<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
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Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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Date of Report (Date of earliest event reported): May 30, 1997
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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
- ---------------------------- --------------------- -------------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
2200 West Parkway Boulevard
Salt Lake City, Utah 84119
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(Address of principal executive offices, including zip code)
(801) 975-1776
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(Registrant's telephone number, including area code)
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<PAGE> 2
TABLE OF CONTENTS
Item 2. Acquisition or Disposition of Assets ................................ 1
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits ........................................................ 1
a. Financial Statements and Pro Forma Financial Information .... 1
b. Exhibits .................................................... 1
SIGNATURES ................................................................... 2
i
<PAGE> 3
Item 2. Acquisition or Disposition of Assets.
On May 30, 1997, Franklin Quest Co. ("Franklin") and Covey Leadership
Center, Inc. ("Covey") completed the merger described in the Press Release
attached as Exhibit 3 to this Report (the "Merger"). In the Merger, Franklin
issued 5,030,984 shares of its Common Stock in exchange for all of the issued
and outstanding capital stock of Covey. The shares of Franklin were valued in
the exchange at $22.1625 per share, which was the average of the per share
closing sale price of the Franklin Common Stock on the New York Stock Exchange
for the twenty consecutive trading days ending on May 28, 1997. All outstanding
options to purchase Covey Common Stock were converted into 382,100 options to
purchase Franklin Common Stock, exercisable at $5.97 per share. In connection
with the Merger, Franklin acquired from Stephen R. Covey certain license rights
for $27,000,000 in cash. The name of Franklin was changed in the Merger to
Franklin Covey Co.
The number of shares of Common Stock of Franklin issued in connection
with the Merger for the Common Stock of Covey was determined through
arms'-length negotiations conducted by principals of Franklin and Covey. There
was no material relationship between Covey, the shareholders of Covey, Franklin
or any of their respective affiliates, officers or directors or any associate of
any such officers or directors.
A definitive Proxy Statement relating to the Merger which includes the
definitive Merger Agreement, financial statements of Franklin and Covey and pro
forma financial information giving effect to the Merger was filed with the
Securities and Exchange Commission on April 30, 1997 and is filed as Exhibit 1
to this Report.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
a. Financial Statements and Pro Forma Financial Information.
The financial statements and pro forma financial information
specified in Item 7 of Form 8-K are included in the definitive Proxy
Statement referred to in Item 2 above and filed as Exhibit 1 to this
Report.
b. Exhibits.
<TABLE>
<CAPTION>
S-K No. Description Exhibit No.
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<S> <C> <C>
20.1 Definitive Proxy Statement dated April 30, 1997 1
2.1 The Merger Agreement dated as of March 21, 1997 by and among Franklin, --
Covey, and the Covey Stockholders is included as an exhibit to the definitive
Proxy Statement referred to above and filed herewith.
2.2 Articles of Merger of Covey Leadership Center, Inc. with and into Franklin 2
Quest Co., including the related Plan of Merger, dated May 30, 1997, as filed
pursuant to Section 16-10a-1101 of the Utah Revised Business Corporation
Act.
99.1 Press Release dated May 30, 1997. 3
</TABLE>
1
<PAGE> 4
SIGNATURES
Pursuant to the requirements 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.
FRANKLIN COVEY CO.
/s/ JON H. ROWBERRY
-----------------------------
Jon H. Rowberry
President and Chief Operating Officer
Date: June 3, 1997
2
<PAGE> 1
Exhibit 2.2
ARTICLES OF MERGER
OF
COVEY LEADERSHIP CENTER, INC.
WITH AND INTO
FRANKLIN QUEST CO.
Pursuant to the provisions of Section 16-10a-1105 of the Utah Revised
Business Corporation Act (the "Act"), Franklin Quest Co., a Utah corporation
("Franklin"), and Covey Leadership Center, Inc., a Utah corporation ("Covey"),
hereby execute the following Articles of Merger:
1. Attached hereto as Exhibit A, and incorporated herein by this
reference, is the Plan of Merger dated May 30, 1997 (the "Plan of Merger"),
which sets forth the terms of the merger of Covey with and into Franklin (the
"Merger").
2. The designation of the voting group of Covey that voted on the
Merger was Common Stock. The number of outstanding shares of Common Stock of
Covey and the number of votes entitled to be cast by the holders of such shares,
as of April 21, 1997, was 790,000. The number of votes of the Covey Common Stock
voting group cast for the Merger was 790,000 and the number of votes of the
Covey Common Stock voting group cast against the Merger was none.
3. The designation of the voting group of Franklin that voted on the
Merger was Common Stock. The number of outstanding shares of Common Stock of
Franklin and the number of votes entitled to be cast by the holders of such
shares, as of April 21, 1997, was 19,766,458. The number of votes of the
Franklin Common Stock voting group cast for the Merger was 12,573,402 and the
number of votes of the Franklin Common Stock voting group cast against the
Merger was 111,457.
EXECUTED as of the 30th day of May, 1997.
COVEY LEADERSHIP CENTER, INC., FRANKLIN QUEST CO.,
a Utah corporation a Utah corporation
By /s/ Stephen M. R. Covey By /s/ Jon H. Rowberry
------------------------------ ------------------------------
Stephen M. R. Covey, President Jon H. Rowberry, President
and Chief Executive Officer and Chief Operating Officer
<PAGE> 2
PLAN OF MERGER
THIS PLAN OF MERGER (this "Plan") is entered into as of the
30th day of May, 1997, by and among Franklin Quest Co., a Utah corporation
("Franklin") and Covey Leadership Center, Inc., a Utah corporation ("Covey").
RECITALS
A. Franklin is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Utah.
B. Covey is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Utah.
C. The respective Boards of Directors of Franklin and Covey
and the shareholders of Franklin and Covey deem it advisable for good and valid
business reasons and for the mutual benefit of Franklin and Covey that Covey be
merged with and into Franklin (the "Merger") as a statutory merger under Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended, upon the terms
and subject to the conditions set forth herein and in the Merger Agreement among
the parties hereto dated as of March 21, 1997 (the "Merger Agreement"), and in
accordance with the Utah Revised Business Corporation Act (the "Act").
D. Franklin and Covey and their respective Boards of
Directors and, to the extent required by applicable law, their respective
shareholders, have approved this Plan.
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual covenants contained herein, the parties hereto agree as follows:
1. The Merger. At the Effective Time (as hereinafter defined),
in accordance with the Merger Agreement and Section 16-10a-1105(2) of the Act,
Covey shall be merged with and into Franklin, the separate existence of Covey
shall cease, and Franklin shall continue as the surviving corporation under the
new corporate name of Franklin Covey Co. (Franklin and Covey are herein
sometimes referred to as the "Constituent Corporations," and Franklin, in its
capacity as the corporation surviving the Merger, is sometimes referred to
herein as the "Surviving Corporation.")
2. Effective Time. The Merger shall become effective
immediately upon the filing of Articles of Merger and this Plan with the Utah
Department of Commerce, Division of Corporations and Commercial Code. The date
and time of such filing are sometimes referred to herein as the "Effective
Time."
3. Effect of the Merger. At the Effective Time, the Merger
shall have the effect provided for in Section 16-10a-1106 of the Act.
4. Articles of Incorporation and Bylaws; Directors and
Officers.
(a) The Revised Articles of Incorporation and
Bylaws of Franklin, as in effect immediately prior to the Effective
Time, shall, except as amended as hereinafter provided, be the
<PAGE> 3
Articles of Incorporation and Bylaws of the Surviving Corporation at
the Effective Time and shall thereafter continue to be its Articles of
Incorporation and Bylaws until amended as provided therein and under
applicable law.
(b) Article I of the Revised Articles of
Incorporation of Franklin shall be hereby amended effective as of the
Effective Time to read as follows:
ARTICLE I - NAME
The name of the corporation is Franklin Covey Co.
(c) The following listed individuals shall be
the directors of the Surviving Corporation at the Effective Time:
Hyrum W. Smith - Chairman
Stephen R. Covey - Co-Chairman
Jon H. Rowberry
Stephen M. R. Covey
Robert H. Daines
E. J. "Jake" Garn
Dennis G. Heiner
Daniel P. Howells
Thomas H. Lenagh
James M. Beggs
Robert F. Bennett
Beverly Campbell
Joel Peterson
Kay Stepp
Robert Whitman
Each of Hyrum W. Smith, Jon H. Rowberry, Robert H. Daines,
E. J. "Jake" Garn, Dennis G. Heiner, Daniel P. Howells, Thomas H. Lenagh,
James M. Beggs, Robert F. Bennett and Beverly Campbell, who were directors
of Franklin prior to the Effective Time, shall continue to serve as
directors of the Surviving Corporation until the expiration of their term
as currently scheduled to expire. Each of Joel Peterson, Kay Stepp and
Robert Whitman will serve a term as a director expiring at the annual
meeting of shareholders to be held in 2000 and until their successors shall
be duly elected and qualified. Stephen R. Covey shall serve a term as a
director expiring at the annual meeting of shareholders to be held in 1999
and until his successor shall be duly elected and qualified. Stephen M. R.
Covey shall serve a term as a director expiring at the annual meeting of
shareholders to be held in 1998 and until his successor shall be duly
elected and qualified.
(d) The following listed individuals shall be
the officers of the Surviving Corporation at the Effective Time:
Chairman and Chief Executive Officer - Hyrum W. Smith
President and Chief Operating Officer - Jon H. Rowberry
Executive Vice President, Secretary and General Counsel - Val John Christensen
Executive Vice President and Chief Financial Officer - John L. "Jack" Theler
Executive Vice President, Marketing - Stephen M. R. Covey
<PAGE> 4
Executive Vice President, Manufacturing - Don J. Johnson
Executive Vice President, Organizational Sales - Mark W. Stromberg
Executive Vice President, Consumer Sales - D. Gordon Wilson
Executive Vice President, International Operations - Robert J. Guindon
5. Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any further action on the part of Franklin, Covey or
the shareholders of Franklin or Covey, all of the shares of common stock of
Covey issued and outstanding (the "Covey Common") in the aggregate, except for
dissenting shares, shall automatically be converted into the right to receive
shares of common stock of Franklin (the "Franklin Common") with the right of
each of the holders thereof, as of the Effective Time, to be treated as a
registered holder of shares of Franklin Common as of the Effective Time with all
rights to dividends and other distributions made to registered holders of
Franklin Common as of such date, provided that the aggregate number of shares of
Franklin Common that each of the Shareholders shall be entitled to receive shall
be rounded down to the nearest whole share, and provided further that if the
number of shares of Franklin Common that a Shareholder is entitled to receive is
rounded down to the nearest whole share, such Shareholder shall receive from
Franklin in respect of the fractional share subject to such rounding, the value,
determined to two decimal places, in cash of such fractional share. On the
effective date, each share of Covey Common, except for dissenting shares, will,
by virtue of the Merger, be canceled and converted into the right to receive
6.36823 number of shares of Franklin Common.
6. Termination or Abandonment. This Plan may be
terminated and the Merger abandoned as provided in the Merger Agreement.
7. Other Provisions.
(a) Governing Law. This Plan shall be governed
in all respects by the laws of the State of Utah.
(b) Counterparts. This Plan may be executed in
counterparts, each of which shall be an original, but all of which
together shall constitute one and the same agreement.
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Plan by
their duly authorized officers as of the date first above written.
FRANKLIN QUEST CO., a Utah corporation
By: /s/ Jon H. Rowberry
------------------------------------
Jon H. Rowberry, President and Chief
Operating Officer
COVEY LEADERSHIP CENTER, INC., a Utah
corporation
By: /s/ Stephen M. R. Covey
------------------------------------
Stephen M. R. Covey, President and
Chief Executive Officer
<PAGE> 1
EXHIBIT 20.1
LOGO
April 30, 1997
Dear Stockholder:
I am pleased to forward the enclosed Joint Proxy Statement for the Special
Meeting of Stockholders of Franklin Quest Co., a Utah corporation ("Franklin"),
to be held on Friday, May 30, 1997 at 11:00 a.m., local time, at the Hyrum W.
Smith Auditorium, 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331,
to consider and vote upon the combination of Franklin and Covey Leadership
Center, Inc., a Utah corporation ("Covey"), through a merger ("Merger"), with
Franklin as the surviving corporation. The name of the surviving corporation
will be changed to "Franklin Covey Co."
The Merger is subject to the terms and conditions of a Merger Agreement
("Merger Agreement") dated as of March 21, 1997 and a related Plan of Merger to
be executed by Franklin and Covey and filed with the Utah Department of
Commerce, Division of Corporations and Commercial Code. In the Merger, Covey
will be merged with and into Franklin and the Articles of Incorporation of
Franklin will be amended to change the name of Franklin to Franklin Covey Co.
Pursuant to the Merger, each outstanding share of Common Stock of Covey ("Covey
Common Stock"), other than dissenting shares, will be converted, without any
action on the part of the holder thereof, into the right to receive shares of
newly issued Common Stock of Franklin ("Franklin Common Stock"). In connection
with the Merger, Franklin will separately acquire an exclusive, perpetual,
worldwide, royalty free, transferrable license to make, use, sell, sublicense
and otherwise deal in the products and materials and tangible and intangible
assets, including all derivative works, which are described in a Licensing
Agreement executed by and between Stephen R. Covey and Covey, together with all
rights under the Licensing Agreement (the "License Rights") for an aggregate of
$27 million in cash or Franklin Common Stock valued at the average of the per
share closing sales prices of the Franklin Common Stock on the New York Stock
Exchange for the 20 consecutive trading days ending on the second trading day
prior to the closing date of the Merger (the "Average Franklin Price"). The
amount of cash or number of shares of Franklin Common Stock to be received for
the License Rights will be determined by Dr. Covey prior to the effective time
of the Merger. The maximum number of shares of Franklin Common Stock to be
issued in connection with all the transactions contemplated by the Merger will
not exceed 6,631,272 shares, which will include the shares which Dr. Covey
elects to receive for the License Rights and the shares reserved for the
exercise of Franklin options into which outstanding options to purchase Covey
Common Stock (the "Covey Options") will be converted. The number of shares to be
issued to Covey Stockholders in the Merger will be 6,631,272 reduced by (i) a
number of shares determined by dividing the total amount of cash which Dr. Covey
elects to receive for the License Rights by the Average Franklin Price, (ii) the
actual number of shares of Franklin Common Stock issued for the License Rights
and (iii) the number of shares of Franklin Common Stock reserved for the
exercise of Franklin options into which the Covey Options will be converted. The
Average Franklin Price, if determined as of April 22, 1997 (the latest
practicable date before the printing of the Joint Proxy Statement) would have
been $21.256. If the Average Franklin Price remains at $21.256, as to which
there can be no assurance, the number of shares of Franklin Common Stock which
the holder of each share of Covey Common Stock would be entitled to receive in
the Merger would be approximately 6.30711 shares (the "Share Exchange Ratio").
All outstanding options to purchase Covey Common Stock will be converted into
options to purchase Franklin Common Stock with the number of Franklin options
issued and the exercise price adjusted to reflect the Share Exchange Ratio. The
shares of Franklin Common Stock held by Franklin stockholders prior to the
Merger will remain unchanged by the Merger.
The accompanying Joint Proxy Statement provides a detailed description of
the Merger Agreement, certain business and financial information of Franklin and
Covey and other important information. Copies of the Merger Agreement and the
Plan of Merger are attached to the Joint Proxy Statement as Appendix A.
<PAGE> 2
The Franklin Board of Directors ("Board") has carefully reviewed and
considered the terms and conditions of the proposed Merger and has received the
opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated, its financial
advisor, that as of March 17, 1997 and based on and subject to certain matters
stated therein, the consideration to be paid by Franklin pursuant to the Merger
is fair to Franklin from a financial point of view. A copy of the opinion is
attached to the Joint Proxy Statement as Appendix B. Franklin stockholders are
advised to read the opinion in its entirety. The Board has determined that the
transaction is in the best interests of the Franklin stockholders, has
unanimously approved the Merger Agreement and the Merger, and unanimously
recommends that the stockholders vote FOR approval of the Merger.
The Merger, Merger Agreement and Plan of Merger must be approved by the
holders of a majority of the shares of issued and outstanding Franklin Common
Stock. Your vote on this matter is very important. We urge you to review
carefully the enclosed material and to return your proxy promptly.
Whether or not you plan to attend the meeting, please sign and promptly
return your proxy card in the enclosed postage paid envelope. If you attend the
meeting, you may vote in person if you wish, even though you have previously
returned your proxy.
Sincerely,
/s/ HYRUM W. SMITH
Hyrum W. Smith
Chairman and Chief Executive Officer
<PAGE> 3
FRANKLIN QUEST CO.
2200 WEST PARKWAY BOULEVARD
SALT LAKE CITY, UTAH 84119
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Special Meeting") of
Stockholders of Franklin Quest Co., a Utah corporation ("Franklin"), will be
held on Friday, May 30, 1997, at 11:00 a.m., local time, at the Hyrum W. Smith
Auditorium, 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331, for
the following purposes:
1. To consider and vote upon a proposal to approve (a) the Merger Agreement
dated as of March 21, 1997 (the "Merger Agreement") by and among Franklin, Covey
Leadership Center, Inc., a Utah corporation ("Covey"), and the stockholders of
Covey (the "Covey Stockholders"), and the related Plan of Merger to be executed
by Franklin and Covey and filed with the Utah Department of Commerce, Division
of Corporations, (b) the merger of Covey with and into Franklin (the "Merger")
whereby, among other things, (i) Franklin will survive the Merger and the
outstanding shares of Covey Common Stock, $.001 par value per share ("Covey
Common Stock"), other than dissenting shares, will be converted into the right
to receive 6,631,272 shares of Franklin Common Stock, $.05 par value ("Franklin
Common Stock"), less that number of shares which would be equal to the $27
million to be paid in cash or Franklin Common Stock for the License Rights
(discussed below) divided by the Average Franklin Price (defined below) and,
less the number of shares of Franklin Common Stock to be reserved upon
conversion of outstanding options to purchase Covey Common Stock (the "Covey
Options") at the Share Exchange Ratio (defined below), (ii) each Covey Option
will be converted into an option to purchase shares of Franklin Common Stock,
with the number of options and the exercise price adjusted to reflect the Share
Exchange Ratio, (iii) the Articles of Incorporation of Franklin will be amended
to change the name of Franklin to Franklin Covey Co., and (iv) Franklin will
separately acquire from Stephen R. Covey an exclusive, perpetual, worldwide,
royalty free, transferrable license to make, use, sell, sublicense and otherwise
deal in the products and materials and all other tangible and intangible assets,
including all derivative works, which are the subject matter of and are
described in that certain Licensing Agreement dated November 1, 1990, for an
aggregate of $27 million, to be paid in cash or Franklin Common Stock, or both,
valued at the Average Franklin Price.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The "Average Franklin Price" will be an amount determined on the basis of
an average of the closing sales price of Franklin Common Stock on the New York
Stock Exchange for the 20 consecutive trading days ending two days prior to the
closing date of the Merger. The "Share Exchange Ratio" shall be the number of
shares of Franklin Common Stock issued in exchange for each share of Covey
Common Stock at the effective date of the Merger obtained by dividing 6,631,272
less that number of shares which would be equal to the $27 million paid to
Stephen R. Covey for the License Rights divided by the Average Franklin Price
and then divided by 850,000 (the number of outstanding shares of Covey Common
Stock and the number of shares subject to Covey Options).
The foregoing items of business are more fully described in the Joint Proxy
Statement accompanying this Notice.
Only stockholders of record of Franklin Common Stock at the close of
business on April 21, 1997 are entitled to notice of, and will be entitled to
vote at, the Special Meeting or any adjournment thereof. Approval of the Merger
Agreement and the Merger will require the affirmative vote of the holders of a
majority of the shares of Franklin Common Stock issued and outstanding.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ HYRUM W. SMITH
Hyrum W. Smith
Chairman and Chief Executive Officer
Salt Lake City, Utah
April 30, 1997
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, YOU ARE URGED
TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
ACCOMPANYING JOINT PROXY STATEMENT AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE
SPECIAL MEETING. ANY STOCKHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN
PERSON EVEN IF SUCH STOCKHOLDER HAS RETURNED A PROXY.
<PAGE> 4
[LOGO]
April 30, 1997
Dear Stockholder:
I am pleased to forward the enclosed Joint Proxy Statement for the Special
Meeting of Stockholders of Covey Leadership Center, Inc., a Utah corporation
("Covey"), to be held on Friday, May 30, 1997 at 9:30 a.m., local time, at the
Hyrum W. Smith Auditorium, 2200 West Parkway Boulevard, Salt Lake City, Utah
84119-2331, to consider and vote upon the combination of Covey with Franklin
Quest Co., a Utah corporation ("Franklin") through the merger (the "Merger") of
Covey with and into Franklin.
The Merger is subject to the terms and conditions of a Merger Agreement
("Merger Agreement") dated as of March 21, 1997 and a related Plan of Merger to
be executed by Franklin and Covey and filed with the Utah Department of
Commerce, Division of Corporations and Commercial Code. In the Merger, Covey
will be merged with and into Franklin and the Articles of Incorporation of
Franklin will be amended to change the name of Franklin to Franklin Covey Co.
Pursuant to the Merger, each outstanding share of Common Stock of Covey ("Covey
Common Stock"), other than dissenting shares, will be converted, without any
action on the part of the holder thereof, into the right to receive shares of
newly issued Common Stock of Franklin ("Franklin Common Stock"). In connection
with the Merger, Franklin will separately acquire an exclusive, perpetual,
worldwide, royalty free, transferrable license to make, use, sell, sublicense
and otherwise deal in the products and materials and tangible and intangible
assets, including all derivative works, which are described in a Licensing
Agreement executed by and between Stephen R. Covey and Covey, together with all
rights under the Licensing Agreement (the "License Rights") for an aggregate of
$27 million in cash or Franklin Common Stock valued at the average of the per
share closing sales prices of the Franklin Common Stock on the New York Stock
Exchange for the 20 consecutive trading days ending on the second trading day
prior to the closing date of the Merger (the "Average Franklin Price"). The
amount of cash or number of shares of Franklin Common Stock to be received for
the License Rights will be determined by Dr. Covey prior to the effective time
of the Merger. The maximum number of shares of Franklin Common Stock to be
issued in connection with all the transactions contemplated by the Merger will
not exceed 6,631,272 shares, which will include the shares which Dr. Covey
elects to receive for the License Rights and the shares reserved for the
exercise of Franklin options into which outstanding options to purchase Covey
Common Stock (the "Covey Options") will be converted. The number of shares to be
issued to Covey Stockholders in the Merger will be 6,631,272 reduced by (i) a
number of shares determined by dividing the total amount of cash which Dr. Covey
elects to receive for the License Rights by the Average Franklin Price, (ii) the
actual number of shares of Franklin Common Stock issued for the License Rights
and (iii) the number of shares of Franklin Common Stock reserved for the
exercise of Franklin options into which the Covey Options will be converted. The
Average Franklin Price, if determined as of April 22, 1997 (the latest
practicable date before the printing of the Joint Proxy Statement) would have
been $21.256. If the Average Franklin Price remains at $21.256, as to which
there can be no assurance, the number of shares of Franklin Common Stock which
the holder of each share of Covey
<PAGE> 5
Common Stock would be entitled to receive in the Merger would be approximately
6.30711 shares (the "Share Exchange Ratio"). All outstanding options to purchase
Covey Common Stock will be converted into options to purchase Franklin Common
Stock with the number of Franklin options issued and the exercise price adjusted
to reflect the Share Exchange Ratio. The shares of Franklin Common Stock held by
Franklin stockholders prior to the Merger will remain unchanged by the Merger.
The accompanying Joint Proxy Statement provides a detailed description of
the Merger Agreement, certain business and financial information of Franklin and
Covey and other important information. Copies of the Merger Agreement and the
Plan of Merger are attached to the Joint Proxy Statement as Appendix A.
The Covey Board of Directors ("Board") has carefully reviewed and
considered the terms and conditions of the proposed Merger. The Board has
determined that the transaction is in the best interests of Covey and the Covey
Stockholders, has unanimously approved the Merger Agreement and the Merger, and
unanimously recommends that the Covey Stockholders vote FOR approval of the
Merger.
The Merger, Merger Agreement and Plan of Merger must be approved by the
holders of at least 66 2/3% of the outstanding shares of Covey Common Stock.
Your vote on this matter is very important. We urge you to review carefully the
enclosed material and to return your proxy promptly.
Whether or not you plan to attend the meeting, please sign and promptly
return your proxy card in the enclosed postage paid envelope. If you attend the
meeting, you may vote in person if you wish, even though you have previously
returned your proxy.
Sincerely,
/s/ STEPHEN R. COVEY
Stephen R. Covey
Chairman of the Board
<PAGE> 6
COVEY LEADERSHIP CENTER, INC.
3507 NORTH UNIVERSITY AVENUE
PROVO, UTAH 84604
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Special Meeting") of
Stockholders of Covey Leadership Center, Inc., a Utah corporation ("Covey"),
will be held at 9:30 a.m., local time, on Friday, May 30, 1997, at the Hyrum W.
Smith Auditorium, 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331,
for the following purposes:
1. To consider and vote upon a proposal to approve (a) the Merger Agreement
dated as of March 21, 1997 (the "Merger Agreement") by and among Franklin Quest
Co., a Utah corporation ("Franklin"), Covey and the stockholders of Covey (the
"Covey Stockholders"), and the related Plan of Merger to be executed by Franklin
and Covey and filed with the Utah Department of Commerce, Division of
Corporations, (b) the merger of Covey with and into Franklin (the "Merger")
whereby, among other things, (i) Franklin will survive the Merger and the
outstanding shares of Covey Common Stock, $.001 par value per share ("Covey
Common Stock"), other than dissenting shares, will be converted into the right
to receive 6,631,272 shares of Franklin Common Stock, $.05 par value ("Franklin
Common Stock"), less that number of shares which would be equal to the $27
million to be paid in cash or Franklin Common Stock for the License Rights
(discussed below) divided by the Average Franklin Price (defined below) and,
less the number of shares of Franklin Common Stock to be reserved upon
conversion of outstanding options to purchase Covey Common Stock (the "Covey
Options") at the Share Exchange Ratio (defined below), (ii) each Covey Option
will be converted into an option to purchase shares of Franklin Common Stock,
with the number of options and the exercise price adjusted to reflect the Share
Exchange Ratio, (iii) the Articles of Incorporation of Franklin will be amended
to change the name of Franklin to Franklin Covey Co., and (iv) Franklin will
separately acquire from Stephen R. Covey an exclusive, perpetual, worldwide,
royalty free, transferrable license to make, use, sell, sublicense and otherwise
deal in the products and materials and tangible and intangible assets, including
all derivative works, which are the subject matter of and are described in that
certain Licensing Agreement dated November 1, 1990, for an aggregate of $27
million, to be paid in cash or Franklin Common Stock, or both, valued at the
Average Franklin Price.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The "Average Franklin Price" will be an amount determined on the basis of
an average of the closing sales price of Franklin Common Stock on the New York
Stock Exchange for the 20 consecutive trading days ending two days prior to the
closing date of the Merger. The "Share Exchange Ratio" shall be the number of
shares of Franklin Common Stock issued in exchange for each share of Covey
Common Stock at the effective date of the Merger obtained by dividing 6,631,272
less that number of shares which would be equal to the $27 million paid to
Stephen R. Covey for the License Rights divided by the Average Franklin Price
and then divided by 850,000 (the number of outstanding shares of Covey Common
Stock and the number of shares subject to Covey Options).
The foregoing items of business are more fully described in the Joint Proxy
Statement accompanying this Notice.
Only stockholders of record of Covey Common Stock at the close of business
on April 21, 1997 are entitled to notice of, and will be entitled to vote at,
the Special Meeting or any adjournment thereof. Approval of the Merger Agreement
and the Merger will require the affirmative vote of at least 66 2/3% of the
shares of the holders of Covey Common Stock issued and outstanding.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ STEPHEN R. COVEY
Stephen R. Covey
Chairman of the Board
Provo, Utah
April 30, 1997
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, YOU ARE URGED
TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
ACCOMPANYING JOINT PROXY STATEMENT AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE
SPECIAL MEETING. ANY STOCKHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN
PERSON EVEN IF SUCH STOCKHOLDER HAS RETURNED A PROXY.
<PAGE> 7
FRANKLIN QUEST CO. COVEY LEADERSHIP CENTER, INC.
------------------------
JOINT PROXY STATEMENT
------------------------
This Joint Proxy Statement is being furnished to the stockholders of
Franklin Quest Co., a Utah corporation
("Franklin"), in connection with the solicitation of proxies by the Franklin
Board of Directors for use at the Special Meeting of Franklin stockholders (the
"Franklin Meeting") to be held at 11:00 a.m., local time, on Friday, May 30,
1997, at the Hyrum W. Smith Auditorium, 2200 West Parkway Boulevard, Salt Lake
City, Utah 84119-2331, and at any adjournments or postponements of the Franklin
Meeting.
This Joint Proxy Statement is also being furnished to the stockholders of
Covey Leadership Center, Inc., a Utah corporation ("Covey"), in connection with
the solicitation of proxies by the Covey Board of Directors for use at the
Special Meeting of Covey stockholders (the "Covey Meeting") to be held at 9:30
a.m., on Friday, May 30, 1997, at the Hyrum W. Smith Auditorium, 2200 West
Parkway Boulevard, Salt Lake City, Utah 84119-2331, and at any adjournments or
postponements of the Covey Meeting.
This Joint Proxy Statement also constitutes the Disclosure Statement of
Franklin for use in connection with the offer and issuance of shares of Common
Stock of Franklin, $.05 par value per share ("Franklin Common Stock"), pursuant
to the merger (the "Merger") of Covey with and into Franklin under the terms of
the Merger Agreement dated as of March 21, 1997 by and among Franklin, Covey and
the stockholders of Covey (the "Covey Stockholders"). In the Merger, Covey will
be merged with and into Franklin and the Articles of Incorporation of Franklin
will be amended to change the name of Franklin to Franklin Covey Co. Pursuant to
the Merger, each outstanding share of the Common Stock of Covey ("Covey Common
Stock"), other than dissenting shares, will be converted, without any action on
the part of the holder thereof, into the right to receive shares of newly issued
Common Stock of Franklin ("Franklin Common Stock"). In connection with the
Merger, Franklin will separately acquire an exclusive, perpetual, worldwide,
royalty free, transferrable license to make, use, sell, sublicense and otherwise
deal in the products and materials and tangible and intangible assets, including
all derivative works, which are described in a Licensing Agreement executed by
and between Stephen R. Covey and Covey, together with all rights under the
Licensing Agreement (the "License Rights") for an aggregate of $27 million in
cash or Franklin Common Stock valued at the average of the per share closing
sales prices of the Franklin Common Stock on the New York Stock Exchange for the
20 consecutive trading days ending on the second trading day prior to the
closing date of the Merger (the "Average Franklin Price"). The amount of cash or
number of shares of Franklin Common Stock to be received for the License Rights
will be determined by Dr. Covey prior to the Effective Time of the Merger. The
maximum number of shares of Franklin Common Stock to be issued in connection
with all the transactions contemplated by the Merger will not exceed 6,631,272
shares which will include the shares which Dr. Covey and The Stephen and Sandra
Covey 1992 Posterity Trust (the "Covey Trust") elect to receive for the License
Rights and the shares reserved for the exercise of Franklin options into which
outstanding options to purchase Covey Common Stock (the "Covey Options") will be
converted. The number of shares to be issued to Covey Stockholders in the Merger
will be 6,631,272 reduced by (i) a number of shares determined by dividing the
total amount of cash which Dr. Covey elects to receive for the License Rights by
the Average Franklin Price, (ii) the actual number of shares of Franklin Common
Stock issued for the License Rights and (iii) the number of shares of Franklin
Common Stock reserved for the exercise of Franklin options into which the Covey
Options will be converted. The Average Franklin Price, if determined as of April
22, 1997 (the latest practicable date before the printing of the Joint Proxy
Statement) would have been $21.256. If the Average Franklin Price remains at
$21.256, as to which there can be no assurance, the number of shares of Franklin
Common Stock which the holder of each share of Covey Common Stock would be
entitled to receive in the Merger would be approximately 6.30711 shares (the
"Share Exchange Ratio"). All Covey Options will be converted into options to
purchase Franklin Common Stock with the number of Franklin options issued and
the exercise price adjusted to reflect the Share Exchange Ratio. The shares of
Franklin Common Stock held by Franklin stockholders prior to the Merger will
remain unchanged by the Merger.
On April 22, 1997, the closing sale price of Franklin Common Stock as
reported on the New York Stock Exchange was $21 5/8.
This Joint Proxy Statement and accompanying form of Proxy are first being
mailed to stockholders of Franklin and Covey on or about April 30, 1997.
------------------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT. THE
PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS ARE STRONGLY URGED TO
READ AND CONSIDER CAREFULLY THIS JOINT PROXY STATEMENT IN ITS ENTIRETY,
PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS."
------------------------
THE DATE OF THIS JOINT PROXY STATEMENT IS APRIL 30, 1997.
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION.................................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... iii
SUMMARY.................................................................. 1
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA -- Franklin.............. 8
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA -- Covey................. 9
SUMMARY PRO FORMA FRANKLIN AND COVEY COMBINED FINANCIAL DATA............. 10
RISK FACTORS............................................................. 11
THE FRANKLIN MEETING..................................................... 14
PRINCIPAL STOCKHOLDERS OF FRANKLIN....................................... 16
THE COVEY MEETING........................................................ 17
PRINCIPAL STOCKHOLDERS OF COVEY.......................................... 19
THE MERGER AND RELATED TRANSACTIONS...................................... 20
General............................................................. 20
Conversion of Shares; Purchase of License Rights.................... 20
Conversion of Options............................................... 20
Amendment to Articles of Incorporation.............................. 20
Exchange of Certificates............................................ 21
Background of the Merger............................................ 21
Reasons for the Merger.............................................. 23
Operations Following the Merger..................................... 25
Opinion of Merrill Lynch............................................ 25
Interests of Certain Persons in the Merger.......................... 30
Other Related Agreements............................................ 31
Representations and Covenants....................................... 31
Conditions to the Merger............................................ 32
Closing............................................................. 35
Termination or Amendment............................................ 35
Regulatory Matters.................................................. 35
Certain Federal Income Tax Considerations........................... 36
Accounting Treatment................................................ 37
Appraisal Rights.................................................... 37
Fees and Expenses................................................... 39
PRINCIPAL STOCKHOLDERS OF FRANKLIN COVEY CO. (PRO FORMA)................. 40
SELECTED HISTORICAL FINANCIAL DATA -- Franklin........................... 42
SELECTED HISTORICAL FINANCIAL DATA -- Covey.............................. 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Franklin Quest Co. ................................................. 44
Covey Leadership Center, Inc. ...................................... 50
BUSINESS OF FRANKLIN..................................................... 55
BUSINESS OF COVEY........................................................ 66
COMPARISON OF RIGHTS OF STOCKHOLDERS OF FRANKLIN AND COVEY............... 76
STOCKHOLDER PROPOSALS.................................................... 76
EXPERTS.................................................................. 77
LEGAL MATTERS............................................................ 77
INDEX TO PRO FORMA AND HISTORICAL FINANCIAL STATEMENTS................... 78
APPENDICES
A. Merger Agreement and certain exhibits, including
Articles of Merger and Plan of Merger
B. Opinion of Merrill Lynch
C. Part 13 of the Utah Revised Business Corporation Act
</TABLE>
i
<PAGE> 9
NO PERSON HAS BEEN AUTHORIZED BY FRANKLIN OR COVEY TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY FRANKLIN OR COVEY. THIS JOINT PROXY
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT OR A SOLICITATION FOR A
PROXY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT NOR ANY DISTRIBUTION OF
THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT RELATES SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
Franklin is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These materials can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of these materials can also be obtained
from the Commission at prescribed rates by writing to the Public Reference
Section of the Commission 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, electronically filed documents, including reports, proxy statements
and other information filed by Franklin can be obtained from the Commission's
Website at http://www.sec.gov. Franklin's Common Stock is quoted on the New York
Stock Exchange and reports and other information concerning Franklin may also be
inspected and copied at the office of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
Under the rules and regulations of the Commission, the solicitation of
proxies from the Covey Stockholders to approve and adopt the Merger Agreement
and the Merger constitutes an offering of the Franklin Common Stock to be issued
in connection with the Merger. This Joint Proxy Statement constitutes the
Disclosure Statement which is being furnished to the Covey Stockholders in
connection with the offering of the Franklin Common Stock.
ii
<PAGE> 10
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by Franklin with the Commission
under the Exchange Act are incorporated herein by Franklin by reference:
(a) Franklin's Annual Report on Form 10-K for the fiscal year ended August
31, 1996 (the "Franklin Form 10-K"); and
(b) Franklin's Quarterly Reports on Form 10-Q for the quarterly periods
ended November 30, 1996 and February 28, 1997 (the "Franklin 10-Qs").
All reports and other documents filed by Franklin pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement and prior to the date of the Franklin Special Meeting shall be deemed
to be incorporated by reference herein and to be a part hereof from the date of
filing of such reports and documents. Any statement included or contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Joint Proxy Statement
to the extent that a statement contained herein, or in any other subsequently
filed document that also is incorporated or deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed to constitute a part of this Joint
Proxy Statement, except as so modified or superseded.
THIS JOINT PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS
TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST BY
ANY PERSON TO WHOM THIS JOINT PROXY STATEMENT HAS BEEN DELIVERED. REQUESTS FOR
THESE DOCUMENTS SHOULD BE DIRECTED TO FRANKLIN QUEST CO., OFFICE OF THE CHIEF
FINANCIAL OFFICER, 2200 WEST PARKWAY BOULEVARD, SALT LAKE CITY, UTAH 84119
(TELEPHONE NUMBER (801) 975-1776). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY MAY 20, 1997.
iii
<PAGE> 11
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Joint Proxy Statement, the appendices hereto and documents incorporated
by reference herein. The summary does not contain a complete description of the
terms of the Merger and is qualified in its entirety by reference to the full
text of this Joint Proxy Statement and the Appendices hereto. Stockholders are
urged to read this Joint Proxy Statement and the Appendices in their entirety.
This Proxy Statement contains forward-looking statements about future
results which are subject to risks and uncertainties. Franklin's and Covey's
actual results may differ significantly from the results in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."
THE COMPANIES
Franklin. Franklin is a provider of training seminars and products designed
to improve individual productivity. Franklin's principal seminars and products
are based upon its comprehensive time management system which, through the use
of the Company's primary product, the Franklin Day Planner, enables individuals
to better manage time by identifying goals and prioritizing tasks necessary to
achieve them. Franklin also provides training, consulting services and products
designed to improve written and oral business communication skills. Unless
otherwise indicated, "Franklin" refers to Franklin Quest Co. and each of its
operating divisions and subsidiaries. Franklin was incorporated in Utah as The
Franklin Institute, Inc. in 1983 and renamed Franklin Quest Co. in 1992.
Franklin's principal executive offices are located at 2200 West Parkway
Boulevard, Salt Lake City, Utah 84119-2331. Its telephone number is (801)
975-1776.
Covey. Covey is a provider of integrated educational materials, training
workshops, consulting services, publications and products designed to empower
individuals and organizations to become more effective. Covey is a Utah
corporation formed as Stephen R. Covey & Associates in 1980 and renamed Covey
Leadership Center, Inc. in 1989. Unless otherwise indicated, "Covey" refers to
Covey Leadership Center, Inc., a Utah corporation, and its wholly-owned
subsidiary. Covey's principal executive offices are located at 3507 North
University Avenue, Provo, Utah 84604. Its telephone number is (800) 331-7716.
THE MERGER
Franklin, Covey and the Covey Stockholders have entered into a Merger
Agreement dated as of March 21, 1997, a copy of which is attached hereto as
Appendix A, whereby Covey is to be merged with and into Franklin.
CONVERSION OF SECURITIES; PURCHASE OF LICENSE RIGHTS
Upon consummation of the Merger, each share of Covey Common Stock then
outstanding, other than dissenting shares, will be converted automatically into
the right to receive newly issued shares of Franklin Common Stock. The maximum
number of shares of Franklin Common Stock to be issued in connection with all
transactions contemplated by the Merger, including shares to be issued for the
License Rights and reserved for the exercise of options into which Covey Options
will be converted, is 6,631,272. Cash will be paid in lieu of fractional shares.
See "The Merger and Related Transactions -- Conversion of Shares; Purchase of
License Rights."
Upon consummation of the Merger, each option to purchase Covey Common Stock
then outstanding will be converted automatically into an option to purchase a
number of shares of Franklin Common Stock determined by multiplying the number
of shares of Covey Common Stock subject to a Covey Option by the Share Exchange
Ratio, at an exercise price per share equal to the exercise price per share of
the Covey Option at the time of the Merger divided by the Share Exchange Ratio.
To avoid fractional shares, the number of shares of Franklin Common Stock
subject to a converted Covey Option will be rounded to the nearest whole share.
The other terms of the Covey Options, including vesting schedules, will remain
unchanged. See "The Merger and Related Transactions -- Conversion of Options."
1
<PAGE> 12
The shares of Franklin Common Stock outstanding prior to the Merger will
remain unchanged by the Merger, except for dilution resulting from issuance of
the additional shares in the Merger.
EXCHANGE OF CERTIFICATES
At closing, certificates representing the number of shares of Franklin
Common Stock to which each Covey Stockholder is entitled will be delivered in
exchange for certificates of Covey Common Stock surrendered for cancellation.
HOLDERS OF COVEY COMMON STOCK SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR
EXCHANGE UNTIL THE CLOSING.
Following effectiveness of the Merger, Franklin will issue to each holder
of a Covey Option a document evidencing the conversion of each Covey Option to
Franklin options. See "The Merger and Related Transactions -- Conversion of
Options."
REASONS FOR THE MERGER
Franklin and Covey have identified several potential benefits of the Merger
that they believe will contribute to the success of Franklin and Covey
(together, the "Combined Company"). The Combined Company will be able to, among
other things, offer a wide variety of highly-regarded training services and
products to organizations and individuals and achieve operating efficiencies and
cost savings through combining administrative, manufacturing and distribution
functions. See "The Merger and Related Transactions -- Reasons for the Merger."
OPERATIONS FOLLOWING THE MERGER
Following the Merger, Covey will continue its operations as the Covey
Leadership Center(R), a division of Franklin Covey Co. Five former Covey board
members will join ten existing members of the Board of Directors of Franklin and
committees of the Board of Directors of Franklin will be reconstituted to
include former Covey board members. See "The Merger and Related
Transactions -- Operations Following the Merger."
DATE, TIME AND PLACE OF MEETINGS OF STOCKHOLDERS
Franklin. The Franklin Meeting will be held on Friday, May 30, 1997, at
11:00 a.m., local time, at the Hyrum W. Smith Auditorium, 2200 West Parkway
Boulevard, Salt Lake City, Utah 84119-2331.
Covey. The Covey Meeting will be held on Friday, May 30, 1997, at 9:30
a.m., local time, at the Hyrum W. Smith Auditorium, 2200 West Parkway Boulevard,
Salt Lake City, Utah 84119-2331.
PURPOSES OF THE MEETINGS
Franklin Meeting. At the Franklin Meeting, stockholders of record of
Franklin will be asked to consider and vote upon a proposal to approve the
Merger, the Merger Agreement and the Plan of Merger.
Covey Meeting. At the Covey Meeting, stockholders of record of Covey will
be asked to consider and vote upon a proposal to approve the Merger, the Merger
Agreement and the Plan of Merger.
RECORD DATES; SHARES ENTITLED TO VOTE
Franklin. Holders of record of Franklin Common Stock on April 21, 1997 (the
"Record Date") are entitled to notice of and to vote at the Franklin Meeting. At
the close of business on the Record Date, there were outstanding and entitled to
vote 19,766,458 shares of Franklin Common Stock, each of which will be entitled
to one vote on each matter to be acted upon.
Covey. Holders of record of Covey Common Stock on the Record Date are
entitled to notice of and to vote at the Covey Meeting. At the close of business
on the Record Date, there were outstanding and entitled to vote 790,000 shares
of Covey Common Stock, each of which will be entitled to one vote on each matter
to be acted upon.
2
<PAGE> 13
VOTE REQUIRED
Franklin. Approval of the Merger Agreement and the Merger will require the
affirmative vote of the holders of Franklin Common Stock representing a majority
of the shares issued and outstanding. The approval by Franklin's stockholders of
the Merger Agreement and the Merger is required by the Utah Revised Business
Corporation Act ("URBCA") and by the rules of the New York Stock Exchange (the
"NYSE") governing corporations with securities listed on the NYSE.
Covey. Approval and adoption of the Merger Agreement and the Merger will
require the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of Covey Common Stock entitled to vote.
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at both the Franklin
Meeting and the Covey Meeting is a majority of the shares of Franklin Common
Stock or Covey Common Stock, respectively, issued and outstanding on the Record
Date. Abstentions and broker non-votes will be counted for purposes of
determining whether a quorum is present. Since approval of the Merger Agreement
and the Merger requires the approval of a majority and 66 2/3% of the
outstanding shares of Franklin and Covey, respectively, non-votes and
abstentions will have the same effect as a vote against the Merger Agreement and
the Merger. THE ACTIONS PROPOSED IN THIS JOINT PROXY STATEMENT ARE NOT MATTERS
THAT CAN BE VOTED ON BY BROKERS HOLDING FRANKLIN COMMON STOCK FOR BENEFICIAL
OWNERS WITHOUT THE OWNERS'S SPECIFIC INSTRUCTIONS. ACCORDINGLY, ALL BENEFICIAL
OWNERS OF FRANKLIN COMMON STOCK ARE URGED TO RETURN THE ENCLOSED PROXY CARD
MARKED TO INDICATE THEIR VOTES.
APPRAISAL RIGHTS
Covey Stockholders who dissent from the Merger will be entitled to rights
of appraisal under Sections 1301 - 1331 of Part 13 of the URBCA. Franklin
stockholders will not be entitled to rights of appraisal. The obligation of
Franklin to complete the Merger is conditioned on holders of not more than 10%
of the outstanding Covey Common Stock exercising appraisal rights. See "The
Merger and Related Transactions -- Appraisal Rights."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of management of Covey have interests in the Merger that
are different from, or in addition to, the interests of Covey Stockholders
generally. See "The Merger and Related Transactions -- Interests of Certain
Persons in the Merger."
OPINION OF FINANCIAL ADVISOR
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") has
delivered its written opinion to the Franklin Board of Directors dated March 17,
1997 (the "Merrill Lynch Opinion), that, as of such date, and based upon and
subject to the factors and assumptions set forth in such written opinion, the
total consideration to be paid by Franklin pursuant to the Merger is fair to
Franklin from a financial point of view. The full text of the Merrill Lynch
Opinion, which sets forth the assumptions made, matters considered and
limitations on the review undertaken by Merrill Lynch, is attached as Appendix B
to this Joint Proxy Statement. Franklin stockholders are urged to read the
opinion in its entirety. See "The Merger and Related Transactions -- Opinion of
Financial Advisor."
RECOMMENDATIONS OF FRANKLIN'S AND COVEY'S BOARDS OF DIRECTORS
Franklin's Board of Directors. The Board of Directors of Franklin has
unanimously approved the Merger Agreement and the Merger and has determined that
the Merger is in the best interests of Franklin and its stockholders. The
Franklin Board of Directors unanimously recommends approval of the Merger
Agreement and the Merger by the Franklin stockholders. The primary factors
considered and relied upon by the Franklin
3
<PAGE> 14
board of Directors in reaching its recommendation are referred to in "The Merger
and Related Transactions -- Reasons for the Merger."
Covey's Board of Directors. The Board of Directors of Covey has unanimously
approved the Merger Agreement and the Merger and has determined that the Merger
is in the best interests of, and is on terms that are fair to, Covey and the
Covey Stockholders. The Covey Board of Directors unanimously recommends approval
of the Merger Agreement and the Merger by the Covey Stockholders. The primary
factors considered and relied upon by the Covey Board of Directors in reaching
its recommendation are referred to in "The Merger and Related
Transactions -- Reasons for the Merger."
RELATED AGREEMENTS
In connection with the Merger, Franklin, Covey, certain stockholders of
Franklin, the Covey Stockholders and employees of Covey have entered into
related agreements, including an agreement for the purchase of the License
Rights, a Shareholders Agreement, a Registration Rights Agreement, Employment
and/or Noncompetition Agreements, a Speaker Services Agreement, an Authorship
Agreement and Investment Letters and Releases. See "The Merger and Related
Transactions -- Related Agreements."
THE MERGER AGREEMENT
Representations and Covenants. Under the Merger Agreement, Franklin, Covey
and the Covey Stockholders have made a number of representations regarding their
respective capital structures, operations, financial conditions and other
matters, including their authority to enter into the Merger Agreement and to
consummate the Merger. Franklin, Covey and the Covey Stockholders have
covenanted that, until the consummation of the Merger or the termination of the
Merger Agreement, they will carry on their respective businesses in the ordinary
course and attempt to preserve their present businesses and relationships with
customers, suppliers and others and will use their best efforts to consummate
the Merger. Covey has agreed not to solicit, initiate discussions or engage in
negotiations with any person relating to a possible acquisition of Covey. See
"The Merger and Related Transactions -- Representations and Covenants."
Conditions to the Merger. In addition to the requirement that the requisite
approval of the stockholders of Franklin and Covey Stockholders be obtained,
consummation of the Merger is subject to a number of other conditions that, if
not satisfied or waived, may cause the Merger not to be consummated and the
Merger Agreement to be terminated. Each party's obligation to consummate the
Merger is conditioned on, among other things, the accuracy of the other party's
representations, the other party's performance of its covenants, satisfactory
due diligence, the obtaining of required consents, the absence of a material
adverse change with respect to the other party, favorable legal opinions, an
opinion from Arthur Andersen LLP to Covey and the Covey Stockholders that the
Merger will be treated as a tax free reorganization, an agreement for the
purchase of the License Rights with Stephen R. Covey and the Covey Trust, an
Investment Letter from each of the Covey Stockholders acknowledging the receipt
of restricted shares of Franklin Common Stock and agreeing to certain
restrictions of transferability of the Franklin Common Stock, Employment and/or
Noncompetition Agreements with key Covey employees, a Shareholders Agreement, a
Registration Rights Agreement, a Speaker Services Agreement with Stephen R.
Covey, an Authorship Agreement with Stephen R. Covey, a Release from each of the
Covey Stockholders, and the absence of legal action seeking to prevent the
consummation of the Merger. See "The Merger and Related
Transactions -- Conditions to the Merger."
Closing. As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreement, Franklin and Covey will file
Articles of Merger with the Utah Department of Commerce, Division of
Corporations. The Merger will become effective upon such filings. It is
anticipated that, assuming all conditions are met, the Merger will occur and a
closing will be held on May 30, 1997. See "The Merger and Related
Transactions -- Closing."
Termination or Amendment. The Merger Agreement may be terminated (i) by
written consent of Franklin, Covey and the Covey Stockholders, (ii) by either
Franklin or Covey as a result of a breach by the other party of a material
representation, warranty, covenant or agreement set forth in the Merger
Agreement or in the event any of the conditions precedent to the obligation of
either Franklin or Covey are not satisfied or
4
<PAGE> 15
waived prior to the Effective Time, and (iii) by Franklin or Covey in the event
either shall determine, in its sole discretion, that a matter discovered in due
diligence and/or set forth on disclosure schedules to the Merger Agreement is
unacceptable. If either Franklin, Covey or certain of the Covey Stockholders
shall terminate the Merger Agreement without cause or refuse to complete the
agreement or to satisfy the conditions to closing required to be satisfied by
it, Franklin or Covey, as the case may be, will be entitled to a payment of
$500,000, as liquidated damages. If, however, the Merger Agreement is terminated
prior to May 2, 1997 because of objections to matters set forth on disclosure
schedules, neither Franklin nor Covey shall have any obligation to the other for
liquidated damages.
The Merger Agreement may be amended by Franklin and Covey at any time
before or after approval by the Franklin stockholders or the Covey Stockholders
but only if the amendment is in writing and signed by Franklin, Covey and each
of the Covey Stockholders.
Fees and Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with the Merger Agreement and the Merger will be
paid by the party incurring the expense; however, Franklin will incur all costs
and expenses related to the preparation and filing of this Joint Proxy
Statement.
RISK FACTORS
In considering whether to vote for the approval and adoption of the Merger
Agreement and the Merger, stockholders of Franklin and Covey should carefully
consider all of the information contained in this Joint Proxy Statement and, in
particular, the information set forth in "Risk Factors."
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the United States
Federal Trade Commission (the "FTC"), the Merger may not be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the United States Justice Department (the
"Antitrust Division"), and specified waiting period requirements have been
satisfied. Each of Franklin and Covey filed their respective Notification and
Report Forms required under the HSR Act with the FTC and the Antitrust Division
on April 18, 1997 and expiration of the applicable waiting period under the HSR
Act is expected prior to consummation of the Merger. See "The Merger and Related
Transactions -- Regulatory Matters."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Arthur Andersen LLP will render an opinion to Covey and the Covey
Stockholders to the effect that the Merger will qualify as a reorganization (a
"Reorganization") under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"), in which case no gain or loss would generally be
recognized by the Covey Stockholders, solely on the exchange of their shares of
Covey Common Stock for shares of Franklin Common Stock. If the Merger were not
to so qualify, the exchange of shares would be taxable.
