $0.5 million was accrued as final earnout payment to the
previous owner of LTS for favorable operating performance under terms of the
purchase agreement. The acquisition of LTS was accounted for using the purchase
method. LTS, Inc., had sales for the year ended December 31, 1994, of
approximately $2.6 million. The acquisition, not including the accrued final
payment, resulted in intangible assets of $1.2 million, which are being
amortized over periods ranging from 5 to 7 years.
Effective December 1, 1994, the Company acquired Publishers Press, Inc.
("Publishers") for $22.4 million. Publishers, a Utah corporation, prints the
Franklin Day Planner and related accessory products and provides book and
commercial printing services to clients in the western United States.
Publishers' sales for the year ended December 31, 1993, were approximately $41.5
million, including sales to the Company of $23.8 million. The transaction, which
was accounted for as a purchase, was effected through the exchange of
approximately 738,000 shares of the common stock of the Company for all of the
issued and outstanding capital stock of Publishers. The acquisition resulted in
intangibles of approximately $18.5 million which are being amortized over
periods ranging from 7 to 30 years.
The following unaudited pro forma combined financial data presents the results
of operations of the Company as if Publishers had been acquired as of the
beginning of the periods presented (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
AUGUST 31,
- -----------------------------------------------------------------------
1995 1994
(Unaudited)
<S> <C> <C>
Revenue $284,028 $237,649
Net income 39,623 33,763
Net income per share 1.74 1.48
</TABLE>
The foregoing unaudited pro forma results of operations reflect the effect of
certain pro forma adjustments including (1) conforming Publishers compensation
expense levels with those of the Company, (2) the depreciation of property and
equipment based on the estimated fair value of property and equipment acquired,
(3) the amortization of the goodwill and other intangibles resulting from the
acquisition and (4) the adjustment of income taxes to reflect a combined
effective federal and state income tax rate.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The unaudited quarterly financial information included on page __ of the annual
report to shareholders is an integral part of the consolidated financial
statements.
17
<PAGE> 1
EXHIBIT 22
FRANKLIN COVEY CO.
Wholly-Owned Subsidiaries and Divisions
Franklin Development Corporation (a Utah corporation)
Franklin Covey Europe, Inc. (a Utah corporation)
Franklin Covey Canada, Ltd. (an Ontario, Canada corporation)
Franklin Excellence, Inc. (a Utah corporation)
Franklin Covey Asia, Inc. (a Utah corporation)
Franklin Covey Australia, Inc. (a Utah corporation)
Franklin Covey NZ, Inc. (a Utah corporation)
Franklin Covey Mexico, Inc. (a Utah corporation)
Franklin Covey Taiwan, Inc. (a Utah corporation)
Franklin Covey Argentina, Inc. (a Utah corporation)
Franklin Covey Brazil, Inc. (a Utah corporation)
Franklin Covey Spain, Inc. (a Utah corporation)
Franklin Covey Puerto Rico, Inc. (a Puerto Rico corporation)
Franklin Covey SA, Inc. (a Utah corporation)
Franklin Covey ASC, Inc. (a Utah corporation)
Publishers Press, Inc. (a Utah corporation)
Franklin Covey Travel, Inc. (a Utah corporation)
Franklin Covey Client Sales, Inc. (a Utah corporation)
Franklin Covey Catalog Sales, Inc. (a Utah corporation)
Franklin Covey Product Sales, Inc. (a Utah corporation)
Franklin Covey Services, L.L.C. (a Utah limited liability company)
Franklin Covey Marketing, Ltd. (a Utah limited partnership)
Franklin Covey Europe, Limited (a U.K. limited liability company)
Check Advantage Plus, Inc.
The above subsidiaries are owned 100 percent by Franklin Covey
Co. Franklin Development Corporation is the entity under which all real estate
is held. Publishers Press, Inc. is in the printing business and prints the
Franklin Day Planner pages. Franklin Covey Travel, Inc. is in the business of
providing general travel agency services. Check Advantage Plus, Inc. is in the
business of processing and collecting bad debts and bad checks for Franklin
Covey Co. All other subsidiaries are engaged in the same business as the parent.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included or incorporated by reference in this Form
10-K, into the Company's previously filed Registration Statements on Form S-8,
File Nos. 33-73624 and 33-51314, and Form S-3, File No. 33-47894.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
November 19, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 33-51314 and 33-73624) and S-3 (No. 33-47894) of
Franklin Covey Co., of our report dated September 20, 1995, appearing on page 17
of this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report on the Financial Statement Schedule, which appears on
page 19 of this Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
November 21, 1997
SEC 2400.981
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1
<CASH> 20,389
<SECURITIES> 0
<RECEIVABLES> 73,771
<ALLOWANCES> 1,931
<INVENTORY> 55,748
<CURRENT-ASSETS> 169,743
<PP&E> 175,893
<DEPRECIATION> 56,125
<TOTAL-ASSETS> 572,187
<CURRENT-LIABILITIES> 86,903
<BONDS> 94,144
0
0
<COMMON> 1,353
<OTHER-SE> 354,052
<TOTAL-LIABILITY-AND-EQUITY> 572,187
<SALES> 433,272
<TOTAL-REVENUES> 433,272
<CGS> 175,602
<TOTAL-COSTS> 190,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> 66,363
<INCOME-TAX> 27,498
<INCOME-CONTINUING> 38,865
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,865
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.76
</TABLE>