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting
in accordance with generally accepted accounting principles ("GAAP"). See "The
Merger and Related Transactions -- Accounting Treatment."
5
<PAGE> 16
MARKET PRICE AND DIVIDEND INFORMATION
FRANKLIN MARKET PRICE DATA
Franklin's Common Stock is traded on the New York Stock Exchange under the
symbol "FNQ." Following the Merger, the Common Stock of the Combined Company
will be traded under the symbol "FC." The following table sets forth the range
of high and low closing sales prices reported on the New York Stock Exchange for
Franklin Common Stock for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended August 31, 1997:
First Quarter............................................ $21 3/4 $17 1/8
Second Quarter........................................... 23 1/4 20 1/8
Third Quarter (through April 22, 1997)................... 22 3/8 20 5/8
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........................................... 22 1/4 18 1/8
Fiscal Year Ended August 31, 1995:
First Quarter............................................ $39 3/8 $32 1/4
Second Quarter........................................... 35 7/8 27 1/4
Third Quarter............................................ 35 7/8 30
Fourth Quarter........................................... 32 1/8 21 3/4
Fiscal Year Ended August 31, 1994:
First Quarter............................................ $32 1/8 $25 3/8
Second Quarter........................................... 38 1/2 28
Third Quarter............................................ 40 1/2 31 1/2
Fourth Quarter........................................... 38 1/2 37 3/4
</TABLE>
DIVIDEND INFORMATION
Franklin has not paid any dividends since its public offering in 1992 and
currently anticipates it will retain all available funds to finance future
growth and business expansion. Any future determination to pay dividends will be
at the direction of the Combined Company's Board of Directors and will be
dependent on results of operations, contractual restrictions and other factors
deemed relevant by the Board of Directors. Covey's ability to pay dividends is
currently limited by loan agreements to amounts necessary to pay taxes by Covey
Stockholders resulting from an S Corporation election made by the Covey
Stockholders.
RECENT CLOSING PRICES
The following table sets forth the closing price per share of Franklin
Common Stock on the NYSE on January 21, 1997, the last trading day before
announcement of the proposed Merger, and on April 22, 1997, a recent date prior
to the printing of this Joint Proxy Statement and the equivalent per share
prices for Covey Common Stock based on the Franklin Common Stock prices:
<TABLE>
<CAPTION>
FRANKLIN COVEY
COMMON STOCK COMMON STOCK(1)
------------ ---------------
<S> <C> <C>
January 21, 1997.............................. $ 22 5/8 $142.70
April 22, 1997................................ 21 5/8 136.39
</TABLE>
- ---------------
(1) Represents the equivalent of one share of Covey Common Stock calculated by
multiplying the closing sale price per share of Franklin Common Stock by an
Exchange Ratio of 6.30711.
6
<PAGE> 17
Because the market price for Franklin Common Stock is subject to
fluctuation, the market value of the shares of Franklin Common Stock that
holders of Covey Common Stock will receive in the Merger may increase or
decrease prior to and following the Merger. Covey Stockholders are urged to
obtain current market quotations for Franklin Common Stock. No assurance can be
given as to the future price or market for Franklin Common Stock.
NUMBER OF STOCKHOLDERS
As of April 21, 1997, there were 421 stockholders of record who held shares
of Franklin Common Stock (although Franklin has been informed that there are in
excess of 10,500 beneficial owners), as shown on the records of Franklin's
transfer agent for such shares. As of that date, there were 15 stockholders of
record who held shares of Covey Common Stock as shown in Covey's stock transfer
ledger.
7
<PAGE> 18
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
FRANKLIN QUEST CO.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, SIX MONTHS ENDED
----------------------------------------------------- FEBRUARY 29/28,
1992 1993 1994 1995 1996 -------------------------
-------- -------- -------- -------- -------- 1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Total sales.................. $120,793 $165,483 $215,940 $277,122 $332,006 $185,473 $208,335
Gross margin................. 71,371 98,675 130,921 166,978 185,784 106,043 121,994
Income from operations....... 27,793 37,612 49,702 61,551 56,683 42,401 43,230
Income before provision for
income taxes............... 27,365 38,723 50,995 64,230 58,241 43,325 43,627
Provision for income taxes... 10,772(1) 15,307 20,078 25,484 24,002 17,543 17,559
Net income................... 16,593 23,416 30,917 38,746 34,239 25,782 26,068
Net income per share......... $ 0.93 $ 1.10 $ 1.40 $ 1.71 $ 1.53 $ 1.14 $ 1.25
Weighted average number of
common and common
equivalent shares
outstanding (000's)........ 17,880 21,267 22,081 22,692 22,328 22,650 20,845
OPERATING DATA:
Sales:
Product.................... $ 92,862 $130,006 $166,219 $192,356 $236,039 $136,742 $155,124
Training................... 27,931 35,477 49,721 68,168 70,812 35,788 41,308
Services................... -- -- -- 16,598 25,155 12,943 11,903
-------- -------- -------- -------- -------- -------- --------
Total sales $120,793 $165,483 $215,940 $277,122 $332,006 $185,473 $208,335
======== ======== ======== ======== ======== ======== ========
Number of seminars
presented.................. 4,320 5,350 5,359 6,555 6,987 3,634 3,731
Number of retail stores
(at period end)............ 19 28 49 70 90 80 95
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents.... $ 58,193 $ 63,493 $ 49,705 $ 35,006 $ 24,041 $ 32,583
Working capital.............. 68,775 84,689 86,409 87,629 84,340 81,951
Total assets................. 113,654 144,734 198,433 263,305 268,445 283,450
Long-term debt (including
current)................... 12,898 10,649 9,612 6,209 6,406 6,007
Shareholders' equity......... 82,447 112,997 162,085 224,342 231,835 241,979
</TABLE>
- ---------------
(1) Through June 2, 1992, Franklin was exempt from payment of federal and
certain state income taxes as a result of an S Corporation election made by
the shareholders of Franklin. The 1992 provision for income taxes reflects
on a pro forma basis, the income tax expense that would have been recorded
had Franklin not been exempt from paying taxes under the S Corporation
election.
8
<PAGE> 19
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
COVEY LEADERSHIP CENTER, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Total sales.................................... $29,379 $48,157 $69,003 $76,043 $98,676
Gross margin................................... 17,812 29,262 39,410 48,239 60,819
Income from operations......................... 1,749 4,264 2,593 5,807 9,581
Income before provision for foreign and certain
state income taxes.......................... 1,557 3,832 949 4,797 8,728
Provision for foreign and certain state income
taxes(1).................................... 30 21 135 294 375
Net income..................................... $ 1,527 $ 3,811 $ 814 $ 4,503 $ 8,353
OPERATING DATA:
Sales:
Training.................................... $24,690 $41,078 $59,995 $64,433 $83,822
Product..................................... 4,689 7,079 9,008 11,610 14,854
------- ------- ------- ------- -------
Total sales............................ $29,379 $48,157 $69,003 $76,043 $98,676
======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents...................... $ 22 $ 52 $ 70 $ 358 $ 139
Working capital (deficit)...................... (649) (1,741) (1,440) 319 4,318
Total assets................................... 9,927 18,859 23,229 27,211 36,561
Long-term liabilities (including current)...... 1,093 2,493 7,992 6,040 7,176
Shareholders' equity(1)........................ 1,305 3,914 2,432 7,121 11,852(2)
</TABLE>
- ---------------
(1) Covey has elected, for federal and state income tax purposes, to include its
taxable income with that of its shareholders (an S Corporation election).
Accordingly, Covey does not record a provision for federal and state income
taxes which would otherwise be considered in the determination of net income
had Covey not elected S Corporation status. A provision has been made for
foreign income taxes and for state income taxes for those states that tax S
Corporations.
(2) Does not reflect distributions of $10.1 million to the Covey Stockholders
for the payment of income taxes on earnings through December 31, 1996 and of
previously-taxed earnings, which were made subsequent to December 31, 1996.
9
<PAGE> 20
SUMMARY PRO FORMA FRANKLIN AND COVEY COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The summary pro forma combined financial data has been derived in part from
the pro forma combined financial statements appearing elsewhere herein and
should be read in conjunction with those statements and the notes thereto. This
pro forma data is not necessarily indicative of the results to be expected after
the proposed Merger is consummated. The following summary unaudited condensed
pro forma combined statements of income data for the year ended August 31, 1996
and for the six months ended February 28, 1997 assume that the business
combination occurred as of September 1, 1995 and combine the historical results
of operations of Franklin with the historical results of operations of Covey for
the same respective periods. The following summary unaudited condensed pro forma
combined balance sheet data as of February 28, 1997 assume that the Merger
occurred at that date and reflects the combination of the historical balance
sheets of Franklin and Covey as of that date.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
AUGUST 31, FEBRUARY 28,
1996 1997
---------- ------------
<S> <C> <C>
PRO FORMA STATEMENTS OF INCOME DATA:
Sales.............................................. $421,064 $262,490
Gross margin....................................... 244,942 156,380
Income from operations............................. 62,838 48,058
Net income......................................... 35,142 27,656
Earnings per share:
Franklin historical............................. 1.53 1.25
Covey historical................................ 8.85 6.25
Covey equivalent pro forma as adjusted for
shares to be issued in the Merger(1)........... 1.40 0.99
Pro forma combined.............................. $ 1.29 $ 1.07
Pro forma combined weighted average number of
common and common equivalent shares outstanding. 27,311 25,828
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28,
1997
-------------
<S> <C>
PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 31,707
Working capital............................................ 48,454
Total assets............................................... 459,509
Long-term debt, less current portion....................... 10,713
Stockholders' equity....................................... 351,927
BOOK VALUE PER SHARE(2):
Franklin historical........................................ $ 12.26
Covey historical........................................... 3.17(3)
Covey equivalent pro forma as adjusted for
shares to be issued in the Merger(1).................... 0.50(3)
Pro forma combined......................................... 14.24
</TABLE>
- ---------------
(1) Calculated by multiplying the Covey historical shares outstanding by an
estimate of the Share Exchange Ratio of 6.30711 shares of Franklin Common
Stock for each share of Covey Common Stock.
(2) Based upon actual shares of Franklin and Covey outstanding as of February
28, 1997. See Notes to Pro Forma Combined Financial Statements.
(3) Reflects estimated distributions of $10.7 million to the Covey Stockholders
for the payment of income taxes on earnings through February 28, 1997 and of
previously-taxed earnings, which were made subsequent to February 28, 1997.
10
<PAGE> 21
RISK FACTORS
Except for historical information contained herein, this Joint Proxy
Statement contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially. Factors that cause or
contribute to such differences include, but are not limited to, those discussed
elsewhere in this Joint Proxy Statement and in the documents incorporated herein
by reference. The following risk factors should be considered by holders of
Covey Common Stock in evaluating whether to approve the Merger Agreement and the
Merger and thereby become holders of Franklin Common Stock and by holders of
Franklin Common Stock in evaluating whether to approve the Merger Agreement, the
Merger and the issuance of Franklin Common Stock in the Merger and for the
License Rights. These factors should be considered in conjunction with the other
information included and incorporated by reference in this Joint Proxy
Statement.
EFFECT OF COMBINING BUSINESSES; PURCHASE ACCOUNTING
There can be no assurance that combining the business of Franklin with the
business of Covey, even achieved in an efficient and effective manner, will
result in combined results of operations and financial condition superior to
what would have been achieved by Franklin and Covey independently. Issuance of
the Franklin Common Stock in connection with the Merger and accounting for the
Merger as a purchase will result in significant intangible assets or a
significant charge against results of operations, or both, which could
materially and adversely affect future results of operations. Further, unless
cost savings and increased revenues result from the Merger, of which there can
be no assurance, future earnings and profitability may be adversely affected.
There can be no assurance that stockholders of Franklin or Covey would not
achieve greater returns on investment if the Merger was not consummated.
INTEGRATION OF CERTAIN OPERATIONS
The integration of certain operations following the Merger will require the
dedication of management resources which will temporarily distract attention
from day-to-day business of the Combined Company. Among other things, the
Combined Company intends to integrate product offerings, training services,
distribution channels, administration and sales and marketing efforts. There can
be no assurance that integration will be accomplished expeditiously or
successfully. Franklin and Covey currently offer products and training services
which may be deemed to compete with each other. There can be no assurance that
customers for these products and training services will continue historical
buying patterns following the Merger or that changes in these products or
training services made to integrate operations will not adversely affect future
sales of these products and training services.
MANAGEMENT OF GROWTH
Franklin and Covey have each experienced rapid growth that has placed a
significant strain upon its management, operational and financial resources.
Upon consummation of the Merger, the Combined Company will need to integrate a
large number of personnel as well as operational, financial, management,
accounting and reporting systems and procedures. The Combined Company's ability
to manage its growth effectively will require it to continue to expand its
operational, financial and management controls, accounting and reporting systems
and procedures and other internal processes. There can be no assurance that such
factors will not have a material adverse effect on the Combined Company's
business, financial condition and results of operations.
DEPENDENCE ON PRODUCTS/SERVICES
Each of Franklin and Covey derives a substantial percentage of sales from
specific products and services. Approximately 85% of Franklin's revenues during
the fiscal year ended August 31, 1996 were obtained from its Time Quest(R) time
management seminar and sales of the Franklin Day Planner and related products.
Substantially all of Covey's revenues were derived from products and training
services based on content from the books The 7 Habits of Highly Effective
People(R), Principle-Centered Leadership(R) and First Things First(R). Neither
Franklin nor Covey can assure that sales from these products or services will
continue at historical
11
<PAGE> 22
levels after the Merger or that the Combined Company will be successful in
creating other products or services which will result in future profitable
operations.
INDUSTRY CONDITIONS AND COMPETITION
Each of Franklin and Covey competes in the training and educational
services industry which is highly fragmented and competitive. Franklin's time
management seminar, "Time Quest," and Covey's leadership and time management
seminars compete with a variety of similar seminars and workshops in the
marketplace. In each of Franklin's and Covey's markets, there is substantial
competition from a number of well-established, well-financed companies, some of
which have greater resources than Franklin, Covey or the Combined Company.
Increased competition by existing and future competitors could result in sales
declines and price reductions that could materially adversely affect sales and
profitability. There is no assurance that the Combined Company will compete as
effectively as Franklin and Covey have competed separately.
DEPENDENCE ON KEY PERSONNEL
The continued success of Franklin and Covey depends on the management and
leadership skills of certain key management personnel, including Hyrum W. Smith,
Chairman of the Board and Chief Executive Officer of Franklin, and Stephen R.
Covey, Chairman of the Board of Covey. The loss of either of Messrs. Smith or
Covey or certain other members of senior management could adversely affect the
business of the Combined Company. The loss of key management or an inability to
attract, retain and motivate senior management could adversely affect the
business of the Combined Company. Moreover, the consummation of the Merger will
result in changes in senior management which may prove disruptive and could
result in the loss of key management personnel.
RAPID GROWTH; SEASONALITY
Franklin and Covey have each experienced rapid and significant growth in
sales and earnings. There can be no assurance that historical rates of growth
will continue or that the Combined Company will be able to sustain the level of
sales and earnings that have been achieved or that are forecasted. Moreover,
future growth, if achieved, may place significant strain on the management of
the Combined Company. Future operating results will depend, in part, on
management's ability to achieve and manage future growth in general, including
recruiting additional qualified management and other personnel. The businesses
of Franklin and, to a lesser extent, Covey have been seasonal, reflecting
customer buying habits for calendar related products.
ABSENCE OF SIGNIFICANT PROPRIETARY PROTECTION
Franklin and Covey seek to protect proprietary aspects of their seminars
and products through a combination of trademarks, copyrights and confidentiality
agreements. These measures, however, may not provide significant protection from
competitors. The materials, concepts, designs and products of Franklin and Covey
have been and may continue to be imitated and their trademarks and copyrights
have been and may continue to be challenged by others, which could have a
material adverse effect on future operating results. Moreover, these materials
are often translated into languages and made available in countries where
Franklin and Covey have no physical presence or where copyright and trademark
laws are difficult to enforce. The Combined Company could also incur substantial
costs in seeking enforcement of its rights against infringement or the
unauthorized use of its proprietary property by others and there can be no
assurance that others may not independently develop seminars and products that
are similar or superior to the seminars and products offered by Franklin and
Covey but which do not infringe on existing proprietary rights.
VOLATILITY OF FRANKLIN STOCK PRICE
The market price of Franklin Common Stock has been, and in the future may
be, highly volatile. Factors such as quarter-to-quarter variations in Franklin's
revenues and earnings, which may be increased as a result of the Merger, could
cause the market price of Franklin Common Stock to fluctuate significantly. In
addition, in recent years, the stock markets have experienced significant
volatility which often may have been unrelated
12
<PAGE> 23
to the operating performance of the affected companies. Such volatility may
adversely affect the market price of the Franklin Common Stock. See "Price Range
of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Merger, there will be a maximum of 25,666,088
million shares of Franklin Common Stock outstanding of which approximately
16,881,073 shares will be eligible, under applicable securities laws, for
immediate sale in the public market without restriction. The shares of Franklin
Common Stock issued in the Merger will be issued in reliance upon exemptions
from registration under applicable securities laws for transactions not
involving any public offering and will not be eligible for sale except in
compliance with Rule 144 which has recently been revised to permit limited
resales of restricted securities after a one-year period and to allow unlimited
resales of such securities by non-affiliates after a two-year period. However, a
condition of the Merger is that the Covey Stockholders agree not to offer, sell
or otherwise dispose of the Franklin Common Stock issued in the Merger for a
period of 24 months from the Effective Date of the Merger. Pursuant to the
Merger, certain of the Covey Stockholders will be granted incidental
registration rights exercisable beginning two years from the Effective Date of
the Merger and continuing for a period of three years, pursuant to which they
will be permitted to participate in any registration statement filed on behalf
of the Combined Company, but only if and to the extent other executive officers
or directors of Franklin are also permitted to participate.
CONTROL BY MANAGEMENT
Upon consummation of the Merger, and assuming no shares of Franklin Common
Stock are issued for the License Rights, the officers and directors of the
Combined Company will own approximately 20 percent of the outstanding shares of
the Franklin Common Stock, excluding treasury shares held by Franklin. Stephen
R. Covey and the Covey Trust will own approximately eight percent of the
Franklin Common Stock and Stephen M. R. Covey will own approximately two percent
of the Franklin Common Stock. By virtue of such holdings, management will have
the ability to significantly influence fundamental corporate transactions of the
Combined Company and the election of the Combined Company's Board of Directors.
Certain of the stockholders of Franklin and Covey will enter into a Shareholders
Agreement which requires that shares of Franklin Common Stock be voted for
designated nominees to the Board of Directors in each election of Directors
through August 31, 2000. See "The Merger and Related Transactions -- Operations
Following the Merger."
RISKS OF INTERNATIONAL OPERATIONS
Covey currently has licensee agreements with licensees who operate
independently in 26 countries. Additionally, Covey operates direct operations in
Canada, Australia and the Middle East region. Foreign operations, particularly
licensee operations, present risks that are different than those encountered in
the United States, such as potential political, social and economic instability.
While the licensee agreements require maintenance of certain standards, there is
no assurance that the Combined Company will not experience adverse results in
its foreign operations or that significant currency fluctuations will not
adversely affect the Combined Company's reported results.
13
<PAGE> 24
THE FRANKLIN MEETING
DATE, TIME AND PLACE OF MEETING
The Franklin Meeting will be held on Friday, May 30, 1997 at 11:00 a.m.,
local time, at the Hyrum W. Smith Auditorium, 2200 West Parkway Boulevard, Salt
Lake City, Utah 84119-2331.
RECORD DATE AND SHARES ENTITLED TO VOTE
Only holders of record of Franklin Common Stock at the close of business on
the Record Date, April 21, 1997, are entitled to notice of and to vote at the
Franklin Meeting. As of the close of business on the Record date, there were
19,766,458 shares of Franklin Common Stock outstanding and entitled to vote,
held of record by 421 stockholders (although Franklin has been informed that
there are in excess of 10,500 beneficial owners). A majority, or 9,883,230, of
these shares, present in person or represented by proxy, will constitute a
quorum for the transaction of business. Each Franklin stockholder is entitled to
one vote for each share of Franklin Common Stock held as of the Record Date.
VOTING OF PROXIES
The Franklin proxy accompanying this Joint Proxy Statement is solicited on
behalf of the Board of Directors of Franklin for use at the Franklin Meeting.
Stockholders are requested to complete, date and sign the accompanying proxy and
promptly return it in the accompanying envelope or otherwise mail it to
Franklin. All proxies that are properly executed and returned, and that are not
revoked, will be voted at the Franklin Meeting in accordance with the
instructions indicated on the proxies or, if no direction is indicated, to
approve the Merger Agreement and the Merger. Franklin's Board of Directors does
not presently intend to bring any business before the Franklin Meeting other
than the specific proposals referred to in this Joint Proxy Statement and
specified in the notice of the Franklin Meeting. So far as is known to
Franklin's Board of Directors, no other matters are to be brought before the
Franklin Meeting. As to any business that may properly come before the Franklin
Meeting, it is intended that proxies, in the form enclosed, will be voted in
respect thereof in accordance with the judgment of the persons voting such
proxies. A Franklin stockholder who has given a proxy may revoke it at any time
before it is exercised at the Franklin Meeting by (i) delivering to the
Secretary of Franklin a written notice, bearing a date later than the proxy,
stating that the proxy is revoked, (ii) signing and so delivering a proxy
relating to the same shares and bearing a later date prior to the vote at the
Franklin Meeting, or (iii) attending the Franklin Meeting and voting in person.
VOTE REQUIRED
Approval of the Merger Agreement and the Merger by Franklin's stockholders
is required by the URBCA and the rules of the NYSE governing corporations with
securities listed on the NYSE. Such approval requires the affirmative vote of
the holders of a majority of the issued and outstanding shares of Franklin
Common Stock. As of the Record Date, executive officers and directors of
Franklin and their affiliates as a group beneficially owned 2,662,377 shares of
Franklin Common Stock (approximately 14% of the shares of Franklin Common Stock
then outstanding).
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the Franklin Meeting
is a majority of the shares of Common Stock issued and outstanding on the Record
Date. Abstentions and broker non-votes will be counted for purposes of
determining the presence of a quorum, but will not be counted as votes entitled
to be cast. Because approval of the Merger Agreement and the Merger requires the
approval of a majority of the outstanding shares, abstentions and broker
nonvotes will have the same effect as a vote against the proposal. THE ACTIONS
PROPOSED IN THIS JOINT PROXY STATEMENT ARE NOT MATTERS THAT CAN BE VOTED ON BY
BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE OWNERS' SPECIFIC
INSTRUCTIONS. ACCORDINGLY, ALL BENEFICIAL OWNERS OF FRANKLIN COMMON STOCK ARE
URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE THEIR VOTES.
14
<PAGE> 25
SOLICITATION OF PROXIES AND EXPENSES
Franklin will bear the cost of solicitation of proxies in the enclosed form
from its stockholders. In addition to solicitation by mail, the directors,
officers and employees of Franklin may solicit proxies from stockholders by
telephone, telegram, letter or in person. Following the original mailing of the
proxies and other soliciting materials, Franklin will request brokers,
custodians, nominees and other record holders to forward copies of the proxy and
other soliciting materials to persons for whom they hold shares of Franklin
Common Stock and to request authority for the exercise of proxies. In such
cases, Franklin, upon the request of the record holders, will reimburse such
holders for their reasonable expenses.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF FRANKLIN BELIEVES THAT THE MERGER IS FAIR TO AND
IN THE BEST INTERESTS OF FRANKLIN AND ITS STOCKHOLDERS AND, THEREFORE,
UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE
MERGER.
15
<PAGE> 26
PRINCIPAL STOCKHOLDERS OF FRANKLIN
The following table sets forth information regarding the beneficial
ownership of Franklin Common Stock as of April 10, 1997 by (i) each person who
is known by Franklin to beneficially own more than 5% of Franklin Common Stock,
(ii) each director, (iii) each executive officer and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AS OF
APRIL 10, 1997
---------------------------
NUMBER OF PERCENTAGE OF
NAME(1) SHARES(2) TOTAL(3)
- -------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Yacktman Capital Management......................................... 2,667,900 13.5%
303 West Madison
Chicago, Illinois 60606
Hyrum W. Smith(4)(5)(6)............................................. 1,720,158 8.7
c/o Franklin Quest Co.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
Dennis R. Webb(4)(5)(6)(7).......................................... 1,498,212 7.6
c/o Franklin Quest Co.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
Capital Research and Management..................................... 1,350,000 6.8
333 South Hope Street
Los Angeles, California 90071
KPM Investment Management........................................... 1,179,400 6.0
10250 Regency Circle
Omaha, Nebraska 68114
Arlen B. Crouch(5)(6)............................................... 1,266,450 6.1
c/o Franklin Quest Co.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
Wasatch Advisors.................................................... 1,017,767 5.2
68 South Main Street
Salt Lake City, Utah 84101
Robert F. Bennett(8)................................................ 480,659 2.4
Val John Christensen(6)............................................. 257,030 1.3
Robert H. Daines(9)................................................. 59,305 *
Jon H. Rowberry(6).................................................. 31,500 *
James M. Beggs(10).................................................. 13,000 *
D. Gordon Wilson(6)................................................. 9,004 *
Thomas H. Lenagh(6)................................................. 10,000 *
Daniel P. Howells(6)................................................ 9,000 *
Beverly B. Campbell................................................. 300 *
E. J. "Jake" Garn................................................... 0 --
John L. Theler...................................................... 1,000 *
Don J. Johnson(6)................................................... 3,500 *
Mark W. Stromberg................................................... 2,500 *
Dennis G. Heiner.................................................... 0 --
All directors and executive officers as a group (16
persons)(4)(6).................................................... 3,863,406 18.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise indicated below, the persons named in the table have
sole voting and investment power with respect to all shares of stock shown
as beneficially owned by them, subject to community property laws, where
applicable.
16
<PAGE> 27
(2) Includes stock options to purchase Franklin Common Stock exercisable within
sixty (60) days of April 10, 1997.
(3) The percentages set forth have been computed without taking into account
treasury shares held by Franklin and are based on 19,766,458 shares of
Franklin Common Stock, and, with respect to those persons holding options
to purchase Franklin Common Stock exercisable within sixty (60) days of
April 10, 1997, the number of shares of Franklin Common Stock that are
issuable at the end of such period upon the exercise thereof.
(4) The share amounts indicated as beneficially owned are subject to options
granted to other directors, officers and key employees of the Company by
the following persons in the following amounts: Hyrum W. Smith, 122,480
shares, and Dennis R. Webb, 52,500 shares.
(5) The share amounts indicated for Hyrum W. Smith are owned of record by Hyrum
W. Smith as trustee of The Hyrum W. Smith Trust with respect to 762,648
shares; those indicated for Dennis R. Webb, by Dennis R. Webb as trustee of
The Lighthouse Foundation with respect to 32,500 shares; and those
indicated for Arlen B. Crouch by Arlen B. Crouch as trustee of The Arlen B.
Crouch Trust with respect to 10,000 shares. Messrs. Smith, Webb and Crouch
are the respective trustees of those trusts and foundations, having sole
power to vote and dispose of all shares held by the respective trusts and
foundations and may be deemed to have beneficial ownership of such shares.
An additional 90,000 shares indicated for Arlen B. Crouch are held by Mr.
Crouch's wife as trustee of The Derrel R. Crouch Trust and may be deemed to
be beneficially owned by Mr. Crouch.
(6) The share amounts indicated include shares subject to options currently
exercisable held by the following persons in the following amounts: Hyrum
W. Smith, 60,000 shares; Arlen B. Crouch, 934,029 shares; Val John
Christensen, 159,000 shares; Thomas H. Lenagh, 9,000 shares; Daniel R.
Howells, 9,000 shares; D. Gordon Wilson, 5,000 shares; Jon H. Rowberry,
22,500 shares; Don J. Johnson, 2,500 shares; and all executive officers and
directors as a group, 1,201,029 shares.
(7) Dennis R. Webb was a director and Senior Vice President of the Company
until his resignation in 1993.
(8) The share amounts indicated for Robert F. Bennett include 3,810 shares
owned by Mr. Bennett's two daughters sharing the same household. All other
shares are owned of record by The Robert F. Bennett Asset Management Trust.
(9) The share amounts indicated for Robert H. Daines include 15,000 shares
owned by Tahoe Investments, L.L.C., a Utah limited liability company, of
which Mr. Daines is a member.
(10) The share amounts indicated for James M. Beggs include 2,000 shares held by
Mr. Beggs' wife.
THE COVEY MEETING
DATE, TIME AND PLACE OF MEETING
The Covey Meeting will be held on Friday, May 30, 1997 at 9:30 a.m., local
time, at the Hyrum W. Smith Auditorium, 2200 West Parkway Boulevard, Salt Lake
City, Utah 84119-2331.
RECORD DATE AND SHARES ENTITLED TO VOTE
Only holders of record of Covey Common Stock at the close of business on
the Record Date, April 21, 1997, are entitled to notice of and to vote at the
Covey Meeting. As of the close of business on the Record date, there were
790,000 shares of Covey Common Stock outstanding and entitled to vote, held of
record by 15 stockholders. A majority, or 395,001, of these shares, present in
person or represented by proxy, will constitute a quorum; however, a vote of the
holders of 66 2/3% of the Covey Common Stock, or 526,667 shares, is required to
approve the Merger. Each Covey stockholder is entitled to one vote for each
share of Covey Common Stock held as of the Record Date.
17
<PAGE> 28
VOTING OF PROXIES
The Covey proxy accompanying this Joint Proxy Statement is solicited on
behalf of the Board of Directors of Covey for use at the Covey Meeting.
Stockholders are requested to complete, date and sign the accompanying proxy and
promptly return it in the accompanying envelope or otherwise mail it to Covey.
All proxies that are properly executed and returned, and that are not revoked,
will be voted at the Covey Meeting in accordance with the instructions indicated
on the proxies or, if no direction is indicated, to approve the Merger Agreement
and the Merger. Covey's Board of Directors does not presently intend to bring
any business before the Covey Meeting other than the specific proposals referred
to in this Joint Proxy Statement and specified in the notice of the Covey
Meeting. So far as is known to Covey's Board of Directors, no other matters are
to be brought before the Covey Meeting. As to any business that may properly
come before the Covey Meeting, it is intended that proxies, in the form
enclosed, will be voted in respect thereof in accordance with the judgment of
the persons voting such proxies. A Covey stockholder who has given a proxy may
revoke it at any time before it is exercised at the Covey Meeting by (i)
delivering to the Secretary of Covey a written notice, bearing a date later than
the proxy, stating that the proxy is revoked, (ii) signing and so delivering a
proxy relating to the same shares and bearing a later date prior to the vote at
the Covey Meeting, or (iii) attending the Covey Meeting and voting in person.
VOTE REQUIRED
Approval of the Merger Agreement and the Merger by Covey's stockholders is
required by the URBCA and by the Articles of Incorporation of Covey. Such
approval requires the affirmative vote of the holders of 66 2/3% of the issued
and outstanding Covey Common Stock. As of the Record Date, executive officers
and directors of Covey and their affiliates as a group beneficially owned
409,801 shares of Covey Common Stock (approximately 47% of the shares of Covey
Common Stock then outstanding). As of the Record Date and the date of this Joint
Proxy Statement, Franklin owns no shares of Covey Common Stock.
QUORUM; ABSTENTIONS
The required quorum for the transaction of business at the Covey Meeting is
a majority of the shares of Common Stock issued and outstanding on the Record
Date. Abstentions will be counted for purposes of determining the presence of a
quorum, but will not be counted as votes entitled to be cast. Because approval
of the Merger Agreement and the Merger requires the affirmative vote of at least
66 2/3% of the outstanding shares of Covey Common Stock entitled to vote
thereon, abstentions will have the same effect as a vote against the Merger
Agreement and the Merger.
SOLICITATION OF PROXIES AND EXPENSES
Covey will bear the cost of solicitation of proxies in the enclosed form
from its stockholders. In addition to solicitation by mail, the directors,
officers and employees of Covey may solicit proxies from stockholders by
telephone, telegram, letter or in person.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF COVEY BELIEVES THAT THE MERGER IS FAIR TO AND IN
THE BEST INTERESTS OF COVEY AND ITS STOCKHOLDERS AND, THEREFORE, UNANIMOUSLY
RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE MERGER. In
considering such recommendation, stockholders should be aware that Franklin has
agreed to enter into agreements, including employment, consulting and purchase
agreements, with certain directors and officers of Covey. See "The Merger and
Related Transactions -- Interest of Certain Persons in the Merger."
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES
WITH THEIR PROXY CARDS.
18
<PAGE> 29
PRINCIPAL STOCKHOLDERS OF COVEY
The following table sets forth information regarding the beneficial
ownership of Covey Common Stock as of April 10, 1997 by (i) each person who is
known by Covey to beneficially own more than 5% of Covey Common Stock, (ii) each
director, (iii) each executive officer and (iv) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AS OF
APRIL 10, 1997
---------------------------
NUMBER OF PERCENTAGE OF
NAME(1) SHARES TOTAL(2)
- --------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Stephen R. Covey(3).................................................. 319,801 40.48%
2160 N. Oakcrest Lane
Provo, Utah 84604
Stephen M. R. Covey.................................................. 50,000 6.33
554 East 2550 North
Provo, Utah 84604
Blaine N. Lee........................................................ 50,000 6.33
10435 South 600 East
Salem, Utah 84653
A. Roger Merrill..................................................... 50,000 6.33
755 East Cedar Hollow
Lehi, Utah 84043
Brad G. Anderson..................................................... 50,000 6.33
1145 East 250 North
Orem, Utah 84057
Michael Sean M. Covey................................................ 50,000 6.33
1864 North 270 East
Orem, Utah 84057
David M. R. Covey.................................................... 50,000 6.33
32 Hillside Place
The GAP, QLSLD 4061
Australia
Joel Peterson........................................................ 0 --
Robert Whitman....................................................... 0 --
Kay Stepp............................................................ 0 --
All directors and executive officers as a group (4 persons)(3)....... 409,801 46.81%
</TABLE>
- ---------------
(1) Except as otherwise indicated below, the persons named in the table have
sole voting and investment power with respect to all shares of stock shown
as beneficially owned by them, subject to community property laws, where
applicable.
(2) Based on 790,000 shares of Covey Common Stock issued and outstanding.
(3) Includes 82,500 shares held by Stephen M. R. Covey, as the Trustee of a
certain Voting Trust, the shares of which are beneficially held by Stephen
R. Covey. The Voting Trust will be terminated upon consummation of the
Merger.
19
<PAGE> 30
THE MERGER AND RELATED TRANSACTIONS
GENERAL
The Merger Agreement provides for the merger of Covey with and into
Franklin, with Franklin to be the surviving corporation of the Merger. The name
of Franklin will be changed to Franklin Covey Co. The discussion in this Joint
Proxy Statement of the Merger and the description of the principal terms of the
Merger Agreement are subject to and qualified in their entirety by reference to
the Merger Agreement, a copy of which is attached to this Joint Proxy Statement
as Appendix A and incorporated herein by reference.
CONVERSION OF SHARES; PURCHASE OF LICENSE RIGHTS
Pursuant to the Merger, each outstanding share of Covey Common Stock, other
than dissenting shares, will be converted, without any action on the part of the
holder thereof, into the right to receive shares of newly issued Franklin Common
Stock. The maximum number of shares of Franklin Common Stock to be issued in
connection with all the transactions contemplated by the Merger will not exceed
6,631,272 shares which will include the shares which Dr. Covey and the Covey
Trust elect to receive for the License Rights and the shares reserved for the
exercise of Franklin options into which Covey Options will be converted. The
number of shares to be issued to Covey Stockholders in the Merger will be
6,631,272 reduced by (i) a number of shares determined by dividing the total
amount of cash which Dr. Covey and the Covey Trust elect to receive for the
License Rights by the Average Franklin Price, (ii) the actual number of shares
of Franklin Common Stock issued for the License Rights and (iii) the number of
shares of Franklin Common Stock reserved for the exercise of Franklin options
into which the Covey Options will be converted. No fractional shares of Franklin
Common Stock will be issued in the Merger. Instead, each Covey stockholder who
would otherwise be entitled to receive a fraction of a share of Franklin Common
Stock will receive an amount of cash equal to the Average Franklin Price
multiplied by the fraction of a share of Franklin Common Stock to which the
stockholder would otherwise be entitled.
In connection with the Merger, Franklin will separately acquire from
Stephen R. Covey and the Covey Trust the License Rights for an aggregate of $27
million in cash or Franklin Common Stock valued at the Average Franklin Price.
The amount of cash or number of shares of Franklin Common Stock to be received
for the License Rights will be determined by Dr. Covey and the Covey Trust prior
to the Effective Time of the Merger.
It is expected that, as a result of the Merger, Franklin will increase its
fully diluted shares outstanding by a maximum of 6,631,272 shares, which would
represent approximately 25% of the shares on a fully diluted basis. The shares
of Franklin Common Stock held by Franklin stockholders prior to the Merger will
remain unchanged by the Merger.
CONVERSION OF OPTIONS
Upon consummation of the Merger, each then outstanding Covey Option will
automatically be converted into an option to purchase a number of shares of
Franklin Common Stock determined by multiplying the number of shares of Covey
Common Stock subject to the Covey Option by the Share Exchange Ratio at an
exercise price per share equal to the exercise price per share of the Covey
Option at the time of the Merger divided by the Share Exchange Ratio, rounded up
to the nearest whole cent. To avoid fractional shares, the number of shares of
Franklin Common Stock subject to an assumed Covey Option will be rounded to the
nearest whole share. The other terms of the Covey Options, including vesting
schedules, will remain unchanged. As of the Record Date, 60,000 shares of Covey
Common Stock were subject to outstanding Covey Options.
AMENDMENT TO ARTICLES OF INCORPORATION
Upon approval of the Merger and Plan of Merger, the Articles of
Incorporation of Franklin will be amended to change the name of Franklin to
Franklin Covey Co.
20
<PAGE> 31
EXCHANGE OF CERTIFICATES
At the closing of the Merger, each Covey Stockholder will be entitled to
receive in exchange for surrender of Covey Common Stock certificates held by
such holder a certificate representing the number of whole shares of Franklin
Common Stock equal to the Share Exchange Ratio multiplied by the number of
shares subject to the Covey Common Stock certificate being exchanged. No
fraction of a share of Franklin Common Stock will be issued; but, in lieu
thereof, each holder of shares of Covey Common Stock who would otherwise be
entitled to a fraction of a share of Franklin Common Stock (after aggregating
all fractional shares of Franklin Common Stock to be received by such holder)
will receive from Franklin an amount of cash (rounded to the nearest whole cent)
equal to the product of (i) such fraction, multiplied by (ii) the Average
Franklin Price.
If any certificate for shares of Franklin Common Stock is to be issued in a
name other than that in which the Covey Common Stock certificate surrendered in
exchange therefor is registered, it will be a condition of the issuance thereof
that the Covey Common Stock certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Franklin or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Franklin Common Stock in any name other than that of the registered holder of
the Covey Common Stock certificate surrendered, or established to the
satisfaction of Franklin or any agent designated by it that such tax has been
paid or is not payable.
HOLDERS OF COVEY COMMON STOCK CERTIFICATES SHOULD NOT
SUBMIT THEIR CERTIFICATES FOR EXCHANGE UNTIL THE CLOSING OF THE MERGER.
BACKGROUND OF THE MERGER
During the spring and summer of 1996, Franklin and Covey were separately
engaged in development of strategic plans with Franklin focusing on the
acquisition of training programs and products which would be perceived as the
most effective, highest quality products available to enhance individual and
organizational performance, with the Franklin Day Planner, Franklin's leading
product, utilized as the standard implementation device for corporation training
programs. Covey's long-term growth strategy sought to optimize market
opportunities for distribution of Covey products and training services for
organizations and individuals, including establishing direct sales, catalog and
retail distribution channels. Included in Covey's strategic plan was
consideration of several alternatives for financing of its strategy, including
incurrence of debt, private financing or an initial public offering.
On June 25, 1996, Hyrum W. Smith, Chairman and Chief Executive Officer of
Franklin and Arlen B. Crouch, then President and Chief Operating Officer of
Franklin, met with Stephen R. Covey, Chairman of Covey, and Stephen M. R. Covey,
President and Chief Executive Officer of Covey, to discuss a matter unrelated to
a potential business combination. After discussing the unrelated matter, the
parties engaged in informal discussion regarding the possibility of merging
Franklin and Covey. On July 8, 1996, Jon H. Rowberry, then Chief Financial
Officer of Franklin, informed the Franklin Board that he would contact Stephen
M. R. Covey to determine if Covey would be interested in further informal
discussions.
In July and August, 1996, Messrs. Smith, Crouch, Rowberry and Stephen M. R.
Covey continued informal discussions. Stephen M. R. Covey stated that Covey was
enthusiastic about its own strategy but would keep the Franklin option as an
open item for possible consideration with Covey's other strategic alternatives.
On September 6, 1996, Messrs. Smith, Crouch and Rowberry met with Messrs.
Stephen M. R. Covey, Joel Peterson, Vice Chairman of Covey, and Robert Guindon,
then Executive Vice President of Covey to continue discussions. A mutual
Confidentiality and Nondisclosure Agreement was signed and limited financial
information was exchanged at that time.
21
<PAGE> 32
On November 30, 1996, the Confidentiality and Nondisclosure Agreement was
amended to enable additional directors of both Franklin and Covey and their
advisors to have access to certain financial information for the purpose of
analysis.
On December 10, 1996, Messrs. Rowberry and Val John Christensen, Executive
Vice President and General Counsel of Franklin, met with Stephen M. R. Covey and
Covey's General Counsel and Securities Counsel to discuss certain terms and
conditions of structure and governance in a possible merger.
During the balance of December and the first week of January, several
meetings were held by telephone and in person for the purposes of discussing and
preparing a draft of a Letter of Intent.
On January 7, 1997, the Franklin Board met to review the proposed
transaction outlined in a draft Letter of Intent. Mr. Rowberry briefed the
Franklin Board on discussions that had taken place to that date and presented
the terms and conditions on which the representatives of the two companies had
agreed to merge. The Franklin Board unanimously endorsed the strategic grounds
for a merger with Covey, but cautiously examined the impact of the proposed
transaction from a financial point of view and the issues of corporate
governance following the merger. After discussion, the Franklin Board voted to
adjourn to permit management to obtain additional information and to further
explore with Covey the issues of consideration and corporate governance,
including the composition of the Board of the merged entity and the management
structure of the new organization. The Covey Board of Directors also held a
special Board meeting on January 7, 1997 to review the proposed transaction
outlined in the draft Letter of Intent. The Covey Board focused particularly on
issues of consideration and corporate governance following the merger and
approved the terms of the Letter of Intent with minor modifications.
On January 9, 1997, pursuant to the direction of the Franklin Board,
Messrs. Rowberry and Stephen M. R. Covey met again to discuss the merger and, on
January 13, 1997, Messrs. Smith and Stephen R. Covey signed a revised Letter of
Intent, subject to board approvals.
On January 15, 1997, the Franklin Board reconvened via a special telephonic
meeting during which Mr. Rowberry reported on his further discussions with Covey
concerning the additional information the Franklin Board had requested and
governance of the combined entity. Following Mr. Rowberry's report and a
detailed discussion of the information presented, the Franklin Board authorized
management to execute the Letter of Intent with certain modifications. Covey
held an informal meeting of some directors on the same date to communicate the
terms of the modified Letter of Intent and recommended that management develop a
recommendation for consideration by the full Covey Board on Monday, January 20,
1997.
Following several discussions among Messrs. Stephen M. R. Covey, Rowberry,
Christensen and Smith between January 15 and January 20, 1997, Covey's Board
held a special meeting on January 20, 1997 and accepted the terms of the merger
proposed by the Franklin Board, which was communicated to Franklin in writing on
January 21, 1997. On January 22, 1997, Franklin and Covey announced in a joint
press release the signing of the Letter of Intent to merge the companies.
During the week of January 24, 1997, Franklin solicited proposals from
investment banking firms to provide an opinion as to whether the merger of
Franklin and Covey on the terms contemplated would be fair to Franklin from a
financial point of view. After review of the proposals, Merrill Lynch was
selected to provide the opinion. During the first week of February, Merrill
Lynch visited both Franklin and Covey, interviewed executives of each party and
gathered financial and other data to use as a basis for rendering an opinion as
to the fairness of the consideration to be paid by Franklin pursuant to the
Merger. During the same time period, Franklin and Covey continued discussions
with their respective financial and legal advisors with respect to the tax,
financial and accounting implications of the proposed merger.
Between March 3rd and March 17th, discussions continued between Franklin
and Covey to negotiate and finalize the Merger Agreement and related
transactions. On March 17th, the Board of Directors of Franklin met and received
a presentation by Merrill Lynch in which Merrill Lynch indicated orally and
confirmed in writing its conclusion that the consideration to be paid by
Franklin pursuant to the Merger was fair to Franklin from a financial point of
view. The Franklin Board also reviewed and approved the terms of the Merger
Agreement and authorized the officers of Franklin to execute and deliver the
Merger Agreement. The Board
22
<PAGE> 33
of Directors of Covey also met on March 17th for the purpose of reviewing and
approving the Merger Agreement and authorized the officers of Covey to execute
and deliver the Merger Agreement.
REASONS FOR THE MERGER
Franklin's Reasons for the Merger. Franklin's growth strategy is to
establish Franklin as a leading provider of corporate training services and
products designed to improve personal productivity and performance. This
strategy contemplates the development or acquisition of training programs and
products that will be perceived by corporate and institutional clients as the
most effective, highest quality products on the market for enhancing individual
and institutional performance. A key element of this strategy is to position the
Franklin Day Planner as the standard implementation tool for all corporate
training programs.
Franklin has observed over the past several years the emergence of Covey as
a leading provider of leadership training services and products as well as
proprietary publications and programs designed to empower people and
organizations to become more effective. Franklin believes that Covey has a core
competency in researching, designing and marketing educational and intellectual
property products and services.
The Franklin Board has discussed on many occasions during the past several
years the business advantages the two companies could enjoy if they merged
operations. The Franklin Board has observed that the respective mission
statements of Franklin and Covey are harmonious and that the intellectual
property, services and product offerings of the respective companies are
complementary. With all of the foregoing in mind, Franklin's Board has
identified several potential benefits of the Merger that it believes will
contribute to the success of the Combined Company. These potential benefits
include:
- The ability of the Combined Company to offer Covey's top rated leadership
programs, The 7 Habits of Highly Effective People and Principle-Centered
Leadership which, with other Covey publications and programs and
Franklin's own highly regarded time management and other training
programs and products, will represent a significant menu of training
products and services.
- As a result of the quality intellectual content of Covey's leadership
programs and excellent promotional effort reflected in positive
relationships established with business and feature writers, Covey has
developed recognition and visibility at the senior management level of
corporations which will afford the Combined Company access for marketing
a broader range of training products and services.
- Covey has demonstrated the capacity to develop, produce and market new
intellectual property and related materials (books, audio tapes, video
tapes and training programs) that are well received and, when marketed
through Franklin's existing distribution channels, will contribute to the
success of the Combined Company.
- Substantial synergies and cost-savings can be realized through adding
Covey's products to Franklin's existing distribution channels and
utilizing Franklin's production facilities to produce Covey's books,
training and planning materials.
In the course of its discussion, the Franklin Board of Directors reviewed
with Franklin's management a number of factors relevant to the Merger, including
the strategic overview and prospects for Franklin. The Franklin Board also
considered, among other matters, (i) information concerning Franklin's and
Covey's respective businesses, prospects, financial performance and condition,
operations, management and competitive position; (ii) the financial condition,
results of operations and businesses of Franklin and Covey before and after
giving effect to the Merger; (iii) current financial market conditions and
historical market prices, volatility and trading information with respect to
Franklin Common Stock; (iv) the consideration to be received by Covey
stockholders in the Merger and relationship between the market value of Franklin
Common Stock to be issued and exchanged for each share of Covey Common Stock and
for the License Rights and Franklin's per share reported earnings and certain
other measures; (v) the belief that the terms of the Merger Agreement, including
the parties' respective representations, warranties and covenants and the
conditions to their respective obligations are reasonable; (vi) the ability of
Franklin to devote management time and energy to the integration and
assimilation of Covey's business and organization should the Merger be
consummated;
23
<PAGE> 34
(vii) a financial presentation by Merrill Lynch, including the written opinion
of Merrill Lynch rendered on March 17, 1997, stating that as of such date, and
based upon and subject to the factors and assumptions set forth in such written
opinion, the consideration to be paid by Franklin pursuant to the Merger is fair
to Franklin from a financial point of view; (viii) the impact of the Merger upon
Franklin's customers and (ix) reports from management, financial advisors and
legal advisors as to the results of their due diligence investigation of Covey.
The Board of Directors of Franklin also considered a number of potentially
negative factors in its deliberations concerning the Merger, including, but not
limited to, (a) the risk that the benefits sought to be achieved in the Merger
will not be achieved and (b) the other risks described under "Risk Factors."
In view of the wide variety of factors considered by the Franklin Board of
Directors, the Franklin Board of Directors did not find it practicable to
quantify or otherwise assign relative weights to the specific factors considered
in approving the Merger Agreement and Merger. However, after taking into account
all of the factors set forth above, the Franklin Board of Directors determined
unanimously that the Merger Agreement and Merger were in the best interests of
Franklin and its stockholders and that Franklin should proceed with the Merger
Agreement and the Merger.
Covey's Reasons for the Merger. Covey's Board of Directors considered the
Merger with Franklin in the context of Covey's strategic plan for long-term
growth. From 1990 to 1994, Covey grew rapidly in terms of revenue, growing at a
compound annual rate of 55%. Profitability, however, fluctuated during the
period and Covey's financial position was highly leveraged. In January 1995,
Covey's management and Board embarked on a strategy of stabilizing the core
business, improving profitability and enhancing Covey's financial position. The
strategy included adding new products to the core business and creating new
channels of distribution.
The strategy proved effective as profits increased substantially. Covey
experienced positive cash flow and leverage was reduced. With improved
performance realized and a basic business model of generating recurring revenue
streams through the sale of high margin intellectual property products in place,
Covey's Board approved a long-term growth strategy to optimize these market
opportunities. The Covey Board also identified substantial capital requirements
and reviewed several alternatives for raising capital, including the private
sale of equity, incurrence of debt, project financing and a possible initial
public offering. In the context of these developments, merger discussions with
Franklin were initiated. Covey's Board of Directors has identified several
potential benefits of the Merger that it believes will contribute to the success
of the Combined Company. These potential benefits include:
- The Merger gives Covey immediate access to widespread retail stores and
significantly enhanced catalog distribution channels.
- The Merger will give Covey access to Franklin's liquidity and capital
resources.
- The Merger gives Covey access to improved operations and excellence in
printing capabilities.
- The Merger enables Covey to focus on content creation, product
development and meeting the needs of organizational clients, representing
Covey's greatest strengths.
- The Combined Company has the potential to realize significant cost
savings in administration.
- The Covey Board concluded that the basic missions of the respective
companies were substantially comparable (helping people and organizations
improve productivity and effectiveness) and that the underlying value
systems of the organizations were similar, which would contribute to a
constructive combination.
- The Merger with Franklin and the receipt of Franklin Common Stock in
connection with the Merger allows stockholders of Covey to participate in
a public company with the potential for capital appreciation and future
liquidity.
In the course of its deliberations, the Covey Board of Directors reviewed
with Covey's management a number of additional factors relevant to the Merger,
including the strategic overview and prospects for Covey, its products and its
financial requirements. The Covey Board also considered, among other matters,
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(i) information concerning Franklin's and Covey's respective businesses,
prospects, financial performance and condition, operations, technology,
management and competitive position; (ii) the financial condition, results of
operations and businesses of Franklin and Covey before and after giving effect
to the Merger, (iii) current financial market conditions and historical market
prices, volatility and trading information with respect to Franklin Common
Stock; (iv) the consideration to be received by Covey stockholders in the
Merger, allowing Covey stockholders to participate in a public company with the
potential for capital appreciation and liquidity; (v) the belief that the terms
of the Merger Agreement, including the parties' mutual representations,
warranties and covenants, are reasonable; (iv) the fact that the Merger is
expected to be tax-free for federal income tax purposes; (iv) the impact of the
Merger upon Covey's customers and employees and (vii) reports from management,
financial advisors and legal advisors as to the results of their due diligence
investigation of Franklin.
The Board of Directors of Covey also considered a number of potentially
negative factors in its deliberations concerning the Merger, including, but not
limited to, (i) the shared control over the future operations of Covey following
the Merger; (ii) the risks that the benefits sought to be achieved in the Merger
will not be achieved and (iii) the other risks described above under "Risk
Factors."
In view of a wide variety of factors considered by the Covey Board of
Directors, the Covey Board did not find it practicable to quantify or otherwise
assign relative weight to the specific factors considered. However, after taking
into account all of the factors set forth above, the Board of Directors of Covey
determined unanimously that the Merger Agreement and the Merger were in the best
interests of Covey and its stockholders and that Covey should proceed with the
Merger and the Merger Agreement.
OPERATIONS FOLLOWING THE MERGER
Following the Merger, Covey will continue its operations as Covey
Leadership Center, a division of Franklin Covey Co. The Board of Directors of
the Franklin Covey Co. will consist of 15 members and Messrs. Stephen R. Covey,
Stephen M. R. Covey, Joel Peterson, Kay Stepp and Robert Whitman will be added
to ten members of the Franklin Board. Messrs. Arlen B. Crouch and Val John
Christensen will not continue as Franklin directors after the Merger. A
Nominating Committee of the Board consisting of Messrs. Hyrum W. Smith and
Stephen R. Covey (or their designated successors) shall have exclusive authority
until August 31, 2000 to nominate individuals to serve on the Board of Directors
and on the Executive Committee of the Board. The Nominating Committee shall also
nominate the President, Chief Executive Officer and Chief Financial Officer of
Franklin Covey Co., the President of the Covey Leadership Center division and
the members of the Strategic Management Committee (described below) during the
same period. The Board of Directors shall appoint an Executive Committee
consisting of Joel Peterson, Chairman, and Messrs. Hyrum W. Smith, Jon H.
Rowberry and Stephen M. R. Covey. Until August 31, 2000, the Executive Committee
shall have exclusive authority to make strategic decisions regarding the Covey
Leadership Center division and to set compensation and other employment terms
for designated employees. Other committees of the Board will be reconstituted to
include previous board members of Covey. In addition, a Strategic Management
Committee (a non-Board committee) consisting of Messrs. Rowberry, Stephen M. R.
Covey and John L. Theler, Chief Financial Officer of Franklin, will be created
and shall be responsible for day-to-day operations of Franklin Covey Co. The
stockholders of Covey will become stockholders of Franklin and their rights as
stockholders will be governed by Franklin's Articles of Incorporation and
Bylaws, as amended.
OPINION OF MERRILL LYNCH
On March 17, 1997, Merrill Lynch, financial advisor to Franklin, delivered
its oral opinion, which opinion was subsequently confirmed in a written opinion
dated as of March 17, 1997, to the Franklin Board, to the effect that, as of
such date, and based upon the assumptions made, matters considered and limits of
review as set forth in such opinion, the consideration to be paid by Franklin
pursuant to the Merger is fair to Franklin from a financial point of view. A
copy of the written opinion of Merrill Lynch, dated March 17, 1997, which sets
forth the assumptions made, matters considered, and certain limitations on the
scope of review undertaken by Merrill Lynch, is attached as Annex B to this
Joint Proxy Statement. FRANKLIN STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE
OPINION OF MERRILL LYNCH CAREFULLY
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AND IN ITS ENTIRETY. References herein to the "Merrill Lynch Opinion" refer to
the written opinion of Merrill Lynch dated as of March 17, 1997.
A COPY OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND CERTAIN LIMITATIONS ON THE SCOPE OF REVIEW
UNDERTAKEN BY MERRILL LYNCH, IS ATTACHED TO THIS JOINT PROXY STATEMENT AS
ANNEX B. HOLDERS OF FRANKLIN SHARES ARE URGED TO READ THE MERRILL LYNCH
OPINION IN ITS ENTIRETY. THE MERRILL LYNCH OPINION IS DIRECTED ONLY TO THE
FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE CONSIDERATION TO BE PAID BY
FRANKLIN PURSUANT TO THE MERGER. THE MERRILL LYNCH OPINION DOES NOT ADDRESS
THE MERITS OF THE UNDERLYING DECISION OF FRANKLIN TO ENGAGE IN THE MERGER
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF FRANKLIN SHARES
AS TO HOW SUCH STOCKHOLDER SHOULD VOTE. THE SUMMARY OF THE MERRILL LYNCH
OPINION SET FORTH IN THIS JOINT PROXY STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at the Merrill Lynch Opinion, Merrill Lynch, among other
things, (i) reviewed Covey's audited financial statements and related financial
information for the three fiscal years ended December 31, 1996, (ii) reviewed
Franklin's Annual Reports, Forms 10-K and related financial information for the
three fiscal years ended August 31, 1996, and Franklin's Form 10-Q and the
related unaudited financial information for the quarterly period ending November
30, 1996, (iii) reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and prospects
of Franklin and Covey, furnished to Merrill Lynch by Franklin and Covey,
respectively, as well as the synergies and related cost savings and expenses
expected to result from the Merger, discussed with Merrill Lynch by Franklin and
Covey, respectively; (iv) conducted discussions with members of senior
management and representatives of Franklin and Covey concerning their respective
businesses and prospects before and after giving effect to the Merger; (v)
reviewed the market prices and valuation multiples for the Common Stock of
Franklin and compared them with those of certain publicly traded companies which
Merrill Lynch deemed to be relevant; (vi) reviewed the results of operations of
Franklin and Covey and compared them with those of certain companies which
Merrill Lynch deemed to be relevant; (vii) compared the proposed financial terms
of the Merger with the financial terms, to the extent publicly available, of
certain other transactions which Merrill Lynch deemed to be relevant; (viii)
reviewed the potential pro forma impact of the Merger; (ix) reviewed a draft of
the Merger Agreement dated March 17, 1997; and (x) reviewed such other financial
studies and analyses and took into account such other matters as Merrill Lynch
deemed necessary, including Merrill Lynch's assessment of general economic,
market and monetary conditions.
In preparing the Merrill Lynch Opinion, Merrill Lynch assumed and relied on
the accuracy and completeness of all information supplied or otherwise made
available to it by or on behalf of Franklin or Covey or publicly available. With
respect to the financial forecast information and the synergies and related cost
savings and expenses expected to result from the Merger furnished to or
discussed with Merrill Lynch by Franklin and Covey, Merrill Lynch assumed that
they were reasonably prepared and reflected the best currently available
estimates and judgment of Franklin's or Covey's management as to the expected
future financial performance of Franklin or Covey, as the case may be, and the
synergies and related cost savings and expenses expected to result from the
Merger. Merrill Lynch did not assume any responsibility for independently
verifying such information or undertake an independent evaluation or appraisal
of any of the assets or liabilities of Franklin or Covey nor was Merrill Lynch
furnished with any such evaluation or appraisal. In addition, Merrill Lynch did
not conduct any physical inspection of the properties or facilities of Franklin
or Covey. Merrill Lynch also assumed that the Merger would be consummated on the
terms substantially similar to those set forth in the draft of the Merger
Agreement dated March 17, 1997. The Merrill Lynch Opinion is necessarily based
upon market, economic and other conditions as they existed on, and could be
evaluated as of, the date of the Merrill Lynch Opinion.
The matters considered by Merrill Lynch in arriving at the Merrill Lynch
Opinion are based on numerous macroeconomic, operating and financial assumptions
with respect to industry performance, general business
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and economic conditions, many of which are beyond the control of Franklin and
Covey, and involve the application of complex methodologies and educated
judgment. Any estimates incorporated in the analyses performed by Merrill Lynch
are not necessarily indicative of actual past or future results or values, which
may be significantly more or less favorable than such estimates. Estimated
values do not purport to be appraisals and do not necessarily reflect the prices
at which businesses or companies may be sold in the future, and such estimates
are inherently subject to uncertainty. No public company utilized as a
comparison is identical to Franklin or Covey, and none of the acquisition
comparables or other business combinations utilized as a comparison is identical
to the proposed Merger. Accordingly, an analysis of publicly traded comparable
companies and comparable business combinations is not mathematical; rather it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the comparable companies
or company to which they are being compared.
The following is a summary of the material portions of the financial and
comparative analyses performed by Merrill Lynch in arriving at its oral opinion
delivered to the Franklin Board on March 17, 1997.
Comparable Public Companies Analysis. Merrill Lynch compared certain
financial and operating information and ratios for Covey with corresponding
publicly available financial and operating information and ratios for a group of
publicly traded companies that Merrill Lynch deemed to be relevant. The
companies included A.T. Cross Company, Day Runner Inc., Filofax Group PLC,
Franklin Quest Co., Harcourt General Inc., Houghton Mifflin Company, John Wiley
& Sons, Inc., Manpower Inc., National Education Corp., Right Management
Consultants, Incorporated, Successories Inc. and Thomas Group Inc.
(collectively, the "Covey Comparables"). These companies were selected, among
other reasons, because they operate in one or more of the market segments in
which Covey operates. Merrill Lynch calculated the following: (i) the Covey
Comparables (with the exception of Houghton Mifflin Company and National
Education Corp.) ratio of market value to net income for the last twelve months
("LTM"), which ranged from 6.5x to 24.8x (with a median of 13.6x and a mean of
14.8x); (ii) the Covey Comparables calendarized ratio of market value to
earnings estimates for 1997 and 1998 (based on earnings estimates from First
Call Earnings Estimates ("First Call")), which ranged from 9.2x to 19.2x for
calendar year 1997 (with a median of 14.3x and a mean of 14.4x) and which ranged
from 9.6x to 17.5x for calendar year 1998 (with a median of 15.6x and a mean of
14.5x); (iii) the Covey Comparables (with the exception of National Education
Corp.) ratio of market value to book equity, which ranged from 1.5x to 5.9x
(with a median of 2.8x and a mean of 3.1x); (iv) the Covey Comparables (with the
exception of National Education Corp.) ratio of market capitalization to the LTM
sales, which ranged from 0.57x to 2.05x (with a median of 1.04x and a mean of
1.10x); (v) the Covey Comparables (with the exception of National Education
Corp.) ratio of market capitalization to earnings before interest, taxes,
depreciation and amortization ("EBITDA"), which ranged from 4.5x to 13.1x (with
a median of 7.2x and a mean of 7.5x); (vi) the Covey Comparables (with the
exception of National Education Corp.) ratio of market capitalization to
earnings before interest and taxes ("EBIT"), which ranged from 5.9x to 19.1x
(with a median of 10.7x and a mean of 10.8x); and (vii) the Covey Comparables
five-year projected earnings per share ("EPS") growth rates (based on
information provided by the Institutional Brokers Estimate System ("IBES")),
which ranged from 12.3% to 35.0% (with a median of 17.0% and a mean of 19.1%).
Merrill Lynch then applied the relevant ratios for the Covey Comparables to
Covey's LTM net income, calendarized earnings estimates for 1997 and 1998, book
equity, LTM sales, EBITDA and EBIT. Based on the application of these multiples
to Covey, Merrill Lynch determined an implied range of equity values for Covey,
which ranged from a high of $155.9 million to a low of $125.9 million, with a
midpoint of $140.9 million.
Merrill Lynch compared certain financial and operating information and
ratios for Franklin to the corresponding publicly available financial and
operating information and ratios of nine publicly traded companies that Merrill
Lynch deemed to be relevant. The companies included A.T. Cross Company, BT
Office Products International, Inc., Day Runner Inc., Filofax Group PLC,
Manpower Inc., National Education Corp., Right Management Consultants,
Incorporated, Successories Inc. and Thomas Group Inc. (collectively, the
"Franklin Comparables"). Merrill Lynch calculated multiples for the Franklin
Comparables of market capitalization to LTM revenue, EBITDA and EBIT and
multiples of market value to LTM EPS,
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1997 and 1998 EPS estimates (based on information from First Call) and last
fiscal quarter book equity. As a result of the above procedures, Merrill Lynch
noted that the multiples for Franklin (except for LTM revenue multiples) were
generally within the range of multiples for the Franklin Comparables. Based on
the above analyses, Merrill Lynch determined an implied range of the values of
the consideration to be paid by Franklin pursuant to the Merger, which ranged
from a high of $157.1 million to a low of $128.9 million, with a midpoint of
$143.0 million.
Discounted Cash Flow Analysis. Merrill Lynch calculated ranges of equity
values for Covey and Franklin based upon the value, discounted to the present,
of an estimated six calendar-year stream of unlevered free cash flow through
2002 (both with and without pre-tax synergies anticipated to be realized as a
result of the Merger) and a projected calendar year 2002 terminal value based on
multiples of estimated EBITDA ranging from 5.0x to 7.0x. Merrill Lynch prepared
the estimates of Covey's and Franklin's six calendar-year stream of unlevered
free cash flow and EBITDA through 2002 based upon discussions with management of
Covey and Franklin, respectively. Merrill Lynch utilized discount rates based on
theoretical analyses of the weighted average cost of capital and a range of
EBITDA multiples based on review of the EBITDA multiples of the Covey
Comparables, the Franklin Comparables, the Covey Comparable Acquisitions and the
Franklin Comparable Acquisitions. Based on such analyses, the implied equity
value of Covey ranged from $208.6 million to $330.2 million, with a midpoint of
$269.4 million, and an implied value of the consideration to be paid by Franklin
pursuant to the Merger ranged from $139.5 million to $199.1 million, with a
midpoint of $169.3 million.
Comparable Acquisition Analysis. Merrill Lynch reviewed the consideration
paid in the following acquisitions involving office products, educational and
publishing companies between January 1991 and September 1996 (acquiror/target):
Staples, Inc./Office Depot Inc.; Tribune Education Company/Educational
Publishing; Thomas Nelson Inc./The C.R. Gibson Company; Investor Group/United
Stationers Inc.; Electronic Data Systems Corp./AT Kearney Inc.; Corporate
Express Inc./Siekert & Baum Inc.; Houghton Mifflin Company/McDougal Littell &
Company; Office Depot Inc./Eastman Office Products Corp.; The Gillette
Company/Parker Pen Holdings Ltd.; Fukutake Publishing Company/Berlitz
International Inc.; and Sogeti SA/MAC Group (the "Covey Comparable
Acquisitions").
Merrill Lynch calculated the "offer value" (defined as the offer price per
share multiplied by the sum of the number of shares outstanding and the number
of exercisable options outstanding) of the Covey Comparable Acquisitions as a
multiple of LTM net income (with the exception of the Fukutake Publishing
Company/Berlitz International Inc. acquisition), of LTM cash flow and of book
equity (with the exception of the Corporate Express, Inc./Siekert & Baum Inc.
acquisition). The ranges of the offer value as a multiple of LTM net income, LTM
cash flow and book equity for such acquisitions were as follows: (i) offer value
to LTM net income ranged from 13.8x to 27.4x (with a median of 21.2x and a mean
of 20.5x), (ii) offer value to LTM cash flow ranged from 10.3x to 21.7x (with a
median of 12.1x and a mean of 14.7x) and (iii) offer value to book equity ranged
from 1.3x to 6.1x (with a median of 2.3x and a mean of 2.9x). Merrill Lynch also
calculated the "transaction value" (defined as the offer value plus the
liquidation values of any preferred stock, short term debt, long term debt and
the value of minority interests less cash and equivalents and proceeds from
exercisable options) of the Covey Comparable Acquisitions as a multiple of LTM
EBITDA, of LTM EBIT (with the exception of the Fukutake Publishing
Company/Berlitz International, Inc. acquisition) and of LTM revenues. The ranges
of the transaction values as a multiple of LTM EBITDA, LTM EBIT and LTM revenues
for such acquisitions were as follows: (i) transaction value to LTM EBITDA
ranged from 5.8x to 14.6x (with a median of 10.1x and a mean of 10.1x), (ii)
transaction value to LTM EBIT ranged from 7.4x to 16.9x (with a median of 12.5x
and a mean of 12.3x); and (iii) transaction value to LTM revenues ranged from
0.46x to 2.94x (with a median of 1.40x and a mean of 1.43x). Merrill Lynch then
applied the relevant ratios for the Covey Comparable Acquisitions to Covey's
financial information and determined an implied range of equity values for
Covey, which ranged from a high of $175.9 million to a low of $130.9 million,
with a midpoint of $153.4 million.
Merrill Lynch compared certain financial and operating information and
ratios for Franklin to the corresponding publicly available financial and
operating information and ratios of eight acquisitions involving office
products, educational and publishing companies that Merrill Lynch deemed to be
relevant. These
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acquisitions included Staples Inc./Office Depot Inc., Thomas Nelson, Inc./The
C.R. Gibson Company, Investor Group/United Stationers, Inc., Electronic Data
Systems Corp./AT Kearney Inc., Corporate Express, Inc./Siekert & Baum Inc.,
Office Depot Inc./Eastman Office Products Corp., The Gillette Company/Parker Pen
Holdings Ltd. and Sogeti SA/MAC Group (the "Franklin Comparable Acquisitions").
Merrill Lynch calculated multiples for the Franklin Acquisition Comparables of
offer values as a multiple of LTM net income, of LTM cash flow and of book
equity (with the exception of The Corporate Express Inc./Siekert & Baum Inc.
acquisition). The ranges of the offer value as a multiple of LTM net income, LTM
cash flow and book equity for such acquisitions were as follows: (i) offer value
to LTM net income ranged from 13.8x to 27.4x (with a median of 21.2x and a mean
of 20.5x), (ii) offer value to LTM cash flow ranged from 10.3x to 21.7x (with a
median of 11.8x and a mean of 13.9x) and (iii) offer value to book equity ranged
from 2.1x to 6.1x (with a median of 2.3x and a mean of 3.2x). Merrill Lynch also
calculated multiples for the Franklin Acquisition Comparables of transaction
values as a multiple of LTM EBITDA, of LTM EBIT and of LTM EBIT revenues. The
ranges of the transaction values as a multiple of LTM EBITDA, LTM EBIT and LTM
revenues for such acquisitions were as follows: (i) transaction value to LTM
EBITDA ranged from 5.8x to 12.7x (with a median of 9.9x and a mean of 9.4x),
(ii) transaction value to EBIT ranged from 7.4x to 16.9x (with a median of 12.5x
and a mean of 12.3x); and (iii) transaction value to LTM EBIT revenues ranged
from 0.46x to 2.65x (with a median of 0.92x and a mean of 1.13x). Merrill Lynch
then applied the relevant ratios for the Franklin Acquisition Comparables to
Franklin's financial information and determined an implied range of value of the
consideration to be paid by Franklin pursuant to the Merger, which ranged from a
high of $168.4 million to a low of $131.7 million, with a midpoint of $150.1
million.
Pro Forma EPS Analysis. Merrill Lynch analyzed certain pro forma effects
resulting from the Merger, including the potential impact of the Merger on
projected EPS for the combined company and, in each such case, with and without
synergies, based on discussion with and financial information provided by the
management of Franklin and Covey. With and without synergies, the Merger would
be accretive to the holders of Franklin Common Stock in the fiscal years 1998
and 1999. In its analysis, Merrill Lynch assumed that the Merger will be
consummated under the purchase method of accounting and that the Company will be
able to continue its share repurchase program, which is dependent upon a number
of factors not within Franklin's control.
The summary set forth above, while containing all material elements of the
analyses performed by Merrill Lynch, does not purport to be a complete
description of such analyses. Arriving at a fairness opinion is a complex
process not necessarily susceptible to partial or summary description. In
arriving at its opinion, Merrill Lynch did not attribute any particular weight
to any analysis or factors considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Merrill Lynch believes that its analysis must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all such factors and analyses, could create a misleading view of the
process underlying its analyses set forth in the Merrill Lynch Opinion.
The Franklin Board of Directors selected Merrill Lynch to render a fairness
opinion on the basis of Merrill Lynch's reputation as an internationally
recognized investment banking firm with substantial expertise in transactions
similar to the Merger and because it is familiar with Franklin and its business.
As part of its investment banking business, Merrill Lynch is continually engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions. For Merrill Lynch's services, Franklin has agreed to pay
Merrill Lynch a fee of $300,000, upon the delivery of Merrill Lynch's written
fairness opinion. Franklin also agreed to reimburse Merrill Lynch for certain
reasonable out-of-pocket expenses (including reasonable fees and expenses of its
legal counsel) incurred in connection with its engagement and to indemnify
Merrill Lynch and certain related persons against certain liabilities, including
liabilities under securities laws, arising out of its engagement.
Merrill Lynch has also performed various investment banking services for
Franklin in the past and has received customary fees for such services. In the
ordinary course of its securities business, Merrill Lynch may actively trade
equity securities of Franklin for its own account and the accounts of its
customers, and Merrill Lynch therefore may hold a long or short position in such
securities.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Purchase of License Rights from Stephen R. Covey. On November 1, 1990
Stephen R. Covey and Covey entered into a Licensing Agreement (the "License
Agreement") pursuant to which Stephen R. Covey licensed to Covey the exclusive
right to make, use, promote and market derivative works of the books, The 7
Habits of Highly Effective People and Principle-Centered Leadership and the
right to use the name, picture and/or likeness of Stephen R. Covey in promoting
and marketing the licensed products. On July 1, 1992 and on July 1, 1993, an
undivided 12% and 8%, respectively, of the License Agreement was assigned by
Stephen R. Covey to the Stephen R. Covey 1992 Irrevocable Trust. The resulting
20% interest in the License Agreement was subsequently assigned to the Covey
Trust on December 30, 1993. The License Agreement provided for a royalty of 3.5%
of Covey's gross monthly revenues. In connection with the Merger, Franklin will
purchase from Stephen R. Covey and the Covey Trust all of their right, title and
interest in the License Agreement and will be amending the License Agreement
with Stephen R. Covey to provide that it will be a perpetual, worldwide,
fully-paid royalty-free, freely transferrable license to use the products
covered by the License Agreement, and all derivative works therefrom. The
consideration for the License Rights will be an aggregate of $27 million dollars
payable in cash, Franklin Common Stock valued at the Average Franklin Price, or
both. Dr. Covey and the Covey Trust will determine the amount of cash or number
of shares of Franklin Common Stock to be received prior to the effective time of
the Merger.
Employment Agreements. In connection with the Merger, Covey has entered
into five-year employment agreements with Messrs. Blaine Lee, Roger Merrill and
David Hanna, who are currently key employees of Covey primarily engaged in
authoring leadership training books, developing leadership training materials
and presenting leadership seminars. The employment agreements, which are subject
to approval by Franklin, provide that Messrs. Lee, Merrill and Hanna will
perform substantially the same duties for Covey Leadership Center as previously
performed and, in addition, will require each to complete and publish at least
one leadership training book and related single cassette audio tape ("Book")
during the initial employment term with all copyrights, trademarks, royalties
and all other rights to the Books owned by Franklin Covey Co. If, during the
initial employment term, Messrs. Lee, Merrill and Hanna do not each complete and
publish a Book, then Franklin Covey Co. will also have rights beyond the initial
employment term to require each author to complete and publish the Book to the
satisfaction of Franklin Covey in consideration of $100. The employment
agreements provide for an initial salary equivalent to current salaries, may be
terminated only for cause and contain a two-year noncompetition covenant
following termination for any reason.
Stephen R. Covey Speaker Services Agreement. In connection with the Merger,
Stephen R. Covey will enter into an eight-year Speaker Services Agreement with
Franklin Covey Co. whereby the Covey Leadership Center division will act as
exclusive booking agent for Dr. Covey's speaking engagements. Subject to good
health, Dr. Covey will commit to a minimum of fifteen speaking engagements and
one satellite event per year during the first four years of the Speaker Services
Agreement and a minimum of five speaking engagements during the fifth year. No
minimum number of engagements will be required during years six through eight of
the Speaker Services Agreement. Dr. Covey will retain 80% of revenues from
speaking engagements and an amount to be negotiated with respect to satellite
events or other public events. The balance will be paid to the Covey Leadership
Center as a booking commission.
Stephen R. Covey Authorship Agreement. In connection with the Merger,
Stephen R. Covey will enter into an eight-year Authorship Agreement with
Franklin Covey Co. pursuant to which Dr. Covey will agree to complete and
publish four Books currently contracted to publishing houses with all
copyrights, trademarks, royalties and all other rights owned by Franklin Covey
Co. The Books include First Things First Everyday (Simon & Schuster), The 7
Habits of Highly Effective Families (Golden Family Entertainment), an
Applications concept book and an Organization concept book (Simon & Schuster). A
fifth book currently under contract with Simon & Schuster, which is a
business/leadership concept book and tape, will also be completed and published
with one-third of all publisher's royalties paid to Dr. Covey. In addition, Dr.
Covey, at his option, may complete one more business/leadership-concept book and
tape in which he will retain one-third of any publisher's royalties. If the
sixth book and tape are not published within the eight-year term of the
Authorship Agreement, Franklin Covey Co. shall nevertheless have the rights to
the book, subject to Dr. Covey's one-third interest in publisher's royalties.
Finally, Covey Leadership Center shall have an option
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to acquire the rights to any additional business/leadership books published by
Dr. Covey during the term of the Authorship Agreement in consideration of a
one-third interest in any royalties. After the term of the Authorship Agreement,
if Dr. Covey determines to write additional books, he has agreed to inform Covey
Leadership Center of his intention.
Board and Committee Appointments. Pursuant to the Merger, certain former
Board members of Covey will be appointed to the Board of Franklin Covey Co. and
appointed to serve as members of committees of the Board. See "-- Operations
Following the Merger."
Registration Rights Agreement. Franklin and the Covey Stockholders have
agreed that in the event Franklin shall elect to file a registration statement
under the Securities Act of 1933 on Form S-1 or S-3, or on any other form of
registration in which Franklin shareholders may participate as selling
shareholders and such registration statement is filed during the three-year
period commencing two years from the closing of the Merger, any Covey
Stockholder who is then serving as an executive officer or director of Franklin
shall be permitted to participate to the same extent and on the same terms as
any other executive officer or director of Franklin.
OTHER RELATED AGREEMENTS
Investment Letters. The Franklin Common Stock issuable in the Merger will
not be registered under the Securities Act in reliance upon applicable
exemptions from registration requirements of the Securities Act and state "blue
sky" laws for transactions not involving any public offering. Each of the Covey
Stockholders has agreed to provide Franklin with an Investment Letter containing
representations upon which Franklin intends to rely in issuing the shares
without registration and acknowledging restrictions on transferability of the
Franklin Common Stock received by them and agreeing that they will not sell
shares of Franklin Common Stock acquired in the Merger for a period of 24 months
from the Effective Time and, thereafter, only pursuant to an effective
registration statement under the Securities Act covering such shares or an
applicable exemption from the registration requirements of the Securities Act.
Certain of the Covey Stockholders will be afforded registration rights pursuant
to the Registration Rights Agreement described above.
Shareholders Agreement. All of the Covey Shareholders and Messrs. Hyrum W.
Smith, Arlen B. Crouch and Robert F. Bennett, directors and shareholders of
Franklin, will enter into a Shareholders Agreement agreeing to vote their shares
of Franklin for the election as directors of Franklin Covey Co., those persons
nominated by the Nominating Committee through August 31, 2000.
Releases. Each Covey Stockholder will be required to execute and deliver a
waiver and release of any claims against Covey and its officers, directors,
employees, representatives, agents or assigns as a condition to the closing of
the Merger.
REPRESENTATIONS AND COVENANTS
The Merger Agreement contains various representations and warranties of the
parties, including representations by Covey and the Covey Stockholders as to
Covey's organization, capitalization, authority to enter into the Merger
Agreement and to consummate the transactions contemplated thereby, financial
statements, liabilities, conduct of business, tax matters, ownership of real and
personal property, compliance with laws, intellectual property, contracts,
insurance, litigation, employees, benefit plans, compliance with laws,
indebtedness, labor matters, bankruptcy proceedings, receivables and conflicts
of interest. The Merger Agreement also contains representations and warranties
of Franklin as to its organization, capitalization, authority to enter into the
Merger Agreement and to consummate the transactions contemplated thereby, the
accuracy of information contained in Franklin's SEC filings, the existence of
certain liabilities and the absence of certain material undisclosed liabilities
or litigation, compliance with laws and changes in its business.
Under the terms of the Merger Agreement and for the period between the
execution of the Merger Agreement and the Effective Time, each of Covey, the
Covey Stockholders and Franklin have agreed to take such actions as may be
proper or advisable to give notice to, file with, and to seek authorizations,
consents and approvals of governmental agencies and third parties that may be
required, to provide access to
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representatives of each of Franklin and Covey to specified business and
financial information, to promptly notify the other of any material development
affecting consummation of the Merger, to refrain from taking actions which would
likely cause a breach of any representation or warranty set forth in the Merger
Agreement and to take all actions necessary to comply with requirements of the
HSR Act, such that all waiting periods will have expired or have been terminated
prior to the Effective Time. In addition, Franklin, Covey and the Covey
Stockholders have agreed to carry on their respective businesses in the usual,
regular and ordinary course. Covey has agreed to refrain from entering into any
arrangement or contract with any affiliate of Covey or with the Covey
Stockholders to keep its business and property substantially intact and, to
refrain from soliciting, initiating or encouraging any proposal or offer from
any third party relating to a merger, consolidation, reorganization,
liquidation, sale of assets or similar transactions affecting the business or
properties of Covey.
CONDITIONS TO THE MERGER
Each party's respective obligation to effect the Merger is subject to,
among other things, the satisfaction by the Effective Time of the Merger of the
following conditions:
(a) the absence of any law, statute, rule or regulation preventing the
consummation of the Merger or rendering the consummation of the Merger
illegal and the absence of any action, suit or proceeding pending or
threatened for that purpose;
(b) the filing required by the HSR Act having been made and all
applicable waiting periods having expired or been terminated;
(c) the stockholders of Franklin and the Covey Stockholders having
approved the Merger at meetings of shareholders called for that purpose and
preceded by distribution of the Joint Proxy Statement; and
(d) no party shall have terminated the Merger Agreement.
The obligations of Franklin to effect the Merger are subject to, among
other things, the satisfaction prior to the Effective Time of the Merger of the
following conditions, unless waived by Franklin:
(a) The representations and warranties of Covey and the Covey
Stockholders in the Merger Agreement shall be true and correct in all
material respects on and as of the Effective Time of the Merger;
(b) Each of Covey and the Covey Stockholders shall have performed and
complied with their respective covenants in all material respects through
the Effective Time;
(c) Covey shall have obtained all third party consents and approvals
necessary in order that the consummation of the Merger will not constitute
a breach or violation of, or result in a right of termination or
acceleration of any contract or agreement to which Covey is a party or any
encumbrance on any of Covey's assets pursuant to the provisions of any
agreement, arrangement or understanding or any license, franchise or
permit, in any such case which is material to Covey;
(d) An officer of Covey shall have delivered to Franklin a certificate
signed by such officer to the effect that the conditions specified above
have been satisfied in all respects;
(e) The Covey Stockholders shall have delivered to Franklin
certificates representing all issued and outstanding Covey Common Stock for
cancellation, at the Effective Time, upon issuance of the Franklin Common
Stock to the Covey stockholders as provided by the Plan of Merger;
(f) Covey shall have delivered to Franklin certified copies of
resolutions by which all corporate action on the part of Covey necessary to
approve the Merger Agreement, the Plan of Merger and the
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Merger were taken, including approval of the Covey Stockholders in the
manner required by the URBCA;
(g) Franklin shall have received from counsel to Covey and the Covey
Stockholders an opinion with respect to such matters as Franklin may
reasonably request prior to the Effective Time, addressed to Franklin and
dated as of the Effective Date;
(h) Arthur Andersen LLP shall have delivered its opinion to Covey and
the Covey Stockholders to the effect that the Merger will be treated as a
tax-free reorganization for federal income tax purposes;
(i) The holders of not more than 10% of the outstanding shares of
Covey Common Stock shall have elected dissenters' rights of appraisal in
connection with voting on the Merger;
(j) All of the Covey Stockholders and certain stockholders of Franklin
shall have entered into a Shareholders Agreement, in form and substance
reasonably acceptable to Franklin;
(k) Franklin shall have received a fairness opinion from Merrill Lynch
in form and substance reasonably acceptable to Franklin affirming that the
consideration to be paid by Franklin pursuant to the Merger is fair to
Franklin from a financial point of view;
(l) No legal action or proceeding shall have been instituted to
restrain or prohibit the transactions contemplated by the Merger Agreement
and there shall have been no material adverse change in the business
operations, properties or assets or in the condition, financial or
otherwise, of Covey;
(m) Each of Roger Merrill, Blaine Lee and David Hanna, current key
employees of Covey, shall have executed and delivered an Employment
Agreement in form and substance reasonably acceptable to Franklin;
(n) Stephen R. Covey and the Covey Trust shall have sold the License
Rights to Franklin and completed all transactions necessary for such
transactions to have been completed and be effective as of the Effective
Time;
(o) Each Covey Stockholder shall have entered into a Waiver and
Release, waiving and releasing any and all claims against Covey and such
waiver and release shall be in full force and effect and shall not have
been amended;
(p) Franklin shall have performed or caused the performance of any and
all investigations, inspections and studies, including financial,
environmental, title, asset and liability condition, tax, employee, benefit
plans, intellectual property and otherwise as Franklin deems appropriate,
all of which must be satisfactory to Franklin in its sole discretion;
(q) Franklin shall have obtained the approval of the stockholders of
Franklin to the Merger;
(r) Each of the Covey Stockholders shall have executed and delivered
to Franklin an Investment Letter acknowledging and confirming that
consummation of the Merger and issuance of the Franklin Common Stock to the
stockholders of Covey constitutes the offer and sale of securities under
the Securities Act and applicable state "blue sky" statutes, that the
issuance of the Franklin Common Stock is being made in express reliance
upon exemptions from registration requirements of the Securities Act based
upon the Covey Stockholders' representations and warranties made in the
Investment Letter and that no disposition of the Franklin Common Stock will
be made except in compliance with the Investment Letter and the Securities
Act and rules and regulations thereunder and in any event, that no sale or
offer to sell, pledge, hypothecation or other disposition will be made for
a period of two years from the Effective Date;
(s) Covey and the Covey Stockholders shall have entered into a
Registration Rights Agreement in a form reasonably acceptable to Franklin;
(t) There shall have been no material adverse change from December 31,
1996 until the Effective Time in the business, operations, properties or
assets or in the condition, financial or otherwise, of Covey;
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(u) Franklin shall have reviewed and approved all existing covenants
not to compete between Covey and its key employees;
(v) There shall be no more than 60,000 Covey Options outstanding at
the Effective Time; and
(w) Each of the Covey Stockholders shall have delivered to Franklin an
Agreement Not to Sell, in form and substance reasonably satisfactory to
Franklin, pursuant to which such Stockholder agrees not to dispose of his
Franklin Common Stock for a period of two years following the Effective
Date.
(x) All Employee Stock Transfer and Repurchase Agreements and related
Voting Trust Agreements between Covey and the Covey Stockholders shall have
been terminated prior to the Effective Time.
The obligations of Covey and the Covey Stockholders to effect the Merger
are subject to, among other things, the satisfaction prior to the Effective
Time, of the following conditions, unless waived by Covey:
(a) The representations and warranties of Franklin shall be true and
correct in all material respects at and as of the Effective Time;
(b) Franklin shall have performed and complied with all of its
covenants in all material respects through the Effective Time;
(c) Franklin shall have obtained all third party consents and
approvals necessary in order that the consummation of the Merger will not
constitute a breach or violation of, or result in a right of termination or
acceleration of any contract or agreement to which Franklin is a party or
any encumbrance on any of Franklin's assets pursuant to the provisions of
any agreement, arrangement or understanding or any license, franchise or
permit, in any such case which is material to Franklin;
(d) Franklin shall have delivered to Covey a certificate to the effect
that the representations, warranties and covenants are true and correct and
that the covenants have been complied with in all material respects;
(e) Franklin shall have delivered to Covey and the Covey Stockholders
a certified copy of the text of resolutions by which all corporate action
on the part of Franklin necessary to adopt and approve the Merger
Agreement, the Merger and the Plan of Merger was taken, certificates for
the Franklin Common Stock to be issued in connection with the Merger and
Articles of Merger and the Plan of Merger duly executed by Franklin;
(f) Covey and the Covey Stockholders shall have received from counsel
to Franklin an opinion with respect to such matters as Covey may reasonably
request prior to the Effective Time, addressed to Covey and the Covey
Stockholders and dated as of the Effective Time;
(g) Franklin shall have delivered Franklin Common certificates to each
of the Covey Shareholders in exchange for the Covey stock certificates;
(h) All actions to be taken by Franklin in connection with
consummation of the transactions contemplated by the Merger Agreement and
all certificates, opinions, instruments and other documents required to
effect the transaction contemplated by the Merger Agreement will have been
reasonably satisfactory in form and substance to Covey;
(i) Franklin shall have entered into the Registration Rights Agreement
in form reasonably satisfactory to Covey;
(j) All of the Covey Stockholders and certain stockholders of Franklin
shall have entered into a Shareholders Agreement in form reasonably
satisfactory to Covey;
(k) No court action or proceeding shall have been instituted to
restrain or prohibit the transactions contemplated by the Merger Agreement
or any related agreement and, at the Effective Time, there shall be no
material adverse change in the business, operations, properties or assets
in the condition, financial
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or otherwise of Franklin, and Covey shall receive a certificate to that
effect dated as of the Effective Time, executed by the President of
Franklin;
(l) Franklin shall have entered into a Speaker Services Agreement with
Stephen R. Covey in form reasonably satisfactory to Stephen R. Covey;
(m) Covey shall have performed or caused the performance of any and
all investigations, inspections and studies, including environmental,
title, asset and liability condition, all of which must be satisfactory to
Covey in its sole discretion;
(n) Covey and the Covey Stockholders shall have received an opinion
from Arthur Andersen, LLP in form reasonably satisfactory to Covey that the
Merger will be treated as a tax-free reorganization; and
(o) Franklin shall have taken all corporate action necessary to amend
its bylaws to provide for the corporate governance provisions contemplated
by the Merger Agreement.
CLOSING
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreement, Franklin and Covey will file
Articles of Merger with the Utah Department of Commerce, Division of
Corporations and Commercial Code. The Merger will be effective upon such filing.
It is anticipated that, assuming all conditions are met, the Merger will occur
and the closing will be held on May 30, 1997.
TERMINATION OR AMENDMENT
Termination or Amendment. The Merger Agreement may be terminated (i) by
written consent of Franklin, Covey and the Covey Stockholders, (ii) by either
Franklin or Covey as a result of a breach by the other party of a material
representation, warranty, covenant or agreement set forth in the Merger
Agreement or in the event any of the conditions precedent to the obligation of
either Franklin or Covey are not satisfied prior to the Effective Time, and
(iii) by Franklin or Covey in the event either shall determine, in its sole
discretion, that a matter discovered in due diligence and/or set forth on
disclosure schedules to the Merger Agreement is unacceptable. If either
Franklin, Covey or certain of the Covey Stockholders shall terminate the Merger
Agreement without cause or refuse to complete the agreement or to satisfy the
conditions to closing required to be satisfied by it, Franklin or Covey, as the
case may be, will be entitled to a payment of $500,000 as liquidated damages.
If, however, the Merger Agreement is terminated prior to May 2, 1997 because of
objections to matters set forth on disclosure schedules, neither Franklin nor
Covey shall have any obligation to the other for liquidated damages.
The Merger Agreement may be amended by Franklin and Covey at any time
before or after approval by the Franklin stockholders or the Covey Stockholders
but only if the amendment is in writing and signed by Franklin, Covey and each
of the Covey Stockholders.
REGULATORY MATTERS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. Each of Franklin and
Covey filed their respective Notification and Report Forms required under the
HSR Act with the FTC and the Antitrust Division on April 18, 1997 and the
applicable waiting period under the HSR Act is expected to expire prior to
consummation of the Merger. At any time before or after consummation of the
Merger, the FTC, the Antitrust Division, state attorneys general or others could
take action under the antitrust laws with
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respect to the Merger, including seeking to enjoin the consummation of the
Merger or seeking divestiture of substantial assets of Franklin or Covey.
Based on information available to them, Franklin and Covey believe that the
Merger will not violate federal or state antitrust laws. However, there can be
no assurance that a challenge to the consummation of the Merger on antitrust
grounds will not be made or that, if such a challenge were made, Franklin and
Covey would prevail or would not be required to accept certain conditions,
possibly including divestitures or hold-separate arrangements, in order to
consummate the Merger.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations relevant to the exchange of shares of Covey Common Stock solely
for Franklin Common Stock pursuant to the Merger that are generally applicable
to holders of Covey Common Stock. This discussion is based on currently existing
provisions of the Code, existing and proposed Treasury Regulations thereunder
and current administrative rulings and court decisions, all of which are subject
to change. Any such change, which may or may not be retroactive, could alter the
tax consequences to Franklin, Covey or the Covey Stockholders as described
herein.
Covey Stockholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular Covey
Stockholders in light of their particular circumstances, such as stockholders
subject to the alternative minimum tax provisions of the Code, who are foreign
persons, who do not hold their Covey Common Stock as capital assets, or who
acquired their shares in connection with stock options or in other compensatory
transactions. In addition, the following discussion does not address the tax
consequences of the Merger under foreign, state or local tax laws, the tax
consequences of transactions effectuated prior to, subsequent to, or
concurrently with, the Merger (whether or not any such transactions are
undertaken in connection with the Merger), including without limitation any
transaction in which shares of Covey Common Stock are acquired or shares of
Franklin Common Stock are disposed of. ACCORDINGLY, COVEY STOCKHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE MERGER.
The Merger is intended to constitute a "reorganization" within the meaning
of Section 368(a) of the Code (a "Reorganization"). Provided that the Merger
does so qualify as a Reorganization, then, subject to the limitations and
qualifications referred to herein, the Merger will generally result in the
following federal income tax consequences:
(a) No gain or loss will be recognized by holders of Covey Common
Stock solely upon their receipt in the Merger of Franklin Common Stock in
exchange therefor (except to the extent of cash received in lieu of a
fractional share of Franklin Common Stock).
(b) The aggregate tax basis of the Franklin Common Stock received by
Covey Stockholders in the Merger (including any fractional shares of
Franklin Common Stock not actually received) will be the same as the
aggregate tax basis of the Covey Common Stock surrendered in exchange
therefor.
(c) The holding period of the Franklin Common Stock received by each
Covey stockholder in the Merger will include the period for which the Covey
Common Stock surrendered in exchange therefor was considered to be held,
provided that the Covey Common Stock so surrendered is held as a capital
asset at the time of the Merger.
(d) Cash payments received by holders of Covey Common Stock in lieu of
a fractional share will be treated as if such fractional share of Franklin
Common Stock had been issued in the Merger and then redeemed by Franklin. A
Covey stockholder receiving such cash will recognize gain or loss, upon
such payment, measured by the difference (if any) between the amount of
cash received and the basis in such fractional share.
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(e) Neither Franklin nor Covey will recognize material amounts of gain
solely as a result of the Merger.
Even if the Merger qualifies as a Reorganization, a recipient of shares of
Franklin Common Stock could recognize gain to the extent that such shares were
considered to be received in exchange for services or property. All or a portion
of such gain may be taxable as ordinary income. Gain could also have to be
recognized to the extent that a Covey stockholder was treated as receiving
(directly or indirectly) consideration other than Franklin Common Stock in
exchange for Covey Common Stock. The parties are not requesting and will not
request a ruling from the Internal Revenue Service (the "IRS") in connection
with the Merger. However, the Covey Stockholders must satisfy certain
conditions, including the Code's "continuity of interest" requirement. To
satisfy the continuity of interest requirement, Covey Stockholders must not,
pursuant to a plan or intent existing at or prior to the Merger, dispose of or
transfer so much of either (i) their Covey Common Stock in anticipation of the
Merger or (ii) the Franklin Common Stock to be received in the Merger such that
Covey Stockholders, as a group, would no longer have a significant equity
interest in the Covey business being conducted after the Merger. Covey
Stockholders will generally be regarded as having a significant equity interest
as long as the number of shares of Franklin Common Stock received in the Merger
represents, in the aggregate, a substantial portion of the entire consideration
received by the Covey Stockholders in the Merger. No assurance can be made that
the "continuity of interest" requirement will be satisfied, and if such
requirement is not satisfied, the Merger would not be treated as a
Reorganization.
A successful IRS challenge to the Reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in Covey Stockholders recognizing taxable gain or loss with respect
to each share of Common Stock of Covey surrendered equal to the difference
between the stockholder's basis in such shares and the fair market value, as of
the Effective Time of the Merger, of the Franklin Common Stock received in
exchange therefor. In such event, a stockholder's aggregate basis in the
Franklin Common Stock so received would equal its fair market value, and the
stockholder's holding period for such stock would begin the day after the
Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting
with Franklin as the acquiring party in accordance with generally accepted
accounting principles. Under the purchase method of accounting, the purchase
price of Covey, including direct costs of the Merger to be incurred by Franklin,
will be allocated to the net assets, including identifiable intangible assets,
based upon estimated fair values at the date of acquisition. The identified
intangible assets to be acquired will consist of assembled workforce and
content, customer list, trade name and marketing assets and other goodwill-type
assets which will be amortized over periods of 12, 20, 40 and 30 years,
respectively.
The unaudited pro forma combined financial information included elsewhere
in this Joint Proxy Statement has been prepared on the basis of the assumptions
in the Notes thereto and includes assumptions relating to the allocation of the
consideration paid for the assets and liabilities of Covey based on preliminary
estimates of their fair value. Franklin is currently in the process of
determining the actual fair values of the assets and liabilities of Covey. Upon
completion of this determination, the allocation of the purchase price may be
revised. Additionally, the estimated values of the assets and liabilities at the
time of the Merger could vary from the amounts presented in the unaudited pro
forma combined financial information. However, management anticipates that the
estimated fair values reflected therein will not differ materially from actual
values. If the Merger is consummated, Franklin's financial statements will
reflect effects of acquisition adjustments only from the date of acquisition.
See "Unaudited Pro Forma Combined Financial Information."
APPRAISAL RIGHTS
Sections 1301-1331 of Part 13 of the URBCA provide appraisal rights
(sometimes referred to as "dissenters' rights") to stockholders of Utah
corporations in certain situations, including to the Covey Stockholders because
the separate existence of Covey will disappear in the Merger. However, appraisal
rights
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are not available to stockholders of a corporation, such as Franklin, whose
securities are listed on a national securities exchange.
Pursuant to the terms of the Merger Agreement, if holders of Covey Common
Stock have exercised dissenters' rights in connection with the Merger in
accordance with the provisions of Sections 1301 - 1331 of Part 13 of the URBCA
("Part 13"), any Dissenting Shares (as defined below) will not be converted into
Franklin Common Stock but will be converted into the right to receive such
consideration as may be determined to be due with respect to such Dissenting
Shares pursuant to the laws of the State of Utah. The obligation of Franklin to
consummate the Merger is conditioned upon the holders of not more than 10% of
the outstanding shares of Covey Common Stock exercising their right to dissent.
The following summary of the provisions of Part 13 is not intended to be a
complete statement of such provisions and is qualified in its entirety by
reference to the full text of Part 13, a copy of which is attached to this Joint
Proxy Statement as Appendix C and is incorporated herein by reference.
If the Merger is approved by the required vote of Franklin's and Covey's
stockholders and is not abandoned or terminated, each holder of shares of Covey
Common Stock who does not vote in favor of the Merger and who follows the
procedures set forth in Part 13 will be entitled to have his shares of Covey
Common Stock purchased by the Combined Company for cash at their Fair Value (as
defined below). The "Fair Value" of shares of Covey Common Stock will be
determined as of the day before the first announcement of the terms of the
proposed Merger, excluding any appreciation or depreciation in anticipation of
the proposed Merger. The shares of Covey Common Stock with respect to which
holders have perfected their purchase demand in accordance with Part 13 and have
not effectively withdrawn or lost such rights are referred to in this Joint
Proxy Statement as the "Dissenting Shares."
Prior to the vote taken to approve the proposed Merger at the Covey
Meeting, a Covey Stockholder who wishes to assert dissenters' rights must (a)
deliver written notice to Covey of his intent to demand payment for shares if
the proposed Merger is approved and (b) may not vote any of this shares in favor
of the proposed Merger. Within ten days after approval of the Merger by the
Covey Stockholders, the Combined Company must mail a notice of such approval
(the "Approval Notice") to all shareholders who are entitled to demand payment
for their shares under Part 13, together with a statement of the price
determined by the Combined Company to represent the Fair Value of the applicable
Dissenting Shares (determined in accordance with the immediately preceding
paragraph), a brief description of the procedures to be followed in order for
the shareholder to pursue his dissenters' rights, a copy of Part 13 and a form
for demanding payment. The statement of price to be delivered by the Combined
Company will constitute an offer by the Combined Company to purchase all
dissenting shares at the stated amount. Only a holder of record of Covey Common
Stock as of April 21, 1997 (or his duly appointed representative) is entitled to
assert a purchase demand for the shares registered in that holder's name.
A stockholder of Covey electing to exercise dissenters' rights must, within
30 days after the date on which the Approval Notice is mailed to such
stockholder, demand in writing from the Combined Company the purchase of his
shares of Covey Common Stock and payment to the stockholder of their fair market
value and must submit a certificate representing the Dissenting Shares to the
Combined Company in accordance with the terms of the Approval Notice. A
stockholder who does not demand payment and deposit share certificates as
required, by the date set in the Approval Notice, is not entitled to payment for
shares under Part 13. A holder who elects to exercise dissenter's rights should
mail or deliver his written demand for payment to the Combined Company at 2200
West Parkway Boulevard, Salt Lake City, Utah 84119-2331, directed to the
attention of Jon H. Rowberry, President and Chief Operating Officer. The demand
should specify the holder's name and mailing address, the number of shares of
Covey Common Stock owned by such stockholder and state that such holder is
demanding purchase of his shares in payment of their Fair Value. Upon the later
of the Effective Time and receipt by the Combined Company of each payment demand
made pursuant to Part 13, the Combined Company shall pay the amount the Combined
Company estimates to be the Fair Value of the Dissenting Shares, plus interest
at the legal rate of interest to each dissenter who has complied with the
requirements of Part 13 and who has not yet received payment.
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Any holder of Dissenting Shares who has not accepted an offer made by the
Combined Company may, within 30 days after the Combined Company first offered
payment for his shares, notify the Combined Company in writing of his own
estimate of the Fair Value of his shares and demand payment of the estimated
amount, plus interest, less any payment made under Part 13, if (i) the holder of
Dissenting Shares believes that the amount offered or paid by the Combined
Company under Part 13 is less than the Fair Value of the shares, (ii) the
Combined Company fails to make payment within 60 days after the date set by the
Combined Company as the date by which it must receive the payment demand, or
(iii) Covey, having failed to consummate the proposed Merger, does not return
share certificates deposited by a holder as required by Part 13. If the Combined
Company denies that the shares are Dissenting Shares, or if the Combined Company
and the shareholder fail to agree upon the fair market value of the shares, then
within 60 days after receiving the payment demand, the Combined Company must
petition the District Court of Salt Lake County (the "Court") to determine
whether the shares are Dissenting Shares or to determine the Fair Value of such
holder's shares of Covey Common Stock, or both. If the Combined Company does not
commence the proceeding within the 60-day period, it shall pay each holder of
Dissenting Shares whose demand remains unresolved the amount demanded. The
Combined Company shall make all holders of Dissenting Shares whose demands
remain unresolved parties to the proceeding as an action against their shares.
The Court may appoint one or more persons as appraisers to receive evidence and
recommend a decision on the question of Fair Value. Each holder of Dissenting
Shares made a party to the proceeding is entitled to judgment for the amount, if
any, by which the Court finds that the Fair Value of his shares, plus interest,
exceeds the amount paid by the Combined Company.
If any holder of shares of Covey Common Stock who demands the purchase of
his shares under Part 13 fails to perfect, or effectively withdraws or loses his
right to, such purchase, the shares of such holder will be converted into the
right to receive the number of shares of Franklin Common Stock to be exchanged
for shares of Covey Common Stock held by such person, in accordance with the
Merger Agreement. Dissenting Shares lose their status as Dissenting Shares if
(a) the Merger is abandoned; (b) the shares are transferred to a third party
prior to their submission for the required endorsement; (c) the stockholder
fails to make a written demand for purchase or to deposit the shares with the
Combined Company when making such demand; (d) the stockholder votes to approve
and adopt the Merger Agreement; (e) the stockholder and the Combined Company do
not agree on the status of the shares as Dissenting Shares or do not agree on
the purchase price, but neither the Combined Company nor the stockholder files a
complaint within 60 days after the mailing of the Approval Notice; or (f) with
the Combined Company's consent, the stockholder delivers to the Combined Company
a written withdrawal of such stockholder's demand for purchase of his shares.
FEES AND EXPENSES
All costs and expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereby are to be paid by the party incurring such
expense, except that expenses incurred in connection with preparation of the
Joint Proxy Statement and filing fees incurred in connection with the Joint
Proxy Statement and the listing of additional shares to be issued in connection
with the Merger shall be borne by Franklin.
In addition to the fee to be paid to Merrill Lynch for rendering its
fairness opinion, other transaction costs and other direct costs associated with
the Merger to be paid by Franklin are anticipated to total approximately
$600,000, consisting of legal fees, accounting fees, printing expenses, filing
fees and other miscellaneous expenses. Such costs will be treated as part of the
direct costs of the Merger. See "Franklin Covey Unaudited Pro Forma Combined
Financial Statements." The parties anticipate that the combined Merger expenses
will total approximately $1.5 million.
39
<PAGE> 50
PRINCIPAL STOCKHOLDERS OF FRANKLIN COVEY CO. (PRO FORMA)
The following table sets forth pro forma information regarding the
beneficial ownership of Franklin Common Stock upon consummation of the Merger by
(i) each person who is known by Franklin to beneficially own more than 5% of
Franklin Common Stock, (ii) each director, (iii) each executive officer and (iv)
all directors and executive officers as a group. The information set forth below
assumes the following: (a) consummation of the Merger as of April 10, 1977, (b)
an Average Franklin Price of $21.458 per share of Franklin Common Stock and (c)
election by Stephen R. Covey to receive all of the $27 million paid for the
License Rights in cash. These assumptions result in a Share Exchange Ratio of
6.32117.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------
NUMBER OF PERCENTAGE OF
NAME(1) SHARES(2) TOTAL(3)
- -------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Yacktman Capital Management......................................... 2,667,900 10.8%
303 West Madison
Chicago, Illinois 60606
Stephen R. Covey.................................................... 1,878,876 7.6
2160 N. Oakcrest Lane
Provo, Utah 84604
Hyrum W. Smith(4)(5)(6)............................................. 1,720,158 6.9
c/o Franklin Quest Co.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
Dennis R. Webb(4)(5)(6)(7).......................................... 1,498,212 6.1
c/o Franklin Quest Co.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
Capital Research and Management..................................... 1,350,000 5.5
333 South Hope Street
Los Angeles, California 90071
Arlen B. Crouch(5)(6)............................................... 1,266,450 4.9
Robert F. Bennett(8)................................................ 480,659 1.9
Stephen M. R. Covey................................................. 315,944 1.2
Val John Christensen(6)............................................. 257,030 1.0
Robert H. Daines(9)................................................. 59,305 *
Jon H. Rowberry(6).................................................. 31,500 *
James M. Beggs(10).................................................. 13,000 *
D. Gordon Wilson(6)................................................. 9,004
Thomas H. Lenagh(6)................................................. 10,000 *
Daniel P. Howells(6)................................................ 9,000 *
Beverly B. Campbell................................................. 300 *
E. J. "Jake" Garn................................................... 0 --
Dennis G. Heiner.................................................... 0 --
Don J. Johnson(6)................................................... 3,500 *
Joel Peterson....................................................... 0 --
Kay Stepp........................................................... 0 --
Mark W. Stromberg................................................... 2,500 *
John L. Theler...................................................... 1,000 *
Robert Whitman...................................................... 0 --
All directors and executive officers as a group
(21 persons)(4)(6)................................................ 6,058,226 23.3%
</TABLE>
40
<PAGE> 51
- ---------------
* Less than 1%.
(1) Except as otherwise indicated below, the persons named in the table have
sole voting and investment power with respect to all shares of stock shown
as beneficially owned by them, subject to community property laws, where
applicable.
(2) Includes stock options to purchase Franklin Common Stock exercisable within
sixty (60) days of April 10, 1997.
(3) The percentages set forth have been computed without taking into account
treasury shares held by Franklin and are based on 24,760,188 shares of
Franklin Common Stock outstanding upon consummation of the Merger, and,
with respect to those persons holding options to purchase Franklin Common
Stock exercisable within sixty (60) days of February 28, 1997, the number
of shares of Franklin Common Stock that are issuable at the end of such
period upon the exercise thereof.
(4) The share amounts indicated as beneficially owned are subject to options
granted to other directors, officers and key employees of the Company by
the following persons in the following amounts: Hyrum W. Smith, 122,480
shares, and Dennis R. Webb, 52,500 shares.
(5) The share amounts indicated for Hyrum W. Smith are owned of record by Hyrum
W. Smith as trustee of The Hyrum W. Smith Trust with respect to 762,648
shares; those indicated for Dennis R. Webb, by Dennis R. Webb as trustee of
The Lighthouse Foundation with respect to 32,500 shares; and those
indicated for Arlen B. Crouch by Arlen B. Crouch as trustee of The Arlen B.
Crouch Trust with respect to 10,000 shares. Messrs. Smith, Webb and Crouch
are the respective trustees of those trusts and foundations, having sole
power to vote and dispose of all shares held by the respective trusts and
foundations, and may be deemed to have beneficial ownership of such shares.
An additional 90,000 shares indicated for Arlen B. Crouch are held by Mr.
Crouch's wife as trustee of The Derrel R. Crouch Trust and may be deemed to
be beneficially owned by Mr. Crouch.
(6) The share amounts indicated include shares subject to options currently
exercisable held by the following persons in the following amounts: Hyrum
W. Smith, 60,000 shares; Arlen B. Crouch, 934,029 shares; Val John
Christensen, 159,000 shares; Thomas H. Lenagh, 9,000 shares; Daniel R.
Howells, 9,000 shares; D. Gordon Wilson, 5,000 shares; Jon H. Rowberry,
22,500 shares; Don J. Johnson, 2,500 shares; and all executive officers and
directors as a group, 1,201,029 shares.
(7) Dennis R. Webb was a director and Senior Vice President of the Company
until his resignation in 1993.
(8) The share amounts indicated for Robert F. Bennett include 3,810 shares
owned by Mr. Bennett's two daughters sharing the same household. All other
shares are owned of record by The Robert F. Bennett Asset Management Trust.
(9) The share amounts indicated for Robert H. Daines include 15,000 shares
owned by Tahoe Investments, L.L.C., a Utah limited liability company, of
which Mr. Daines is a member.
(10) The share amounts indicated for James M. Beggs include 2,000 shares held by
Mr. Beggs' wife.
41
<PAGE> 52
SELECTED HISTORICAL FINANCIAL DATA
FRANKLIN QUEST CO.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth selected historical consolidated financial
data with respect to Franklin for the periods indicated. This financial data
should be read in conjunction with Franklin's Consolidated Financial Statements
(including the Notes thereto) and "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Franklin" appearing elsewhere
herein. The selected historical consolidated financial data as of August 31,
1992, 1993, 1994 and 1995, and for the years then ended, have been derived from
Franklin's Consolidated Financial Statements which have been audited by Price
Waterhouse LLP, independent public accountants, whose report with respect to
such Consolidated Financial Statements as of August 31, 1995 and for each of the
two years in the period then ended appears elsewhere in this Joint Proxy
Statement. The selected consolidated historical financial data as of August 31,
1996 and for the year then ended, have been derived from Franklin's Consolidated
Financial Statements which have been audited by Arthur Andersen LLP, independent
public accountants, whose report with respect to such Consolidated Financial
Statements appears elsewhere in this Joint Proxy Statement. The selected
historical consolidated financial data for Franklin for the six months ended
February 29, 1996 and February 28, 1997 have been derived from Franklin's
unaudited Consolidated Financial Statements which, in the opinion of Franklin's
management, reflect all adjustments which are of a normal recurring nature
necessary for a fair presentation of the results for such periods. Results for
the unaudited six months ended February 28, 1997, set forth herein, are not
necessarily indicative of the results to be expected for Franklin's full fiscal
year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 29/28,
------------------------------------------------------ --------------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Sales:
Product................................. $ 92,862 $130,006 $166,219 $192,356 $236,039 $ 136,742 $155,124
Training................................ 27,931 35,477 49,721 68,168 70,812 35,788 41,308
Services................................ -- -- -- 16,598 25,155 12,943 11,903
-------- -------- -------- -------- -------- -------- --------
Total sales........................... 120,793 165,483 215,940 277,122 332,006 185,473 208,335
Cost of sales............................... 49,422 66,808 85,019 110,144 146,222 79,430 86,341
-------- -------- -------- -------- -------- -------- --------
Gross margin............................ 71,371 98,675 130,921 166,978 185,784 106,043 121,994
Selling, general and administrative....... 41,200 57,358 75,942 95,802 116,362 57,922 70,740
Depreciation and amortization............. 2,378 3,705 5,277 9,625 12,739 5,720 8,024
-------- -------- -------- -------- -------- -------- --------
Income from operations.................. 27,793 37,612 49,702 61,551 56,683 42,401 43,230
Interest income........................... 745 2,034 2,178 2,513 2,188 1,150 719
Interest expense.......................... (1,300) (1,059) (885) (578) (630) (226) (322)
Other income.............................. 127 136 -- 744 -- -- --
-------- -------- -------- -------- -------- -------- --------
Income before provision for income
taxes................................. 27,365 38,723 50,995 64,230 58,241 43,325 43,627
Provision for income taxes................ 10,772(1) 15,307 20,078 25,484 24,002 17,543 17,559
-------- -------- -------- -------- -------- -------- --------
Net income.............................. $ 16,593 $ 23,416 $ 30,917 $ 38,746 $ 34,239 $ 25,782 $ 26,068
======== ======== ======== ======== ======== ======== ========
Net income per share.................... $ 0.93 $ 1.10 $ 1.40 $ 1.71 $ 1.53 $ 1.14 $ 1.25
======== ======== ======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding.... 17,880 21,267 22,081 22,692 22,328 22,650 20,845
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
------------------------------------------------------ FEBRUARY 28,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 58,193 $ 63,493 $ 49,705 $ 35,006 $ 24,041 $ 32,583
Working capital........................... 68,775 84,689 86,409 87,629 84,340 81,951
Total assets.............................. 113,654 144,734 198,433 263,305 268,445 283,450
Long-term debt (including current)........ 12,898 10,649 9,612 6,209 6,406 6,007
Shareholders' equity...................... 82,447 112,997 162,085 224,342 231,835 241,979
</TABLE>
- ---------------
(1) Through June 2, 1992, Franklin was exempt from payment of federal and
certain state income taxes as a result of an S Corporation election made by
the shareholders of Franklin. The 1992 provision for income taxes reflects
on a pro forma basis, the income tax expense that would have been recorded
had Franklin not been exempt from paying taxes under the S Corporation
election.
42
<PAGE> 53
SELECTED HISTORICAL FINANCIAL DATA
COVEY LEADERSHIP CENTER, INC.
(IN THOUSANDS)
The following table sets forth selected historical consolidated financial
data with respect to Covey for the periods indicated. This financial data should
be read in conjunction with Covey's Consolidated Financial Statements (including
the Notes thereto) and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Covey" appearing elsewhere herein. The
selected historical consolidated financial data as of December 31, 1992, 1993
and 1994, and for the years then ended, have been derived from Covey's
Consolidated Financial Statements which have been audited by Dodge Evans and
Co., independent public accountants, whose report with respect to such
Consolidated Financial Statements for the year ended December 31, 1994 appears
elsewhere in this Joint Proxy Statement. The selected historical consolidated
financial data as of December 31, 1995 and 1996 and for the years then ended,
have been derived from Covey's Consolidated Financial Statements which have been
audited by Arthur Andersen LLP, independent public accountants, whose report
with respect to such Consolidated Financial Statements appears elsewhere in this
Joint Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Sales:
Training.................................... $24,690 $41,078 $59,995 $64,433 $83,822
Product..................................... 4,689 7,079 9,008 11,610 14,854
------- ------- ------- ------- -------
Total sales............................ 29,379 48,157 69,003 76,043 98,676
Cost of sales.................................. 11,567 18,895 29,593 27,804 37,857
------- ------- ------- ------- -------
Gross margin........................... 17,812 29,262 39,410 48,239 60,819
Selling, general and administrative............ 15,532 24,208 35,442 40,505 48,657
Depreciation and amortization.................. 531 790 1,375 1,927 2,581
------- ------- ------- ------- -------
Income from operations................. 1,749 4,264 2,593 5,807 9,581
Interest expense............................... (195) (338) (676) (811) (849)
Other income (expense), net.................... 3 (94) (1,026) (113) 10
Minority Interest.............................. -- -- 58 (86) (14)
------- ------- ------- ------- -------
Income before provision for foreign and
certain state income taxes........... 1,557 3,832 949 4,797 8,728
Provision for foreign and certain state income
taxes(1).................................... 30 21 135 294 375
------- ------- ------- ------- -------
Net income............................. $ 1,527 $ 3,811 $ 814 $ 4,503 $ 8,353
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 22 $ 52 $ 70 $ 358 $ 139
Working capital................................ (649) (1,741) (1,440) 319 4,318
Total assets................................... 9,927 18,859 23,229 27,211 36,561
Long-term debt (including current)............. 1,093 2,493 7,992 6,040 7,176
Shareholders' equity(1)........................ 1,305 3,914 2,432 7,121 11,852(2)
</TABLE>
- ---------------
(1) Covey has elected, for federal and state income tax purposes, to include its
taxable income with that of its shareholders (an S Corporation election).
Accordingly, Covey does not record a provision for federal and state income
taxes which would otherwise be considered in the determination of net income
had Covey not elected S Corporation status. A provision has been made for
foreign income taxes and for state income taxes for those states that tax S
Corporations.
(2) Does not reflect distributions of $10.1 million to the Covey Stockholders
for the payment of income taxes on earnings through December 31, 1996 and of
previously-taxed earnings, which were made subsequent to December 31, 1996.
43
<PAGE> 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FRANKLIN QUEST CO.
The following discussion should be read in conjunction with the
Consolidated Financial Statements of Franklin and the Notes thereto included
elsewhere in this Joint Proxy Statement.
OVERVIEW
Franklin has been in the business of teaching time management seminars
since Franklin's inception in 1983 and has been selling the Franklin Day Planner
since its introduction in February 1984. Increases in sales during the periods
reported have been generated by teaching an increasing number of time management
seminar participants and selling an increasing number of Franklin Day Planners
and related products. Currently, Franklin derives its sales principally from
four areas: (i) institutional, public and Franklin Flexible Training (FFT) time
management seminars and other training and consulting services, (ii) catalog and
direct sales of the Franklin Day Planner and related products, (iii) retail
sales of the Franklin Day Planner and related products in 95 Franklin operated
stores, and (iv) third party printing and tabbing services. Franklin's results
of operations have been seasonal in nature, resulting primarily from customer
buying habits for calendar-related products.
Franklin opened 20 new retail stores during fiscal 1996 and five additional
stores in the first six months of fiscal 1997. Retail store sales as a
percentage of total product sales have increased as Franklin 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 of
sales from catalog to retail stores.
On February 1, 1994, Franklin acquired the assets of Shipley Associates and
two related entities (collectively, "Shipley"). Shipley provided training,
consulting services and products designed to improve written and oral business
communication and presentation skills to clients located in the United States
and Europe. The cash purchase price was $23.0 million. The business of Shipley
is now conducted through the Franklin Quest Consulting Group.
On December 1, 1994, Franklin acquired Publishers Press, Inc.
("Publishers"). 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.
Effective as of April 1, 1995, Franklin acquired the assets of Time
Systems, Inc. ("Time Systems"), a time management training and product company
headquartered in Phoenix, Arizona. The cash purchase price was $8.6 million.
Time Systems markets a combination of time management training and planner
products to corporate and individual customers.
Effective as of December 1, 1995, Franklin 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
guaranteed purchase price was approximately $8.9 million, and additional
payments may be made, based on the operating results of PPI over the three years
following its acquisition.
Effective October 1, 1996, Franklin acquired the assets of TrueNorth
Corporation ("TrueNorth"). TrueNorth, a Utah corporation, is a leading 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.
Effective March 4, 1997, Franklin 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
44
<PAGE> 55
approximately nine 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
Consolidated Income Statement items expressed as percentages of total sales:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY
YEAR ENDED 29/28
--------------------- -------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales:
Product.................................. 77.0% 69.4% 71.1% 73.7% 74.5%
Training................................. 23.0 24.6 21.3 19.3 19.8
Services................................. 6.0 7.6 7.0 5.7
----- ----- ----- ----- -----
Total Sales...................... 100.0 100.0 100.0 100.0 100.0
Cost of sales.............................. 39.4 39.8 44.0 42.8 41.4
----- ----- ----- ----- -----
Gross margin..................... 60.6 60.2 56.0 57.2 58.6
----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative...... 35.2 34.6 35.1 31.2 34.0
Depreciation and amortization............ 2.4 3.4 3.8 3.1 3.9
----- ----- ----- ----- -----
Total operating expenses......... 37.6 38.0 38.9 34.3 37.9
----- ----- ----- ----- -----
Income from operations..................... 23.0 22.2 17.1 22.9 20.7
----- ----- ----- ----- -----
Interest income............................ 1.0 1.0 0.6 0.6 0.4
Interest expense........................... (0.4) (0.2) (0.2) (0.1) (0.2)
Other income............................... 0.2
----- ----- ----- ----- -----
Total other income (expense)..... 0.6 1.0 0.4 0.5 0.2
----- ----- ----- ----- -----
Income before provision for
income taxes................... 23.6 23.2 17.5 23.4 20.9
Provision for income taxes................. 9.3 9.2 7.2 9.5 8.4
----- ----- ----- ----- -----
Net income....................... 14.3% 14.0% 10.3% 13.9% 12.5%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED FEBRUARY 28, 1997 COMPARED WITH THE SIX MONTHS ENDED FEBRUARY
29, 1996
Sales. Sales for the first six months of fiscal 1997 increased $22.9
million, or 12.3%, over the same period in fiscal 1996. Sales included $5.7
million from the Personal Coaching Division, formerly True North Corporation,
which was not acquired until October 1996.
Product sales for the first six months of fiscal 1997 increased $18.4
million, or 13.4%, as compared to the first six months of the previous fiscal
year. Retail store sales comprised $8.6 million of this increase, which
represents a 16.1% increase compared to the first six months of fiscal 1996.
Most of the remaining increase was realized in the areas of network marketing
and catalog sales.
Training sales for the first six months increased by approximately $5.5
million, or 15.4%, compared to the same period a year ago. The revenue increases
resulted from the Personal Coaching Division which was acquired effective
October 1, 1996 and was not included in training revenues for the first six
months of fiscal 1996.
Service revenues decreased $1.0 million, or 8.0%, compared to the first six
months of fiscal 1996. The decrease resulted primarily from unusually strong
sales in the first quarter of the prior fiscal year from printing a nationally
bestselling book and reduced per unit revenues in the current six month period
due to paper price
45
<PAGE> 56
decreases which were passed on to customers and which reduced sales prices of
Publishers Press' outside printing sales.
Gross Margin. Gross margin was 58.6% of sales in the first six months of
fiscal 1997 compared to 57.2% in the comparable six months of fiscal 1996. This
increase was primarily a result of decreases in paper prices and the addition of
the Personal Coaching Division which generated higher gross margins than
Franklin's core products and services.
Operating Expenses and Other Expenses. Operating expenses increased to
37.9% of sales for the first six months of fiscal 1997 compared to 34.3% for the
first six months of the previous year. The increase came primarily from the area
of employee expenses which resulted from staff increases in sales and technology
support. There were also increased marketing program expenses in the second
quarter of fiscal 1997 in comparison to the same quarter in the previous year.
In addition, operating expenses of the Personal Coaching Division are generally
higher as a percentage of sales than expenses in the Company's core business.
Depreciation and leasehold amortization charges were higher by $1.6 million
compared to the same period a year ago because of new equipment purchases to
augment management information systems and to improve customer service. In
addition, leasehold improvements were made to new stores and facilities were
expanded at the Franklin Quest Institute of Fitness. Amortization charges
increased by $745,000 primarily due to amortization of intangible assets
acquired in connection with the acquisition of the Personal Coaching Division.
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
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, purchased
on December 1, 1994. Franklin expects that training sales as a percentage of
total sales will decline in the future because of the strong renewal rates of
replacement fillers, Franklin's entry into commercial printing through
Publishers, and the addition of another product channel with the acquisition of
PPI. Price increases had no material effect on increased sales between the
periods. Franklin continues to anticipate periodic fluctuations in direct
product sales due to irregular volume and timing of sales to network marketing
clients. Catalog sales growth continues to moderate as the retail store chain
expands 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 came 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, Franklin has
experienced, and
46
<PAGE> 57
expects it will continue to experience, increases in these expenses associated
with increases in the level of sales.
Depreciation charges were higher by $1,889,000, 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 $1,225,000 as a result of the amortization of
intangible assets acquired during fiscal 1995 and fiscal 1996.
Income Taxes. Income taxes have been accrued using an effective rate of
41.2% for fiscal 1996 compared to 39.7% for the prior fiscal year. Management
expects that the effective rate for fiscal 1997 will stay at approximately the
same level as 1996. The increase from the prior year is due partly to
non-deductible goodwill generated from the Publishers acquisition and partly to
non-deductible losses incurred in foreign countries.
FISCAL 1995 COMPARED WITH FISCAL 1994
Sales. Sales for the year ended August 31, 1995, increased $61.2 million,
or 28.3%, over the same period in 1994 as a result of an increase in the number
of Franklin Day Planners sold, an increase in the number of time management
seminar participants and the acquisition of new companies. Product sales (direct
product sales, catalog sales and retail store sales) increases of $42.7 million
accounted for 70% of the increase and training sales increases of $18.4 million
accounted for 30% of the increase. Price increases had no material effect on
increased sales between the periods. Direct product sales increased by $16.6
million as a result of the acquisition of Publishers on December 1, 1994. Retail
store sales increased $18.2 million over the previous year as a result of 21
additional store openings and included an increase of $2.7 million in comparable
store sales (comparable store sales growth was calculated using sales of 28
stores that had been open for the full prior comparable period).
Gross Margin. Gross margin was 60.2% of revenues for the year ended August
31, 1995, compared to 60.6% for the same period in 1994. The gross margin of
Publishers' outside printing business is generally lower than the margins on
Franklin's other businesses and was primarily responsible for the reduction in
overall margins.
Operating Expenses and Other Expenses. Selling, general and administrative
expenses decreased 0.7% as a percentage of sales during the year ended August
31, 1995 (34.6% compared to 35.2% in fiscal 1994). Publishers' operations
require significantly less such expenses as a percentage of sales than does the
core business of Franklin.
Depreciation charges were higher by $2,892,000, more than half of which was
due to the Publishers acquisition. The remainder was primarily due to the
addition of two new buildings during 1994, additional manufacturing equipment
and improvements in the 21 new stores. Amortization charges increased by
$2,593,000 as a result of the amortization of intangible assets acquired during
fiscal 1994 and fiscal 1995.
Income Taxes. Income taxes were accrued using an effective rate of 39.7%
for fiscal 1995 compared to 39.4% for the prior fiscal year. The increase was
due primarily to non-deductible goodwill generated from the Publishers
acquisition.
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<PAGE> 58
QUARTERLY RESULTS
The following table sets forth selected unaudited quarterly consolidated
financial data for the most recent ten quarters. The quarterly consolidated
financial data reflects, in the opinion of Management, all adjustments necessary
to present the results of operations for such periods. Results of any one or
more quarters are not necessarily indicative of continuing trends.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, 1995 YEAR ENDED AUGUST 31, 1996 FEBRUARY 28, 1997
------------------------------------- ------------------------------------- -------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY FINANCIAL
INFORMATION:
Sales...................... $71,064 $74,672 $59,380 $72,006 $91,880 $93,593 $72,465 $74,068 $102,377 $105,958
Gross margin............... 44,234 45,550 35,554 41,640 52,553 53,490 41,604 38,137 59,102 62,892
Income before provision for
income taxes............. 20,549 19,852 10,575 13,254 21,709 21,616 10,634 4,282 21,796 21,831
Net income................. 12,432 12,010 6,365 7,939 13,004 12,778 6,285 2,172 13,024 13,044
Net income per share....... $ 0.56 $ 0.53 $ 0.28 $ 0.35 $ 0.57 $ 0.57 $ 0.28 $ 0.10 $ 0.62 $ 0.63
</TABLE>
Franklin's quarterly results of operations reflect seasonal trends that are
primarily the result of customers who renew their Franklin Day Planners on a
calendar year basis. Seminar sales are somewhat seasonal because of the
reluctance of corporate training directors to schedule seminars during holiday
and vacation periods. In Franklin's experience, catalog sales, retail store
sales and income from operations tend to be lower during the month of February
and the third quarter of each fiscal year (March through May). The seasonality
of Franklin'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. Franklin believes that its
rapid growth may have mitigated the effect of seasonal fluctuations on quarterly
results in the past and that such fluctuations may be more pronounced as growth
slows. During the fourth quarter of fiscal 1995, Franklin lowered its estimate
of annual bonus awards, consistent with the determination of bonuses to be paid,
and adjusted sales returns and allowances. The amount of such adjustments, net
of related tax effect, was $519,000. During the fourth quarter of 1996, Franklin
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
$3,057,000. 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, Franklin's primary sources of capital have been net cash
provided by operating activities, long-term borrowing, capital lease financing
and the sale of Common Stock. Working capital requirements have also been
financed through short-term borrowing. At February 28, 1997, Franklin had $32.6
million in cash and cash equivalents, although $23.0 million was utilized
immediately after the end of the quarter to purchase Premier.
Net cash provided by operating activities during the six months ended
February 28, 1997 was $43.2 million. Net cash used in investing activities was
$17.8 million. Of this total, $5.9 million was invested in property and
equipment, and the balance was used in the acquisition of TrueNorth and a
contingent earnout payment which was paid as part of the acquisition of
Productivity Plus. During the first six months of fiscal 1997, Franklin used
$16.0 million to repurchase 860,000 shares of its Common Stock on the open
market.
Working capital during the period decreased by $2.4 million. Management
believes that cash flows and available credit facilities are sufficient to meet
working capital requirements, including anticipated increases in accounts
receivable and inventories associated with sales increases.
Net cash provided by operating activities during fiscal 1996 and 1995 was
$45.4 million and $40.8 million, respectively. In fiscal 1996, $3.6 million was
provided by decreases in inventory and accounts receivable, while in fiscal
1995, $8.4 million was used to finance increases in inventory and accounts
receivable.
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<PAGE> 59
Net cash used in investing activities in fiscal 1996 and 1995 was $26.9
million and $39.3 million, respectively. During fiscal 1996, PPI was purchased
for a total cash outlay of approximately $7.9 million, using cash provided from
operations. Funds invested in property and equipment amounted to $19.5 million
and included new store leasehold improvements, additional manufacturing
equipment and upgrades to Franklin's
core computer systems.
Financing activities used cash of $29.2 million in 1996 and $16.0 million
in 1995. In 1996, the primary use of cash was to repurchase Franklin's Common
Stock. In 1995, the primary use of cash was to repay debt assumed in the
acquisitions made during the year.
Going forward, Franklin 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. Franklin intends to continue acquiring additional data processing
hardware and software to accommodate anticipated increases in sales volume and
to upgrade its management and financial information systems.
Management anticipates using up to $27.0 million in cash along with the
shares of Franklin's Common Stock for the merger with Covey. Management also has
Board authorization to purchase up to an additional 1,655,000 shares of Common
Stock. Should such authority be exercised at current prices, Franklin would
utilize approximately $34.5 million in cash.
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. However, in order to finance its continuing repurchase
of common stock and to provide cash to complete acquisitions in 1997, Franklin
expects to borrow during 1997.
Franklin is registered in all states that have a sales tax and collects and
remits sales. Compliance with environmental laws or regulations has not had any
material effect on Franklin's operations. Inflation has not had a material
effect on Franklin's operations. However, in the future inflation may have an
impact on the price of materials used in the Franklin Day Planner, including
paper and leather materials. Franklin may not be able to pass on such increased
costs to its customers.
Franklin had available lines of credit, not utilized at February 28, 1997,
of $59.0 million. In March 1997, Franklin's Board of Directors authorized its
management to negotiate an increase in its lines of credit. Franklin is
currently negotiating an increase from $59.0 million to $100 million which it
expects to conclude in April 1997.
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<PAGE> 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COVEY LEADERSHIP CENTER, INC.
OVERVIEW
Covey is a provider of integrated educational materials, training
workshops, consulting services, publications and products designed to empower
individuals and organizations to become more effective. In 1996, Covey's
institutional customer list included 82 of the Fortune 100 and over 60% of the
Fortune 500. Covey also provides its products and services to a number of U.S.
and foreign governmental agencies, including the U.S. Department of Defense, and
numerous educational institutions.
In 1980, Dr. Stephen R. Covey, a respected author, lecturer, teacher and
organizational consultant, founded Stephen R. Covey & Associates. In 1989, Covey
changed its name to Covey Leadership Center, Inc., reflecting the expanding
range of Covey's products and services. Initially, the material presented in Dr.
Covey's bestseller, The 7 Habits of Highly Effective People, provided the core
content of Covey's offerings. In 1986, Covey developed a video-based
organizational training program designed to empower organizations and
individuals to achieve greater effectiveness through participant manuals, survey
processes and a reinforcing audio learning system. Covey's programs were
designed to be facilitated by licensed professional trainers and managers in
client organizations, reducing dependence on Covey professional presenters and
creating residual income from manual and material sales.
Since the publication of The 7 Habits of Highly Effective People, Covey has
continued to develop and publish materials designed to increase organizational
and individual effectiveness. Building upon the recognition of The 7 Habits of
Highly Effective People, Covey has employed its proprietary strategy and process
to complete two other bestsellers: First Things First and Principle-Centered
Leadership.
Covey believes its success in empowering organizations and individuals to
become more effective is a direct result of its execution of three core
strategies which Covey believes differentiate it from its competitors: (1)
developing proprietary educational materials that teach and reinforce
principle-centered change, (2) creating name and brand awareness through
pull-through marketing and (3) providing strategic solutions to organizations
and individuals. Covey believes that client facilitated training, which
constitutes the vast majority of individuals trained, is the essence of its
fundamental strategy to create recurring client revenue streams. After having
been certified, licensed clients purchase manuals, profiles, organizers and
other products to conduct Covey training workshops within their organizations.
Most of these purchases are made without Covey having to repeat the sales cycle.
Covey stratifies its revenue sources between two distribution-type
offerings, namely training and products. Training sales consist of change
management and effectiveness consulting, live training seminars and associated
program manuals, presentation videotapes, assessment tools and international
licensee royalties. Product sales consist of products, including audiotapes,
personal organizers and other products, sold through Covey's catalog operations
and retail stores, independent distributors and bookstores. Product sales also
include book royalties and magazine subscription revenues.
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<PAGE> 61
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
consolidated income statement items expressed as a percentage of total sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Sales:
Training.............................................. 86.9% 84.7% 84.9%
Products.............................................. 13.1 15.3 15.1
----- ----- -----
Total sales................................... 100.0 100.0 100.0
Cost of sales........................................... 42.9 36.6 38.4
----- ----- -----
Gross margin.................................. 57.1 63.4 61.6
----- ----- -----
Operating expenses:
Selling, general and administrative................... 51.4 53.3 49.3
Depreciation and amortization......................... 2.0 2.5 2.6
----- ----- -----
Total operating expenses...................... 53.4 55.8 51.9
----- ----- -----
Income from operations........................ 3.8 7.6 9.7
Other income (expense), net............................. (2.4) (1.3) (0.9)
----- ----- -----
Income before provision for foreign and
certain state income taxes.................. 1.4 6.3 8.8
Provision for foreign and certain state income taxes.... 0.2 0.4 0.4
----- ----- -----
Net income.................................... 1.2% 5.9% 8.5%
===== ===== =====
Cost of Sales Data (as a percentage of related sales):
Training.............................................. 39.3% 33.3% 34.0%
Products.............................................. 42.2 33.9 41.7
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Sales. Total sales for 1996 increased $22.6 million or 29.8% to $98.7
million as compared with $76.0 million in 1995. Training sales increased $19.4
million or 30.1% to $83.8 million in 1996 as compared with $64.4 million in
1995. Training sales accounted for 84.9% of total sales in 1996 which is a 0.2%
increase from the 1995 level of 84.7%. The increase in training sales resulted
primarily from the successful introduction of new training seminars and
products, together with expansion of Covey's customer base. Product sales
increased by $3.2 million or 27.9% to $14.9 million in 1996 as compared with
$11.6 million in 1995. The increase in product sales was due primarily to growth
in sales of Covey's 7 Habits Organizer and related products. Additionally, this
increase was due to Covey's pull-through strategy related to increased training
which has resulted in higher levels of catalog and retail store sales.
Gross Margin. Gross margin for 1996 was $60.8 million compared to $48.2
million in 1995. This represented an increase of $12.6 million or 26.1%. Gross
margin as a percentage of sales decreased during 1996 to 61.6% as compared to
63.4% in 1995.
Gross margin for training declined to 66.0% of related revenues from 66.7%
in 1995. The decrease resulted from higher sales volume of lower margin training
products. Gross margin for products as a percentage of related revenues
decreased to 58.3% in 1996 from 66.1% in 1995. During 1996, as part of its
long-term strategy, Covey outsourced its inventory fulfillment and distribution
functions which resulted in higher cost of sales. Product mix has also decreased
the product gross margin percentage as sales of lower margin personal organizers
have accounted for a larger percentage of total product sales.
Operating Expenses. Operating expenses increased by $8.8 million or 20.8%
in 1996 to $51.2 million as compared with $42.4 million in 1995. Operating
expenses as a percentage of sales decreased to 51.9% in 1996 as compared with
55.8% in 1995. Selling, general and administrative expenses decreased as a
percentage of sales to 49.3% in 1996 from 53.3% in 1995. The decrease was
attributable to the absence of transition expenses
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<PAGE> 62
incurred by Covey in 1995 as a result of Covey's decision to shift its marketing
strategy from the use of affiliates to inhouse direct sales. Additionally, Covey
was successful in its attempts to expand revenues without corresponding
increases in employment levels and overhead costs.
Depreciation and amortization expense increased $0.7 million to $2.6
million in 1996 as compared with $1.9 million in 1995; however, as a percentage
of sales, depreciation and amortization expense were consistent between 1996 and
1995. The increase was due to additions to property and equipment and product
development costs and other intangible assets.
Other Expense, Net. Other expense, net, decreased $0.2 million or 15.5% to
$.8 million in 1996 compared with $1.0 million in 1995. During 1996, Covey sold
its majority interest in Executive Excellence Publishing, L.C. and recognized a
gain of approximately $1.0 million. The gain from this sale was partially offset
by a settlement with a former affiliate to conclude a legal dispute in
connection with the termination of an employment agreement.
Income Taxes. Covey has elected, for federal and certain state income tax
purposes, to include its taxable income with that of its shareholders (an S
Corporation election). Accordingly, Covey did not record a provision for federal
and certain state income taxes which would otherwise be considered in the
determination of net income had Covey not elected S Corporation status. A
provision has been made for foreign income taxes and for state income taxes for
those states that tax S Corporations.
Net Income. Net income increased $3.9 million or 85.0% to $8.4 million in
1996 as compared with $4.5 million in 1995. Net income as a percentage of sales
increased to 8.5% in 1996 from 5.9% in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Sales. Total sales increased $7.0 million or 10.2% in 1995 to $76.0 million
as compared with $69.0 million in 1994. Training revenue increased $4.4 million
or 7.4% in 1995 to $64.4 million as compared with $60.0 million in 1994.
Training sales increased primarily as a result of increased training
presentations and international licensing royalties. Product sales increased
$2.6 million or 28.9% to $11.6 million in 1995 as compared with $9.0 million in
1994. Product sales increased due to book royalties from First Things First
being earned for the entire year and increased sales of the Executive Excellence
magazine. Training sales decreased and product sales increased as a percentage
of total sales as a result of new product introductions and due to increased
distribution of Covey's product catalog during 1995.
Gross Margin. Gross margin for 1995 was 63.4% of sales compared to 57.1% in
1994. The gross margin increased $8.8 million to $48.2 million in 1995 from
$39.4 million in 1994. This was an increase of 22.4%. The gross margin for
training increased $6.5 million or 17.9%. Gross margin for training increased to
66.7% of related sales in 1995 compared to 60.7% in 1994. The increase in gross
margin percentage was mainly due to changes in Covey's sales strategy to
increase inhouse direct sales and reductions in related costs. The gross margin
for products increased $2.5 million or 47.4%. Gross margin for products as a
percentage of related sales increased to 66.1% in 1995 as compared to 57.8% in
1994. This increase resulted from expansion of product offerings during the
period and higher book royalties.
Operating Expenses. Operating expenses increased as a percentage of sales
to 55.8% in 1995 from 53.4% in 1994. These expenses increased $5.6 million or
15.3% to $42.4 million in 1995 from $36.8 million in 1994. The increase resulted
from the change in the sales strategy discussed above and higher levels of
incentive compensation as a result of increased profitability.
Other Expense, Net. Other expense, net, decreased $0.6 million or 38.6% to
$1.0 million in 1995 compared with $1.6 million in 1994. The decrease resulted
from a settlement in 1994 of $1.4 million with a former Covey officer. Interest
expense increased 20.0% to $0.8 million in 1995 from $0.7 million in 1994 due to
higher average debt balances during 1995.
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<PAGE> 63
Income Taxes. Covey has elected, for federal and certain state income tax
purposes, to include its taxable income with that of its shareholders (an S
Corporation election). Accordingly, Covey does not record a provision for
federal and state income taxes which would otherwise be considered in the
determination of net income had Covey not elected S Corporation status. A
provision has been made for foreign income taxes and for state income taxes for
those states that tax S Corporations.
Net Income. Net income increased $3.7 million, or 453.0% in 1995, to $4.5
million as compared with $0.8 million in 1994. Overall, net income as a
percentage of sales increased to 5.9% in 1995 from 1.2% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Covey's primary sources of capital have been net cash
provided by operating activities, short and long-term bank borrowing and capital
lease financing.
At December 31, 1995 and 1996, Covey had cash of $0.4 million and $0.1
million, working capital of $0.4 million and $4.3 million and a ratio of current
assets to current liabilities of 1.0 to 1 and 1.2 to 1, respectively. During
1996, Covey's cash position decreased by $0.2 million, consisting of $6.4
million of cash generated by operating activities, $4.9 million of cash used in
investing activities and $1.8 million of cash used in financing activities.
Net cash provided by operating activities was $2.2 million, $6.9 million
and $6.4 million for the years ended December 31, 1994, 1995 and 1996,
respectively. Covey's principal use of cash from operations has been to finance
accounts receivable and inventory associated with growth in Covey's business.
Accounts receivable increased $1.7 million, $2.5 million and $6.5 million during
the years ended December 31, 1994, 1995 and 1996, respectively, and inventories
increased $0.5 million, $0 and $1.3 million, respectively. A portion of the
increases in accounts receivable and inventories were partially offset by
increases in accounts payable and accrued liabilities of $0.2 million, $3.2
million and $3.0 million, respectively. Net cash used in investing activities
was $2.8 million, $2.5 million and $4.9 million during the years ended December
31, 1994, 1995 and 1996, respectively, which primarily consists of purchases of
property and equipment and additions to product development costs and other
intangible assets.
Financing activities provided $0.6 million of cash in 1994 and used $4.1
million and $1.8 million in 1995 and 1996, respectively, which consisted
primarily of repayment of borrowings in 1995 and distributions to S Corporation
shareholders in 1996.
Covey has a credit agreement (the "Credit Agreement") with Zions First
National Bank ("Zions Bank") which provided for a $6 million term loan and a
revolving line of credit commitment of $9 million as of December 31, 1996.
Subsequent to December 31, 1996, the Credit Agreement has been amended to
refinance the term loan and to increase the revolving line of credit commitment
to $25,000,000 through September 1, 1997. Borrowings on the revolving line of
credit are limited to 80% of eligible accounts receivable plus certain other
amounts, as defined. Amounts outstanding under the Credit Agreement are secured
by essentially all of Covey's assets.
As of December 31, 1996, the term loan bore interest at either Zions Bank's
base rate plus .25% or the contracted LIBOR rate plus 235 basis points, as
elected by Covey. As of December 31, 1996, the balance due under the term loan
was $5,125,000 which bore interest at the contracted LIBOR rate plus 235 basis
points, which was 7.85%. The balance outstanding under the term loan has been
transferred to the revolving line of credit.
The revolving line of credit bears interest at either Zions Bank's base
rate or the contracted LIBOR rate plus 210 basis points, as elected by Covey. As
of December 31, 1996, Covey had borrowed $1,230,000 under the revolving line of
credit with approximately $7,770,000 of availability under the line as of
December 31, 1996. Approximately $1,000,000 of borrowings as of December 31,
1996 bore interest at the contracted LIBOR rate plus 210 basis points, which was
7.35%, while approximately $230,000 bore interest at the bank's base rate, which
was 8.25%.
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<PAGE> 64
The Credit Agreement contains certain restrictive covenants with respect to
the operations of Covey. Among other restrictions, included are restrictions on
incurrence of additional indebtedness, maintenance of minimum levels of net
worth and maintenance of minimum levels of quarterly income before taxes. At
December 31, 1996, Covey was in compliance with all restrictive covenants.
On April 14, 1997 Covey distributed approximately $11.4 million to the
Covey Stockholders for the payment of income taxes on earnings through March 31,
1997 and of previously taxed earnings.
Covey expects that cash provided by operations, together with current
sources of available financing, will be sufficient to fund Covey's operations
during 1997.
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<PAGE> 65
BUSINESS OF FRANKLIN
GENERAL
Franklin is a provider of training seminars and products designed to
improve individual productivity. Franklin's principal seminars and products are
based upon Franklin's comprehensive time management system which enables
individuals to better manage their time by identifying goals and prioritizing
the tasks necessary to achieve them through the use of Franklin's primary
product, the Franklin Day Planner(R) (the "Franklin Planner"). Franklin also
provides training, consulting services and products designed to improve written
and oral business communications skills. Through recent acquisitions, Franklin
also offers fitness training services and book and commercial printing services.
Franklin sells its seminars and products to institutional clients such as
corporations, governmental agencies and other organizations, as well as to the
general public. A significant percentage of the users of Franklin's products
continue to use the Franklin Planner and purchase a renewal Franklin Planner
each year, creating substantial recurring sales.
The basic Franklin Day Planner System (the "Franklin System") consists of a
paper-based, two-page per day Franklin Planner, combined with a seven-ring
binder, along with a variety of planning aids, monthly and annual calendars and
personal management sections. Franklin offers various forms and accessories that
allow users to expand and customize their Franklin System. Franklin markets the
Franklin System and accessory products through its sales catalog and its retail
stores. At February 28, 1997, Franklin had 95 retail stores located in 35 states
and the District of Columbia. Product sales, consisting primarily of the
Franklin System and related products, accounted for approximately 79% of
Franklin's sales during the fiscal year ended August 31, 1996. Franklin believes
that a substantial part of its product sales result from referrals by existing
clients.
Seminars are marketed by Franklin's sales force to institutions and the
general public. Each participant in a Franklin seminar receives a seminar kit
containing a Franklin Planner, a vinyl binder, a storage binder and accompanying
instructional materials. Franklin's training consultants tailor Franklin's
seminars to institutional clients' specific businesses and objectives. Franklin
also offers Franklin Flexible Training ("FFT"), a program in which employees of
institutional clients are trained and certified by Franklin to conduct live or
facilitate video presentations of Franklin's seminars to in-house employees.
Training seminars, including seminars presented through the FFT program,
accounted for approximately 21% of Franklin's sales during the year ended August
31, 1996. Since the beginning of fiscal 1991 approximately 1,700,000 persons
have been trained to use the Franklin System, including approximately 350,000
persons during the year ended August 31, 1996.
In April 1995, Franklin acquired the assets of Time Systems, Inc. ("Time
Systems"), a time management training and product company headquartered in
Phoenix, Arizona. In June 1995, Franklin acquired the assets of LTS, Inc., a
distributor of Time Systems products and training services located in Atlanta,
Georgia.
In December 1995, Franklin 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, Franklin 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, Franklin 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 nine 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.
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<PAGE> 66
FRANKLIN'S PRODUCTS
The Franklin System has been developed as the basic tool for implementing
the principles of Franklin's time management system. The Franklin System
consists of a paper-based Franklin Planner, a binder in which to carry it, and
various planning aids, monthly and annual calendars and personal management
sections. Franklin offers a broad line of planners and binders for the Franklin
System, which are available in various sizes and styles. During the fiscal year
ended August 31, 1996, product sales, consisting primarily of the Franklin
System and related products, amounted to approximately $261.2 million and
accounted for approximately 79% of Franklin's sales during the period.
Planners. Master planners for the Franklin System consist of monthly
calendars, task lists and indexes, calendar pages for an entire year,
prioritized daily task lists, appointment schedules, daily expense records and a
daily record of events, all in various sizes and styles. The master planner also
includes 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, and a pagefinder/ruler. The master planner ranges in price from $25.00
to $42.00.
Franklin has designed portions of the Franklin System to be updated
annually through the purchase of renewal planners. Renewal planners include a
full annual set of daily calendaring and recordkeeping pages, twelve monthly
calendar tabs and forms for personal management sections. Renewal planners range
in price from $19.00 to $31.00. Franklin 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. Franklin has also developed and marketed specialized forms for government
employees, students, educators, salespersons, real estate professionals and
building contractors. Franklin's accessory products and forms are generally
available in the Franklin Planner sizes.
Kits. Franklin provides seminar kits to all individuals who attend live
seminars or participate in the FFT program, which include a vinyl binder, master
planner, storage binder and limited training materials. In addition, Franklin
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 $114.00.
Binders. Franklin offers ring binders in a variety of materials and styles
in each of the Franklin Planner 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 Franklin has been designed by a group of
skilled in-house craftsmen to encourage existing clients to upgrade their
binders. Binders range in price from $12.95 to $275.00. A substantial number of
Franklin's clients upgrade their binders from the original vinyl binder
generally received in a kit.
Software. In 1991 Franklin introduced its ASCEND(R) program, a complete
Personal Information Management ("PIM") system which can be used in conjunction
with the paper-based Franklin Planner or used as a stand-alone PIM system.
ASCEND(R) permits users to generate and print data on Franklin paper which can
be inserted directly into the Franklin Planner. The ASCEND(R) program operates
in both the Windows(TM) and Macintosh(R) environments, where a user is able to
access commands with either a keyboard or mouse by clicking on icons or
activating pull-down menus. ASCEND(R) '97 was introduced in August 1996 with new
and enhanced features. Franklin offers ASCEND(R) at a retail price of $99.95
which includes all necessary software, related tutorials and reference manuals.
To support users of its ASCEND(R) program, a technical support staff is
available to answer questions regarding the ASCEND(R) software. Franklin 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.
Accessories. To supplement its principal products, Franklin offers a number
of accessories and related products, including books, video tapes and audio
cassettes focused on time management and other topics. Franklin also offers a
variety of calculators, pens, pencils, pagefinders, hole punches and plastic
pouches.
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TRAINING SERVICES
Franklin's training consultants conduct seminars for employees of
institutional clients and public seminar participants. Additionally, the
Franklin System is taught through the FFT program by institutional clients who
conduct live or facilitate video seminars for their employees. Franklin's
"TimeQuest" seminar accounts for a significant portion of Franklin's training
services revenues. Sales of training services for the fiscal year ended August
31, 1996 were approximately $70.8 million and accounted for 21% of Franklin's
total sales during the period.
Institutional seminars are provided to corporations, government agencies,
educational organizations, small business groups and other organizations. Prior
to seminar presentations, Franklin's training consultants work with Franklin
account executives and their institutional clients to incorporate the clients'
policies and objectives in the Franklin seminars and to present methods by which
the goals of the clients' employees may be aligned with those of the client.
Institutional seminars are priced on the basis of the length of the seminar and
the number of persons trained.
Franklin also offers training through the FFT program. Franklin provides
training materials to in-house training directors who are certified by Franklin
to conduct live presentations and to facilitate video presentations of the
Franklin seminar to their employees. Franklin receives a one-time fee for
training and certifying in-house trainers and also charges a participation fee
for each person trained by an in-house trainer. Each FFT participant receives a
seminar kit, including the Franklin System and training materials.
Franklin 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 System users, 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.
Franklin currently employs 40 training consultants in major metropolitan
areas of the United States and 121 training consultants outside of the United
States. Of the 161 training consultants employed by Franklin, 72 consultants are
trained to conduct time management seminars and 89 consultants are trained to
conduct business communication seminars and to provide other consulting and
training services. Training consultants are selected and trained from a large
number of experienced applicants. These consultants generally have several years
of training 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 Franklin's
certification of the consultant. Franklin believes that the caliber of its
training consultants has been responsible for its reputation of providing high
quality seminars.
The Franklin Quest Consulting Group (formerly the Shipley Division) is
engaged in the business of providing training, consulting services, project
management services and related products designed to improve written and oral
business communication and presentation skills for clients in the private and
public sectors. The Group's consulting services are focused in five distinct
areas: business communication, procedural documentation, scientific
documentation, business development and environmental compliance. The Group's
project management services provide clients with on-site writing experts who
focus on helping organizations address unique documentation needs.
The Franklin Quest 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 Quest Institute of Fitness offers single week or multi-week
training programs on-site at its fitness training complex located near St.
George, Utah. Franklin has developed a special health and fitness module to be a
part of the Franklin System, and clients at the Franklin Quest Institute of
Fitness are trained in the Franklin System.
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SALES AND MARKETING
Franklin 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, Franklin's
sales and percentage of total sales for each of its principal distribution
channels:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 29/28
YEAR ENDED AUGUST 31, -------------------------------------
----------------------------------------------------------
1994 1995 1996 1996 1997
---------------- ---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Training Sales............ $ 49,721 23.0% $ 68,168 24.6% $ 70,812 21.3% $ 35,788 $19.3% $ 41,308 19.8%
Product Sales............. 166,219 77.0 192,356 69.4 236,039 71.1 136,742 73.7 155,124 14.5
Services.................. -- 0.0 16,598 6.0 25,155 7.6 12,943 7.0 11,903 5.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Sales............. $215,940 100.0% $277,122 100.0% $332,006 100.0% $208,335 100.0% $208,335 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Direct Sales. Franklin's direct sales force markets Franklin products and
seminars to institutional clients, public seminar clients and network marketing
companies. All of Franklin's direct sales are made through its staff of in-house
account executives and other marketing personnel.
Franklin employs 78 account executives and 72 inside account executives who
service major metropolitan areas throughout the United States and sell training
services to institutional clients. Franklin employs an additional 26 account
executives outside of the United States. Account executives must have
significant selling experience prior to employment by Franklin and are trained
and evaluated at Franklin and in their respective sales territories during the
first six months of employment. Account executives typically call upon persons
responsible for corporate employee training, such as corporate training
directors or human resource officers. Account executives work closely with
training consultants in their territories to schedule and tailor seminars to
meet specific objectives of institutional clients.
Franklin also employs 140 training consultants throughout the United States
who present institutional and public seminars in their respective territories
and 21 training consultants outside of the United States. Seventy-two of the
training consultants present time management seminars. Eighty-nine consultants
offer business communication seminars and other consulting and training services
for businesses. Training consultants work with account executives 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 42 marketing and administrative personnel at
Franklin'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 Franklin TimeQuest seminar prior to engaging
Franklin to train in-house employees. Smaller institutional clients often enroll
their employees in public seminars under annual group rate contracts 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's seminars and products. These referrals are generally
used as prospects for Franklin's account executives.
As part of its strategy to adapt Franklin's services and products to
additional market segments, Franklin 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 believes that the Franklin System is effective in
communicating uniform marketing plans, product information and procedures to
large numbers of employees, sales representatives and distributors.
Franklin markets the Franklin System, together with customized sales and
training materials, to selected network marketing companies who regularly
recruit large numbers of new sales representatives. Although Franklin has
achieved significant revenues from sales to network marketing companies in a
relatively brief period, Franklin recognizes the volatility of the network
marketing industry, which is characterized by rapid growth, high turnover among
sales representatives, sales fluctuations, exposure to adverse publicity,
regulatory
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scrutiny and intense competition. Franklin has experienced fluctuations in
direct product sales and has experienced significantly lower reorder rates among
network marketing representatives as compared to other users. No assurance can
be given that sales to network marketing clients will continue at existing
levels or that Franklin will be successful in its efforts to market its seminars
and products to existing or additional clients in the network marketing
business.
Through the acquisition of Publishers Press in December 1994 Franklin
acquired greater control over printing of the materials for the Franklin Planner
and of other Franklin products. Publishers Press also provides book and
commercial printing services to clients in the western United States.
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.
Catalog. Franklin periodically mails catalogs to its clients including a
reference catalog, holiday catalog, catalogs timed to coincide with planner
renewals and catalogs related to special events, such as store openings or new
product offerings. Catalogs may be targeted to specific geographic areas or user
groups as appropriate. Catalogs are typically printed in full color with an
attractive selling presentation highlighting product benefits and features.
Franklin 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'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 Franklin's more
than 430 client representatives has the authority to immediately solve any
client service problem.
Franklin utilizes a zone picking system for processing orders. This system
enables Franklin 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
Franklin retail stores. Franklin 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 began opening retail stores
in areas of high client density. The initial stores were generally located in
lower traffic destination locations. Franklin 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 believes that higher costs associated with locating retail stores in
these centers have been offset by increased sales in these locations. Franklin's
retail stores, which average approximately 2,000 square feet, are stocked almost
entirely with Franklin products. Franklin's retail stores strategy focuses on
providing exceptional client service at the point of sale which Franklin
believes increases client satisfaction and frequency and volume of purchases. At
February 28, 1997, Franklin had 95 retail stores located in 35 states and the
District of Columbia.
Franklin attracts existing clients to its retail stores by informing them
of store openings through direct mail. Franklin believes that Franklin's retail
stores encourage walk-through traffic and impulse-buying and that store clients
are a source of participants for Franklin's public seminars. The stores have
also provided Franklin with an opportunity to assess client reaction to new
product offerings.
Franklin believes that its retail stores have a high-end image consistent
with Franklin's marketing strategy. Franklin's products are generally grouped in
sections supporting the different sizes of the Franklin Planner. Products are
attractively presented and displayed with an emphasis on integration of related
products and accessories. Stores are staffed with a manager, an assistant
manager and additional sales personnel as needed. Franklin employees have been
trained in the Franklin System, enabling them to assist and advise clients in
selection and use of Franklin's products. During peak periods, additional
personnel are added to promote prompt and courteous client service.
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INTERNATIONAL SALES
Franklin maintains a sales office in each of Great Britain, Canada, Hong
Kong, Japan, Australia, Taiwan, New Zealand, Mexico and Switzerland. Franklin
also operates retail stores in Canada, Hong Kong and Mexico. International sales
of Franklin's products and services (not including sales to network marketing
companies) accounted for approximately $19.2 million or approximately 6% of
Franklin's sales for the fiscal year ended August 31, 1996. To date, Franklin's
expansion into international markets has been associated principally with
expanding operations of its multinational and network marketing clients in such
markets. However, Franklin's long-term strategy is to provide Franklin's full
line of training services and products to clients in international markets.
Franklin currently offers the Franklin System in several English versions and in
French, Japanese, Chinese, Spanish and a multi-lingual European version.
Franklin has organized wholly-owned subsidiaries for the purpose of conducting
business in several other foreign countries.
CLIENTS
Franklin has developed a broad base of institutional and individual
clients. Franklin has more than 5,000 institutional clients consisting of
corporations, governmental agencies and other organizations. Franklin believes
its products and seminars encourage strong client loyalty. Employees in each of
Franklin'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. Franklin provides
an unconditional guarantee with all of its seminars and products and has adopted
a 100% client satisfaction policy.
COMPETITION
Products. The paper-based time management and personal organization
products market is intensely competitive and subject to rapid change. Franklin
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. Franklin believes its
principal competitors include Day Timer and Day Runner. Franklin 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's ASCEND(R) software competes directly with numerous other PIMs. Many
of Franklin's competitors have significant marketing, product development,
financial and other resources.
Given the relative ease of entry in Franklin's product markets, the number
of competitors could increase, many of whom may imitate Franklin'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 Franklin. Franklin believes that the Franklin System and related
products compete primarily on the basis of user appeal, client loyalty, design,
product breadth, quality, price, functionality and client service. Franklin also
believes that the Franklin System has obtained market acceptance primarily as a
result of the high quality of materials, innovative design, Franklin's attention
to client service, and the strong loyalty and referrals of its existing clients.
Franklin believes that its integration of training services with products has
become a competitive advantage. Moreover, management believes that Franklin 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
Franklin's sales and profitability.
Training Services. The market for time management training and business
communication services is highly competitive and fragmented. Although Franklin
has become a leading provider in the United States of seminars focused on
personal productivity and time management, it faces increasing competition from
many well-established, well-financed companies with significant resources that
offer a wide variety of productivity training, time management programs and
communication training.
The principal competitive factors in the training industry are quality,
effectiveness, client service and price. Through its focus on high-quality
seminar content and presentation, Franklin believes that it provides
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effective seminars that improve individual productivity. Franklin also believes
that the effectiveness of its seminars and related products constitutes a
competitive advantage that has produced a high degree of client loyalty among
its institutional and public clients. Franklin also considers the skills,
experience and training of its account executives, training consultants and
client service representatives to be a competitive advantage. Franklin believes
its seminars are competitively priced consistent with their quality and value.
MANUFACTURING
The manufacturing operations of Franklin consist primarily of printing,
assembling, storing and shipping printed materials used in connection with the
paper-based Franklin System.
Franklin currently prints the various Franklin Planners and other related
forms internally. Franklin's internal printing capacity enables it to control
production costs of the Franklin Planner and other printed materials, exercise
greater control over production schedules and timing of inventories, increase
quality control and reduce risks associated with dependence on outside
suppliers.
In order to obtain volume pricing and consistent quality, Franklin obtains
its paper from a single source 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. Franklin believes there are several
alternative suppliers available to meet Franklin's paper needs. If Franklin were
required to obtain paper from another source, any resulting delay or disruption
could have an adverse effect on Franklin's short-term profitability but is not
expected to have a material adverse effect on Franklin's long-term business or
financial condition.
The Planners and other forms are printed at Franklin and, depending on the
particular product are cut, collated and finished. The products are then
assembled and packaged for placement into inventory. Franklin generally
maintains three to four months of inventory. Franklin primarily uses UPS,
Federal Express and common carriers to ship its products to clients and to the
Franklin retail stores. Automated production, assembly and handling equipment is
used in the manufacturing process to insure consistent quality of printed
materials and to control costs and maintain efficiencies.
Binders used for Franklin's products are produced from either leather,
simulated leather or vinyl materials. All of the leather and vinyl binders are
produced by multiple and alternative product suppliers. The simulated leather
binders are manufactured by both third parties and by Franklin. Franklin
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 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.
Franklin 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. Franklin employees review and
inspect leathers before they are handcrafted by outside suppliers. Additionally,
all finished binders are shipped back to Franklin's facilities for a quality
inspection before being delivered to clients. Representatives of Franklin also
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.
Franklin 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. Franklin 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 AND COPYRIGHTS
Franklin seeks to protect its intellectual property through a combination
of trademarks, copyrights and confidentiality agreements. Franklin claims rights
for several trademarks, including "Values Quest" and "What Matters Most?" and
has obtained trademark registration in the United States for, among others,
"Franklin(R)," "Franklin Quest(R)," "Shipley Associates(R)," "TimeQuest(R),"
"Franklin Day Planner(R)," "ASCEND(R)," "Writing Advantage(R)," the Franklin
logo, and has obtained registrations in various foreign
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countries for certain of its trademarks. While Franklin considers its trademarks
and other proprietary rights to be important, it does not consider such rights
to be material to its business.
Franklin owns all copyrights on its planners, the text and other printed
information provided in its training seminars, the programs contained within
ASCEND and its instructional materials including the Shipley training materials.
Franklin has been issued copyright registrations in the United States covering
the Franklin System and its time management seminar. Franklin also places
copyright notices on its instructional, marketing and advertising materials. In
order to maintain the proprietary nature of its product information, Franklin
enters into written confidentiality agreements with its account executives,
training consultants and certain clients in limited instances. Although Franklin
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 February 20, 1997, Franklin had 3,605 full and part-time U.S.
employees, including 1,791 in sales, marketing and training; 679 in client
service and product development; 678 in production operations and distribution;
and 457 in administration and support staff. None of Franklin's employees are
represented by a union or other collective bargaining group. Management believes
that its relations with its employees are good. Franklin does not currently
foresee a shortage in qualified personnel needed to operate Franklin's business.
FACILITIES
Franklin's principal business operations and executive offices are located
in a complex of seven buildings in Salt Lake City, Utah. These buildings form a
campus of facilities on approximately 41 acres, approximately 37 of which are
developed and approximately four of which remain undeveloped to support expanded
operations in the future. Franklin's central facilities currently consist of
approximately 635,000 square feet, including approximately 350,000 square feet
for manufacturing, distribution and warehousing, and approximately 285,000
square feet for administration. All of Franklin's principal facilities are owned
by Franklin, subject to mortgages of approximately $4.4 million as of August 31,
1996. Franklin's 95 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. Franklin also maintains sales, administrative and/or warehouse
facilities in or near Phoenix; Atlanta; Tokyo; Hong Kong; London; Toronto;
Brisbane; Taipei; Monterrey, Mexico; Mexico City, Mexico; Guadalajara, Mexico;
San Juan, Puerto Rico; Auckland, New Zealand; and Basel, Switzerland under
leases which expire intermittently through the year 2004. Publishers Press
occupies facilities of approximately 141,000 square feet of production space and
24,000 square feet of office space. In connection with operation of the Franklin
Quest Institute of Fitness, Franklin 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 assumed leases
totaling approximately 50,000 square feet in Phoenix, Arizona which expire
through August 1998. In connection with the acquisition of Premier, Franklin
assumed leases for office and warehouse facilities in Bellingham, Washington and
Abbotsford, British Columbia. 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.
LEGAL PROCEEDINGS
Franklin 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
Franklin to be contemplated.
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MANAGEMENT
Directors and Executive Officers. The following table sets forth certain
information with respect to the executive officers and directors of Franklin.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Hyrum W. Smith............... 53 Chairman of the Board and Chief Executive Officer
Jon H. Rowberry.............. 50 President, Chief Operating Officer and Director
Val John Christensen......... 44 Executive Vice President, General Counsel and Director
John L. Theler............... 49 Executive Vice President, Chief Financial Officer and Treasurer
D. Gordon Wilson............. 44 Executive Vice President -- Product and Marketing
Don J. Johnson............... 48 Executive Vice President -- Manufacturing Operations
Mark W. Stromberg............ 42 Executive Vice President -- Sales
James M. Beggs............... 71 Director
Robert F. Bennett............ 63 Director
Beverly B. Campbell.......... 65 Director
Arlen B. Crouch.............. 62 Director
Robert H. Daines............. 62 Director
E. J. "Jake" Garn............ 64 Director
Dennis G. Heiner............. 53 Director
Daniel P. Howells............ 56 Director
Thomas H. Lenagh............. 73 Director
</TABLE>
Hyrum W. Smith, 53, a co-founder of Franklin, has served as a director of
Franklin since December 1983 and has served as Chairman of the Board of
Directors since December 1986. Mr. Smith has been the Chief Executive Officer of
Franklin since February 1997, a position he also held from April 1991 to
September 1996. He was Senior Vice President of Franklin from December 1984 to
April 1991. He is also a director of SkyWest, Inc., a Utah-based regional
airline, with a class of securities registered pursuant to Section 12 of the
Securities Act of 1934. Mr. Smith's term as a director expires in 1999.
Jon H. Rowberry, 50, was employed by Franklin as Senior Vice President,
Treasurer and Chief Financial Officer of Franklin in September 1995, was
appointed as Executive Vice President in March 1996, Chief Operating Officer of
Franklin in September 1996 and as President in February 1997. From 1985 to 1995,
he was employed in several executive positions with Adia S.A., a Switzerland
domiciled international provider of personnel services and with Adia Services,
Inc., its U.S. subsidiary. He served as Chief Financial Officer of Adia
Services, Inc., from 1985 to 1992 and as Chief Financial Officer of Adia S.A.
from 1992 to 1994. From 1994 to 1995, he was Senior Vice President of Specialty
Brands and International Technology for Adia S.A. Mr. Rowberry is a Certified
Public Accountant. Mr. Rowberry's term as a director expires in 1998.
Val John Christensen, 44, has been Secretary and General Counsel of
Franklin since January 1990 and an Executive Vice President since March 1996.
Mr. Christensen was elected a director of Franklin in July 1991. From January
1990 to March 1996, Mr. Christensen served as a Senior Vice President of
Franklin. From March 1987 to November 1989, Mr. Christensen was engaged in the
private practice of law in the law firm of LeBoeuf, Lamb, Lieby & MacRae,
specializing in general business and business litigation matters. From 1983
until he joined Franklin, Mr. Christensen acted as outside counsel to Franklin.
Mr. Christensen's term as a director expires in 1997; however, he will not
continue as a director after the effective date of the Merger.
John L. Theler, 49, has been Executive Vice President and Chief Financial
Officer since January 1997 responsible for Finance, Information Systems and
Administrative Services. From 1992 to 1996, Mr. Theler was employed by
Rubbermaid, a multinational company that markets and manufactures plastic and
rubber consumer products, initially as Vice President of Finance and Controller
of the Home Products Division and later as Vice President and Corporate
Controller. From 1971 to 1992, Mr. Theler was employed by General Electric in
progressive financial assignments, including Chief Financial Officer for CAMCO,
a publicly-traded major appliance manufacturing and distribution operation of
General Electric located in Canada.
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D. Gordon Wilson, 44, has been an Executive Vice President since March 1996
responsible for the Product and Marketing Group. Mr. Wilson served as a Senior
Vice President of Franklin responsible for the retail stores division and the
marketing division since January 1995 and September 1995, respectively. From
1989 to 1994, he was Group Vice President and General Merchandise Manager of the
home division of Fred Meyer, Inc., a regional store operation.
Don J. Johnson, 48, has been Executive Vice President of Operations since
May 1996 responsible for the manufacturing, printing, packaging and distribution
of Franklin Quest's paper and binder products. From 1986 to 1996, Mr. Johnson
was employed by Valleylab, a division of Pfizer, Inc., a medical manufacturing
and distributing company in Denver, Colorado, as Director of International
Manufacturing and Distribution. Mr. Johnson has 26 years of manufacturing and
distribution management experience in both the U.S. and international markets.
Mark W. Stromberg, 42, has been Executive Vice President of Sales since
January 1997 responsible for Training, Network Marketing and Corporate Product
Sales Divisions. From 1984 to 1996, Mr. Stromberg was employed by US WEST
Communications in Salt Lake City, Utah, a cable, telephone and wireless
information services business, as Senior Vice President and CEO of Utah.
James M. Beggs, 71, has been a director of Franklin since October 1987. Mr.
Beggs is currently a senior partner of J.M. Beggs International, which provides
general consulting services to international businesses and start-up companies,
a position he has held since 1988. He is also a director of Rotary Power, Inc.,
a publicly-held company which manufactures rotary power engines. Mr. Beggs is
Chairman Emeritus of SPACEHAB, Inc., which provides services for experimental
projects for space exploration. From 1987 to 1989, Mr. Beggs was President of
DGT, Inc., a privately held company located in Falls Church, Virginia, which
provides analytical services to government agencies. Mr. Beggs served as the
Administrator of NASA from 1981 to 1985. Mr. Beggs' term as a director expires
in 1997.
Robert F. Bennett, 63, has been a director of Franklin since October 1984,
and served as Chairman of the Board from December 1984 to December 1986. In
November 1992, Mr. Bennett was elected a United States Senator from the State of
Utah. Mr. Bennett was the Chief Executive Officer of R.F. Bennett Associates, a
consulting firm which provided general business consulting services to
established businesses and entrepreneurial ventures, from July 1991 to November
1992. From November 1990 to April 1991, Mr. Bennett was Vice Chairman of
Franklin. Mr. Bennett was President of Franklin from October 1984 to January
1991 and served as Chief Executive Officer of Franklin from December 1986 to
April 1991. Mr. Bennett's term as a director expires in 1999.
Beverly B. Campbell, 65, has been a director of Franklin since July 12,
1993. Mrs. Campbell is President of Campbell Associates International, Ltd, an
international consulting firm, and also serves as the Director of International
Affairs for The Church of Jesus Christ of Latter-day Saints, a position she has
held since November 1984. She served as a member of the Board of Directors of
the National Conference (formerly the National Conference of Christians and
Jews) from 1992 to 1997. Ms. Campbell's term as a director expires in 1999.
Arlen B. Crouch, 62, was President and Chief Operating Officer of Franklin
from January 1991 to September 1996 and served as Chief Executive Officer from
September 1996 until his resignation in February 1997. Mr. Crouch was elected a
director of Franklin in December 1986 and served previously as a director from
December 1984 to February 1985. Mr. Crouch served as Executive Vice President of
Franklin from July 1989 to January 1991. Prior to joining Franklin, Mr. Crouch
was a First Vice President and Regional Director of Merrill Lynch & Co., Inc.,
from 1981 to 1989, where he was responsible for retail operations in the
Southern California region. Mr. Crouch's term as a director expires in 1997;
however, he will not continue as a director after the effective date of the
Merger.
Robert H. Daines, 62, has been a director of Franklin since April 1990. Mr.
Daines has been employed as a Professor of Business Management at Brigham Young
University, Provo, Utah, since 1959. Mr. Daines is also currently engaged as a
consultant with the Center for Executive Development in Cambridge,
Massachusetts. He is also a director of AT&T Universal Financial Corporation.
Mr. Daines' term as a director expires in 1998.
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E. J. "Jake" Garn, 64, was elected to serve as a director of Franklin in
January 1993. Mr. Garn has been Vice Chairman of Huntsman Chemical Corporation
since January 1993. From December 1974 to January 1993, Mr. Garn was a United
States Senator from the State of Utah. During his term in the Senate, Mr. Garn
served six years as Chairman of the Senate Banking, Housing and Urban Affairs
Committee and served on the Appropriations, Energy and Natural Resources, and
Senate Rules Committees. Prior to his election to the Senate, Mr. Garn served as
Mayor of Salt Lake City, Utah, from January 1972 to December 1974. Mr. Garn also
currently serves as a director of Dean Witter Intercapital and John Alden
Financial Corporation, is a member of the Board of Trustees of Intermountain
Health Care and serves as a director of NuSkin Asia Pacific Corporation. Mr.
Garn's term as a director expires in 1998.
Dennis G. Heiner, 53, was appointed as a director of Franklin in January
1997. He has been employed by Black & Decker Corporation since 1985 where he is
currently an Executive Vice President and President of the Security Hardware
Group, a world leader in residential door hardware. Mr. Heiner also currently
serves as a director of Raytech Corporation and of Shell Oil/CalResources. Mr.
Heiner's term as a director expires in 1999.
Daniel P. Howells, 56, has been a director of Franklin since April 1992.
Since October 1991, Mr. Howells has been the President and Chief Executive
Officer of Resorts USA, Inc. (formerly Rank Ahnert, Inc.), a recreational
development and hospitality company based in the Pocono mountains of
Pennsylvania. From 1985 until October 1991, Mr. Howells was an Executive Vice
President and General Manager of the Food and Services Management Division of
Marriott Corporation. From 1982 until 1985, Mr. Howells was President and Chief
Executive Officer of Six Flags Corporation, an operator of theme parks in the
United States. Mr. Howells' term as a director expires in 1997.
Thomas H. Lenagh, 73, has been a director of Franklin since December 1986.
Since 1978, Mr. Lenagh has served as a Financial Advisor to SCI Systems, an
electronic contract manufacturer located in Huntsville, Alabama. From 1983 to
1985, Mr. Lenagh was Chairman of the Board and Chief Executive Officer of
Systems Planning/Greiner Engineering, a design engineering firm. From 1965 to
1983, Mr. Lenagh was Treasurer of the Ford Foundation. Mr. Lenagh is also
currently a director of SCI Systems; CML Inc., a specialty retail firm; Gintel
Funds, an equity mutual fund; Adams Express, a closed-end mutual fund; Clemente
Global Fund, an international emerging growth fund; U.S. Life Co., a life
insurance company; Irvine Sensors, a high technology research and development
firm; ICN Pharmaceuticals, a broad-based pharmaceutical company, and V-Band
Corporation, a manufacturer of electronic key and digital switching systems. Mr.
Lenagh's term as a director expires in 1998.
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BUSINESS OF COVEY
GENERAL
Covey is a provider of integrated educational materials, training
workshops, consulting services, publications and products designed to empower
individuals and organizations to become more effective. Covey, which generated
total revenues during the year ended December 31, 1996 of approximately $99
million, enables individuals and organizations to increase their effectiveness
through understanding and applying principles that Covey believes are universal.
In 1996, Covey's institutional customer list included 82 of the Fortune 100 and
over 60% of the Fortune 500. Covey also provides its products and services to a
number of U.S. and foreign governmental agencies, including the U.S. Department
of Defense, and educational institutions. In 1996, direct sales to U.S. and
Canadian organizational customers accounted for approximately 77% of Covey's
revenues; direct marketing, primarily through catalogs, to U.S. and Canadian
organizations and individuals accounted for approximately 13% of Covey's
revenues; and U.S. and Canadian retail sales, consisting of sales through
Covey-owned stores, commercial bookstores and office supply stores, accounted
for approximately 4% of Covey's revenues. Covey also markets its services and
products outside the United States and Canada through Covey-owned or licensed
operations, which accounted for approximately 6% of Covey's revenues during
1996.
Covey provides personal, interpersonal, managerial and organizational
development training materials to individuals and organizations in four specific
market segments: leadership training and consulting, which accounted for
approximately 70% of Covey's 1996 revenues; time management training and
products, which accounted for approximately 23% of Covey's 1996 revenues;
personal and professional development, which accounted for approximately 6% of
Covey's 1996 revenues; and home and family, an emerging segment which accounted
for approximately 1% of Covey's 1996 revenues. Approximately 85% of Covey's 1996
revenues were derived from delivering educational services and implementation
products to institutional clients. The remainder of Covey's revenues was derived
from sales to individual consumer customers.
BACKGROUND
In 1980, Dr. Stephen R. Covey, a respected author, lecturer, teacher and
organizational consultant, founded Stephen R. Covey & Associates after many
years in academic work. In 1989, Covey changed its name to Covey Leadership
Center, Inc., reflecting the expanding range of Covey's products and services.
Initially, the material presented in Dr. Covey's bestseller, The 7 Habits
of Highly Effective People, provided the core content of Covey's offerings. In
1986, Covey developed a video-based organizational training program designed to
empower organizations and individuals to achieve greater effectiveness through
participant manuals, survey processes and a reinforcing audio learning system.
Covey's programs were designed to be facilitated by licensed professional
trainers and managers in client organizations, reducing dependence on Covey
professional presenters and creating residual income from manual and material
sales. Market acceptance of Covey's training program led to publication of The 7
Habits of Highly Effective People by Simon & Schuster Inc. ("Simon & Schuster")
in 1989. Since its publication, The 7 Habits of Highly Effective People has
become a No. 1 New York Times bestseller, has been listed on Publisher's
Weekly's bestseller list for nearly 300 weeks, and, according to Business Week,
was the No. 1 bestselling trade business book in the United States during 1996.
It is also one of the top selling books in other countries around the world. The
audio version of The 7 Habits of Highly Effective People is the first
non-fiction audio book to sell more than one million copies in United States
publishing history.
Since the publication of The 7 Habits of Highly Effective People, Covey has
continued to develop and publish materials designed to increase individual and
organizational effectiveness. Building upon the recognition of The 7 Habits of
Highly Effective People, Covey has employed its proprietary strategy and process
to complete two other bestsellers: First Things First, which has sold over two
million copies and, according to Business Week, was the No. 3 bestselling book
in the United States in 1996, and Principle-Centered Leadership, which has sold
over one million copies. In addition, Covey authors are currently working on
several new books, which are scheduled for publication during the next five
years, two of which, The Power
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Principle by Dr. Blaine Lee and Dr. Covey's latest book, which focuses on highly
effective families, are scheduled for publication during 1997.
STRATEGY
Covey believes its success in empowering organizations and individuals to
become more effective is a direct result of its execution of three core
strategies which Covey believes differentiate it from its competitors:
developing proprietary educational materials that teach and reinforce
principle-centered change, creating name and brand awareness through
pull-through marketing and providing strategic solutions to organizations and
individuals.
Developing Proprietary Education Materials. Based, in part, upon its
reputation for developing successful content and application processes, Covey
seeks to systematically create, license and sell a line of related products and
services which extend from Covey's original content area. See "-- Content and
Product Development." First, a significant market need is identified, validated
and researched. Covey then tests the content area in client presentations.
During the development of a concept, Covey generally selects a publisher and
sells limited publishing rights in exchange for an advance of royalties used to
fund development. Covey then begins development of derivative training programs,
workbooks, audio learning programs, profiles, organizer supplements, calendars,
software or other derivative products, which are timed for simultaneous or
delayed launch in connection with the publication of the book. Finally, an
extensive publicity campaign is launched and sustained to create and fuel
demand. Frequently Covey schedules satellite events, public seminars and
speeches in an effort to simultaneously cross-sell books, tapes and other
products.
Covey's training workshops are interrelated in their core content. A client
can enter the Covey curriculum to meet a specific strategic need, such as
personal leadership via The 7 Habits of Highly Effective People, time management
via First Things First, or managerial leadership via Principle-Centered
Leadership. Each course is a stand-alone experience and, although not dependent
upon core content in the other courses, each course curriculum is constructed to
leverage, complement and build upon the content in other courses. Clients
generate recurring revenue streams as experience in one course leads to purchase
of additional training products and services. Each participant in any public,
Covey-facilitated or client-facilitated workshop receives a participant manual
and companion products including a book, audio tape set and a copy of Covey's 7
Habits Organizer, similar to the Franklin Planner.
Creating Name and Brand Awareness. Covey's sales force markets training and
leadership development workshops to organizations and the general public. In
most instances, Covey's marketing efforts are conducted in response to leads and
requests for information generated through Covey's product pull-through
marketing strategy. This strategy is linked to an extensive national publicity
campaign designed to drive book and product purchases and attendance at public
speaking engagements presented by Covey. Covey's national publicity campaign may
include participation on syndicated television and radio programs, as well as
the publication of related articles in business publications. Covey has designed
a sophisticated name acquisition strategy in an attempt to capture a significant
number of names of book and product purchasers from the mass retail channel and
on-line services. This strategy generates inbound requests for information and
actual product sales, in addition to creating name and brand awareness. Covey
regularly receives inquiries from prospective customers via return mail cards
included in Covey's printed materials and telephone calls to Covey's toll-free
information number. As a result of these inquiries, Covey's sales and marketing
staff spend a majority of their time responding to semi-qualified leads.
Name recognition of Covey's products and services has also been augmented
by strategic marketing alliances developed between Covey and a number of
innovative and respected organizations such as The AT-A-GLANCE Group, the
largest dated goods manufacturer in North America ("AT-A-GLANCE"), and
Microsoft, Inc. ("Microsoft"). See "-- Strategic Distribution Alliances."
Providing Strategic Solutions. Covey provides training at all four levels
of leadership: personal, interpersonal, managerial and organizational. This
breadth of instruction, which Covey believes constitutes a competitive
advantage, enables Covey to provide strategic solutions to its clients, not just
traditional training. Covey account managers consult with their clients to
strategically position Covey's principle-centered
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leadership process with its related training and products as solutions to client
needs. Covey's goal is to empower individuals and organizations to achieve
greater effectiveness by utilizing Covey workshops as strategic elements in
fulfilling client organizational objectives. Many leadership and management
consulting firms attempt to create high performance cultures and teams through
"quick fix" tools and techniques which may increase productivity and
effectiveness in the short term but may not effect lasting long term change.
Covey believes its principle-based core curriculum is foundational to successful
short-term and long-term change efforts that truly result in improved
performance.
TRAINING, FACILITATION AND CONSULTING SERVICES
Covey training, facilitation and consulting services are delivered in the
United States by Covey's Senior and Professional Resource Groups, which consist
of 74 qualified and talented consultants selected through a competitive and
demanding selection process, more than 50% of whom have advanced educational
degrees.
Covey's Senior Resource Group, comprised of 13 experienced consultants,
apply their expertise with senior client management in high-leverage
opportunities to diagnose organizational inefficiencies and to develop and/or
re-design the core components of a client's organizational solutions. The
efforts of Covey's Senior Resource Group are enhanced by several proprietary
consulting tools Covey 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. Covey's Senior Resource Group is an integral
part of Covey's approach to new product development; many of these individuals
have been contributors to, or co-authors of, Covey's books.
Covey's Senior and Professional Resource Consultants coordinate their
efforts with the activities of Covey's client service sales teams in order to
assure that both the consultant and the client account manager participate in
the development of new business and the assessment of client needs. Senior and
Professional Resource Consultants are then entrusted with the actual delivery of
Covey content, seminars, processes and other solutions. Senior and Professional
Resource Consultants follow up continuously with client service teams, working
with them to develop lasting client impact and ongoing business opportunities.
Workshops. Covey offers a range of workshops designed to empower
organizations and individuals to effect principle-centered leadership and
change. Covey's workshops are oriented to address each of four levels of
leadership needs: personal, interpersonal, managerial and organizational. In
addition, Covey believes each of its workshops must provide an impactful
experience, must generate additional business and must be profitable. During
1996, Covey trained more than 350,000 individuals in its single and multiple-day
workshops.
The flagship of Covey's workshops is its three-day "7 Habits" workshop
based upon the material presented in The 7 Habits of Highly Effective People.
The 7 Habits workshop provides the foundation for continued client relationships
and generates more business as Covey content and application tools are delivered
deeper and deeper into the organization. In 1995, Covey added a three-day
Principle-Centered Leadership course, which focuses on managerial and
organization aspects of client needs.
"Covey Leadership Week," which Covey management believes is one of the
premier leadership programs in the United States, consists of a five-day seminar
focused on materials from Covey's 7 Habits of Highly Effective People and
Principle-Centered Leadership courses. Covey Leadership Week is reserved for
executive level management who become champions of principle-centered leadership
and change within their organizations. As a part of the week's agenda, executive
participants design strategies for long-term implementation of Covey principles
and content within their organizations.
Covey's single-day "First Things First" workshop is designed to complement
other Covey curricula and compete in the time management industry. Public
workshops utilizing the First Things First curricula are also conducted in the
United States by SkillPath, Inc. ("SkillPath"), a national provider of training
seminars and workshops, under a license arrangement between Covey and SkillPath.
Using the materials presented in the book entitled First Things First, Covey and
its licensee trained over 90,000 individuals in these workshops during 1996.
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In addition to providing training through Covey consultants and presenters,
Covey also trains and certifies client facilitators to teach selected Covey
workshops within client organizations. Covey believes client-facilitated
training, which constitutes the vast majority of individuals trained, is the
essence of its fundamental strategy to create recurring client revenue streams.
After having been certified, clients purchase manuals, profiles, organizers and
other products to conduct Covey training workshops within their organization,
generally without Covey 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 Covey courses. Since 1988, Covey has trained
more than 7,000 client facilitators. Client facilitators are certified only
after graduating from Covey's Train the Trainer programs and/or completing Covey
Facilitation Week and are also required to meet post-course certification
requirements.
In 1996, Covey introduced the Covey Leadership Library series of video
workshops. The 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.
PRODUCTS
Training Products. In connection with its training, facilitation and
consulting services, Covey sells content-based training products for use by
workshop facilitators and participants. Facilitator products include training
videos, resource guides and presentation aids. Participant products include
course manuals, workbooks, organizers, personal assessment products called
"profiles," and personal application software.
Time Management Products. Based upon its belief that organizational and
individual productivity are dependent on effective time management, Covey has
recently developed a line of products designed to teach and reinforce proven
principles of effective time management.
ORGANIZERS. Covey's 7 Habits Organizer is available in four sizes and
two formats, daily and weekly. The 7 Habits Organizer consists of monthly
calendar tabs, daily or weekly pages for an entire year, 52 weekly compass
cards for recording weekly roles and goals, and personal leadership and
management information. The 7 Habits Organizer is sold as a complete kit or
as a refill. Because the 7 Habits Organizer is based upon, and incorporates
substantial content from, The 7 Habits of Highly Effective People, Covey
believes the 7 Habits Organizer is distinguishable from competing products.
BINDERS, FORMS AND ACCESSORIES. Covey offers a variety of ring binders
in each of the 7 Habits Organizer sizes. Binders are available in vinyl,
tapestry or various types of leathers and range in price from $17.00 to
$250.00. Covey's 7 Habits Organizer offers a wide assortment of forms to
help individuals customize their 7 Habits Organizer according to their
preferences. Covey also sells accessory products for use with the 7 Habits
Organizer, such as plastic photo and disk holders, hole punches, storage
binders, pens, pencils and zippered pouches.
SOFTWARE. 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+. 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. Covey has also coordinated its content with the handheld
personal information manager ("PIM") called The Pilot, which is able to
communicate with Microsoft Schedule+ and 7 Habits Tools.
Personal Development Products. Covey also markets a variety of
content-based personal development products. These products include books, The
Seven Habits(TM) magazine, audio learning systems such as multi-tape and
workbook sets, CD-ROM software products, calendars, posters and other specialty
name brand items. Covey has also identified the home and family market for
development of principle-centered personal development products. Covey
anticipates that during the fourth quarter of 1997 it will publish and launch
Dr. Covey's latest book addressing the habits of highly effective families.
During 1996, Covey began marketing family audio tapes in anticipation of the
completion of Dr. Covey's book.
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SALES AND DISTRIBUTION CHANNELS
Covey's primary distribution channel is direct selling to organizations.
During 1996, Covey's direct sales channel accounted for approximately 83% of
Covey's total sales (domestic and international). During the same period, direct
marketing to individuals and organizations through catalog, direct mail and
strategic alliances accounted for approximately 13% of Covey's total sales.
Covey's retail sales channel, which Covey initiated during the last half of
1996, accounted for approximately four percent of Covey's sales in 1996. Covey
management believes there are significant opportunities to create complementary
sales through cross-marketing between the three distribution channels. The
following table sets forth, for the periods indicated, Covey's sales and
percentage of total sales for each of its distribution channels:
<TABLE>
<CAPTION>
1994 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Direct Sales............... $ 59.5 86.2% $ 63.1 83.0% $ 76.2 77.1%
Direct Marketing........... 6.6 9.6 6.7 8.8 13.1 13.3
Retail..................... 0.4 0.6 2.0 2.6 3.9 4.0
International.............. 2.5 3.6 4.2 5.6 5.5 5.6
----- ----- ----- ----- ----- -----
Total............ $ 69.0 100.0% $ 76.0 100.0% $ 98.7 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
Direct Sales. Covey's Client Services Group markets Covey's products and
services to corporate and government clients in the United States and Canada.
Covey's sales associates consult with clients to provide business solutions that
integrate Covey's materials and workshops with the client's strategic objectives
and market Covey's products and services to corporate and government clients.
Covey believes it has distinguished itself from traditional organizational
corporate training suppliers by positioning its sales to senior management as
well as to traditional human resource department decision makers. Covey's
strategic solutions selling approach is directed to client executive management
teams. Frequently, organizational resources administered by senior management
are less vulnerable to discretionary cuts than resources earmarked for human
relations, support and training. Covey believes many of its clients, including
Saturn Corporation, Marriott Management Services, Ritz Carlton Hotels and
Andersen Consulting, view Covey's training as a critical element of their
efforts to improve performance and effectiveness.
Covey has also focused its direct sales efforts on the specific needs of
educational entities and has created an education division to address those
unique needs. The education division employs account managers and senior
consultants/presenters who serve educators at every level of the organization
(administrators, faculty, parents, and students).
Direct Marketing. Covey mails its catalogs to clients throughout the year.
These include a mini catalog, which is sent in response to requests for general
information, as well as larger and more comprehensive product and program
catalogs mailed periodically in the spring, fall and holiday periods. Catalogs
may be targeted to different client groups as appropriate. In addition, Covey
conducts in a variety of other direct marketing initiatives, including lead
generation programs, new product promotions and other related cross-selling
activities.
Covey has a client service department which customers call, toll-free, to
inquire about a product or place an order. Using a computerized order entry
system, Covey's direct marketing representatives have access to client
preferences, prior orders, billings, shipments and other information. Each of
Covey's more than 53 direct marketing representatives has the authority to
immediately solve any client service problem.
Retail. During 1996, Covey made the strategic decision to open and operate
retail stores. Covey opened its first two retail stores during the fall of 1996
in super-regional malls located in Pleasanton, Ca. and Littleton, Co. Covey's
strategy of locating stores in high traffic malls is designed to take advantage
of the strength of the 7 Habits brand. In independent research tests
commissioned by Covey, approximately 45% of the survey respondents recognized
the 7 Habits brand in unaided, "top of mind" inquiries. Covey hopes that
existing and former clients, as well as other individuals who are familiar with
the 7 Habits principles, will be attracted into Covey's stores. The stores are
between 1,500 and 2,000 square feet and operate as "Covey: The 7 Habits
Store(TM)." Covey also operates a small retail outlet at its East Bay, Provo,
Utah office.
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Covey plans to pursue an aggressive retail strategy and open additional
stores in carefully selected markets. In addition to sales conducted through
Covey's retail stores, Covey also sells self-published audio tapes and books
directly to other retail book and office supply stores.
STRATEGIC DISTRIBUTION ALLIANCES
Covey has pursued an aggressive strategy to create strategic alliances with
innovative and respected organizations in an effort to develop effective
distribution of Covey's products and services. Covey's principal distribution
alliances are outlined below:
- SIMON & SCHUSTER. Simon & Schuster has published a number of Covey books,
including The 7 Habits of Highly Effective People, First Things First,
Principle-Centered Leadership, and Daily Reflections of Highly Effective
People(TM). Covey and Simon & Schuster are currently negotiating
agreements under which Simon and Schuster will publish several new Covey
books, including The Power Principle and First Things First Everyday.
- MICROSOFT. Covey and Microsoft have developed an ongoing marketing
alliance which has resulted in the placement of content from The 7 Habits
of Highly Effective People in Microsoft's Office 95 suite with Schedule+.
See "-- Products -- Time Management Products -- Software."
- AT-A-GLANCE. Covey and AT-A-GLANCE are engaged in a strategic marketing
alliance to sell an AT-A-GLANCE version of the 7 Habits Organizer through
mass distribution channels. See "-- Products -- Time Management
Products."
- GOLDEN FAMILY ENTERTAINMENT. Golden Family Entertainment, Inc., a
publisher of family-oriented books, tapes and other materials, has agreed
to publish Dr. Covey's new book focusing on the habits of effective
families. Covey anticipates that the new book will be available in the
fall of 1997.
- WYNCOM. Wyncom, Inc. promotes and facilitates a number of Dr. Covey's
personal appearances, including an annual global satellite broadcast to
approximately 100,000 participants in the United States and 40 foreign
countries.
- NIGHTINGALE-CONANT. Nightingale-Conant Corp. markets and distributes
multi-tape audios of The 7 Habits of Highly Effective People, First
Things First, Principle-Centered Leadership and Living the 7 Habits,
along with a video tape version of Principle-Centered Living(R).
- SKILLPATH. Pursuant to a license agreement, SkillPath markets and
presents First Things First time management seminars to the general
public as part of SkillPath's educational curriculum. See "Training,
Facilitation and Consulting Services -- Workshops."
INTERNATIONAL OPERATIONS
Covey provides its products and services internationally, principally
through non-exclusive license arrangements with 18 foreign licensees operating
31 foreign offices. Covey's international licensees represent all Covey
programs, products and consulting services. In addition to its license
arrangements, Covey conducts direct operations in Canada, Australia and the
Middle East region. Covey's core international business focuses on
organizational training and development in multi-national and foreign
corporations. In 1996, gross revenues reported by Covey's international
licensees amounted to approximately $20 million, which generated approximately
$3,000,000 in royalties to Covey. Covey's three most popular books, The 7 Habits
of Highly Effective People, Principle-Centered Leadership and First Things First
are currently published in 30, 14 and nine languages, respectively.
COMPETITION
Training. Competition in the organizational training industry is highly
fragmented with no large competitors. 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 Covey's 1996 sales of approximately $99 million, Covey believes it is
a leading competitor in the organizational training
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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. 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. Covey believes its
approach to culture change is distinguishable from the approach taken by more
traditional change management and re-engineering firms, as Covey's approach
complements rather than competes with the offerings of such firms.
Time Management. The market for time management training services and
associated products is highly competitive and fragmented. See "Business of
Franklin -- Competition." Covey believes, however, that its 7 Habits content,
which is extensively integrated into the 7 Habits Organizer, has proven to be a
significant differentiating feature creating a competitive advantage in favor of
Covey, especially in the corporate training segment of the time management
industry. Clients who subscribe for training based upon The 7 Habits of Highly
Effective People receive the 7 Habits Organizer as their primary application
tool for the content.
CONTENT AND PRODUCT DEVELOPMENT
Covey is continually involved in creating new products and services, as
well as updating and improving its existing offerings. Innovative content
creation followed by the development of other related derivative products is a
critical element of Covey's strategy. See "-- Strategy." Consistent with its
strategy, in 1995 and 1996 Covey made a significant investment to re-engineer
its product development process. Covey's re-engineered product development
system integrates four critical functions in the creation of successful new
products: product sales -- to ensure a close client partnership; content
facilitation -- to ensure excellence and expertise; marketing -- to ensure brand
positioning and sales support; and product creation -- to provide instructional
design writing and content engineering. Cross-functional product development
teams create, write and produce the materials that form the foundation for
Covey's products and services.
SOURCING AND FULFILLMENT
The production of all of Covey's products is contracted to a core group of
certified manufacturers located throughout the United States and Canada. Most
products are produced by a primary supplier to achieve favorable pricing
discounts and consistent product quality. Critical products used in Covey's
programs are contracted to primary and secondary suppliers to facilitate product
availability. Typically, Covey requires the manufacturer to purchase all
components from Covey-approved suppliers, manage component inventories, assemble
finished products, and deliver finished products to Covey on a set or
just-in-time schedule.
Covey has contracted with R.R. Donnelley & Sons Company ("Donnelley") and
its subsidiary, Stream International, Inc. ("Stream"), to produce, on a
non-exclusive basis, 7 Habits Organizers. Stream prints dated and non-dated
materials, manages component stock and assembles finished organizer kits. Covey
utilizes Donnelley's volume purchasing capabilities to negotiate all paper
contracts. In order to obtain consistent paper quality, availability and volume
pricing, Covey has created a paper program with a large domestic paper
manufacturer. Covey's paper supplier is required to stock specific paper
quantities at two different facilities, reducing the risk of paper shortages and
the lead times for reprints and planned production runs. Covey has contracted
with Donnelley and Stream to provide warehouse-related services, including
inventory management of finished goods, inbound product receiving, product
storage, order selection and order fulfillment. This relationship requires Covey
and Stream to be linked together through comprehensive systems and clearly
defined processes. The proximity of Stream's facilities, located in Provo and
Lindon, Utah, to Covey's offices facilitates personal interaction between the
two companies.
INTELLECTUAL PROPERTY
Covey seeks to protect its intellectual property through a combination of
trademarks, copyrights and confidentiality agreements. Covey 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
Covey
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Leadership Center, The 7 Habits of Highly Effective People, First Things First,
Principle-Centered Leadership and The Seven Habits. Covey considers its
trademarks and other proprietary rights to be very important and material to its
business.
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. Covey places copyright notices on its
instructional, marketing and advertising materials. In order to maintain the
proprietary nature of its product information, Covey enters into written
confidentiality agreements with its executives, product developers, account
executives, training consultants, other employees and licensees. Although 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.
FACILITIES
Covey's principal business operations and executive offices are conducted
from nine buildings located in Provo, Utah. Covey occupies all or a portion of
each of these buildings, with total leased space of approximately 154,000 square
feet as of May 1, 1997, and leases that terminate intermittently through the
year 2002. Upon completion of Covey's new corporate campus headquarters to be
located in the Riverwoods Business Park in Provo, Utah, Covey intends to
periodically terminate existing leases or sublease unnecessary space until
expiration of existing leases.
Covey currently maintains four field or international offices with two
additional offices projected to open in 1997. Existing field offices are located
in Texas, Virginia, Georgia and Australia. Covey's two retail stores are subject
to leases that expire through the year 2003.
EMPLOYEES AND CONTRACT LABOR
As of January 31, 1997, Covey had a total of 582 full and part-time
employees, including 361 in sales, marketing and facilitation, 95 in support
staff services, 88 in production, operations and distribution and 38 in product
development. None of Covey's employees is represented by a union or other
collective bargaining group. Covey's management believes that its relations with
employees are very good.
As of January 31, 1997, Covey had a total of 49 contracted positions. Of
the 49 contracted positions, 22 are contracted to be presenters and 27 are
contracted for other positions.
LEGAL PROCEEDINGS
In the ordinary course of its business, Covey is periodically threatened
with or named as a defendant in litigation. Covey management does not believe
that any threatened or pending litigation will have a material adverse effect on
Covey's financial condition or results of operation.
MANAGEMENT
Directors and Executive Officers. The following table sets forth certain
information with respect to the executive officers and directors of Covey.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- -------------------------------------------
<S> <C> <C>
Stephen R. Covey....... 64 Chairman of the Board
Stephen M. R. Covey.... 35 President and Chief Executive Officer
Robert J. Guindon...... 53 Chief Operating Officer
Kevin R. Cope.......... 35 Executive Vice President of Professional
Services/Sales
Joel C. Peterson....... 49 Vice Chairman of the Board
Robert A. Whitman...... 43 Director
Kay Stepp.............. 52 Director
</TABLE>
73
<PAGE> 84
Stephen R. Covey founded Covey and has served as its Chairman of the Board
since 1980. Dr. Covey received his MBA degree from Harvard Business School and
his doctorate from Brigham Young University, where he was a professor of
organizational behavior and business management from 1957 to 1983, except for
periods in which he was on leave from teaching, and served as Assistant to the
President and Director of University Relations. Dr. Covey is the author of
several acclaimed books, including The 7 Habits of Highly Effective People and
Principle-Centered Leadership, and the co-author of First Things First. His
newest book in progress focuses on highly effective families.
Stephen M. R. Covey has served as the President and Chief Executive Officer
of Covey since 1994. Mr. Covey joined Covey in 1989, serving in various
capacities prior to his appointment as President and Chief Executive Officer,
including Vice President of Client Services Group, Vice President of Corporate
Development, and Managing Consultant. Mr. Covey earned an MBA degree from
Harvard Business School and has professional work experience in different
industries, including real estate development with Trammell Crow Company in
Dallas.
Robert J. Guindon has served as Chief Operating Officer of Covey since
February 1997 and served as Executive Vice President from 1994 until February
1997. Since joining Covey in May 1992, Mr. Guindon previously served in several
other capacities, including Senior Vice President of Distribution and Managing
Director of Covey's Client Services Division. Prior to joining Covey, Mr.
Guindon was employed by Wang Laboratories, Inc., a word processing equipment
manufacturer and distributor for 14 years in various executive marketing
positions.
Kevin R. Cope has served as the Executive Vice President of Professional
Services/Sales of Covey since February 1997. He was Senior Vice President of
Professional Services/Sales from 1996 to February 1997. Mr. Cope joined Covey in
1989, serving in various roles, including Client Consultant and Corporate
Program Presenter.
Joel C. Peterson has served as a director of Covey since 1993 and as Vice
Chairman of the Board of Directors since 1994. Mr. Peterson is also President of
Peterson Interests, Inc., an investment company with offices in Dallas, Texas
and Salt Lake City, Utah, which manages investments in information,
manufacturing and service businesses. Prior to founding Peterson Interests, Inc.
in 1991, Mr. Peterson was the national managing partner of Trammell Crow
Company, where he was employed from 1973 until 1991, after having earned an MBA
degree from Harvard Business School. Mr. Peterson also serves on the boards of
directors of Performance Printing, a printing company, Peninsula Advisors, a
software company, Mr. Rescue, a road rescue company, and EAGL Golf, a golf
management company.
Robert A. Whitman has served as a director of Covey since 1994. Since 1992,
Mr. Whitman has been the President and Co-Chief Executive Officer of the
Hampstead Group L.L.C. ("Hampstead"), a private Dallas-based investment company
which focuses on the acquisition of controlling interests in companies with
annual revenues of $100 to $500 million. In addition, Mr. Whitman serves as a
director of Wyndham Hotel Corporation, an international hotel and hospitality
chain, and as Chairman and Chief Executive Officer of Mountasia Entertainment
International, a company involved in the ownership and management of location-
based outdoor entertainment centers. Mr. Whitman previously served as Chairman
of the Board of Forum Group, Inc. prior to its sale to the Marriott Corp. in
1996 and as Vice Chairman of Bristol Hotel Company. Prior to joining Hampstead,
Mr. Whitman served as President and Chief Executive Officer of Trammell Crow
Ventures, the real estate investment banking and investment arm of the Trammell
Crow Company, as Chief Financial Officer and director of the Trammell Crow
Company and as Co-Managing Partner for Trammell Crow Interests. Mr. Whitman
received his Bachelor of Arts degree in Finance from the University of Utah and
his MBA degree from Harvard Business School.
Kay Stepp has served as a director of Covey since 1992. Ms. Stepp is a
principal and owner of Executive Solutions, a Portland-based consulting firm
specializing in assisting senior executives and boards of directors. In
addition, Ms. Stepp is Chairman of Wholesome and Hearty Foods, Inc., a
publicly-traded company that markets and manufactures low-fat meatless frozen
food products. Ms. Stepp started Executive Solutions in 1994, following a
fourteen-year career with Portland General Electric, where she served as
President and Chief Operating Officer, Division President, Vice President of
Marketing and Operations, and Vice President
74
<PAGE> 85
of Human Resources and Administration. Ms. Stepp is also currently a director of
Premera Corporation of Seattle and its subsidiaries, Blue Cross of Washington
and Alaska and Pacific Health and Life Insurance Company. Ms. Stepp is a
founding director of Bank of the Northwest, a commissioner of the Portland
Development Commission, a director of the Portland Chamber of Commerce and a
director of Goodwill Industries of the Columbia-Willamette.
75
<PAGE> 86
COMPARISON OF RIGHTS OF STOCKHOLDERS OF
FRANKLIN AND COVEY
The rights of Franklin's stockholders are governed by its Articles of
Incorporation, as amended (the "Franklin Articles"), its Bylaws, as amended (the
"Franklin Bylaws"), and the laws of the State of Utah. The rights of Covey's
stockholders are governed by its Articles of Incorporation, as amended (the
"Covey Articles"), its Bylaws, as amended (the "Covey Bylaws"), and the laws of
the State of Utah. After the Effective Time, the rights of Covey Stockholders
who become Franklin stockholders will be governed by the Franklin Articles, the
Franklin Bylaws and the laws of the State of Utah. In many respects, the rights
of Franklin stockholders and those of Covey Stockholders are similar. The
following is a summary of material differences under their respective Articles
of Incorporation and Bylaws.
Vote Required on Certain Actions. The Covey Articles require the
affirmative vote of at least 66 2/3% of the shares of Covey Common Stock
entitled to vote with respect to the approval of certain proposals, actions or
resolutions including, among other things, amendment to the Covey Articles,
creation of or modification to the Covey Bylaws, election or removal of a
director, dissolution of Covey, merger or consolidation of Covey with or into
another corporation or entity, and creation of a subsidiary. Subject to the
provisions of the URBCA, the Franklin Articles and Franklin Bylaws require only
the affirmative vote of a majority of the shares of Franklin Common Stock
entitled to vote on approval of such matters.
Stockholder Limitations. The Covey Articles provide that, unless at least
66 2/3% of the outstanding shares of Covey Common Stock vote affirmatively
otherwise (an "Extraordinary Issuance"), shares of Covey Common Stock may be
issued and owned only by certain "employees" of Covey and "Covey family members"
(as each is defined in the Covey Articles). In addition, the Covey Bylaws
establish certain restrictions on the type and number of stockholders in order
to preserve Covey's status as a "small business corporation" under the Code. The
Franklin Articles and Franklin Bylaws do not impose comparable restrictions on
the type or number of stockholders.
Preemptive Rights. The Covey Articles provide preemptive rights for
stockholders of Covey Common Stock who are "Covey family members" in the case of
certain Extraordinary Issuances by Covey. The Franklin Articles specifically
provide that no holder of Franklin Common Stock shall have preemptive rights by
virtue of being a stockholder of Franklin Common Stock.
Board of Directors Structure. The Covey Bylaws provide for a Board of
Directors of three to fifteen individuals, each holding office until the next
annual meeting of stockholders and thereafter until his or her successor shall
have been elected and qualified. The Franklin Bylaws provide for a Board of
Directors of three to fifteen individuals, divided into three classes each
consisting of as near as may be one-third of the total number of directors. At
each annual meeting of the stockholders of Franklin, one class of directors is
elected to serve until the annual meeting of stockholders to be held three years
from such meeting and thereafter until their successors shall have been elected
and qualified.
The foregoing discussion of certain similarities and material differences
between the rights of Franklin stockholders and the rights of the stockholders
of Covey under the respective Articles of Incorporation and Bylaws is only a
summary of certain provisions and does not purport to be a complete description
of such similarities and differences, and is qualified in its entirety by
reference to the URBCA, the common law thereunder and the full text of the
respective Articles of Incorporation and Bylaws of Franklin and Covey.
STOCKHOLDER PROPOSALS
As described in Franklin's proxy statement relating to its 1996 Annual
Meeting of Stockholders, stockholder proposals for inclusion in the Franklin
proxy statement and form of proxy relating to the Franklin 1997 Annual Meeting
of Stockholders must be received by Franklin no later than May 15, 1997.
76
<PAGE> 87
EXPERTS
The consolidated financial statements of Franklin Quest Co., included in
this Joint Proxy Statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP and Price Waterhouse LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firms as experts in giving said reports.
The consolidated financial statements of Covey Leadership Center, Inc.,
included in this Joint Proxy Statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP and Dodge
Evans & Co., CPAs, P.C., independent public accountants, and are included herein
in reliance upon the authority of said firms as experts in giving said reports.
Representatives of Arthur Andersen LLP are expected to be present at the
Franklin Meeting and the Covey Meeting. In each case, such representatives are
expected to be available to respond to appropriate questions.
LEGAL MATTERS
The validity of the shares of Franklin Common Stock issued pursuant to the
Merger in exchange for shares of Covey Common Stock and in consideration of the
License Rights and the transactions related thereto will be passed upon for
Franklin by Kimball, Parr, Waddoups, Brown & Gee, Salt Lake City, Utah. Certain
matters relating to the Merger and the transactions related thereto will be
passed upon for Covey by Hill, Harrison, Johnson & Schmutz, P.C., Provo, Utah,
and Jones, Waldo, Holbrook & McDonough, Salt Lake City, Utah.
77
<PAGE> 88
INDEX TO PRO FORMA AND HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PRO FORMA COMBINED FINANCIAL INFORMATION
Pro Forma Combined Financial Information............................................ P-1
Pro Forma Combined Balance Sheet as of February 28, 1997............................ P-2
Pro Forma Combined Statement of Income for the six months ended February 28, 1997... P-3
Pro Forma Combined Statement of Income for the year ended August 31, 1996........... P-4
Notes to Pro Forma Combined Financial Statements.................................... P-5
FRANKLIN QUEST CO. FINANCIAL STATEMENTS
Independent Auditors' Reports....................................................... F-1
Consolidated Balance Sheets as of August 31, 1995 and 1996 and February 28, 1997.... F-3
Consolidated Statements of Income for the years ended August 31, 1994, 1995 and 1996
and the six months ended February 29, 1996 and February 28, 1997.................. F-4
Consolidated Statements of Shareholders' Equity for the years ended August 31, 1994,
1995 and 1996 and the six months ended February 28, 1997.......................... F-5
Consolidated Statements of Cash Flows for the years ended August 31, 1994, 1995 and
1996 and the six months ended February 29, 1996 and February 28, 1997............. F-6
Notes to Consolidated Financial Statements.......................................... F-7
COVEY LEADERSHIP CENTER, INC. FINANCIAL STATEMENTS
Independent Auditors' Reports....................................................... F-17
Consolidated Balance Sheets as of December 31, 1995 and 1996........................ F-19
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and
1996.............................................................................. F-20
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1994, 1995 and 1996............................................................... F-21
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996.......................................................................... F-22
Notes to Consolidated Financial Statements.......................................... F-23
</TABLE>
78
<PAGE> 89
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On March 21, 1997, Franklin and Covey entered into an agreement that
provides for Covey to merge with and into Franklin. Under the agreement, each
outstanding share of Common Stock of Covey will be converted into the right to
receive shares of newly issued Common Stock of Franklin based on the Share
Exchange Ratio, as defined previously, and outstanding options to purchase
Common Stock of Covey will be converted into options to purchase Franklin Common
Stock with the number of Franklin options issued and the exercise price to
reflect the Share Exchange Ratio. In connection with the Merger, Franklin will
acquire the License Rights from Stephen R. Covey for an aggregate of $27 million
payable in either cash or Franklin Common Stock valued at the Average Franklin
Price. The amount of cash or shares of Franklin Common Stock to be received for
the License Rights will be determined by Dr. Covey prior to the Merger. The
maximum number of shares of Franklin Common Stock to be issued in connection
with all transactions contemplated by the Merger will not exceed 6,631,272,
which shares include the maximum shares which Dr. Covey could elect to receive
for the License Rights and the shares reserved for the exercise of Franklin
options into which Covey Options will be converted.
The unaudited pro forma combined financial data of Franklin and Covey have
been prepared using the purchase method of accounting. Franklin's fiscal year
ends August 31 and Covey's fiscal year ends December 31. For purposes of the pro
forma calculations, management has assumed a price of $21.256 per share of
Franklin Common Stock as the Average Franklin Price (as defined previously) and
has assumed that Dr. Covey will elect to receive the entire $27 million in cash.
Based on these assumptions, the Share Exchange Ratio would be approximately
6.30711 shares of Franklin Common Stock for each share of Covey Common Stock.
The following unaudited pro forma combined balance sheet as of February 28,
1997 assumes that the Merger occurred as of that date and reflects the
combination of the historical balance sheets of Franklin and Covey as of that
date with pro forma adjustments to give effect to the business combination as
described in the accompanying Notes to Pro Forma Combined Financial Statements.
The following unaudited pro forma combined statements of income for the six
months ended February 28, 1997 and for the year ended August 31, 1996 assume
that the Merger occurred as of September 1, 1995 and combine the historical
results of operations of Franklin with the historical results of operations of
Covey for the same respective periods, with pro forma adjustments to give effect
to the business combination as described in the accompanying Notes to Pro Forma
Combined Financial Statements.
The unaudited pro forma combined financial information has been prepared on
the basis of the assumptions described above and in the notes hereto and
includes assumptions relating to the allocation of the consideration paid for
the assets and liabilities of Covey based on preliminary estimates of their fair
value. Franklin is currently in the process of determining the actual fair
values of the assets and liabilities of Covey. Upon completion of this
determination, the allocation of the purchase price may be revised.
Additionally, the estimated values of the assets and liabilities at the time of
the merger could vary from the amounts presented herein. However, management
anticipates that the estimated fair values reflected herein will not differ
materially from actual values. In addition, the interest rates on, and the
amount of, borrowings with respect to the merger are assumed solely for the
purpose of presenting the unaudited pro forma combined financial information set
forth below. The actual interest rates on, and the amount of, borrowings may
differ from the assumptions set forth below. In the opinion of management of
Franklin, all adjustments necessary to present fairly such unaudited pro forma
combined financial information have been made based on the proposed terms and
structure of the merger.
The following unaudited pro forma combined financial information has been
included in this Joint Proxy Statement as required by the rules of the
Securities and Exchange Commission and is provided for illustrative purposes
only. Such information does not purport to be indicative of the results which
would actually have been obtained if the Merger had been effected on the dates
indicated, nor is it indicative of actual or future operating results or
financial position that may occur upon consummation of the Merger, if
consummated.
This unaudited pro forma combined financial information should be read in
conjunction with the accompanying notes and the audited financial statements,
including the notes thereto, of Franklin and Covey, respectively, included
elsewhere in this Joint Proxy Statement.
P-1
<PAGE> 90
PRO FORMA COMBINED BALANCE SHEET
AS OF FEBRUARY 28, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
ADJUSTMENTS
FRANKLIN COVEY (NOTE 2) PRO FORMA
-------- ------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 32,583 $ 24 $ (900)(a) $ 31,707
Accounts receivable, net..................... 30,425 20,822 51,247
Inventories.................................. 42,060 4,828 46,888
Other assets................................. 10,348 336 1,425(a) 12,109
-------- ------- -------- --------
Total current assets................. 115,416 26,010 525 141,951
Property and equipment, net.................... 102,047 8,616 110,663
Goodwill and other intangible assets, net...... 62,327 5,196 107,505(a)
27,000(b) 202,028
Other assets................................... 3,720 1,147 4,867
-------- ------- -------- --------
$283,510 $40,969 $ 136,125 $ 459,509
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line-of-credit and current portion of debt... $ 727 $ 9,158 $ 27,000(b)
7,900(c) $ 44,785
Accounts payable............................. 16,037 7,001 23,038
Accrued liabilities and other................ 16,639 6,235 22,874
Income taxes payable......................... -- -- 2,800(c) 2,800
-------- ------- -------- --------
Total current liabilities............ 33,403 22,394 37,700 93,497
Long-term debt, less current portion........... 5,341 5,372 10,713
Deferred income taxes.......................... 2,787 -- 585(a) 3,372
-------- ------- -------- --------
Total liabilities.................... 41,531 27,766 38,285 107,582
-------- ------- -------- --------
Shareholders' Equity:
Common stock................................. 1,101 1 248(a) 1,350
Additional paid-in capital................... 134,106 422 109,277(a) 243,805
Retained earnings............................ 156,917 12,780 (2,080)(a)
(10,700)(c) 156,917
Deferred compensation........................ (1,821) -- (1,821)
Cumulative translation adjustments........... (1,483) -- (1,483)
-------- ------- -------- --------
288,820 13,203 97,840 398,768
Less treasury stock.......................... (46,841) -- (46,841)
-------- ------- -------- --------
Total shareholders' equity........... 241,979 13,203 97,840 351,927
-------- ------- -------- --------
$283,510 $40,969 $ 136,125 $ 459,509
======== ======= ======== ========
</TABLE>
See accompanying notes to pro forma combined financial statements.
P-2
<PAGE> 91
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS
FRANKLIN COVEY (NOTE 2) PRO FORMA
-------- ------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales:
Product................................... $155,124 $ 9,364 $ $ 164,448
Training.................................. 41,308 44,791 86,099
Services.................................. 11,903 -- 11,903
-------- ------- ------- --------
Total sales....................... 208,335 54,155 262,490
-------- ------- ------- --------
Cost of sales:
Product................................... 64,530 3,698 68,228
Training.................................. 12,333 16,071 28,404
Services.................................. 9,478 -- 9,478
Royalties................................. -- 1,704 (1,704)(b) --
-------- ------- ------- --------
Total cost of sales............... 86,341 21,473 (1,704) 106,110
-------- ------- ------- --------
Gross margin...................... 121,994 32,682 1,704 156,380
Selling, general and administrative......... 70,740 25,710 96,450
Depreciation and amortization............... 8,024 1,382 2,466(a) 11,872
-------- ------- ------- --------
Income from operations............ 43,230 5,590 (762) 48,058
Other income (expense), net................. 397 (493) (1,406)(d) (1,502)
-------- ------- ------- --------
Income before provision for income
taxes........................... 43,627 5,097 (2,168) 46,556
Provision for income taxes.................. 17,559 161 1,180(e) 18,900
-------- ------- ------- --------
Net income........................ $ 26,068 $ 4,936 $ (3,348) $ 27,656
======== ======= ======= ========
Net income per share.............. $ 1.25 $ 1.07
======== ========
Weighted average number of common and common
equivalent shares outstanding............. 20,845 4,983(a) 25,828
======== ======= ========
</TABLE>
See accompanying notes to pro forma combined financial statements.
P-3
<PAGE> 92
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED AUGUST 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS
FRANKLIN COVEY (NOTE 2) PRO FORMA
-------- -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales:
Product...................................... $236,039 $ 13,059 $ $ 249,098
Training..................................... 70,812 75,999 146,811
Services..................................... 25,155 -- 25,155
------- ------ -------- -------
Total sales.......................... 332,006 89,058 421,064
------- ------ -------- -------
Cost of sales:
Product...................................... 104,486 5,110 109,596
Training..................................... 22,475 24,790 47,265
Services..................................... 19,261 -- 19,261
Royalties.................................... -- 2,839 (2,839)(b) --
------- ------ -------- -------
Total cost of sales.................. 146,222 32,739 (2,839) 176,122
------- ------ -------- -------
Gross margin......................... 185,784 56,319 2,839 244,942
Selling, general and administrative............ 116,362 45,567 161,929
Depreciation and amortization.................. 12,739 2,504 4,932(a) 20,175
------- ------ -------- -------
Income from operations............... 56,683 8,248 (2,093) 62,838
Other income (expense), net.................... 1,558 (893) (2,812)(d) (2,147)
------- ------ -------- -------
Income before provision for income
taxes.............................. 58,241 7,355 (4,905) 60,691
Provision for income taxes..................... 24,002 361 1,186(e) 25,549
------- ------ -------- -------
Net income........................... $ 34,239 $ 6,994 $(6,091) $ 35,142
======= ====== ======== =======
Net income per share................. $ 1.53 $ 1.29
======= =======
Weighted average number of common and common
equivalent shares outstanding................ 22,328 4,983(a) 27,311
======= ======== =======
</TABLE>
See accompanying notes to pro forma combined financial statements.
P-4
<PAGE> 93
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma combined balance sheet and statements
of income are presented to give effect to the merger of Covey with and into
Franklin. This presentation assumes the transaction occurred as of February 28,
1997 for purposes of the unaudited pro forma combined balance sheet and as of
September 1, 1995 for purposes of the unaudited pro forma combined statements of
income. The purchase method of accounting has been used in preparing the
unaudited pro forma combined data.
The financial position of Franklin as of February 28, 1997 has been
combined with the financial position of Covey as of the same date. The results
of operations of Franklin for its fiscal year ended August 31, 1996 and its six
months ended February 28, 1997 have been combined with the results of operations
of Covey for the same respective periods.
2. PRO FORMA ADJUSTMENTS
The following summarizes the adjustments made to the pro forma combined
financial data:
(a) Reflects in the accompanying Pro Forma Combined Balance Sheet the
estimated purchase price of approximately $110,848,000 to be paid for the
Covey Common Stock and outstanding options to purchase Covey Common Stock
which includes the following: (1) the issuance of 4,982,617 shares of
Franklin Common Stock, valued at $21.256 per share or $105,910,000, in
exchange for the 790,000 shares of Covey Common Stock outstanding as of
February 28, 1997; (2) the issuance of 378,425 options to purchase Franklin
Common Stock at approximately $6.02 per share, in exchange for the 60,000
options to purchase Covey Common Stock outstanding at February 28, 1997 and
the inclusion of the estimated fair value of the Franklin options as part
of the purchase price, which amounts to approximately $4,038,000; and (3)
the estimated direct costs of the merger to be incurred by Franklin of
$900,000. The purchase price has been allocated, based on estimated fair
values of the net assets, as presented below (in thousands):
<TABLE>
<S> <C>
Historical net assets of Covey as of February 28, 1997............ $ 13,203
Less distributions to S Corporation shareholders for the payment
of income tax liabilities and of accumulated earnings made
subsequent to February 28, 1997 by Covey [see (c) below]........ (10,700)
Net current deferred tax asset at February 28, 1997............... 1,425
Net deferred tax liability at February 28, 1997................... (585)
Intangible assets and goodwill acquired........................... 107,505
--------
Total purchase price.................................... $110,848
========
</TABLE>
Also reflects in the accompanying Pro Forma Combined Balance Sheet the
elimination of Covey's historical stockholders' equity accounts, net of the
effect of (c) below.
Reflects in the accompanying pro forma combined statements of income
the additional amortization based on the preliminary purchase accounting
allocation to intangible assets and goodwill acquired in the merger. The
identified intangible assets to be acquired will consist of assembled
workforce and content, customer list, tradename and marketing assets, and
other goodwill-type assets which will be amortized over periods of 12, 20,
40, and 30 years, respectively.
(b) Reflects in the accompanying Pro Forma Combined Balance Sheet
Franklin's borrowing and payment of $27 million in cash to Stephen R. Covey
for the License Rights, and reflects in the accompanying pro forma combined
statements of income the elimination of the royalties paid by Covey under
the license agreement which will not be paid subsequent to the Merger. The
$27 million has been allocated to the intangible assets as discussed in (a)
above.
P-5
<PAGE> 94
(c) Covey has been exempt from payment of federal and certain state
income taxes as a result of an S Corporation election made by the
shareholders of Covey. Subsequent to February 28, 1997, Covey has made
distributions of $10.7 million to its shareholders for the payment of
income taxes on earnings through February 28, 1997 and of previously taxed
earnings. This adjustment reflects estimated borrowings and the
distributions made by Covey prior to the merger.
(d) Reflects additional interest expense that would have been paid
related to borrowings by Franklin [see (b) above], assuming an interest
rate of 8 percent, and for borrowings by Covey [see (c) above], assuming an
interest rate of 8.25 percent.
(e) Reflects the income tax expense that would have been recorded had
Covey not been exempt from paying such taxes [see (c) above] during the
periods presented, assuming a combined federal and state income tax rate of
40 percent. Also reflects the reduction to income tax expense resulting
from amortization of the $27 million paid for the License Rights acquired
from Stephen R. Covey [see (b) above] and the additional interest expense
discussed in (d) above assuming a combined federal and state income tax
rate of 40 percent.
3. PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share have been computed based upon the pro forma
net earnings and the pro forma weighted average number of common shares
outstanding for the periods presented. The pro forma weighted average numbers of
common shares outstanding have been computed by adjusting the historical
weighted average numbers of common shares outstanding for Franklin by the effect
of the shares to be issued in exchange for the Covey Common Stock. The dilutive
effect of the Covey options outstanding on the calculation of pro forma earnings
per share was not material.
P-6
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Franklin Quest Co.:
We have audited the accompanying consolidated balance sheet of Franklin Quest
Co. (a Utah corporation) and subsidiaries as of August 31, 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year 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 audit.
We conducted our audit 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 audit provides 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 Quest Co. and
subsidiaries as of August 31, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
September 26, 1996 (except with respect to
matters discussed in Note 15 as to which the
date is March 21, 1997)
F-1
<PAGE> 96
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Franklin Quest Co.
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, of shareholders' equity and of cash flows as of and for
each of the two years in the period ended August 31, 1995 present fairly, in all
material respects, the financial position, results of operations and cash flows
of Franklin Quest Co. and its subsidiaries as of and for each of the two years
in the period 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 audits. We conducted our audits 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 examining, 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 audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Franklin Quest Co. for any period
subsequent to August 31, 1995.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Salt Lake City, Utah
September 20, 1995
F-2
<PAGE> 97
FRANKLIN QUEST CO.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY
--------------------- 28,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 35,006 $ 24,041 $ 32,583
Accounts receivable, less allowance for doubtful
accounts of $672, $889 and $952...................... 29,355 28,706 30,364
Inventories............................................. 49,796 49,463 42,060
Income taxes receivable................................. 1,015 5,064 4,470
Other assets............................................ 4,612 5,743 5,878
-------- -------- --------
Total current assets............................ 119,784 113,017 115,355
Property and equipment, net............................... 92,654 102,063 102,047
Goodwill and other intangibles, net....................... 47,726 51,115 62,328
Other assets.............................................. 3,141 2,250 3,720
-------- -------- --------
$263,305 $268,445 $ 283,450
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 16,708 $ 12,585 $ 16,037
Accrued compensation.................................... 7,838 8,029 10,587
Other accrued liabilities............................... 5,921 7,157 6,053
Current portion of long-term debt....................... 1,688 906 727
-------- -------- --------
Total current liabilities....................... 32,155 28,677 33,404
Long-term debt, less current portion...................... 4,521 5,500 5,280
Deferred income taxes..................................... 2,287 2,433 2,787
-------- -------- --------
Total liabilities............................... 38,963 36,610 41,471
-------- -------- --------
Commitments and contingencies (Notes 6, 8 and 15)
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, 22,025,000 shares issued................. 1,101 1,101 1,101
Additional paid-in capital.............................. 131,228 132,959 134,106
Retained earnings....................................... 96,610 130,849 156,917
Deferred compensation................................... (740) (1,240) (1,821)
Cumulative translation adjustment....................... (711) (940) (1,483)
-------- -------- --------
227,488 262,729 288,820
Less 254,428, 1,497,407 and 2,288,828 shares of treasury
stock, at cost....................................... (3,146) (30,894) (46,841)
-------- -------- --------
Total shareholders' equity...................... 224,342 231,835 241,979
-------- -------- --------
$263,305 $268,445 $ 283,450
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 98
FRANKLIN QUEST CO.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 29/28,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales:
Product................................... $166,219 $192,356 $236,039 $136,743 $155,124
Training.................................. 49,721 68,168 70,812 35,788 41,308
Services.................................. 16,598 25,155 12,942 11,903
-------- -------- -------- -------- --------
Total sales....................... 215,940 277,122 332,006 185,473 208,335
-------- -------- -------- -------- --------
Cost of Sales:
Product................................... 69,540 77,459 104,486 56,651 64,530
Training.................................. 15,479 19,525 22,475 11,814 12,333
Services.................................. 13,160 19,261 10,965 9,478
-------- -------- -------- -------- --------
Total cost of sales............... 85,019 110,144 146,222 79,430 86,341
-------- -------- -------- -------- --------
Gross margin...................... 130,921 166,978 185,784 106,043 121,994
Selling, general and administrative......... 75,942 95,802 116,362 57,922 70,740
Depreciation and amortization............... 5,277 9,625 12,739 5,720 8,024
-------- -------- -------- -------- --------
Income from operations............ 49,702 61,551 56,683 42,401 43,230
Interest income............................. 2,178 2,513 2,188 1,150 719
Interest expense............................ (885) (578) (630) (226) (322)
Other income................................ 744
-------- -------- -------- -------- --------
Income before provision for income
taxes........................... 50,995 64,230 58,241 43,325 43,627
Provision for income taxes.................. 20,078 25,484 24,002 17,543 17,559
-------- -------- -------- -------- --------
Net income........................ $ 30,917 $ 38,746 $ 34,239 $ 25,782 $ 26,068
======== ======== ======== ======== ========
Net income per share.............. $ 1.40 $ 1.71 $ 1.53 $ 1.14 $ 1.25
======== ======== ======== ======== ========
Weighted average number of common and common
equivalent shares......................... 22,081 22,692 22,328 22,650 20,845
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 99
FRANKLIN QUEST CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED CUMULATIVE TREASURY STOCK TOTAL
----------------- PAID-IN RETAINED COMPEN- TRANSLATION ------------------- SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SATION ADJUSTMENT SHARES AMOUNT EQUITY
------ ------ ---------- -------- -------- ----------- ------ -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31,
1993................. 22,025 $1,101 $ 88,709 $26,947 $ (120) (1,656) $ (3,640) $ 112,997
Tax benefit from
exercise of
affiliate stock
options............ 5,323 5,323
Issuance of common
stock from
treasury........... 12,751 447 497 13,248
Cumulative
translation
adjustment......... (400) (400)
Net income........... 30,917 30,917
------ ------ -------- -------- ------- ------- ------ -------- --------
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
UNAUDITED:
Issuance of common
stock from
treasury........... 298 68 69 367
Purchase of treasury
shares............. (860) (16,016) (16,016)
Deferred
compensation....... 849 (581) 268
Cumulative
translation
adjustment......... (543) (543)
Net income........... 26,068 26,068
------ ------ -------- -------- ------- ------- ------ -------- --------
Balance at February 28,
1997................. 22,025 $1,101 $134,106 $156,917 $(1,821) $(1,483) (2,289) $(46,841) $ 241,979
====== ====== ======== ======== ======= ======= ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 100
FRANKLIN QUEST CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 29/28,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 30,917 $ 38,746 $ 34,239 $ 25,782 $ 26,068
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 6,260 11,745 16,217 7,439 9,470
Provision for losses on accounts receivable....... 524 103 244 299 49
Deferred compensation............................. 147 290 188 268
Loss (gain) on sale of assets..................... 59 (377) 187 21 (209)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...... (167) (3,179) 1,671 (1,174) (1,405)
(Increase) decrease in inventories.............. (12,583) (5,256) 1,889 3,244 7,417
(Increase) decrease in other assets............. (2,195) 286 (1,928) (84) (2,736)
Increase (decrease) in accounts payable and
accrued liabilities.......................... 3,198 (3,098) (3,515) (5,808) 3,311
Increase (decrease) in income taxes............. 4,989 1,669 (3,903) 1,671 949
-------- -------- -------- -------- --------
Net cash provided by operating activities.... 31,002 40,786 45,391 31,578 43,182
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses........................... (30,988) (10,060) (7,608) (7,608) (11,960)
Purchase of property and equipment.................. (24,220) (32,523) (19,463) (11,236) (6,236)
Proceeds from sale of property and equipment........ 13 3,287 148 42 363
-------- -------- -------- -------- --------
Net cash used for investing activities....... (55,195) (39,296) (26,923) (18,802) (17,833)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings................. 831 316
Payments on short-term borrowings................... (469) (363) (121)
Proceeds from long-term debt........................ 157 121 356
Payments on long-term debt and capital leases....... (2,962) (15,166) (2,834) (927) (849)
Purchase of treasury shares......................... (2,673) (28,119) (7,426) (16,016)
Proceeds from treasury stock issuance............... 2,224 1,312 694 367
Proceeds from issuance of common stock.............. 13,248
-------- -------- -------- -------- --------
Net cash provided by (used for) financing
activities................................. 10,805 (15,978) (29,204) (7,659) (16,263)
-------- -------- -------- -------- --------
Effect of foreign exchange rates.................... (400) (211) (229) (236) (544)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents................................ (13,788) (14,699) (10,965) 4,881 8,542
Cash and cash equivalents at beginning of period.... 63,493 49,705 35,006 35,006 24,041
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period... $ 49,705 $ 35,006 $ 24,041 $ 39,887 $ 32,583
======== ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid....................................... $ 885 $ 1,025 $ 616 $ 226 $ 283
Income taxes paid................................... 19,496 24,279 27,973 15,394 15,787
Non-cash investing and financing activities:
Fair value of assets acquired..................... 33,095 51,125 11,019 11,019 13,770
Cash paid for net assets.......................... (30,988) (10,060) (7,608) (7,608) (11,960)
Fair value of stock exchanged for net assets...... (22,430)
-------- -------- -------- -------- --------
Liabilities assumed from acquisitions............. 2,107 18,635 3,411 3,411 1,810
======== ======== ======== ======== ========
Tax effect of exercise of affiliate options....... 5,323 1,571 287 175 13
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 101
FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Franklin Quest Co. (the "Company") provides training seminars and
manufactures and distributes products designed to improve individual
productivity through effective time management. The Company's training seminars
and products are based upon a comprehensive time management system which
includes the Company's primary product, the Franklin Day Planner. The Company
operates principally in the training and personal organizer industry.
UNAUDITED INFORMATION
The accompanying unaudited consolidated balance sheet as of February 28,
1997, the consolidated statements of income and cash flows for the six months
ended February 29 and 28, 1996 and 1997, respectively, and the consolidated
statement of shareholders' equity for the six months ended February 28, 1997
have been prepared on substantially the same basis as the annual consolidated
financial statements. In the opinion of management, the unaudited statements
contain all adjustments (consisting of normal recurring adjustments) necessary
to present fairly the results of operations and cash flows for such periods.
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.
Depreciation of buildings is computed using the straight-line method over their
estimated useful lives ranging from 31 to 39 years. Effective September 1, 1993,
the Company began depreciating newly-acquired equipment using the straight-line
method which conforms to prevailing industry practice. The effect of the change
was not material to the fiscal 1994 financial results. 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.
F-7
<PAGE> 102
FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The balance sheet accounts of the Company's foreign subsidiaries are
translated into U.S. dollars using the current exchange rate and 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 and cash
equivalents. 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 March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long- Lived Assets to be Disposed of" (effective
for financial statements for years beginning after December 15, 1995). SFAS No.
121 establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. The adoption of SFAS No. 121 is not expected to have a material
impact on the Company's financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation" (effective for financial
statements for years beginning after December 15, 1995). SFAS No. 123
establishes a fair value method of accounting for stock-based compensation
plans, either through recognition or disclosure. SFAS No. 123 is not expected to
have a material impact on the Company's financial position or results of
operations.
F-8
<PAGE> 103
FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made in the prior periods' consolidated
financial statements to conform with the current year presentation.
2. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY
------------------- 28,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods.............................. $32,721 $36,156 $25,245
Work-in-process............................. 6,672 4,969 5,784
Raw materials............................... 10,403 8,338 11,031
------- ------- -------
$49,796 $49,463 $42,060
======= ======= =======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY
--------------------- 28,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land and improvements..................... $ 10,417 $ 11,124 $ 11,224
Buildings................................. 29,243 50,038 50,611
Machinery and equipment................... 42,514 48,992 50,286
Furniture and fixtures.................... 22,163 29,788 33,625
Construction in progress.................. 16,930 223 91
-------- -------- --------
121,267 140,165 145,837
Less accumulated depreciation............. (28,613) (38,102) (43,790)
-------- -------- --------
$ 92,654 $102,063 $ 102,047
======== ======== ========
</TABLE>
During fiscal 1995, the Company capitalized interest of $447,000 with
respect to qualifying construction projects. Certain real estate represents
collateral for debt obligations (See Note 5).
4. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY
------------------- 28,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill.................................... $27,310 $31,001 $ 44,251
Curriculum rights........................... 11,631 11,990 12,258
Trade names and other....................... 13,527 17,889 18,467
------- ------- --------
52,468 60,880 74,976
Less accumulated amortization............... (4,742) (9,765) (12,648)
------- ------- --------
$47,726 $51,115 $ 62,328
======= ======= ========
</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 15 years. At each balance sheet date, the
F-9
<PAGE> 104
FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company evaluates the realizability of goodwill based upon expectations of
nondiscounted cash flows and operating income for each subsidiary having a
material goodwill balance. Based upon its most recent analysis, the Company
believes that no material impairment of goodwill exists at August 31, 1996 and
February 28, 1997 (unaudited).
5. DEBT
LINE OF CREDIT
The Company has an unsecured bank line of credit available for working
capital needs in the amount of $9,000,000 at August 31, 1996 and February 28,
1997 (unaudited). The interest rate is the prime rate less .25%. The line of
credit agreement requires the maintenance of certain financial ratios and
working capital levels and expires in March 1997. The Company has an additional
unsecured bank line of credit available for working capital needs of $50,000,000
at February 28, 1997 (unaudited). This line expires on October 1, 2001. The
Company has the option of paying interest on this line at either the prime rate
less 1.00% or the LIBOR rate plus .75%. This line of credit agreement has
certain requirements regarding additional borrowings, levels of tangible net
worth and earnings before interest, taxes, depreciation and amortization. No
borrowings were outstanding under either line of credit at August 31, 1996 and
February 28, 1997 (unaudited).
LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
---------------- FEBRUARY 28,
1995 1996 1997
------- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage payable in monthly installments of $31 including
interest at 9.9% through August 2016, secured by real estate... $ 2,065 $1,895 $1,866
Note payable to bank, payable in monthly installments of $23 plus
interest at prime plus .5% payable through September 2002,
secured by real estate......................................... 1,996 1,714 1,573
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........... 778 763 756
Note payable to bank, paid in full during fiscal 1996............ 504
Other mortgages and notes, payable in monthly installments,
interest ranging from 6.0% to 15.1%, due through 2002, secured
by real estate, inventories and accounts receivable............ 866 1,034 812
------- ------ ------
6,209 6,406 6,007
Less current portion............................................. (1,688) (906) (727)
------- ------ ------
Long-term debt, less current portion................... $ 4,521 $5,500 $5,280
======= ====== ======
</TABLE>
Future maturities of long-term debt at August 31, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING AUGUST 31,
----------------------------------------------------
<S> <C>
1997.............................................. $ 906
1998.............................................. 642
1999.............................................. 1,460
2000.............................................. 439
2001.............................................. 426
Thereafter........................................ 2,533
------
$6,406
======
</TABLE>
F-10
<PAGE> 105
FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LEASE OBLIGATIONS
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, 1996 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING AUGUST 31,
---------------------------------------------------
<S> <C>
1997............................................. $ 5,618
1998............................................. 5,122
1999............................................. 3,992
2000............................................. 2,636
2001............................................. 944
Thereafter....................................... 546
-------
$18,858
=======
</TABLE>
Rental expense for leases under operating lease terms was $3,710,000,
$5,587,000 and $8,925,000 for the years ended August 31, 1994, 1995 and 1996,
respectively.
7. ADVERTISING
Costs for newspaper, television, radio and other advertising are expensed
as incurred and were approximately $7,351,000, $10,907,000 and $15,594,000 for
the years ended 1994, 1995 and 1996, 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. Catalog costs reported in other current assets were approximately
$718,000 and $991,000 at August 31, 1995 and 1996, respectively. Advertising
costs for the six months ended February 28, 1997 (unaudited) were $9,235,000.
Catalog costs reported in other current assets were approximately $580,000 at
February 28, 1997 (unaudited).
8. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
As of August 31, 1995 and 1996, the Company had purchase commitments for
capital expenditures of approximately $2,500,000 and $422,000, respectively.
There were no significant purchase commitments outstanding at February 28, 1997
(unaudited).
LEGAL MATTERS
The Company is the subject of certain legal actions, which it considers
routine to its business activities. As of August 31, 1996 and February 28, 1997
(unaudited), management believes that any potential liability to the Company
under such actions will not materially affect the Company's financial position
or results of operations.
9. RELATED PARTY TRANSACTIONS
In conjunction with the employment of a senior executive, a bridge loan of
$150,000 was granted during fiscal year 1996 which was due upon the sale of his
former residence. This loan was paid off during October 1996 (unaudited).
F-11
<PAGE> 106
FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL TRANSACTIONS
CAPITAL STOCK
On April 10, 1992, the Company's Board of Directors and shareholders
authorized 4,000,000 shares of preferred stock, no par value; none have 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
During January 1994, the Company sold 375,000 shares of its common shares
held in treasury as part of the underwriters' over-allotment agreement in
connection with a secondary stock offering by the Company and certain selling
shareholders for approximately $12,244,000. The Company sold 72,335, 309,045,
132,021 and 22,236 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 1994, 1995 and 1996, and for the six
months ended February 28, 1997 (unaudited), respectively. These shares were sold
for a total of approximately $1,004,000, $2,226,000, $1,025,000, and $392,000
and had a cost of approximately $497,000, $806,000, $371,000 and $69,000 for the
years ended 1994, 1995 and 1996, and for the six months ended February 28, 1997
(unaudited), 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 13). 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 1995 and 1996, the Company purchased 110,000 shares at a
cost of approximately $2,673,000 and 1,375,000 shares at a cost of approximately
$28,119,000, respectively. During the six months ended February 28, 1997
(unaudited), the Company purchased 860,000 shares at a cost of approximately
$16,016,000.
TAX BENEFIT FROM EXERCISE OF AFFILIATE STOCK OPTIONS
During fiscal 1994, 1995 and 1996, 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
$5,323,000, $1,571,000 and $287,000, respectively, which were recorded as
increases to additional paid-in capital. Tax benefits to the Company resulting
from affiliate stock options exercised during the six months ended February 28,
1997 (unaudited) were insignificant.
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. Compensation expense is recognized ratably
over the four year period.
STOCK OPTIONS
Effective March 31, 1992, the Company's Board of Directors approved an
incentive stock option plan whereby 1,000,000 shares of common stock were
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. In December 1993, the shareholders of the Company approved an
increase in the number of shares available for issuance under the incentive
stock plan from 1,000,000 to 5,000,000. Unoptioned shares available for granting
under the incentive stock option plan at February 28, 1997 (unaudited) are
1,126,422.
F-12
<PAGE> 107
FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of nonqualified and incentive stock option activity is set forth
below:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE PER
OPTIONS SHARE
--------- ----------------
<S> <C> <C>
Outstanding at August 31, 1993.................. 2,074,650 $ 1.11 to $26.82
Granted....................................... 1,106,000 26.13 to 34.50
Exercised..................................... (46,200) 1.11 to 21.00
Forfeited..................................... (44,900) 17.05 to 34.50
---------
Outstanding at August 31, 1994.................. 3,089,550 1.11 to 34.50
Granted....................................... 174,500 23.00 to 29.38
Exercised..................................... (269,071) 2.78 to 34.25
Forfeited..................................... (29,550) 24.75 to 34.50
---------
Outstanding at August 31, 1995.................. 2,965,429 1.11 to 34.50
Granted....................................... 838,500 18.50 to 23.50
Exercised..................................... (41,950) 1.11 to 26.13
Forfeited..................................... (23,825) 18.50 to 34.50
---------
Outstanding at August 31, 1996.................. 3,738,154 1.11 to 34.50
Unaudited:
Granted....................................... 711,040 18.00 to 21.75
Exercised..................................... (2,733) 1.11 to 11.83
Forfeited..................................... (49,187) 18.50 to 34.50
---------
Outstanding at February 28, 1997................ 4,397,274 $ 1.11 to $34.50
=========
</TABLE>
Options exercisable at February 28, 1997 (unaudited) were 2,747,991.
11. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN
The Company has defined contribution profit sharing plans which qualify
under Section 401(k) of the Internal Revenue Code. The plan provides 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 plan provides for discretionary matching contributions by the
Company, as determined by the Board of Directors. The discretionary amounts
expensed in the years ended August 31, 1994, 1995 and 1996 were $591,000,
$1,016,000 and $1,172,000, respectively. The discretionary amount expensed
during the six months ended February 28, 1997 (unaudited) was $559,000.
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 26,135, 30,974 and 47,574, have been issued under this plan for
the years ended August 31, 1994, 1995 and 1996. Shares available for issuance
under this plan at August 31, 1996, are 172,244. Shares totaling 21,798 have
been issued under this plan for the six months ended February 28, 1997
(unaudited). Shares available for issuance under this plan at February 28, 1997
(unaudited) are 150,446.
F-13
<PAGE> 108
FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $16,677 $20,943 $19,960
State........................................... 3,629 4,447 3,886
Foreign......................................... 307 778
Deferred:
Federal......................................... (178) (191) (548)
State........................................... (50) (22) (74)
------- ------- -------
$20,078 $25,484 $24,002
======= ======= =======
</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,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate............................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............. 4.7 4.7 4.8
Goodwill amortization.................................. .2 .3
Other.................................................. (.3) (.2) 1.1
---- ---- ----
- - -
39.4% 39.7% 41.2%
==== ==== ====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING AUGUST 31,
----------------------
1995 1996
------- -------
<S> <C> <C>
Current deferred tax assets:
Inventory and bad debt reserve......................... $ 517 $ 1,352
Vacation and other accruals............................ 760 926
Other.................................................. 140 41
------- -------
Total current deferred tax assets.............. 1,417 2,319
------- -------
Long term deferred tax assets and (liabilities):
Interest and inventory capitalization.................. 327 440
Fixed asset step-up.................................... (1,350) (1,365)
Depreciation and amortization.......................... (395) (1,272)
Other.................................................. (869) (236)
------- -------
Total long term deferred tax liabilities,
net.......................................... (2,287) (2,433)
------- -------
Net deferred tax liability............................... $ (870) $ (114)
======= =======
</TABLE>
Current deferred tax assets are reported as a component of other current
assets.
13. ACQUISITIONS
Effective October 1, 1996, the Company acquired the assets of TrueNorth
Corporation ("TrueNorth"). TrueNorth, a Utah corporation, is a leading provider
of post-instructional personal coaching to corporations
F-14
<PAGE> 109
FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The acquisition was accounted for as a purchase. TrueNorth had
sales for the twelve months ended July 31, 1996 of approximately $16.0 million.
The impact on the accompanying consolidated financial statements, as of and for
the six months ended February 28, 1997 (unaudited) would be immaterial, had
TrueNorth been acquired on September 1, rather than October 1, of 1996.
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. The acquisition was accounted for as a purchase. PPI had sales for
the year ended November 30, 1995 of approximately $12.5 million. The results of
operations of PPI are not material to the Company's consolidated financial
statements.
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
million. The acquisition resulted in intangibles of $5.5 million, which are
being amortized over periods ranging from 4 to 30 years. The results of
operations of Time Systems are not material to the Company's consolidated
financial statements.
In June 1995, the Company acquired the assets of LTS, Inc. LTS, Inc. is
headquartered in Atlanta, Georgia, and distributed exclusively Time Systems
products and services. The cash purchase price was $1.9 million and could
increase to approximately $2.2 million based on LTS, Inc.'s operating
performance during the two years after acquisition. The acquisition was
accounted for as a purchase. LTS, Inc. had sales for the year ended December 31,
1994 of approximately $2.6 million. The acquisition resulted in intangibles of
$1.2 million, which are being amortized over periods ranging from 5 to 7 years.
The results of operations of LTS, Inc. are not material to the Company's
consolidated financial statements.
Effective December 1, 1994, the Company acquired Publishers Press, Inc.
("Publishers") for approximately $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. 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 $18.4 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,
----------------------
1994 1995
----------- --------
(UNAUDITED)
<S> <C> <C>
Revenue................................................ $ 237,649 $284,028
Net income............................................. 33,763 39,623
Net income per share................................... 1.48 1.74
</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,
F-15
<PAGE> 110
FRANKLIN QUEST CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
In February 1994, the Company purchased the assets of Shipley Associates
(Shipley) for $23.0 million. Shipley provides training, consulting services and
products designed to improve written and oral business communication and
presentation skills. Shipley's sales for its fiscal year ended July 31, 1993
were $13.4 million. The acquisition was accounted for using the purchase method.
Accordingly, the results of operations of Shipley are included with those of the
Company for periods subsequent to the date of acquisition. The acquisition
resulted in goodwill of $6.2 million and other intangibles of $13.8 million.
These items are being amortized over periods ranging from 4 to 30 years.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The unaudited quarterly financial information included on page 48 of the
Joint Proxy Statement is an integral part of the consolidated financial
statements.
15. SUBSEQUENT EVENTS (UNAUDITED)
Effective 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
guaranteed cash purchase price was approximately $23.0 million. In addition,
contingent payments may be paid based upon Premier's operating performance
during the three years following acquisition. Premier markets academic and
personal planners for students from kindergarten through college throughout the
United States and Canada. Premier's revenues were approximately $35.0 million
for the year ended December 31, 1996.
On March 21, 1997, the Company and Covey Leadership Center, Inc. ("Covey")
entered into an agreement (the "Merger Agreement") that provides for Covey to
merge with and into the Company. Covey is a leading provider of management and
productivity consulting, training seminars and products to individual and
corporate clients and customers throughout the world. Under the terms of the
Merger Agreement, each outstanding share of Covey's Common Stock will be
converted into the right to receive newly issued shares of Common Stock of the
Company based on the share exchange ratio, as defined in the Merger Agreement,
and each existing outstanding option to purchase Common Stock of Covey will be
converted into options to purchase the Company's Common Stock with the number of
Company options issued and the exercise price to reflect the share exchange
ratio. In connection with the merger, the Company will acquire certain license
rights from Covey's major shareholder (the "Shareholder") and related trust for
an aggregate of $27 million payable either in cash or Common Stock of the
Company. The amount of cash or shares of Common Stock of the Company to be paid
for the license rights will be determined by the Shareholder prior to the
merger. The maximum number of shares of Common Stock of the Company to be issued
in connection with all transactions contemplated by the merger will not exceed
6,631,272, which shares include the maximum shares which the Shareholder could
elect to receive for the license rights and the shares reserved for the exercise
of Company options into which the Covey options will be converted. The merger,
which has been approved by the Board of Directors of each company, is subject to
satisfactory completion of due diligence and approval by the shareholders of
both companies.
F-16
<PAGE> 111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Covey Leadership Center, Inc.:
We have audited the accompanying consolidated balance sheets of Covey Leadership
Center, Inc. (a Utah corporation) and subsidiary as of December 31, 1995 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.
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 Covey Leadership Center, Inc.
and subsidiary as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 21, 1997 (except with
respect to the
amendment to the credit agreement
discussed
in Note 3 as to which the date is
April 10, 1997)
F-17
<PAGE> 112
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Covey Leadership Center, Inc.
Provo, Utah
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Covey Leadership Center, Inc. (a Utah
corporation) and subsidiary for the year ended December 31, 1994. 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Covey
Leadership Center, Inc. and subsidiary for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.
/s/ Dodge Evans & Co.
DODGE EVANS & CO.
March 30, 1995
F-18
<PAGE> 113
COVEY LEADERSHIP CENTER, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
Current assets:
Cash..................................................................... $ 358 $ 139
Accounts and notes receivable, net of allowances of $650 and $1,100,
respectively.......................................................... 12,614 19,272
Inventories.............................................................. 3,001 4,261
Amounts due from related parties......................................... 144
Prepaid expenses and other............................................... 731 442
------- -------
Total current assets............................................. 16,704 24,258
Property and equipment, net................................................ 6,530 7,187
Product development costs and other intangible assets, net................. 3,458 5,029
Other assets............................................................... 519 87
------- -------
$27,211 $36,561
======= =======
Current liabilities:
Line-of-credit........................................................... $ 1,125 $ 1,230
Current portion of long-term debt........................................ 1,835 1,866
Current portion of capital lease obligations............................. 528 541
Accounts payable......................................................... 5,554 7,663
Accrued compensation..................................................... 3,715 3,655
Other accrued liabilities................................................ 1,222 2,341
Deferred revenue......................................................... 2,115 2,105
Amounts due to related parties........................................... 291
Accrued distributions to S Corporation shareholders...................... 539
------- -------
Total current liabilities........................................ 16,385 19,940
Long-term debt, net of current portion..................................... 2,391 4,025
Capital lease obligations, net of current portion.......................... 1,286 744
Minority interest.......................................................... 28
------- -------
Total liabilities................................................ 20,090 24,709
------- -------
Commitments and contingencies (Notes 6 and 11)
Shareholders' equity:
Common stock, $.001 par value, 1,000 shares authorized; 790 shares issued
and outstanding....................................................... 1 1
Additional paid-in capital............................................... 422 422
Retained earnings........................................................ 6,698 11,429
------- -------
Total shareholders' equity....................................... 7,121 11,852
------- -------
$27,211 $36,561
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 114
COVEY LEADERSHIP CENTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
Training.................................................... $59,995 $64,433 $83,822
Product..................................................... 9,008 11,610 14,854
------- ------- -------
Total sales......................................... 69,003 76,043 98,676
------- ------- -------
Cost of sales:
Training.................................................... 23,573 21,477 28,532
Product..................................................... 3,805 3,939 6,200
Royalties to major shareholder (Note 9)..................... 2,215 2,388 3,125
------- ------- -------
Total cost of sales................................. 29,593 27,804 37,857
------- ------- -------
Gross margin........................................ 39,410 48,239 60,819
Selling, general, and administrative.......................... 35,442 40,505 48,657
Depreciation and amortization................................. 1,375 1,927 2,581
------- ------- -------
Income from operations.............................. 2,593 5,807 9,581
Interest expense.............................................. (676) (811) (849)
Other income (expense), net................................... (1,026) (113) 10
Minority interest............................................. 58 (86) (14)
------- ------- -------
Income before provision for foreign and certain
state income taxes................................ 949 4,797 8,728
Provision for foreign and certain state income taxes.......... 135 294 375
------- ------- -------
Net income.................................................... $ 814 $ 4,503 $ 8,353
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 115
COVEY LEADERSHIP CENTER, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993................ 835 $1 $211 $ 3,702 $ 3,914
Repurchase and cancellation of common
shares from former officer of the
company................................ (100) (28) (478) (506)
Return and cancellation of common shares
related to non-payment of a note....... (25) (7) 7
Distributions to S Corporation
shareholders........................... (1,790) (1,790)
Net income................................ 814 814
--- -- ---- ------- -------
Balance at December 31, 1994................ 710 1 176 2,255 2,432
Issuance of common shares as
compensation........................... 80 246 246
Distributions to S Corporation
shareholders........................... (151) (151)
Return of distributions to S Corporation
shareholder............................ 91 91
Net income................................ 4,503 4,503
--- -- ---- ------- -------
Balance at December 31, 1995................ 790 1 422 6,698 7,121
Distributions to S Corporation
shareholders........................... (3,622) (3,622)
Net income................................ 8,353 8,353
--- -- ---- ------- -------
Balance at December 31, 1996................ 790 $1 $422 $ 11,429 $11,852
=== == ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 116
COVEY LEADERSHIP CENTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 814 $ 4,503 $ 8,353
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 1,375 1,927 2,581
Gain on sale of subsidiary................................. (954)
Issuance of common shares as compensation.................. 246
Minority interest.......................................... (58) 86 14
Settlement agreements...................................... 911 100
Loss on sale of assets..................................... 92 45 51
Changes in operating assets and liabilities, net of effects
from sale of subsidiary:
Increase in accounts receivable.......................... (1,718) (2,451) (6,482)
Increase in inventories.................................. (515) (34) (1,294)
(Increase) decrease in prepaid expenses and other........ (26) (255) 68
Increase in accounts payable and accrued liabilities..... 234 3,183 2,961
Increase (decrease) in deferred revenue.................. 1,112 (432) 1,149
------- ------- -------
Net cash provided by operating activities............. 2,221 6,918 6,447
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.................. 43 58 32
Net decrease in cash from sale of subsidiary.................. (13)
Purchase of property and equipment and additions to product
development costs and other intangible assets.............. (2,638) (2,346) (5,134)
(Increase) decrease in other assets........................... (83) (147) 227
Advance to minority shareholder in subsidiary................. (136) (58)
------- ------- -------
Net cash used in investing activities................. (2,814) (2,493) (4,888)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under line-of-credit................ (950) (690) 105
Proceeds from issuance of long-term debt...................... 4,500 3,564
Payments on long-term debt.................................... (1,166) (1,691) (1,835)
Payments on capital lease obligations......................... (549) (696) (529)
Borrowing (repayment) of note due to major shareholder........ 1,000 (1,000)
Distributions to S Corporation shareholders................... (2,224) (151) (3,083)
Return of distribution to S Corporation shareholder........... 91
------- ------- -------
Net cash provided by (used in) financing activities... 611 (4,137) (1,778)
------- ------- -------
NET INCREASE (DECREASE) IN CASH................................. 18 288 (219)
CASH AT BEGINNING OF YEAR....................................... 52 70 358
------- ------- -------
CASH AT END OF YEAR............................................. $ 70 $ 358 $ 139
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest........................ $ 633 $ 812 $ 870
Cash paid during the year for foreign and certain state income
taxes...................................................... 135 294 375
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations incurred for acquisition of
equipment.................................................. $ 1,339 $ 445 $ 274
Repurchase of common shares from former officer by issuance of
a note payable............................................. 506
Accrued distributions to S Corporation shareholders........... 539
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 117
COVEY LEADERSHIP CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Covey Leadership Center, Inc. (the "Company"), a Utah corporation, is a
provider of integrated educational materials, training workshops, consulting
services, publications and products designed to empower individuals and
organizations to become more effective through understanding and applying
principles that the Company believes are universal. The Company's main products
and services include program manuals, videotapes, audiotapes, live training
presentations and programs, assessment tools, and personal organizers. The
Company principally markets its products and services nationally through a
direct sales force and internationally through licensee arrangements.
Executive Excellence Publishing, L.C. ("EEP"), a majority owned subsidiary
of the Company through June 30, 1996 (see Note 10), publishes and markets the
Executive Excellence magazine.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and EEP until the Company sold its interest in EEP effective June 30, 1996. All
significant intercompany accounts 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.
Inventories
Inventories, comprised primarily of finished goods, 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 and
amortization. Maintenance, repairs, minor renewals and betterments are expensed
as incurred. Major renewals and betterments are capitalized. The cost of
property and equipment sold or otherwise disposed of and the related accumulated
depreciation and amortization are relieved from the accounts, and any gains or
losses arising from sale or disposal are included in operations.
Depreciation and amortization of property and equipment are computed using
the straight-line method over the estimated useful lives of the related assets.
The estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Computer equipment and software..................................... 3 to 5
Office furniture and equipment...................................... 5 to 7
Leasehold improvements.............................................. 2 to 20
Vehicles............................................................ 5
</TABLE>
F-23
<PAGE> 118
COVEY LEADERSHIP CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and equipment are comprised of the following as of December 31,
1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Computer equipment and software.......................... $ 5,786 $ 7,373
Office furniture and equipment........................... 3,765 4,024
Leasehold improvements................................... 513 1,307
Vehicles................................................. 49 49
------- -------
10,113 12,753
Less accumulated depreciation and amortization........... (3,583) (5,566)
------- -------
$ 6,530 $ 7,187
======= =======
</TABLE>
Product Development Costs and Other Intangible Assets
The Company capitalizes certain costs associated with the development and
production of video and audio products and costs associated with writing books.
These costs are not capitalized until the product has reached economic
feasibility and management has decided to produce and market the product. Costs
and expenses related to research and initial product design are expensed as
incurred and amounted to approximately $677,000, $955,000 and $2,531,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
Amortization is provided for video and audio products using the
straight-line method (which approximates the income forecast method) over their
estimated useful lives, which range from three to eight years. Amortization is
provided for capitalized book costs using the income forecast method.
Costs and expenses related to trademarks and copyrights are capitalized and
amortized ratably over their estimated useful lives, which range from 5 to 15
years.
Product development costs and other intangible assets are comprised of the
following as of December 31, 1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Video and audio products................................... $2,846 $2,867
Books...................................................... 662 2,256
Trademarks and copyrights.................................. 100 444
Other...................................................... 58 142
------ ------
3,666 5,709
Less accumulated amortization.............................. (208) (680)
------ ------
$3,458 $5,029
====== ======
</TABLE>
Revenue Recognition and Classification
Revenue from the sale of products and services is recognized when products
are shipped and services are rendered. The Company defers revenue paid in
advance relating to future services. Revenue from book royalties is recognized
when received. In addition, revenue from magazine subscriptions, which was
generated by EEP, was deferred and recognized pro rata as the delivery of
periodicals occurred (see Note 10). Costs related to the procurement of
subscriptions were expensed as incurred.
Training sales in the accompanying consolidated statements of income
includes training services and the products associated with the training.
Training sales also includes affiliate and foreign licensee royalties.
F-24
<PAGE> 119
COVEY LEADERSHIP CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Product sales includes products sold through the Company's catalog operations
and retail stores, independent distributors and bookstores. Product sales also
includes book royalties and magazine subscription revenue.
Advertising
The Company expenses the cost of advertising the first time the advertising
takes place, except for direct-response advertising related to future public
seminars which is recorded as a prepaid expense until the seminar is held. For
the years ended December 31, 1994, 1995 and 1996, advertising expenses totaled
approximately $1,501,000, $2,039,000 and $3,475,000, respectively.
Income Taxes
The Company has elected, for federal and state income tax purposes, to
include its taxable income with that of its shareholders (an S Corporation
election). Accordingly, the Company does not record a provision for federal and
state income taxes which would otherwise be considered in the determination of
net income had the Company not elected S Corporation status. A provision has
been made for foreign income taxes and for state income taxes for those states
that tax S corporations.
The Company's policy is to record distributions to its shareholders for the
payment of income taxes when they are declared to the shareholders. The Company
anticipates distributing amounts as needed for the payment of the shareholders'
federal and state income taxes.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. 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 Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company adopted SFAS No. 121 for 1996, which had no impact on
the Company's financial position or results of operations.
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 financial
statements to be consistent with the 1996 presentation.
(3) CREDIT AGREEMENT
The Company has a credit agreement (the "Agreement") with a bank which
provided for a $6,000,000 term loan (see Note 4) and a revolving line-of-credit
commitment of $9,000,000 as of December 31, 1996. On April 10, 1997, the
Agreement was amended to refinance the term loan and to increase the revolving
line-of-
F-25
<PAGE> 120
COVEY LEADERSHIP CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
credit commitment to $25,000,000 through September 1, 1997. Borrowings on the
amended revolving line-of-credit are limited to 80 percent of eligible accounts
receivable plus certain other amounts, as defined. Amounts outstanding under the
Agreement are secured by essentially all assets of the Company.
As of December 31, 1996 the term loan bore interest at either the bank's
base rate plus .25 percent or the contracted LIBOR rate plus 235 basis points,
as elected by the Company. As of December 31, 1996, the entire $5,125,000
outstanding balance bore interest at the contracted LIBOR rate plus 235 basis
points, which was 7.85 percent. The remaining balance outstanding under the term
loan was transferred to the revolving line-of-credit on April 10, 1997.
The revolving line-of-credit bears interest at either the bank's base rate
or the contracted LIBOR rate plus 210 basis points, as elected by the Company.
As of December 31, 1995 and 1996, the Company had borrowed $1,125,000 and
$1,230,000, respectively, under the revolving line-of-credit with approximately
$7,770,000 of availability under the line as of December 31, 1996. Approximately
$1,000,000 of borrowings as of December 31, 1996 bore interest at the contracted
LIBOR rate plus 210 basis points, which was 7.35 percent, while approximately
$230,000 bore interest at the bank's base rate, which was 8.25 percent. The
weighted average outstanding balance was $2,783,000 during the year ended
December 31, 1996. The maximum amount outstanding during 1996 was $6,000,000.
The weighted average interest rate was 8.2 percent for the year ended December
31, 1996.
The Agreement contains certain restrictive covenants with respect to the
operations of the Company. Among other restrictions, included are restrictions
on incurrence of additional indebtedness, maintenance of minimum levels of net
worth and maintenance of minimum levels of quarterly income before taxes. At
December 31, 1996, the Company was in compliance with all restrictive covenants.
(4) LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1995 and 1996
(in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Term loan payable to a bank (see Note 3)................. $ 3,125 $ 5,125
Contract payable to an individual, due in monthly
installments of $35,000, including imputed interest at
9 percent, through December 1998 (see Note 6).......... 1,101 766
------- -------
4,226 5,891
Less current portion..................................... (1,835) (1,866)
------- -------
$ 2,391 $ 4,025
======= =======
</TABLE>
Future maturities of long-term debt as of December 31, 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------
<S> <C>
1997......................................................... $1,866
1998......................................................... 1,900
1999......................................................... 1,500
2000......................................................... 625
------
$5,891
======
</TABLE>
F-26
<PAGE> 121
COVEY LEADERSHIP CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) CAPITAL LEASE OBLIGATIONS
Future minimum lease payments for equipment held under capital lease
arrangements as of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------
<S> <C>
1997......................................................... $ 628
1998......................................................... 536
1999......................................................... 247
2000......................................................... 16
------
Total future minimum lease payments................................. 1,427
Less amount representing interest................................... (142)
------
Present value of future minimum lease payments...................... 1,285
Less current portion................................................ (541)
------
$ 744
======
</TABLE>
Total assets held under capital lease arrangements were approximately
$2,522,000 and $2,464,000 with accumulated amortization of approximately
$603,000 and $989,000 as of December 31, 1995 and 1996, respectively.
Amortization of capital lease assets is included in depreciation and
amortization.
(6) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain office and warehouse facilities and equipment
under renewable operating lease agreements with noncancelable terms in excess of
one year. For the years ended December 31, 1994, 1995 and 1996, lease expense
for all operating leases was approximately $941,000, $1,744,000 and $1,445,000,
respectively. The following is a schedule of future minimum rental payments
required under operating leases as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------
<S> <C>
1997........................................... $1,603
1998........................................... 1,348
1999........................................... 1,074
2000........................................... 495
2001........................................... 411
Thereafter..................................... 909
------
$5,840
======
</TABLE>
Shareholder Employment Agreements
In connection with the shareholder agreements discussed in Note 7, the
Company has entered into employment agreements with 10 key employees, who are
also shareholders, which require the Company to pay six months of severance to
each employee shareholder if their employment is terminated other than for
cause, as defined.
Affiliate and Licensing Agreements
Prior to 1994, the Company had entered into licensing agreements with
domestic affiliates and international licensees to market its products and
services in certain geographical areas and to certain market segments. In July
1994, the Company decided to change its domestic sales strategy to phase out the
use of
F-27
<PAGE> 122
COVEY LEADERSHIP CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
affiliates and to rely on inhouse direct sales. To make this transition, the
Company's domestic affiliates were advised that their licensing agreements would
not be renewed upon the expiration of the current terms. To expedite the
transition, the Company offered premium transitional payments generally payable
over an agreed to shorter period than the original agreements. The amount of the
payments was based on the sales during the shorter periods. The premium payments
have been expensed as incurred and have amounted to approximately $876,000,
$857,000 and $186,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. The costs have been included in selling, general and
administrative expense in the accompanying consolidated statements of income.
Also during 1996, the Company settled a legal dispute with an affiliate and has
included the settlement amount in other expense in the accompanying 1996
consolidated statement of income. The agreement requires that the settlement
terms remain confidential.
The Company continues to market its products and services internationally
under licensing agreements.
Legal Matters
During 1994, the Company entered into a settlement agreement with its
former president, who was also a shareholder. Under the terms of the agreement,
the Company acquired the shares of common stock held by the former president and
received a release from all asserted claims. The total settlement of $1,680,000
was structured to be paid in monthly installments of $35,000 through December
1998 without interest. The Company recorded the above settlement net of imputed
interest at 9 percent, which amounted to approximately $1,417,000. The recorded
amount was allocated $506,000 to the shares of common stock acquired (see Note
7) and the remaining amount of $911,000 was expensed in the accompanying 1994
statement of income in other expense.
In September 1996, the Company was named as a secondary defendant in a
legal action arising out of a broker relationship between the Plaintiff and one
of the Company's suppliers. The allegations assert that the Plaintiff acted as a
sales agent of the supplier in selling certain products to the Company. In late
1995, the Company determined that it would no longer purchase products through
the Plaintiff, and engaged another agent in purchasing products from the
supplier. The Plaintiff alleges that the communications among the Company, the
successor agent and the supplier constitute intentional interference with the
Plaintiff's contractual and economic relations. The Plaintiff's claims for
damages against the Company's supplier, the successor agent and the Company
allege losses of commissions or broker's fees of $1,750,000. This matter is in
the discovery phase. The Company has asserted various affirmative defenses and
intends to vigorously defend against the claims. Management believes the lawsuit
to be without merit and, after consultation with legal counsel, that the
ultimate outcome of this matter will not have a material negative effect on the
Company's financial position or results of operations.
The Company is also the subject of certain other legal actions, which it
considers routine to its business activities. As of December 31, 1996,
management believes that any potential liability to the Company under such
actions will not materially affect the Company's financial position or results
of operations.
Fulfillment and Distribution Agreement
The Company entered into a fulfillment and distribution agreement to
provide for inventory procurement, management, and order fulfillment. This
agreement expires in June 2002. Early termination during July 1998 or July 1999
is provided given one-year written notice by either party. Disruption in this
source could cause a delay in the Company's order fulfillment operations which
would have an adverse affect on the Company's operating results.
F-28
<PAGE> 123
COVEY LEADERSHIP CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Real Estate Options and Building Leases
During 1994, the Company began to pursue the development of a new corporate
office building and related facilities. The Company's intent was to enter into
long-term lease arrangements with a party that would build facilities to suit
the Company's specific needs. In April 1995, the Company acquired an option for
$60,000 through a developer (the "Land Agreement") to purchase the required
land. The land becomes available to the Company in four parcels. Pursuant to the
Land Agreement, the Company and the developer formed Covey Corporate Campus One,
L.L.C. ("CCC1"), to develop and construct a sales office building on Parcel A of
the land (the "CCC1 Building").
In July 1995, the Company reached an agreement with the developer to
purchase the developer's interest in CCC1 for $188,000. At this same time, the
Company entered into a Loan and Option Agreement (the "CCC1 Agreement") with The
Boyer Company, L.C. ("Boyer"). Under the CCC1 Agreement, the Company gave Boyer
a 50 percent interest in CCC1 in exchange for Boyer's agreement to advance the
required pre-construction operating costs, to fund any construction costs in
excess of the construction financing, and the commitment to obtain and guarantee
construction and permanent financing for the CCC1 Building. In addition, the
Company entered into a lease on the CCC1 Building and Boyer agreed to serve as
developer and general contractor for the CCC1 Building for a fee of 1.5 percent
of the total project costs. On this same date, CCC1 purchased parcel A for
$601,500.
In October 1996, the Company and Boyer formed Covey Corporate Campus Two,
L.L.C. ("CCC2") under terms similar to CCC1, with certain exceptions, to develop
and construct a corporate office building on Parcel B of the land (the "CCC2
Building"). CCC2 acquired Parcel B for $778,790. The Company and Boyer entered
into lease and developer arrangements similar to CCC1, except the development
fee is to be 2 percent of the total project costs.
In December 1996, pursuant to a Board resolution dated July 1995 for the
Company to be a lessee rather than a real estate developer, the Company offered
to sell to all of its shareholders its ownership in CCC1 and CCC2 and an
assignment of its rights under the Land Agreement. Certain shareholders through
Riverwoods Development, L.C. ("Riverwoods"), a Utah Limited Liability Company,
agreed to purchase the Company's ownership interests for $452,000 of cash and a
$275,000 note payable. The participating shareholders of Riverwoods also made
additional cash investments of $403,000 to cover certain construction costs of
CCC2 and to make interest payments under the Land Agreement. This transaction
was completed under the direction of a committee of the Board of Directors,
which was principally comprised of outside directors who are nonshareholders,
and with the assistance of an independent real estate consultant and other
advisors.
As discussed above, the Company has agreed to lease both buildings for a 12
year period with annual rent commitments of approximately $834,000 and $956,000
for the CCC1 and CCC2 Buildings, respectively. The CCC1 Building was occupied in
February 1997 and the CCC2 Building is expected to be completed by mid-1997. The
lease agreements will be accounted for as operating leases. In connection with
the construction of these buildings, the Company has also committed to pay for
certain leasehold improvements, which amounted to approximately $160,000 for the
CCC1 Building.
(7) COMMON STOCK AND RETAINED EARNINGS
Voting, Transfer and Repurchase Agreements
As of December 31, 1996, the Company has 790,000 shares of common stock
issued and outstanding, of which 290,000 shares are held by key employees and
500,000 shares are held by the Company's founder and major shareholder and his
family members. The shareholders entered into a voting trust agreement in 1991
which provides for the employee shareholders to have 50 percent of the votes on
matters requiring shareholder approval.
F-29
<PAGE> 124
COVEY LEADERSHIP CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Also in 1991, the employee shareholders entered into employee stock
transfer and repurchase agreements which restrict the ability of the employee
shareholders to transfer or sell shares. Upon termination of employment, the
employee shareholders must sell and the Company purchase all shares then owned
at a price based on the current book value of the shares, as defined.
In addition, the major shareholder and his family members entered into
family stock transfer and repurchase agreements in 1991 which restrict their
ability to transfer or sell shares. The family members may transfer or sell
shares to other family members only or may elect to have the Company purchase
shares at a price based on the current book value of the shares, as defined.
Repurchase of Common Shares
During 1994, in connection with the settlement discussed in Note 6, the
Company repurchased and canceled 100,000 shares of common stock from its former
president. A portion of the total settlement amount, which was determined based
on the book value of the common shares acquired in accordance with the above
described agreement, was recorded as a reduction in equity.
During 1994, the Company made distributions to its shareholders for the
payment of estimated federal and state income taxes. As a result of the
settlement agreement with the former president and other adjustments at
year-end, the amounts distributed to the former president during 1994 exceeded
the actual taxes due for the year by approximately $91,000. Accordingly, the
excess distributions were returned to the Company during the year ended December
31, 1995.
Issuance of Common Shares
In January 1995, the Company issued 80,000 shares of common stock to key
employees as compensation for services rendered. The value of the shares issued
was based on book value at the time of issuance in accordance with the above
described agreements and was expensed in 1995.
Common Stock Options
Effective September 30, 1996, the Company's Board of Directors authorized
the grant of options to purchase 60,000 shares of common stock to certain
officers, directors and key employees. The options become exercisable in four
annual installments commencing one year from the date of grant, provided the
optionees continue as employees or directors of the Company. The options expire
ten years from the date of grant. The exercise price is $38 per share which
represents the estimated fair market value of the Company's common stock on the
grant date as determined by the Board of Directors based on an independent
appraisal. At December 31, 1996, no options were exercisable.
The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for stock options granted. Accordingly, no
compensation expense has been recognized since the exercise price of the options
was based on the estimated fair market value of the Company's common stock at
the date of grant. Had compensation expense for these options granted been
determined based on the fair value of the option at the grant date consistent
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net income during the year ended
December 31, 1996 would have been reduced by approximately $39,000.
The fair value of the options granted has been estimated on the date of
grant using the Black-Scholes option pricing model based on the following
assumptions: expected life of five years and risk-free interest rate of 6.45
percent. The estimated fair value of the options granted during 1996 was $10.48
per share.
F-30
<PAGE> 125
COVEY LEADERSHIP CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Retained Earnings
Subsequent to December 31, 1996, the Company's Board of Directors has
authorized estimated distributions of $10.1 million to its shareholders for the
payment of income taxes and of previously taxed earnings. The distributions are
contingent upon increasing the Company's line-of-credit and obtaining bank
approval (see Note 3).
(8) PROFIT SHARING PLANS
The Company has a 401(k) Employee Savings Plan (the "Plan"). The Plan
allows employees to make pretax contributions and the Company to make
discretionary matching contributions. The Company currently matches 100 percent
of employee contributions up to 3 percent of qualifying employee compensation.
The Company's contributions to the Plan amounted to approximately $280,000,
$322,000 and $431,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
The Company instituted a variable pay plan in 1995 which covers
substantially all employees. Distributions under the Plan are based on Company
attainment of earning targets, customer satisfaction ratings and other
nonfinancial performance objectives. The variable pay plan is administered by
the Board of Directors. Variable pay was approximately $4,016,000 and $5,394,000
for the years ended December 31, 1995 and 1996, respectively.
(9) RELATED PARTY TRANSACTIONS
Presentation Fees
The Company has certain presentation agreements with its major shareholder.
These agreements provide for payment of presentation fees based upon the nature
of the presentation, as defined. Presentation fees amounted to approximately
$3,154,000, $2,424,000 and $2,281,000 for the years ended December 31, 1994,
1995 and 1996, respectively.
Licensing and Royalty Agreements
The Company entered into a licensing agreement with its major shareholder
in 1990 that provides for royalty payments to the shareholder and a related
trust in exchange for licensing rights to certain materials and products. The
agreement provides for royalty payments based on adjusted gross revenues
calculated on a quarterly basis. Royalty expense amounted to approximately
$2,215,000, $2,388,000 and $3,125,000 for the years ended December 31, 1994,
1995 and 1996, respectively, and has been separately classified in the
accompanying consolidated statements of income. As of December 31, 1995, the
Company had accrued royalties in the amount of $291,000 to the major shareholder
and related trust. As of December 31, 1996, the Company had overpaid royalties
in the amount of $144,000 to the major shareholder and related trust. As
discussed in Note 11, subsequent to December 31, 1996 the shareholder has agreed
to exchange his interest in the licensing agreement for $27,000,000 to be paid
in either cash or shares of Franklin Quest, Co.'s common stock.
The Company entered into royalty agreements with a shareholder and another
coauthor, who is also the shareholder's spouse, for royalty payments in exchange
for copyrights on the First Things First book. The royalties for the shareholder
amounted to approximately $20,000 and $95,000 for the years ended December 31,
1994 and 1995, respectively. Effective January 1995, the royalty agreement with
the shareholder was modified such that royalty payments were considered to be
included in his employee compensation. Royalties to the shareholder's spouse
amounted to approximately $0, $145,000, and $117,000, for the years ended
December 31, 1994, 1995 and 1996, respectively.
F-31
<PAGE> 126
COVEY LEADERSHIP CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, the Company entered into a licensing agreement with its major
shareholder to promote his books. The Company receives royalty income on a
formula basis for its promotional efforts. Royalty income amounted to
approximately $167,000, $1,010,000 and $846,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
(10) SALE OF INTEREST IN EXECUTIVE EXCELLENCE
The Company sold its ownership interest in EEP to Leadership Resources,
Inc. on June 30, 1996 for $100,000 in cash, a $400,000 non-interest bearing note
receivable, and forgiveness of $534,000 of advance distributions made by EEP to
the Company. The note receivable is secured by a security and pledge agreement
and is payable in $16,667 monthly installments through July 1998. As of December
31, 1996, $297,000, net of imputed interest at 8 percent, was outstanding under
the note receivable. The Company recognized a gain of $954,000 on the sale,
which is included in other income in the accompanying statement of income for
the year ended December 31, 1996.
(11) SUBSEQUENT EVENTS
Acquisition of Assets
On February 7, 1997, the Company purchased certain assets and assumed
certain lease obligations of a licensee for approximately $1,500,000. Of this
purchase price, $750,000 was paid upon signing the agreement and $750,000 is
payable in installments through October 1997. The assets acquired include
goodwill and certain tangible assets used in the business.
Agreement to Merge
On March 21, 1997, the Company and Franklin Quest, Co. ("Franklin"), a
leading provider of training seminars and the creator of the Franklin Day
Planner, entered into an agreement that provides for the Company to merge with
and into Franklin. Under the agreement, each outstanding share of the Company's
Common Stock will be converted into the right to receive shares of newly issued
Common Stock of Franklin based on the share exchange ratio, as defined in the
merger agreement, and each outstanding option to purchase Common Stock of the
Company will be converted into options to purchase Franklin Common Stock with
the number of Franklin options issued and the exercise price to reflect the
share exchange ratio. In connection with the merger, Franklin will acquire the
license rights (see Note 9) from the Company's major shareholder and related
trust for an aggregate of $27 million payable in either cash or Franklin Common
Stock. The amount of cash or shares of Franklin Common Stock to be received for
the license rights will be determined by the shareholder prior to the merger.
The maximum number of shares of Franklin Common Stock to be issued in connection
with all transactions contemplated by the merger will not exceed 6,631,272,
which shares include the maximum shares which the shareholder could elect to
receive for the license rights and the shares reserved for the exercise of
Franklin options into which the Company's options will be converted. The merger,
which has been approved by the Board of Directors of each company, is subject to
satisfactory completion of due diligence and approval by the shareholders of
both companies.
F-32
<PAGE> 127
APPENDIX A
MERGER AGREEMENT
AMONG
FRANKLIN QUEST CO.,
A UTAH CORPORATION,
COVEY LEADERSHIP CENTER, INC.,
A UTAH CORPORATION,
AND
THE SHAREHOLDERS OF COVEY LEADERSHIP CENTER, INC.
DATED AS OF
MARCH 21, 1997
<PAGE> 128
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 -- THE MERGER.................................................................. 1
1.1 The Plan of Merger.............................................................. 1
(a) The Merger................................................................. 1
(b) Effect of the Merger....................................................... 1
(c) Articles of Incorporation and Bylaws; Directors and Officers............... 1
(d) Conversion of Securities................................................... 1
(e) Dissenting Shares.......................................................... 3
(f) Surrender and Exchange of Covey Options.................................... 3
(g) License of Intellectual Property........................................... 4
1.2 Taking of Necessary Action; Further Action...................................... 4
1.3 Proxy Statement................................................................. 4
1.4 Expenses of the Proxy Statement................................................. 5
1.5 Indemnification................................................................. 5
ARTICLE 2 -- CONDITIONS.................................................................. 6
2.1 Conditions to Obligations of Each Party to Effect the Merger.................... 6
2.2 Conditions to Obligation of Franklin............................................ 7
2.3 Conditions to Obligation of Covey and the Shareholders.......................... 9
ARTICLE 3 -- PRE-MERGER COVENANTS........................................................ 10
3.1 Pre-Merger Covenants............................................................ 10
(a) Notices and Consents....................................................... 10
(b) Operation of Business...................................................... 11
(c) Affiliated Transactions.................................................... 11
(d) Preservation of Business................................................... 11
(e) Access..................................................................... 11
(f) Notice of Developments..................................................... 11
(g) Exclusivity................................................................ 11
(h) Representations and Warranties............................................. 12
(i) Hart-Scott-Rodino Act Compliance.......................................... 12
(j) Confidentiality........................................................... 12
3.2 Tax Distributions to Covey Shareholders......................................... 12
3.3 Disclosure Schedule............................................................. 13
ARTICLE 4 -- ADDITIONAL AGREEMENTS....................................................... 14
4.1 Post-Merger Covenants........................................................... 14
(a) Franklin Governance........................................................ 14
(b) Confidentiality............................................................ 16
(c) Indemnification............................................................ 16
(d) Tax Treatment.............................................................. 19
(e) Files and Records.......................................................... 20
(f) Indemnification of Covey Officers and Directors............................ 20
(g) Tax Benefits............................................................... 20
(h) Subsidiary Names........................................................... 21
(i) Bylaws.................................................................... 21
ARTICLE 5 -- REPRESENTATIONS AND WARRANTIES.............................................. 21
5.1 Representations and Warranties of Covey and the Shareholders.................... 21
(a) Organization, Qualification and Corporate Power............................ 21
(b) Authorization of Transaction............................................... 21
(c) Noncontravention........................................................... 22
(d) Capitalization............................................................. 22
(e) Subsidiaries............................................................... 23
</TABLE>
i
<PAGE> 129
<TABLE>
<S> <C> <C>
(f) Financial Statements....................................................... 23
(g) Events Subsequent to Most Recent Fiscal Year End........................... 23
(h) Undisclosed Liabilities.................................................... 24
(i) Conduct of Business; Records and Books of Account......................... 24
(j) Tax Matters............................................................... 24
(k) Real and Personal Property and Related Matters............................. 26
(l) Environmental Compliance.................................................. 27
(m) Legal Compliance............................................................ 28
(n) Intellectual Property...................................................... 28
(o) Contracts.................................................................. 29
(p) Insurance.................................................................. 30
(q) Powers of Attorney......................................................... 30
(r) Litigation................................................................. 30
(s) Employees; Employment Practices: Compensation and Vacations................ 31
(t) Employee Benefit Plans..................................................... 31
(u) Compliance with Laws; Certain Operations................................... 32
(v) Indebtedness............................................................... 32
(w) Labor Discussions and Troubles............................................. 32
(x) Notes and Accounts Receivable.............................................. 32
(y) No Bankruptcy Proceedings.................................................. 33
(z) Bank Accounts and Safe Deposit Boxes; Powers of Attorney................... 33
(aa) Potential Conflicts of Interest............................................ 33
(bb) Brokers' Fees.............................................................. 33
(cc) Disclosure................................................................. 33
(dd) Ownership of Stock......................................................... 33
(ee) Execution, Delivery and Enforceability of Agreement; No Violation.......... 34
(ff) Residence and Domicile..................................................... 34
(gg) Investment Representations................................................. 34
(hh) Brokers or Finders......................................................... 35
(ii) Additional Information..................................................... 35
(jj) Name; Shareholder Claims Against Covey..................................... 35
5.2 Representations and Warranties of Franklin...................................... 35
(a) Organization............................................................... 35
(b) Authorization of Transaction............................................... 35
(c) Noncontravention........................................................... 36
(d) Capital Structure of Franklin.............................................. 36
(e) SEC Documents.............................................................. 37
(f) Information Supplied....................................................... 37
(g) No Default................................................................. 37
(h) Compliance with Applicable Laws............................................ 37
(i) Litigation................................................................ 38
(j) Events Subsequent to the Most Recent Fiscal Quarter End................... 38
(k) Undisclosed Liabilities.................................................... 38
(l) Disclosure................................................................ 38
ARTICLE 6 -- MISCELLANEOUS............................................................... 38
6.1 Termination..................................................................... 38
6.2 Liquidated Damages.............................................................. 39
6.3 Press Releases and Announcements................................................ 40
6.4 No Third Party Beneficiaries.................................................... 40
6.5 Entire Agreement................................................................ 40
6.6 Succession and Assignment....................................................... 40
</TABLE>
ii
<PAGE> 130
<TABLE>
<S> <C> <C>
6.7 Counterparts.................................................................... 40
6.8 Headings........................................................................ 41
6.9 Notices......................................................................... 41
6.10 Governing Law................................................................... 42
6.11 Amendments and Waivers.......................................................... 42
6.12 Severability.................................................................... 42
6.13 Expenses........................................................................ 42
6.14 Construction.................................................................... 42
6.15 Incorporation of Exhibits and Schedules......................................... 42
6.16 Remedies........................................................................ 42
6.17 Directly or Indirectly.......................................................... 43
6.18 Attorney's Fees................................................................. 43
ARTICLE 7 -- DEFINITIONS................................................................. 43
7.1 Definitions..................................................................... 43
Adverse Consequences............................................................ 43
Affiliate....................................................................... 43
Affiliated Group................................................................ 43
Articles of Merger.............................................................. 43
Basis........................................................................... 43
Claim........................................................................... 43
Code............................................................................ 43
Confidential Information........................................................ 43
Covey Common.................................................................... 43
Disclosure Schedule............................................................. 43
Dissenting Shares............................................................... 43
Effective Date.................................................................. 43
Effective Time.................................................................. 43
Employee Benefit Plans.......................................................... 44
Employee Welfare Benefit Plan................................................... 44
Encumbrance..................................................................... 44
Environmental Claim............................................................. 44
Environmental Laws.............................................................. 44
Environmental Liabilities....................................................... 44
ERISA........................................................................... 44
Exchange Act.................................................................... 44
Franklin Common................................................................. 44
Franklin Parties................................................................ 44
GAAP............................................................................ 44
Governmental Authorization...................................................... 44
Governmental Body............................................................... 44
Hazardous Materials............................................................. 45
Indebtedness.................................................................... 45
Intellectual Property........................................................... 45
Knowledge....................................................................... 45
Legal Requirement............................................................... 45
Liability....................................................................... 45
Merger.......................................................................... 45
Order........................................................................... 45
Ordinary Course of Business..................................................... 45
Permitted Exceptions............................................................ 45
Person.......................................................................... 46
Plan of Merger.................................................................. 46
</TABLE>
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<TABLE>
<S> <C> <C>
Registration Statement.......................................................... 46
Release......................................................................... 46
Remedial Action................................................................. 46
SEC............................................................................. 46
Securities Act.................................................................. 46
Security Interest............................................................... 46
Shareholders.................................................................... 46
Shares.......................................................................... 46
Subsidiary...................................................................... 46
Tax............................................................................. 46
Tax Return...................................................................... 46
URBCA........................................................................... 46
</TABLE>
iv
<PAGE> 132
MERGER AGREEMENT
THIS MERGER AGREEMENT (this "Agreement") is entered into as of March 21,
1997 among Franklin Quest Co., a Utah corporation ("Franklin"), Covey Leadership
Center, Inc., a Utah corporation ("Covey"), and each of the Shareholders of
Covey (the shareholders of Covey are referred to individually herein as a
"Shareholder" and collectively as the "Shareholders"). Franklin, Covey and the
Shareholders are collectively referred herein as the "Parties" and individually
as a "Party".
Capitalized terms used herein and not otherwise defined herein have the
meanings set forth in Article 7.
The respective boards of directors of Franklin and Covey have approved the
transactions contemplated hereby and Franklin and Covey have determined for good
and valid business reasons that it is advisable to consummate the merger
described in Article 1 (the "Merger") as a statutory merger or reorganization
under Section 368(a)(1)(A) of the Code, as a result of which: (i) all of the
outstanding capital stock of Covey, existing before the Merger, will be
converted into the right to receive common stock of Franklin, and (ii) Covey
will be merged with and into Franklin with Franklin as the surviving corporation
after the Merger, all on the terms and subject to the conditions set forth in
this Agreement.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties hereby agree as follows.
ARTICLE 1 -- THE MERGER
1.1 The Plan of Merger. In connection with the Merger and the
reorganization under Code Section 368(a)(1)(A), the respective boards of
directors of Franklin and Covey have, by resolutions, duly adopted and approved
the following provisions of this Article 1 and a plan of merger (the "Plan of
Merger") required by Section 16-10a-1101 of the Utah Revised Business
Corporation Act (the "URBCA"), which Plan of Merger is also a plan of
reorganization required by Code Sections 354 and 361. The Plan of Merger is
still subject to the approval of Franklin's and Covey's shareholders as provided
in this Agreement. The Plan of Merger includes, among other things, provisions
to the following effect:
(a) The Merger. At the Effective Time, in accordance with this
Agreement and Section 16-10a-1105(2) of the URBCA, Covey shall be merged
with and into Franklin, the separate existence of Covey shall cease, and
Franklin shall continue as the surviving corporation under the new
corporate name of Franklin Covey Co. Franklin, in its capacity as the
corporation surviving the Merger, sometimes is referred to herein as the
"Surviving Corporation".
(b) Effect of the Merger. At the Effective Time, the Merger shall have
the effect provided for in Section 16-10a-1106 of the URBCA.
(c) Articles of Incorporation and Bylaws; Directors and Officers. The
Articles of Incorporation and Bylaws of Franklin, as in effect immediately
prior to the Effective Time, shall, except as amended by the articles of
merger to be filed in respect of the Merger (which include the Plan of
Merger attached thereto as an exhibit), in the form set forth as Exhibit
1.1(c)(i) hereto, in accordance with Section 16-10a-1105 of the URBCA (the
"Articles of Merger"), be the Articles of Incorporation and Bylaws of the
Surviving Corporation at the Effective Time and shall thereafter continue
to be its Articles of Incorporation and Bylaws until amended as provided
therein and under applicable law. The individuals named on Exhibit
1.1(c)(ii) shall be the directors of the Surviving Corporation at the
Effective Time. The individuals named on Exhibit 1.1(c)(iii) shall be the
officers of the Surviving Corporation at the Effective Time.
(d) Conversion of Securities.
(i) At the Effective Time, by virtue of the Merger and without any
further action on the part of Franklin or Covey or the Shareholders, all
of the shares of common stock of Covey issued and outstanding (the
"Covey Common"), in the aggregate, except for Dissenting Shares, shall
automatically be cancelled and extinguished and be converted into and
become a right to receive a number of
<PAGE> 133
shares of common stock of Franklin (the "Franklin Common") at the Share
Conversion Rate set forth below, with the right of each of the holders
thereof, as of the Effective Time, to be treated as a registered holder
of that number of shares of Franklin Common as of the Effective Time
which such Shareholder is entitled to receive pursuant to the terms of
this Article 1, and with all rights to dividends and other distributions
made to registered holders of Franklin Common as of such date; provided
that the aggregate number of shares of Franklin Common that each of the
Shareholders shall be entitled to receive shall be rounded down to the
nearest whole share, and provided further that if the number of shares
of Franklin Common that a shareholder is entitled to receive is rounded
down to the nearest whole share, such Shareholder shall receive from
Franklin in respect of the fractional share subject to such rounding,
the value, determined to two decimal places, in cash of such fractional
share. On the Effective Date, each share of Covey Common (except for
Dissenting Shares) will, by virtue of the Merger, be cancelled and
converted into the right to receive the number of shares of Franklin
Common equal to the "Share Conversion Amount". For purposes of this
Agreement, the Share Conversion shall be the number of shares of
Franklin Common calculated in accordance with the following formula:
<TABLE>
<S> <C>
Share Conversion Amount = 6,631,272-X-Y
--------------
A
</TABLE>
where: X equals the number of shares of Franklin Common to
be issued to Stephen R. Covey and to the Trustees
of the Stephen and Sandra Covey Posterity Trust,
dated December 30, 1993 (the "Trust") for the
"License Rights" as set forth in Section 1.1(g),
which, when combined with Y shall have a value
equal to $27,000,000. For purposes of determining
the value of the number of shares of Franklin
Common received by Stephen R. Covey and the Trust
for the License Rights which are to be subtracted
from $27,000,000, each such share of Franklin
Common shall have a value equal to Z; and
<TABLE>
<S> <C> <C> <C>
where:
Y = the amount of cash to be paid to
Stephen R. Covey and the Trust ; and
for the License Rights pursuant to
1.1(g)
-----------------------------------------
Z
</TABLE>
where: Z shall equal the average closing price of the
Franklin Common on the New York Stock Exchange (the
"NYSE") for the twenty (20) trading days ending on
the second trading day prior to the Effective Date;
and
where: A equals the aggregate number of shares of Covey
Common outstanding in the business day immediately
preceding the Effective Date (determined on a fully
diluted basis and assuming, for purposes of the
calculation, the exercise of all options or
warrants to purchase Covey Common).
(ii) At the Closing, the Shareholders will deliver to Franklin, free
and clear of any Encumbrances, certificates of Covey Common, representing
all of the outstanding Covey Common, duly endorsed in blank or accompanied
by stock powers or other instruments of transfer duly endorsed in blank,
and bearing or accompanied by all requisite stock transfer stamps;
(iii) At the Closing, Franklin shall issue to the Shareholders, other
than holders of Dissenting Shares, the number of shares of Franklin Common
calculated in accordance with Section 1.1(d)(i) in exchange for the Covey
Common so delivered by the Shareholders by Franklin's delivery of one or
more certificates to each Shareholder for the aggregate number of shares of
Franklin Common that such Shareholder is entitled to receive as set forth
and determined in accordance with Section 1.1(d)(i) hereof.
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<PAGE> 134
(iv) If stock is to be issued in the name of, or directed to an
account in the name of, a person other than the person in whose name the
certificates for shares surrendered for exchange are registered, it shall
be a condition of the exchange that the person requesting such exchange
shall pay to Franklin any transfer or other Taxes required by reason of the
issuance of such certificate in the name of a person other than the
registered owner of the certificates surrendered, or shall establish to the
satisfaction of Franklin that such Tax has been paid or is not applicable.
Notwithstanding the foregoing, no party hereto shall be liable to a holder
of certificates theretofore representing shares of Covey Common for any
amount paid to a public official pursuant to any applicable abandoned
property, escheat or similar law. Until so surrendered and exchanged, each
such certificate shall represent solely the right to receive the
certificate representing Franklin Common to be issued pursuant to Section
1.1(d)(iii), into which the shares it theretofore represented shall have
been converted pursuant to Section 1.1(d)(i), and Franklin shall not be
required to issue to such holder the stock to which he, she or it otherwise
would be entitled; provided that procedures allowing for payment against
lost or destroyed certificates against receipt of customary and appropriate
certifications and indemnities shall be provided.
(e) Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, shares of Covey Common outstanding immediately prior to the
Effective Time that are held by Shareholders who have not voted in favor of
the Merger or consented thereto in writing and who have demanded appraisal
rights with respect thereto in accordance with Sections 16-10a-1301 through
1331 of the URBCA (the "Dissenting Shares") shall not be converted as
described in Section 1.1(d), but shall, from and after the Effective Time,
represent only the right to receive payment of the fair value of such
Shareholder's Dissenting Shares in accordance with the provisions of the
URBCA and this Section. Any shares of Covey Common held by a Shareholder
who, prior to the Effective Time, withdraws a demand for appraisal of such
shares or loses the right to appraisal as provided in the URBCA shall not
be considered Dissenting Shares. Covey shall give Franklin prompt notice of
any written demands for appraisal of any shares of Covey Common, attempted
withdrawals of such demands, and any other instruments received by Covey
pursuant to the URBCA relating to dissenting Shareholders and shareholders'
rights of appraisal.
(f) Surrender and Exchange of Covey Options. Covey currently has
outstanding options to acquire Covey Common (the "Covey Options") that are
held by certain employees and consultants. At the Effective Time, each
outstanding Covey Option, by virtue of the Merger and without any further
action on the part of Franklin, Covey, or the Shareholders, shall
automatically be converted into an option to purchase shares of Franklin
Common equal to the product of the number of shares of Covey Common
issuable upon exercise of the Covey Option multiplied by the Share
Conversion Rate. If prior to the Effective Date Franklin effects a stock
dividend, stock split or reverse stock split with respect to its shares of
Franklin Common, then the number of shares of Franklin Common issuable upon
exercise of stock options issued by Franklin pursuant to the Merger shall
be adjusted proportionally. The per share exercise price of each Covey
Option shall be equal to the exercise price per share of the Covey Option
divided by the Share Conversion Rate. Each holder of a Covey Option not
exercised prior to the Effective Date shall surrender for cancellation all
documentation evidencing such Covey Option to Franklin and, upon such
surrender, shall be entitled to receive in exchange therefor an option
grant granting such holder the option to purchase the number of shares of
Franklin Common into which such holder's Covey Options shall have been
converted as aforesaid. Such option grants shall be issued pursuant to and
shall be governed by Franklin's Amended and Restated 1992 Stock Incentive
Plan as it shall exist at the Effective Time. Such option grant shall
expire on the dates such holder's Covey Options would have expired but for
this Merger and shall be exercisable at the exercise price computed as
indicated in this Section 1.1(g). Additionally, the general terms of the
Covey Options, including the vesting schedule and the qualification or not
of the option under Section 422 of the Code, shall continue in the options
to be issued by Franklin. Notwithstanding that the conversion of Covey
Options into options to purchase Franklin Common pursuant to this Agreement
is automatic at the Effective Date, no former holder of a Covey Option
shall be entitled to exercise an option to purchase shares of Franklin
Common unless and until all documentation regarding such holder's Covey
Options is surrendered to Franklin for cancellation in exchange for a new
option grant as set forth above. The aggregate number of shares of Franklin
Common
3
<PAGE> 135
issuable upon exercise of any option to purchase Franklin Common issued
pursuant to this Agreement shall be rounded to the nearest whole number in
the event of fractions (with 0.5 being rounded up), and no cash payment
shall be made with respect to any fractional share.
(g) License of Intellectual Property. As a condition of the Merger
occurring, at the Closing, Franklin shall separately purchase from Stephen
R. Covey and from the Trustee of the Trust, pursuant to a fully paid-up,
irrevocable, perpetual, exclusive, world-wide, freely transferrable
license, all right, title and interest in and to the products and materials
and all other tangible and intangible assets, including derivative works,
which are the subject matter of and are described in that certain Licensing
Agreement executed by and between Stephen R. Covey and Covey, dated
November 1, 1990 (the "License Agreement") together with all rights in and
to the License Agreement (collectively, the "License Rights"). The price to
be paid by Franklin to Stephen R. Covey and the Trust for the License
Rights shall be $27,000,000, which amount Franklin shall pay to Stephen R.
Covey and the Trust, at their separate election, in the form of Franklin
Common or cash or a combination thereof. Any portion of the purchase price
for the License Rights paid by Franklin in the form of Franklin Common
shall have a value, for purposes of the $27,000,000, of the number of
shares of Franklin Common taken by Stephen R. Covey and the Trust
multiplied by Z where Z is the value determined in accordance with Section
1.1(d)(i) hereof.
1.2 Taking of Necessary Action; Further Action.
(a) Franklin on the one hand, and Covey and the Shareholders on the other
hand, shall use reasonable efforts to take all such action (including without
limitation action to cause the satisfaction of the conditions of the other to
effect the Merger) as may be necessary or appropriate in order to effectuate the
Merger, and to cause the Effective Time to occur, on or before May 31, 1997 or
such later date as the Board of Directors of Franklin and Covey shall agree.
(b) As soon as practicable after the satisfaction or waiver of the
conditions set forth in Article 2, and in no event later than five business days
after such satisfaction or waiver, the Parties will cause the Articles of Merger
to be properly executed and delivered to the Utah Department of Commerce,
Division of Corporations and Commercial Code (the "Division") for filing.
(c) The Merger shall be effective upon the filing of such Articles of
Merger with the Division.
(d) Subject to the provisions of Article 2 and Section 6.1 of this
Agreement, the closing of the Merger contemplated by this Agreement (the
"Closing") shall take place at the offices of Franklin in Salt Lake City, Utah
as soon as practicable following the fulfillment or waiver of each of the
conditions set forth in Article 2, or at such other time and place or on such
other date as Franklin and Covey may mutually agree.
(e) At the Effective Time, the stock transfer books of Covey shall be
closed and no transfer of shares of Covey Common issued and outstanding
immediately prior to the Effective Time shall thereafter be made.
(f) If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full possession of all the rights, privileges,
immunities and franchises of Franklin or Covey (the "Constituent Corporations"),
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, and the officers of the Surviving Corporation are fully
authorized in the name of the Constituent Corporations or otherwise to take, and
shall take, all such action.
1.3 Proxy Statement. (a) As soon as practicable following the execution
hereof, Franklin will (i) prepare and file with the United States Securities and
Exchange Commission (the "SEC") a Proxy Statement (the "Proxy Statement")
prepared in accordance with Section 14 of the Securities Exchange Act of 1934
(the "Exchange Act") and satisfying all applicable requirements of federal and
state law and (ii) use its best efforts to cause the Proxy Statement to be
completed and distributed to the Franklin shareholders and the Shareholders in
connection with meetings to be held for obtaining shareholder approvals of this
Agreement and the Plan of Merger by the Franklin shareholders and the
Shareholders.
4
<PAGE> 136
(b) Covey will furnish such information concerning Covey and its subsidiary
as necessary or appropriate to cause the Proxy Statement, insofar as it relates
to Covey and its subsidiary, to comply with the Exchange Act and other
applicable requirements of federal and state law. Covey agrees promptly to
advise Franklin if at any time prior to the shareholders' meetings any
information provided by Covey for inclusion in the Proxy Statement becomes
incorrect or incomplete in any material respect and to provide the information
needed to correct such inaccuracy or omission. Covey will continue to furnish
Franklin with such supplemental information as may be necessary or appropriate
in order to cause such Proxy Statement, insofar as it relates to Covey and its
subsidiary, to comply with the Exchange Act and applicable federal and state law
after the mailing thereof to the Franklin shareholders and the Shareholders and
prior to the respective shareholders' meetings.
(c) Franklin shall provide Covey with reasonable opportunity to review and
comment on the contents of the Proxy Statement and shall not include therein or
omit therefrom any information to which counsel for Covey may reasonably object.
(d) The Proxy Statement, when filed, (i) will comply as to form with the
requirements of the Exchange Act in all material respects, and (ii) will not
contain any untrue statements of a material fact or omit to state a material
fact necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that Franklin makes no representation or warranty in respect of any information
that Covey or any of the Shareholders supply for use in the Proxy Statement.
1.4 Expenses of the Proxy Statement. All expenses of the Proxy Statement
and all amendments and supplements thereto, including, without limitation,
Franklin's legal fees, accounting fees, printing costs, "Blue Sky" and SEC
filing fees, will be borne by Franklin.
1.5 Indemnification. (a) Franklin will indemnify each Shareholder and
every officer, director, and employee of Covey with respect to the Proxy
Statement filed pursuant to Section 1.3 against all Adverse Consequences,
including any Adverse Consequences incurred in settlement of any litigation,
commenced or threatened, arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in or any amendment or
supplement thereof, incident to such filing or compliance, or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading under
the circumstances under which they were made, or any violation by Franklin of
the Exchange Act or state securities laws applicable to Franklin and relating to
action or inaction required of Franklin in connection with such filing,
qualification or compliance, and shall reimburse each Shareholder and every
officer, director, and employee of Covey for reasonable legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any Claim related thereto as incurred, provided that Franklin will not
be liable in any such case to the extent that any untrue statement, omission or
violation is made in reliance upon and in conformity with information furnished
to Franklin in writing by Covey or by any Shareholder.
(b) Each Shareholder will severally (and not jointly) indemnify Franklin,
each of its directors, officers and employees, and each Person who controls
Franklin within the meaning of Section 15 of the Securities Act, against all
Adverse Consequences, including any Adverse Consequences incurred in settlement
of any litigation, commenced or threatened, arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
the Proxy Statement, or any amendment or supplement thereof, incident to such
filing or compliance, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case only to the extent that such
untrue statement or omission is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
information furnished to Franklin in writing by Covey or by any such
Shareholder, or any violation by such Shareholder of the Exchange Act or state
securities laws applicable to such individual and relating to action or inaction
required of such individual in connection with any such filing, qualification or
compliance, and shall reimburse Franklin, such directors, officers, employees
and control Persons for reasonable legal or any other expenses reasonably
incurred in connection with investigating, preparing or defending any Claim
related thereto as incurred. The liability of each Shareholder under this
Section 1.5 shall be limited to the untrue statements or
5
<PAGE> 137
alleged untrue statements of material facts made by such Shareholder or the
omission to state a material fact, and no Shareholder shall have liability for
the actions or statements of other Shareholders. The liability of the
Shareholders for statements or omissions of Covey shall be limited in the manner
specified in Section 4.1(c)(ii)(B) hereof.
(c) Any claim made under this Section 1.5 must be made within the
applicable statute of limitations for bringing a claim based upon the definitive
Proxy Statement. If the indemnification provided for in this Section 1.5 is held
by a court of competent jurisdiction to be unavailable to any of the parties
entitled thereto under this Agreement with respect to any Adverse Consequences,
then the indemnifying party, in lieu of indemnifying the party otherwise
entitled to such indemnification, shall contribute to the amount paid in respect
of such Adverse Consequences or payable by such parties in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and of the party otherwise entitled to such indemnification on the other in
connection with the statements or omissions or actions that resulted in Adverse
Consequences as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the party otherwise entitled to
indemnification shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by the indemnifying party
or by the party otherwise entitled to such indemnification and the relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission of or by the indemnifying party or the party
otherwise entitled to such indemnification.
ARTICLE 2 -- CONDITIONS
2.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each Party to effect the Merger and to consummate the
other transactions contemplated hereby shall be subject to the fulfillment at or
prior to the Effective Time of the following conditions:
(a) There shall have been no law, statute, rule or regulation,
domestic or foreign, enacted or promulgated which would make consummation
of the Merger illegal;
(b) The filing required by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended ("HSR") shall have been made and all
applicable waiting periods shall have expired or been terminated.
(c) No action, suit, or proceeding (a "Proceeding") shall be pending
or threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction wherein an
unfavorable judgment, order, decree, stipulation, injunction, or charge
would (i) prevent consummation of the Merger, or (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation of the Merger (and no such judgment, order, decree,
stipulation, injunction,or charge shall be in effect).
(d) No Party shall have terminated this Agreement pursuant to Section
6.1.
(e) The Franklin shareholders and the Shareholders shall have approved
the Merger in accordance with the URBCA at meetings of shareholders called
for that purpose and preceded by distribution of the Proxy Statement
described in Section 1.3 hereof.
(f) All Employee Stock Transfer and Repurchase Agreements and related
Voting Trust Agreements between Covey and the Shareholders shall have been
terminated prior to the Effective Time.
(g) The existing Consulting Agreement between Covey and Stephen R.
Covey shall have been terminated and a new consulting agreement shall have
been executed between Franklin and Stephen R. Covey in a form acceptable to
Franklin and Stephen R. Covey.
(h) Franklin and the Shareholders of Covey shall enter into a
Registration Rights Agreement in form and substance satisfactory to the
Parties which will provide for, among other things, an incidental or
"piggyback" registration right for those Shareholders of Covey who are
serving as executive officers or directors of Franklin and at such time as
Franklin shall elect to file a registration statement under the
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1933 Act on Form S-1 or S-3 or on any other form in which Franklin
shareholders shall be eligible to participate as selling shareholders. The
registration right shall be given to the designated shareholders of Covey
to the same extent and on the same terms as such rights are extended to
other executive officers of Franklin and shall be available during the
period commencing two years from the Effective Date and ending five years
from the Effective Date.
Any Party may waive any condition, in whole or in part, specified in this
Section 2.1 if such Party executes a writing so stating at or prior to the
Effective Time.
2.2 Conditions to Obligation of Franklin. The obligations of Franklin to
effect the Merger and to consummate the other transactions contemplated hereby
and to perform its other obligations hereunder is also subject to satisfaction
at or prior to the Effective Time of the following conditions:
(a) The representations and warranties set forth in Section 5.1 shall
be true and correct in all material respects at and as of the Effective
Time;
(b) Each of Covey and the Shareholders shall have performed and
complied with all of their respective covenants hereunder in all material
respects through the Effective Time;
(c) Covey shall have procured all of the third party consents and
approvals necessary in order that the Merger and the transactions
contemplated herein not constitute a breach or violation of, or result in a
right of termination or acceleration of any contract or agreement to which
Covey is a party or any Encumbrance on any of Covey's assets pursuant to
the provisions of, any agreement, arrangement or understanding or any
license, franchise or permit, in any such case which is material to Covey;
(d) An officer of Covey shall have delivered to Franklin a certificate
signed by each of such parties to the effect that each of the conditions
specified above in Section 2.2(a) through (c), inclusive, is satisfied in
all respects;
(e) The Shareholders shall have delivered to Franklin the certificates
and stock powers identified on Schedule 1.1(d)(ii) in form and substance
satisfactory to Franklin representing all issued and outstanding Covey
Common (which the Shareholders authorize the Surviving Corporation to
cancel, at the Effective Time, upon issuance of the Shares to the
Shareholders as provided by the Plan of Merger);
(f) Covey shall have delivered to Franklin (i) a certified copy of the
text of the resolutions by which all corporate action on the part of Covey
necessary to approve this Agreement, the Plan of Merger and the Merger were
taken, (ii) a certificate executed by the President of Covey that the
Merger and all of the transactions contemplated hereby have been approved
by the board of directors of Covey and the Shareholders in the manner
required by the URBCA, (iii) an incumbency certificate signed by an officer
of Covey certifying the signature and office of each officer executing this
Agreement or any other agreement, certificate or other instrument executed
pursuant hereto, (iv) Articles of Merger (and the Plan of Merger) duly
executed by Covey, and (v) duly executed terminations of any and all powers
of attorney or authorizations to any Person to act for or on behalf of
Covey;
(g) Franklin shall have received from counsel to Covey and the
Shareholders, an opinion with respect to such matters as Franklin may
reasonably request prior to the Effective Time, addressed to Franklin and
dated as of the Effective Date;
(h) All actions to be taken by Covey and the Shareholders in
connection with consummation of the transactions contemplated hereby and
all certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably satisfactory
in form and substance to Franklin and its counsel;
(i) Each of the Shareholders shall have delivered to Franklin a duly
executed Lock-up Agreement in form reasonably satisfactory to Franklin
pursuant to which each Shareholder agrees to make no disposition of such
Shareholder's Franklin Common for a period of two years following the
Effective Date;
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(j) Shareholders holding no more than 10% of the Covey Common shall
have elected dissenters' rights;
(k) All of the Shareholders and those shareholders of Franklin
identified on Exhibit 2.2(k)(i) hereof shall have entered into a
Shareholders Agreement in a form reasonably satisfactory to Franklin
agreeing to vote for the individuals who are nominated by the Nominating
Committee of the Board of Directors to serve on the Board of Directors of
Franklin;
(l) Franklin shall have obtained a fairness opinion from Merrill Lynch
& Co., Inc. in form and substance reasonably acceptable to Franklin
affirming that the transaction is fair to the shareholders of Franklin;
(m) No court action or proceeding shall have been instituted to
restrain or prohibit the transactions contemplated by this Agreement and
the agreements related hereto and at the Effective Time, there shall be no
Claims, whether or not fully covered by insurance that (i) have a
substantial probability of restraining or prohibiting or creating damages
in connection with the transactions contemplated by this Agreement and the
agreements related thereto, or (ii) could result in a material adverse
change of business, operations, properties or assets or in the condition,
financial or otherwise, of Covey, and Franklin shall receive a certificate
to that effect dated as of the Effective Date and executed by the President
of Covey;
(n) There shall have been no material adverse change, from December
31, 1996 until the Effective Time, in the business, operations, properties
or assets or in the condition, financial or otherwise, of Covey, and
Franklin shall have received a certificate to that effect as of the
Effective Time and executed by the President of Covey and the person
primarily responsible for Covey's financial affairs;
(o) Each of Roger Merrill, Blaine Lee and David Hanna, current key
employees of Covey, shall have executed and delivered an employment
agreement in form and substance reasonably acceptable to Franklin and each
such employment agreement shall be in full force and effect;
(p) Stephen R. Covey and the Trust shall have sold to and completed
all transactions necessary, in exchange for cash and Franklin Common having
a total combined value of $27,000,000, with the Franklin Common being
valued as provided in Section 1.1(g), for purchase of the License Rights as
provided in Section 1.1(g), and such transaction, including any necessary
amendments to the License Agreement, shall have been completed on or as
part of the Closing and be effective as of the Effective Time;
(q) Each Shareholder shall have entered into a Waiver and Release in a
form reasonably acceptable to Franklin pursuant to which each Shareholder
releases and waives any claims such Shareholder may have against Covey
except for those arising out of this Agreement and except for obligations
arising out of contracts still in force between such Shareholder and Covey
which survive the Merger and obligations arising under Covey benefit plans
which are related to such Shareholder's employment by Covey, and such
Waiver and Release shall be in full force and effect and shall not have
been amended;
(r) Franklin shall have performed or caused the performance of any and
all investigations, inspections and studies, including, but not limited to,
financial, environmental, title, asset and liability condition, tax,
employee and employee benefits, intellectual property and otherwise as
Franklin deems appropriate, all of which must be satisfactory to Franklin,
in its sole discretion, and will include, but not be limited to, interviews
with Covey's officers, directors and employees;
(s) Each of the Shareholders shall have executed and delivered to
Franklin an "Investment Letter" in a form reasonably acceptable to
Franklin, acknowledging and confirming each Shareholder's understanding and
agreement that the consummation of the Merger and the issuance of the
Franklin Common to the Shareholders constitutes the offer and sale of
securities under the Securities Act and applicable state statutes and that
the issuance of Franklin Common is being made in express reliance upon
exemptions from registration requirements of the Securities Act and
applicable state statutes based upon the Shareholders' representations and
warranties made in the Investment Letter; and
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(t) Franklin shall have reviewed and approved all existing covenants
not to compete that are currently in force between Covey and its key
employees, which agreements require each key employee not to compete with
the Surviving Corporation for two years following the termination of such
employee's employment.
(u) There shall be no more than 60,000 Covey Options outstanding at
the Effective Time which are to be converted into options to purchase
Franklin Common.
Franklin may waive any condition, in whole or in part, specified in this
Section 2.2 if Franklin executes a writing so stating at or prior to the
Effective Time.
2.3 Conditions to Obligation of Covey and the Shareholders. The
obligation of Covey and the Shareholders to effect the Merger is also subject to
satisfaction at or prior to the Effective Time of the following conditions:
(a) The representations and warranties set forth in Section 5.2 below
shall be true and correct in all material respects at and as of the
Effective Time;
(b) Franklin shall have performed and complied with all of its
respective covenants hereunder in all material respects through the
Effective Time;
(c) Franklin shall have procured all of the third party consents and
approvals necessary in order that the Merger and the transactions
contemplated herein not constitute a breach or violation of, or result in a
right of termination or acceleration of any contract or agreement to which
Franklin is a party or any Encumbrance on any of Franklin's assets pursuant
to the provisions of, any agreement, arrangement or understanding or any
license, franchise or permit, in any such case which is material to
Franklin;
(d) Franklin shall have delivered to Covey a certificate signed by an
officer of Franklin to the effect that each of the conditions specified
above in Sections 2.3(a) and (b) are satisfied in all respects;
(e) Each of the Shareholders shall have received the certificates for
Franklin Common as described in Section 1.1(d)(iii);
(f) Franklin shall have delivered to Covey (i) a certified copy of the
text of the resolutions by which all corporate action on the part of
Franklin necessary to adopt and approve this Agreement, the Merger and the
Plan of Merger was taken, (ii) a certificate executed by the President of
Franklin that the Merger and all of the transactions contemplated hereby
have been approved by the boards of directors and shareholders of Franklin
in the manner required by the URBCA, (iii) incumbency certificates signed
by an officer of Franklin certifying the signature and office of each
officer executing this Agreement or any other agreement, certificate or
other instrument executed pursuant hereto, and (iv) Articles of Merger and
the Plan of Merger duly executed by Franklin;
(g) Covey and the Shareholders shall have received from counsel to
Franklin, an opinion with respect to such matters as Covey may reasonably
request prior to the Effective Time, addressed to Covey and the
Shareholders and dated as of the Effective Date;
(h) All actions to be taken by Franklin in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form
and substance to Covey and its counsel.
(i) All of the Shareholders and those shareholders of Franklin
identified on Schedule 2.2(k)(i) hereof shall have entered into the
Shareholders Agreement contemplated by Section 2.2(k) in a form reasonably
satisfactory to Covey and to the Shareholders.
(j) No court action or proceeding shall have been instituted to
restrain or prohibit the transactions contemplated by this Agreement and
the agreements related hereto and at the Effective Time there shall be no
Claims, whether or not fully covered by insurance, that (i) have a
substantial probability of restraining or prohibiting or creating damages
in connection with the transactions contemplated by this
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Agreement and the agreements related thereto, or (ii) could result in a
material adverse change in business, operations, properties or assets or in
the condition, financial or otherwise, of Franklin, and Covey shall receive
a certificate to that effect dated as of the Effective Time, executed by
the President of Franklin.
(k) Stephen R. Covey and the Trust shall have sold to and completed
all transactions necessary to transfer all of the License Rights to
Franklin, in exchange for cash and Franklin Common having a total combined
value of $27,000,000, with the Franklin Common being valued as provided in
Section 1.1(g) and such transaction, including any necessary amendments to
the License Agreement, shall have been completed on or as part of the
Closing and be effective as of the Effective Time.
(l) There shall have been no material adverse change, from December
31, 1996 until the Effective Time, in the business, operations, properties
or assets or in the condition, financial or otherwise, of Franklin, and
Covey shall have received a certificate to that effect as of the Effective
Time and executed by the President and Chief Financial Officer of Franklin.
(m) Covey shall have performed or caused the performance of any and
all investigations, inspections and studies, including, but not limited to,
financial, environmental, title, asset and liability condition, tax,
employee and employee benefits, intellectual property and otherwise as
Covey deems appropriate, all of which must be satisfactory to Covey, in its
sole discretion, and will include, but not be limited to, interviews with
Franklin's officers, directors and employees.
(n) Each of the Shareholders shall have delivered to Franklin a duly
executed Lock-up Agreement in form reasonably satisfactory to Covey
pursuant to which each Shareholder agrees to make no disposition of such
Shareholder's Franklin Common for a period of two years following the
Effective Date.
(o) Covey and the Shareholders shall have received an opinion from
Arthur Andersen, LLP in form reasonably satisfactory to Covey that the
Merger will be treated as a tax-free reorganization.
(p) Franklin shall have taken all necessary corporate action to amend
its Bylaws to specifically contemplate (and not to contradict) the
governance provisions set forth in Section 4.1(a) and the Plan of Merger
herein in a form reasonably satisfactory to Covey and its legal counsel.
Each of Covey and the Shareholders may waive, in whole or in part, any
condition specified in this Section 2.3 if it executes a writing so stating at
or prior to the Effective Time.
ARTICLE 3 -- PRE-MERGER COVENANTS
3.1 Pre-Merger Covenants. The Parties agree as follows with respect to
the period between the execution of this Agreement and the Effective Time (with
the exception of certain obligations set forth in Section 3.2, which may occur
after the Effective Time).
(a) Notices and Consents. Covey and the Shareholders will (and the
Shareholders will cause Covey to) give any notices to third parties, and
Covey and the Shareholders will (and the Shareholders will cause Covey to)
use its and their reasonable efforts to obtain any third party consents or
assignments necessary to consummate the Merger and any other consents or
assignments that Franklin may reasonably request in connection with the
matters pertaining to Covey or the Shareholders disclosed or required to be
disclosed in the Disclosure Schedule. Franklin will give any notices to
third parties and Franklin will use its reasonable efforts to obtain any
third party consents or assignments necessary to consummate the Merger and
any other consents or assignments that Covey may reasonably request in
connection with the matters pertaining to Franklin required to be disclosed
in the Disclosure Schedule. Each of the Parties will take any additional
action that may be necessary, proper or advisable in connection with any
other notices to, filings with, and authorizations, consents, and approvals
of governments, governmental agencies, and third parties that it may be
required to give, make, or obtain.
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(b) Operation of Business. Covey will not (and the Shareholders will
not permit Covey to) engage in any practice, take any action, embark on any
course of inaction, or enter into any transaction outside the Ordinary
Course of Business. Without limiting the generality of the foregoing, Covey
will not (and the Shareholders will not permit Covey to), without the
consent of Franklin, engage in any practice, take any action, embark on any
course of inaction, or enter into any transaction that would have to be
disclosed pursuant to or would constitute a breach under Section 5.1(g).
Franklin will promptly advise Covey of any material actions proposed to be
taken by Franklin from the date of this Agreement through the Effective
Time which are outside the Ordinary Course of Franklin's Business.
(c) Affiliated Transactions. Except as expressly contemplated by this
Agreement, or as consented to by Franklin, Covey will not (and the
Shareholders will not permit Covey to) enter into any transaction,
arrangement or contract with, or distribute or transfer any property or
other assets to, any officer, director, shareholder or Affiliate of Covey
or the Shareholders. Franklin will promptly advise Covey of any
distribution or transfer of any property or other assets to any officer,
director, shareholder or Affiliate of Franklin outside the Ordinary Course
of Business.
(d) Preservation of Business. Covey will (and the Shareholders will
cause Covey to) use reasonable efforts to keep its business and properties
substantially intact, including its present operations, physical
facilities, working conditions, and relationships with lessors, licensors,
suppliers and clients. Franklin will use reasonable efforts to keep its
business and properties substantially intact, including its present
operations, physical facilities, working conditions and relationships with
licensors, suppliers and clients.
(e) Access. Covey will permit (and the Shareholders will cause Covey
to permit) representatives of Franklin to have full access at all
reasonable times, and in a manner so as not to interfere with the normal
business operations of Covey, to all business operations of Covey, to all
premises, properties, books, records, contracts, Tax records, and documents
of or pertaining to Covey. Franklin will permit representatives of Covey to
have full access to all information and filings made by Franklin with the
SEC under the Securities Act or the Exchange Act. Franklin will permit
representatives of Covey to have full access, at all reasonable times and
in a manner so as not to interfere with normal business operations of
Franklin, to all business operations of Franklin, to all premises,
properties, books, records, contracts, tax records and documents of or
pertaining to Franklin. From the date of this Agreement to the Closing
Date, Franklin will provide to Covey a copy of any SEC filings made from
and after the date of this Agreement and through the Closing Date and
copies of any and all reports or letters sent by Franklin to its
shareholders as a group.
(f) Notice of Developments. Covey will (and the Shareholders will
cause Covey to) give prompt written notice to Franklin of any material
development affecting the assets, Liabilities, business, financial
condition, operations, results of operations, or future prospects of Covey.
Franklin will give prompt written notice to Covey of any material
development affecting the assets, Liabilities, business, financial
condition, operation, results of operations or future prospects of
Franklin. Each Party will give prompt written notice to the other of any
material development affecting the ability of the Parties to consummate the
transactions contemplated by this Agreement. No disclosure by any Party
pursuant to this Section 3.1(f), however, shall be deemed to amend or
supplement the Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
(g) Exclusivity. Neither Covey nor the Shareholders will (and the
Shareholders will not cause or permit Covey to) at any time prior to the
termination of this Agreement pursuant to Section 6.1(a) or the Effective
Time, whichever shall first occur: (i) solicit, initiate, or encourage the
submission of any proposal or offer from any Person relating to any (A)
liquidation, dissolution, or recapitalization, (B) merger, consolidation or
reorganization, (C) acquisition or purchase of securities or assets, or (D)
similar transaction or purchase combination involving Covey, or (ii)
participate in discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other matter any effort or attempt by any Person to do or seek to do any of
the foregoing. The Shareholders and Covey will (and the Shareholders will
cause Covey to) notify Franklin immediately if
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any Person makes any proposal, offer, inquiry, or contact with respect to
any of the foregoing. Franklin will advise Covey if at any time prior to
termination of this Agreement pursuant to Section 6.1(a) or the Effective
Time, whichever shall first occur, if any party shall solicit, initiate, or
encourage the submission of any proposal or offer relating to any
liquidation, dissolution, recapitalization, merger, consolidation,
reorganization, or purchase of a material part of the securities or assets
or a similar transaction or purchase combination involving Franklin or if
Franklin proposes to participate in negotiations with any other person
regarding any of the foregoing.
(h) Representations and Warranties. Neither Covey nor the
Shareholders will (and the Shareholders will not cause or permit Covey to)
take any actions which would cause or would reasonably likely cause a
breach of any representation and warranty of Covey or the Shareholders set
forth in this Agreement. Franklin will not take any actions which would
cause or would reasonably likely cause a breach of any representation or
warranty of Franklin set forth in this Agreement.
(i) Hart-Scott-Rodino Act Compliance. The Parties have jointly made a
determination, after reasonable inquiry and investigation, that the
transactions contemplated by this Agreement and the Plan of Merger require
compliance with HSR. Each of the Shareholders, to the extent applicable,
Covey and Franklin agree to promptly take all actions necessary so as to
comply with the requirements of HSR in such time periods that all waiting
periods will have expired or been terminated prior to the Effective Time.
(j) Confidentiality. Covey and the Shareholders on the one hand and
Franklin on the other hand, will maintain in confidence and will cause the
directors, officers, employees, agents and advisors of Covey, the
Shareholders and Franklin to maintain in confidence any written, oral or
other information obtained in confidence from another party in connection
with this Agreement or the transactions contemplated hereby unless (A) such
information becomes publicly available through no fault of such party, (B)
the use of such information is necessary and appropriate in making any
filing or obtaining any consent or approval required for the consummation
of the transactions contemplated hereby, or (C) the furnishing or use of
such information is required by legal proceedings or requirements. If the
transactions contemplated hereby are not consummated, each party will
return or destroy as much of such written information as the other party
may reasonably request.
3.2 Tax Distributions to Covey Shareholders. The Shareholders shall be
paid a distribution of cash from Covey in order to pay their Federal and state
income tax liabilities, including composite shareholder tax return liabilities,
attributable to the S corporation taxable income of Covey for the year ended
December 31, 1996 and for the period January 1, 1997 through the Effective Date.
Specifically, the following provisions shall govern the amount and timing of tax
distributions by Covey to the Shareholders.
(a) A cash distribution shall be made by Covey on or before April 15,
1997 in an aggregate amount equal to (1) 48% of the estimated net amount of
all income, gains, deductions, and losses of Covey which would be reflected
on a Federal return for the year ended December 31, 1996, less (2) the
amount of Federal and state estimated tax payments made by Covey on behalf
of the Shareholders and as estimated tax payments toward composite
shareholder return liabilities for year ended December 31, 1996. Any such
distribution shall be used to pay estimated 1996 composite return extension
liabilities and the remainder used for the payment of the Shareholders'
estimated 1996 Federal and state extension liabilities or remitted to the
Shareholders.
(b) The 1996 Federal Tax Return of Covey shall be completed prior to
the Effective Date. Upon the final completion of such return, a cash
distribution shall be made by Covey in the amount of (1) 48% of the net
amount of all income, gains, deductions and losses as shown on Covey's 1996
Federal return, less (2) the amount of Federal and state estimated tax
payments made by Covey on behalf of the Shareholders and as payments
towards composite return liabilities for 1996, and payments made pursuant
to (a) above. The distribution shall be used to pay composite return
liabilities and the remainder remitted to the Shareholders. To the extent
the amounts in (2) exceed the amount in (1), the excess shall be treated as
a distribution to the Shareholders for payment of 1997 tax liabilities and
shall decrease the amount otherwise payable in (d).
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(c) A cash distribution shall be made by Covey on or before April 15,
1997 in an aggregate amount equal to 48% of the estimated net amount of all
income, gains, deductions, and losses of Covey which would be reflected on
a Federal Tax Return for the period January 1, 1997 through March 31, 1997.
The estimated taxable income shall be estimated by Covey personnel and
shall be subject to Franklin's review and approval, not to be unreasonably
withheld. The distribution shall be used by the Shareholders to pay
composite return estimated taxes and the remainder used for the payment of
the Shareholders' individual Federal and state estimated tax payments or
remitted to the Shareholders.
(d) A cash distribution shall be made by Covey prior to the Effective
Date in an aggregate amount equal to (1) 48% of the estimated net amount of
all income, gains, deductions, and losses for Covey which would be
reflected on a Federal Tax Return for the period January 1, 1997 through
the Effective Date, less (2) the amount of the distribution made pursuant
to (c). The estimated taxable income shall be estimated by Covey employees
and shall be subject to Franklin's review and approval, not to be
unreasonably withheld. The distribution shall be used to pay composite
return estimated tax liabilities and the remainder used for the payment of
the Shareholders' individual Federal and state estimated tax payments or
remitted to the Shareholders.
(e) Upon the completion of the Federal Tax Return for Covey for the
period January 1, 1997 through the Effective Date, Covey employees shall
determine the amount by which the total of the distributions pursuant to
(c) and (d) and any excess amount paid pursuant to the last sentence of (b)
either exceed or are less than 48% of the net amount of all income, gains,
deductions, and losses reported on Covey's Federal Tax Return for the
period. Any excess distributions shall be contributed back to Franklin by
the Shareholders within 45 days of the completion of the Covey Federal Tax
Return. Any shortfall in distributions shall be distributed by the
Surviving Corporation to the Shareholders within 45 days of the completion
of such returns. Franklin employees shall have the right to review and
reasonably approve the Federal Tax Return of Covey and the calculations
made pursuant to this paragraph. For the purpose of the distributions
contemplated by this Section 3.2, the Parties agree to use the "cut-off"
method rather than any allocation of days.
(f) Costs incurred in connection with Covey and Shareholder compliance
requirements relating to S corporation income of Covey for 1996 and the
period January 1, 1997 through the Effective Date shall be paid by Covey
and the Surviving Corporation, as applicable, in a manner consistent with
prior years.
3.3 Disclosure Schedule. A preliminary draft of the Disclosure Schedule
required to be delivered by each Party hereto shall be prepared and delivered to
the other Party by March 28, 1997. The final draft of the Disclosure Schedule
required to be delivered by each Party shall be delivered to the other party no
later than April 25, 1997. After delivery of the final Disclosure Schedule on
April 25, 1997, the Party delivering such Disclosure Schedule shall thereafter
not be entitled to make any amendments thereto and such Disclosure Schedule
shall be deemed to be final and binding except that any party may amend and
modify its Disclosure Schedule up to the Effective Time to disclose events
occurring after April 25, 1997 and prior to the Effective Time. After April 25,
1997, each Party undertakes and agrees that it will promptly notify the other
Party of any material events which have occurred which would be required to be
disclosed on the Disclosure Schedule as soon as practicable after the occurrence
of such event.
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ARTICLE 4 -- ADDITIONAL AGREEMENTS
4.1 Post-Merger Covenants. The Parties agree as follows with respect to
the period following the Effective Time:
(a) Franklin Governance. Promptly following the Effective Time, the
Board of Directors of Franklin shall create four committees of the Board of
Directors which shall be established as follows:
(i) An Executive Committee comprised of the following four
individuals shall be created:
Joel Peterson, Chairman
Hyrum W. Smith
Jon H. Rowberry
Stephen M. R. Covey
If either Joel Peterson or Stephen M. R. Covey is unable or unwilling,
for any reason, to serve on the Executive Committee, the other of Joel
Peterson or Stephen M. R. Covey shall have the right to designate a
member from among the members of the Board of Directors of the Surviving
Corporation to serve as a member of the Executive Committee in the place
and stead of the person between Joel Peterson or Stephen M. R. Covey who
is unwilling or unable to serve. If Hyrum W. Smith or Jon H. Rowberry is
unable or unwilling, for any reason, to serve on the Executive
Committee, the other of Hyrum W. Smith or Jon H. Rowberry shall have the
right to designate a member of the Board of Directors to serve as a
member of the Executive Committee in the place and stead of the person
between Hyrum W. Smith or Jon H. Rowberry who is unable or unwilling to
serve. This right to designate representatives on the Executive
Committee as described in this Section 4.1(a)(i) shall continue until
August 31, 2000 (the "Control Period").
The Executive Committee of the Board of Directors shall be given
exclusive authority, for the period commencing at the Effective Time and
continuing throughout the Control Period, to make decisions with respect
to terminating or making material changes in the compensation of or
employment rights and duties (as they exist immediately following the
Effective Time) of the employees of the Surviving Corporation to be
designated by Covey which designation shall be reasonably acceptable to
Franklin, and which employees will be designated on or prior to the
Effective Date. Notwithstanding the foregoing provisions, compensation
for executive officers of the Surviving Corporation shall be determined
by the Compensation Committee. Any decision regarding the employment
continuation of any person who is an employee of Franklin or the
Surviving Corporation who is also a member of the Executive Committee
shall be handled in the following manner. Such member of the Executive
Committee who is an employee of Franklin or the Surviving Corporation or
any other Franklin Subsidiary shall be excused from the Executive
Committee meeting while such deliberation and vote is being made. A
decision to terminate such employee shall require the unanimous consent
of the remaining members of the Executive Committee for such decision to
be effective. The Executive Committee of the Board of Directors shall
also have exclusive authority during the Control Period to make
strategic decisions regarding the "Covey Leadership Center Division" as
described in Section 4.1(a)(v) below.
(ii) A Nominating Committee shall be established comprised of the
following two individuals:
Hyrum W. Smith
Stephen R. Covey
If, during the Control Period, Hyrum W. Smith is unable or unwilling,
for any reason, to serve as a member of the Nominating Committee, Jon H.
Rowberry shall serve on the Nominating Committee in his stead. If,
during the Control Period, Jon H. Rowberry is unable or unwilling to
serve as a member of the Nominating Committee for any reason, Hyrum W.
Smith shall designate a member of the Board of Directors to serve on the
Nominating Committee in place of Hyrum W. Smith or Jon H. Rowberry. If,
during the Control Period, Stephen R. Covey is unable or unwilling, for
any reason, to serve as a member of the Nominating Committee, Stephen M.
R. Covey shall serve on the
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Nominating Committee in his place and stead. If, during the Control
Period, Stephen M. R. Covey is unable or unwilling, for any reason, to
serve as a member of the Nominating Committee, Stephen R. Covey, shall
designate a member of the Board of Directors to serve on the Nominating
Committee in place of Stephen R. Covey or Stephen M. R. Covey. During
the Control Period the Nominating Committee shall be comprised of two
members unless such number is changed by the majority vote of the
Executive Committee.
The Nominating Committee shall have exclusive authority, during the
Control Period, to nominate individuals for election to the following
offices: President, Chief Executive Officer, Chief Financial Officer,
President of the Covey Leadership Center Division; individuals to be
nominated by the Board of Directors to serve on the Board of Directors;
the persons to serve as the Chairperson of any Committee of the Board of
Directors; and the number and identity of individuals to serve on the
Strategic Management Committee (a non-Board committee) and the number of
and identity of any members of the Board of Directors to serve on the
Executive Committee in addition to those identified in Section
4.1(a)(i).
(iii) A Compensation Committee shall be established comprised of
the following individuals:
Kay Stepp, Chairperson
Daniel P. Howells
Dennis G. Heiner
The Compensation Committee shall have such authority as the Board
of Directors delegates to such Committee in establishing executive
compensation plans and programs and administering the various
compensation plans adopted by the Board of Directors, subject, however,
during the Control Period, to the special authority with respect to
compensation granted to the Executive Committee as described in Section
4.1(a)(i).
(iv) An Audit Committee shall be established comprised of the
following individuals:
E. J. "Jake" Garn, Chairman
Robert H. Daines
Robert Whitman
(v) Franklin, Covey and the Shareholders intend that the respective
missions of Covey and Franklin, as they existed immediately prior to the
Effective Time, will continue after the Effective Time and during the
Control Period. Consequently, during the Control Period, the Surviving
Corporation shall establish a division titled "Covey Leadership Center
Division", which shall be operated as a separate operating division of
Franklin under the direction of Stephen M. R. Covey as President. During
the Control Period, the Covey Leadership Center Division shall be
operated with the mission and the goals and objectives which Covey was
pursuing immediately prior to the Effective Time, subject to the
direction and control of the Executive Committee. During the Control
Period, the purpose and directives of the Covey Leadership Center
Division will not be altered or materially changed, except by the
Executive Committee in the exercise of their good faith and reasonable
business judgment.
(vi) During the Control Period, a Strategic Management Committee (a
non-Board committee) shall be established among the officers of
Franklin, which Committee shall be responsible for day-to-day
operational decisions of Franklin and shall be initially comprised of
the following officers:
Jon H. Rowberry
Stephen M. R. Covey
John L. Theler
(vii) As a condition of the closing, at the Effective Time the
Shareholders of Covey and certain shareholders of Franklin as set forth
on Schedule 2.2(k) hereto shall enter into an agreement whereby each
party to the Shareholders Agreement agrees, during the Control Period,
to vote his,
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her or its shares of Franklin Common for the election of members to
serve on the Board of Directors as shall be nominated by the Nominating
Committee during the Control Period.
(b) Confidentiality. Each of the Shareholders will treat and hold as
confidential all of the Confidential Information, refrain from using any of
the Confidential Information except in connection with this Agreement or
their duties as employees of the Surviving Corporation, and deliver
promptly to the Surviving Corporation or destroy, at the request and option
of the Surviving Corporation, all tangible embodiments (and all copies) of
the Confidential Information which are in his, her or its possession or
control. In the event that any of the Shareholders is requested or required
(by oral question or request for information or documents in any legal
proceeding, interrogatory, subpoena, civil investigative demand, or similar
process) to disclose any Confidential Information, such Shareholder will
notify the Surviving Corporation promptly of the request or requirement so
that the Surviving Corporation may seek an appropriate protective order or
waive compliance with the provisions of this Section 4.1(b). If, in the
absence of a protective order or the receipt of a waiver hereunder, any of
the Shareholders is, on the advice of counsel, compelled to disclose any
Confidential Information to any tribunal or else stand liable for contempt,
such Shareholder may disclose the Confidential Information to the tribunal;
provided, however, that the disclosing Shareholder shall use his, her or
its reasonable efforts to obtain, at the reasonable request and sole
expense of the Surviving Corporation, an order or other assurance that
confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as the Surviving Corporation shall
designate.
(c) Indemnification.
(i) Survival. The representations and warranties of Covey and the
Shareholders shall survive the Effective Time for the following periods:
(A) all representations and warranties with respect to Taxes and
Intellectual Property shall survive for a period of five years following
the Effective Date;
(B) all other representations and warranties shall survive for
three years following the Effective Date;
(even if Franklin knew or had reason to know of a misrepresentation or
breach at the Effective Time). The representations and warranties of
Franklin shall survive the Effective Time for the following periods:
(C) all representations and warranties with respect to Taxes and
Intellectual Property shall survive for a period of five years following
the Effective Date; and
(D) all other representations and warranties shall survive for
three years following the Effective Date (even if Covey or the
Shareholders knew or had reason to know of a misrepresentation or breach
at the Effective Time).
All of the covenants of Franklin, Covey and the Shareholders shall
survive consummation of the Merger (even if Franklin, Covey or any of
the Shareholders, as the case may be, knew or had reason to know of a
breach of a covenant at the Effective Time), and continue in full force
and effect. If Franklin, Covey or any of the Shareholders actually
becomes aware of a misrepresentation or breach of a representation or
warranty by any of the other Parties hereto prior to the Effective Time,
the Party learning of the breach or misrepresentation shall inform the
other Parties hereto of such breach or misrepresentation so that it can
be dealt with, to the extent possible, by the Party making the
misrepresentation or causing the breach, and the failure to so notify
the other Parties shall be deemed a waiver and release as to such breach
or misrepresentation by the Party learning of such breach or
misrepresentation.
(ii) (A) Indemnification Provisions for Benefit of Franklin. In
the event Covey or any of the Shareholders breaches any of their
respective representations, warranties or covenants contained in this
Agreement and provided that a Franklin Party makes a written claim for
indemnification against the Shareholders during the period in which such
representations, warranties or covenants survive
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the consummation of the Merger (as set forth in Section 4.1(c)(i)
above), then the Shareholders agree, jointly and severally, to indemnify
and defend the Franklin Parties from and against, and reimburse the
Franklin Parties for, the entirety of any Adverse Consequences that the
Franklin Parties may experience or suffer through and after the date of
claim for indemnification or reimbursement resulting from, arising out
of, relating to, or caused by the breach.
(B) Limitation on Indemnification Provisions for Benefit of
Franklin. Notwithstanding any provision of this Agreement to the
contrary, no Shareholder shall be liable to Franklin until the aggregate
of all Adverse Consequences for which the Shareholders would, but for
this provision, be liable exceeds on a cumulative basis an amount equal
to $50,000, and then the Shareholders shall be liable for all Adverse
Consequences relating back to the first dollar; and provided further
that the Shareholders' aggregate liability to Franklin for a breach of
any representation, warranty or covenant under this Agreement shall in
no event exceed $50,000,000; and provided further that the individual
liability of any Shareholder shall not exceed an amount equal to the
amount determined by multiplying the percentage of the Covey Common
which such Shareholder owned immediately prior to the Effective Time by
$50,000,000.
(iii) Indemnification Provisions for the Benefit of the
Shareholders. In the event Franklin breaches any of its
representations, warranties or covenants contained in this Agreement,
and provided that the Shareholders (or any of them) make a written claim
for indemnification against Franklin during the period in which such
representations, warranties or covenants survive the consummation of the
Merger (as set forth in Section 4.1(c)(i) above), Franklin agrees to
indemnify and defend each of the Shareholders from and against the
entirety of any Adverse Consequences such Shareholder(s) may suffer
through and after the date of the claim for indemnification or
reimbursement resulting from, arising out of, relating to, or caused by
the breach.
(iv) Notice of Claim. Any party entitled to indemnification under
this Section 4.1(c) (the "Indemnified Party") agrees that promptly after
it becomes aware of facts giving rise to a claim by such Indemnified
Party for indemnification pursuant to this Section 4.1(c), the
Indemnified Party will provide, or cause to be provided, notice thereof
(a "Claim Notice") in writing to the parties required to provide
indemnification hereunder (the "Indemnifying Party"), specifying the
nature and specific basis for such claim, and to the extent feasible,
the estimated amount of damages attributable thereto, and a copy of all
papers served with respect to such claim (if any). For purposes of this
Section 4.1(c)(iv), receipt by an Indemnified Party of written notice of
any demand, assertion, claim, action or proceeding (judicial,
administrative or otherwise) by or from any Person other than any
Indemnified Party that gives rise to a claim on behalf of any
Indemnified Party shall constitute the discovery of facts giving rise to
a claim by it and shall require prompt notice of the receipt of such
matter as provided in the first sentence of this Section 4.1(c)(iv). The
failure of the Indemnified Party to send a Claim Notice shall not
relieve the Indemnifying Party from liability hereunder with respect to
such claim except to the extent, and only to the extent, such failure
prejudiced the Indemnifying Party.
(v) Indemnification Procedures. All claims for indemnification
under this Agreement shall be asserted and resolved as follows:
(A) In the event any Indemnified Party should have a claim
against the Indemnifying Party that does not involve a third party
claim asserted against such Indemnified Party that could give rise to
a right of indemnification, contribution or reimbursement under this
Agreement ("Third Party Claim"), the Indemnified Party shall
transmit, or cause to be transmitted, to the Indemnifying Party a
Claim Notice with respect to such claim. If the Indemnifying Party
does not notify the Indemnified Party within 30 days from their
receipt of the Claim Notice that the Indemnifying Party disputes such
claim, the claim specified in the Claim Notice shall be deemed a
liability of the Indemnifying Party hereunder. If the Indemnifying
Party has timely disputed such claim, as provided above, such dispute
shall be
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resolved by such dispute resolution proceedings to which the
Indemnified Party and the Indemnifying Party may agree or by judicial
proceedings.
(B) In the event any Indemnified Party shall have a Third Party
Claim asserted against it, the Indemnified Party shall transmit to
the Indemnifying Party a Claim Notice relating to such Third Party
Claim. During the 30-day period following receipt by the Indemnifying
Party of a Claim Notice or such shorter period (but no shorter than
15 days) as is necessary for such Indemnified Party to respond to a
complaint or summons (the "Election Period"), the Indemnifying Party
shall notify the Indemnified Party (i) whether the Indemnifying Party
disputes its potential liability to such Indemnified Party under this
Section 4.1(c)(v) with respect to such Third Party Claim or (ii)
whether the Indemnifying Party desires, at the sole cost and expense
of the Indemnifying Party, to defend such Indemnified Party against
such Third Party Claim.
(C) If the Indemnifying Party notifies the Indemnified Party
within the Election Period that the Indemnifying Party does not
dispute its or their potential liability to such Indemnified Parties
under this Article 4 and that the Indemnifying Party elects to assume
the defense of the Third Party Claim, then the Indemnifying Party
shall have the right to defend, at its or their sole cost and
expense, such Third Party Claim by all appropriate proceedings, which
proceedings shall be prosecuted diligently by the Indemnifying Party
to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this Section 4.1(v), provided
that such settlement shall not impose any obligations upon the
Indemnified Party or deprive such Indemnified Party of any rights
without its consent, or shall not constitute an admission or
precedent that is harmful to such Indemnified Party. During the
Election Period, the Indemnifying Party shall have full control of
such defense and proceedings, including, subject to the preceding
sentence, any compromise or settlement thereof. During the Election
Period, the Indemnified Party is hereby authorized (at the sole cost
and expense of the Indemnifying Party but only if such Indemnified
Party is actually entitled to indemnification hereunder or if the
Indemnifying Party assumes the defense with respect to the Third
Party Claim), to file, any motion, answer or other pleadings that
such Indemnified Party shall deem necessary or appropriate to protect
its interest and which is not materially prejudicial to the
Indemnifying Party. The Indemnified Party shall use reasonable
efforts to notify the Indemnifying Party in advance of any such
activities during the Election Period. If requested by the
Indemnifying Party, the Indemnified Party agrees, at the sole cost
and expense of the Indemnifying Party, to cooperate with the
Indemnifying Party and its or their counsel in contesting any Third
Party Claims, including, without limitation, by making of any related
counterclaim against the Person asserting the Third Party Claim or
any cross-complaint against any Person. The Indemnified Party shall
have the right to participate in, but not control, any defense or
settlement of any Third Party Claim controlled by the Indemnifying
Party pursuant to this Section 4.1(c)(v), and shall bear its own
costs and expenses with respect to any such participation.
(D) If the Indemnifying Party fails to notify the Indemnified
Party within the Election Period that the Indemnifying Party elects
to defend the Indemnified Party pursuant to Section 4.1(c)(v), or if
the Indemnifying Party elects to defend such Indemnified Party
pursuant to Section 4.1(c)(v) but fails to diligently and promptly
defend or settle the Third Party Claim, then such Indemnified Party
shall have the right, but not the obligation, to defend, at the sole
cost and expense of the Indemnifying Party, the Third Party Claim by
such proceedings deemed reasonably appropriate by such Indemnified
Party and its counsel. Such Indemnified Party shall have full control
of such defense and proceedings, including any compromise or
settlement of such Third Party Claim. If requested by the Indemnified
Party, the Indemnifying Party shall, at the sole cost and expense of
the Indemnifying Party, cooperate with the Indemnified Party and its
counsel in contesting any Third Party Claim that the Indemnified
Party is contesting, or, if appropriate and related to the Third
Party Claim in question, in making any counterclaim against the
Person asserting the Third Party Claim or any cross-
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complaint against any Person. Notwithstanding the foregoing, if the
Indemnifying Party has delivered a written notice to the Indemnified
Party to the effect that the Indemnifying Party disputes their
potential liability to the Indemnified Party under this Section
4.1(c) on the grounds that the matter for which reimbursement,
contribution or indemnification is sought is not subject to
reimbursement, contribution or indemnification (as opposed to such
claim being without merit) and if such dispute is resolved in favor
of the Indemnifying Party by a final, nonappealable order of a court
of competent jurisdiction, the Indemnifying Party shall not be
required to bear the costs and expenses of the Indemnified Party's
defense pursuant to this Section 4.1(c) or of the Indemnified Party's
participation therein at the Indemnified Party's request, and the
Indemnified Party shall reimburse the Indemnifying Party in full for
all reasonable costs and expenses of the Indemnifying Party in
connection with the Third Party Claim, excluding however any
litigation with respect to its indemnity obligation hereunder. The
Indemnifying Party shall have the right to participate in, but not
control, any defense or settlement controlled by the Indemnified
Party pursuant to this Section 4.1(c)(v) and the Indemnifying Party
shall bear its own costs and expenses with respect to any such
participation.
(E) Payments of all amounts owing by the Indemnifying Party as a
result of a Third Party Claim shall be made within five business days
after the earlier of (i) the settlement of the Third Party Claim or
(ii) the expiration of the period of appeal of a final adjudication
of such Third Party Claim. Payments of all amounts owing by the
Indemnifying Party other than as a result of a Third Party Claim
shall be made within thirty days after the later of (i) the time when
notice of the claim is delivered to the Indemnifying Party, or (ii)
if contested through dispute resolution proceedings, the expiration
of the period for appeal of a final adjudication of the Indemnifying
Party's liability to the Indemnified Party under this Agreement.
Notwithstanding the above, if the Indemnifying Party has not
contested their indemnity, contribution or reimbursement obligations
hereunder and have not elected to assume the defense of a Third Party
Claim, the Indemnifying Party shall reimburse (promptly after the
receipt of each invoice therefor) the Indemnified Party for the
reasonable costs and expenses incurred by such Indemnified Party in
contesting such Third Party Claim together with reasonable support
for such expenditures.
(F) If the Indemnifying Party assumes the defense of any Third
Party Claim (1) no compromise or settlement of any such Claims may be
effected by the Indemnifying Party without the Indemnified Parties'
consent, which shall not be unreasonably withheld, unless the sole
relief provided is monetary damages that are paid in full by the
Indemnifying Party; and (2) the Indemnified Parties will have no
further liability with respect to the compromise or settlement of
such claims. Notwithstanding the foregoing, if an Indemnified Party
determines in good faith that there is a reasonable probability that
any Third Party Claim may adversely affect it or its Affiliates,
other than as a result of monetary damages for which it would be
entitled to indemnification under this Agreement, the Indemnified
Party may, by notice to the Indemnifying Party, assume the exclusive
right to defend, compromise or settle such Third Party Claim, but the
Indemnifying Party shall not be bound by any determination of a Third
Party Claim so defended or any compromise or settlement effected
without its consent (which may not be unreasonably withheld).
(G) Interest shall begin to accrue on all amounts owing by the
Indemnifying Party on the day such amounts are due and shall continue
until such amounts are paid. Interest shall accrue at a variable rate
per annum equal to the prime rate published each business day in the
"Money Rates" section of The Wall Street Journal plus two percent
(2%).
(d) Tax Treatment. Each of the Parties agrees to treat the Merger as
a statutory merger type of tax-free reorganization within the meaning of
Code Section 368(a)(1)(A) and to prepare and file all tax returns and
related reports and schedules consistent with such treatment and to take no
action intended to disqualify or to be inconsistent with such treatment.
Each of the Parties agrees to cooperate with, and make available all
necessary documents and records (with appropriate measures to preserve
confidential-
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ity) to, any Party as requested (at the requesting Person's sole cost and
expense) to assist such requesting Person in the defense or substantiation
of such tax treatment. It is expressly understood and agreed, however, that
the Parties' respective responsibilities pertaining to the tax treatment of
the Merger are limited to those representations, warranties and covenants
as to plans, intentions, commitments and other factual matters and actions
described in this Agreement and that no Party is representing or warranting
that such tax treatment will not be challenged by a taxing authority or, if
challenged, will not be denied or modified.
(e) Files and Records. Promptly after the Effective Time, the
Shareholders will cause Covey to deliver (at the sole cost and expense of
the Surviving Corporation), arrange for the delivery of, or make available
for Franklin, the Surviving Corporation or their representatives to pick
up, all financial and tax information, tax returns (including tax returns
of all partnerships of which Covey is a partner), account ledgers,
corporate records, computer or electronically recorded data, and other
documents, data, and things owned by or related to Covey or its assets,
that are in the possession or control of the Shareholders, including
without limitation, any of such items that are held by the attorneys,
accountants, contractors, or consultants of Covey or of the Shareholders as
Franklin or the Surviving Corporation shall request.
(f) Indemnification of Covey Officers and Directors. Franklin and
Covey acknowledge that all rights to indemnification or exculpation now
existing in favor of the directors, officers, employees and agents of Covey
as provided in its Articles of Incorporation and Bylaws or otherwise in
effect as of the date hereof with respect to matters occurring prior to the
Effective Time shall survive the Merger and shall continue in full force
and effect. After the Effective Time, the Surviving Corporation shall
indemnify, defend and hold harmless the present and former officers,
directors, employees and agents of Covey (each an "Indemnified Agent")
against all losses, claims, damages, liabilities, fees and expenses
(including reasonable fees and disbursements of counsel) and judgments,
fines, losses, claims, liabilities and amounts paid in settlement (provided
that any such settlement is effected with the prior written consent of the
Surviving Corporation)) arising out of actions or omissions occurring at or
prior to the Effective Time to the full extent permitted under the URBCA,
Covey's Articles of Incorporation or Bylaws, in effect at the date hereof,
including provisions therein relating to the advancement of expenses
incurred in the defense of any action or suit; provided that nothing herein
shall impair any rights or obligations of any present or former directors
or officers of Covey. The Surviving Corporation shall maintain in effect
for not fewer than six years from and after the Effective Time the policies
of directors' and officers' liability insurance most recently maintained by
Covey; provided that the Surviving Corporation may substitute therefor
policies with reputable and financially sound carriers of at least the same
coverage and containing terms and conditions no less advantageous as long
as such substitution does not result in gaps or lapses in coverage with
respect to claims arising from or related to matters occurring prior to the
Effective Time. The Surviving Corporation shall pay all expenses (including
reasonable attorneys' fees) that may reasonably be incurred by the
Indemnified Agent in successfully enforcing the rights to which the
Indemnified Agent is entitled under this Agreement or the Surviving
Corporation's Articles of Incorporation or Bylaws or to which such
Indemnified Agent is otherwise entitled. In the event the Surviving
Corporation or any of its successors or assigns (1) consolidates with or
merges into any other Person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger or (ii) transfers all
or substantially all of its properties and assets to any person, then, and
in each such case, proper provisions shall be made so that the successors
and assigns of the Surviving Corporation shall assume its obligations set
forth in this Section 4.1(f). The provisions of this Section 4.1(f) are
intended to be for the benefit of, and shall be enforceable by, each
Indemnified Agent, his or her heirs and his or her personal
representatives. Notwithstanding any provision in this Section 4.1(f) to
the contrary, nothing in this Section 4.1(f) shall be deemed to entitle any
Shareholder to indemnification or reimbursement for any matter to which a
Franklin Party is entitled to indemnification under Section 4.1(c)
resulting from a breach by such Shareholder of any representation, warranty
or covenant in this Agreement.
(g) Tax Benefits. Franklin covenants and agrees that to the extent
either Covey or the Shareholders are assessed Taxes at any time by any
taxing authority (either as a result of any present or future tax
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examination or otherwise) with respect to any taxable period of Covey prior
to the Effective Date, and as a result of such assessment and the payment
of any Taxes resulting from such assessment, Franklin receives any tax
advantage or benefit, Franklin shall promptly pay to the Shareholders the
actual tax benefits received as partial or full reimbursement of such
payment of Taxes or alternatively, at the election of the Shareholders, as
a distribution tax-free of accumulated earnings to the extent there are any
tax-free accumulated earnings that have previously been taxed to the
Shareholders and to the extent allowed or required by the IRC and related
regulations. Such reimbursement shall not exceed the Taxes actually paid by
such Shareholders. A "tax advantage or benefit" for the purpose of this
paragraph means an actual cash tax savings to the Surviving Corporation.
(h) Subsidiary Names. Franklin covenants and agrees to change the
names of all of its Subsidiaries that currently include the "Franklin
Quest" name to now include "Franklin Covey", both in their respective
organizational documents and in public reference.
(i) Bylaws. The Surviving Corporation shall not amend its Bylaws to
be inconsistent with the governance provisions set forth in Section 4.1(a)
of this Agreement and the Plan of Merger at any time during the Control
Period.
ARTICLE 5 -- REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of Covey and the Shareholders. Covey
and each of the Shareholders hereby, jointly and severally, represent and
warrant to Franklin that all of the statements contained in this Section 5.1 (a)
through (c) are correct and complete as of the date of this Agreement and that
all of the statements contained in this Section 5.1(a) through (ac) will be
correct and complete as of the Effective Time (as though made at the Effective
Time and as though the Effective Time were substituted for the date of this
Agreement throughout this Section 5.1), except as exceptions are permitted to be
set forth in the disclosure schedule attached to this Agreement (the "Covey
Disclosure Schedule"). For purposes of the following representations and
warranties, except for the representations and warranties contained in Sections
5.1(a), (b), (d), (e), (f) and (g), Covey shall be deemed to include its
subsidiary, except that all references to U.S. law shall instead refer to
similar laws applicable to the subsidiary business, if any. The Covey Disclosure
Schedule will be arranged in paragraphs corresponding to the lettered and
numbered paragraphs contained in this Section 5.1.
(a) Organization, Qualification and Corporate Power. (i) Covey is a
corporation duly organized, validly existing, and in good standing under
the laws of the State of Utah. Covey has full corporate power and authority
to carry on the businesses in which it is engaged and to own and use the
properties owned and used by it. Covey's wholly-owned subsidiary ("Covey
Sub") is a corporation duly organized, validly existing and in good
standing under the laws of the Province of Queensland in the country of
Australia. Covey Sub has full corporate power and authority to carry on the
business in which it is engaged and to own and use the properties owned and
used by it.
(ii) Each of Covey and Covey Sub is qualified to conduct business and
is in good standing under the laws of each jurisdiction wherein the nature
of its business or its ownership of property requires it to be so
qualified, except where the failure to be so qualified will not have a
material adverse effect on the business, properties or operations of Covey
or Covey Sub. As of the Effective Date (but not as of the date of this
Agreement), Section 5.1(a)(ii) of the Covey Disclosure Schedule will
contain a complete and accurate list of each jurisdiction in which Covey or
Covey Sub is authorized to do business, each jurisdiction in which it has
filed tax returns, and each jurisdiction in which it has employees or in
which inventory is located.
(b) Authorization of Transaction. Covey has full corporate power and
authority to execute and deliver this Agreement, the Articles of Merger and
the Plan of Merger and to perform its obligations hereunder and thereunder.
Without limiting the generality of the foregoing, the board of directors of
Covey (as of the date of this Agreement and as of the Closing Date) and the
Shareholders (as of the Closing Date but not as of the date of this
Agreement), acting in their capacity as shareholders of Covey, have duly
authorized the execution, delivery, and performance of this Agreement and
the Plan of Merger by Covey and have adopted and approved the Plan of
Merger in the manner required by the URBCA.
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This Agreement constitutes the valid and legally binding obligation of
Covey, enforceable against Covey in accordance with its terms, except as
such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation, arrangement and other similar laws
affecting creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). After obtaining the approval of the Shareholders, upon
the execution and delivery thereof by Covey, the Plan of Merger will
constitute the valid and legally binding obligation of Covey, enforceable
against Covey in accordance with its terms except as such enforcement may
be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation, arrangement and other similar laws affecting
creditors' rights generally and by general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or
at law).
(c) Noncontravention. Neither the execution and the delivery of this
Agreement or the Plan of Merger, nor the consummation of the transactions
contemplated hereby or thereby will (i) violate any statute, regulation or
rule applicable to Covey, (ii) violate any judgment, order, decree,
stipulation, injunction, charge, or other restriction of any government,
governmental agency, or court to which Covey is subject or any provision of
the Articles of Incorporation or Bylaws of Covey, or (iii) conflict with,
result in a breach of, constitute a default under, result in the
acceleration of, create in any Person the right to accelerate, terminate,
modify, or cancel, or require any notice under any contract, lease,
sublease, license, sublicense, franchise, permit, indenture, agreement or
mortgage for borrowed money, instrument representing Indebtedness, Security
Interest, or other arrangement to which Covey is a party or by which it is
bound or to which any of its assets is subject, except where such conflict,
breach or default would not have a material adverse effect on the financial
condition or operations of Covey and its subsidiary taken as a whole or on
the ability of the Parties to consummate the transactions contemplated by
this Agreement. Other than in connection with or in compliance with the
provisions of the URBCA and HSR, neither Covey nor the Shareholders is
required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental
agency in order for the Parties to consummate the transactions contemplated
by this Agreement. As of the Effective Date (but not as of the date of this
Agreement), except as set forth in Section 5.1(c) of the Covey Disclosure
Schedule, neither the execution and delivery of this Agreement or the Plan
of Merger or the consummation or performance of any of the transactions
contemplated thereby will, directly or indirectly, with or without the
notice or lapse of time: (i) give any governmental authority the right to
revoke, withdraw, suspend, cancel, or modify any governmental authorization
that is held by Covey or that otherwise relates to the business or any of
the assets owned, leased or used by Covey, (ii) cause Covey to become
subject to or to become liable for the payment of any tax, (iii) cause any
of the assets owned by Covey to be reassessed or revalued by any taxing
authority or other governmental authority, or (iv) result in the imposition
or creation of any Encumbrance upon or with respect to any of the assets
owned, leased or used by Covey.
(d) Capitalization. The entire authorized capital stock of Covey
consists of 1,000,000 shares of common stock, $.001 par value per share, of
which 790,000 shares are issued and outstanding and constitutes the Covey
Common. All of the shares of Covey Common have been duly authorized, are
validly issued, fully paid, and nonassessable, and are held of record and
beneficially by the Shareholders. The entire authorized capital stock of
Covey Sub consists of 1,000,000 shares of Common Stock, $0.001 par value
per share, of which 790,000 shares are issued and outstanding, which
constitute the entire issued and outstanding capital stock of Covey Sub,
all of which issued and outstanding shares are owned by Covey. All of the
issued and outstanding shares of Covey Sub capital stock have been duly
authorized, validly issued, fully paid and nonassessable, and are held of
record and beneficially by Covey. None of the shares of Covey's or Covey
Sub's capital stock has been issued in violation of the preemptive rights
of any Person. There are, as of the date hereof, and there will not be in
excess of as of the Effective Time, 60,000 Covey Options. Except as set
forth in Section 5.1(d) of the Covey Disclosure Schedule, there are no
outstanding or authorized common or preferred shares (other than Covey
Common owned by the Shareholders), options, warrants, rights, contracts,
rights of first refusal or first offer, calls, puts, rights to subscribe,
conversion rights, or other agreements or commitments to which Covey or
Covey Sub is a party or which are binding upon Covey or Covey Sub providing
for the issuance, disposition, or acquisition of any of its capital stock.
Except as set forth in Section 5.1(d) of the Covey Disclosure
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Schedule, there are no outstanding or authorized stock appreciation,
phantom stock, or similar rights with respect to Covey or Covey Sub and
there are no contractual or statutory preemptive rights or similar
restrictions with respect to the issuance or transfer of any shares of
Covey Common or the capital stock of Covey Sub. Except as set forth in
Section 5.1(d) of the Covey Disclosure Schedule, there are no voting
trusts, proxies, or any other agreements, restrictions or understandings
with respect to the voting of Covey Common or the capital stock of Covey
Sub.
(e) Subsidiaries. Except as set forth in Section 5.1(e) of the Covey
Disclosure Schedule, Covey has no Subsidiaries and Covey does not, directly
or indirectly, own any shares of stock or any other security or interest in
any corporation, partnership, association, limited liability company or
joint venture.
(f) Financial Statements. Attached hereto as Schedule 5.1(f) are the
following financial statements (collectively the "Financial Statements"):
(i) audited consolidated and consolidating balance sheets and statements of
income, changes in stockholders' equity, and cash flows as of and for the
fiscal years ended December 31, 1995, 1994 and 1993 of Covey (the "Audited
Financial Statements"); and (ii) audited consolidated and consolidating
balance sheets and statement of income, changes in stockholders' equity and
cash flows as of and for the fiscal year ended December 31, 1996 (the "Most
Recent Fiscal Year End") for Covey. The Financial Statements have been
prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby and fairly present the financial condition and
results of operations as of the times and for the periods referred to
therein. Within 30 days after the end of the first fiscal quarter, Covey
will deliver to Franklin unaudited consolidated balance sheets of Covey for
the 3 month period ending March 31, 1997 and the related statements of
income, changes in shareholders' equity and cash flow for such 3 month (the
"Unaudited Financial Statements"). The Unaudited Financial Statements will
fairly present the financial condition and results of operations, changes
in shareholders' equity and the cash flow of Covey as of March 31, all in
accordance with GAAP and reflect the consistent application of such
accounting principles throughout the period involved, except for normal
recurring year end adjustments which are not, and are not expected to be,
material in amount and the addition of required footnotes thereto.
(g) Events Subsequent to Most Recent Fiscal Year End. Since the Most
Recent Fiscal Year End, there has not been any material adverse change in
the assets, Liabilities, business, financial condition, operations, results
of operations, or future prospects of Covey. Without limiting the
generality of the foregoing, except as set forth in Section 5.1(g) of the
Covey Disclosure Schedule, since the Most Recent Fiscal Year End:
(i) Covey has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than in the Ordinary Course of
Business;
(ii) other than with respect to Covey's Master Video Licenses, no
party (including, without limitation, Covey) has, accelerated,
terminated, modified, or cancelled any contract, lease, sublease,
license, or sublicense (or series of related contracts, leases,
subleases, licenses, and sublicenses) involving more than $25,000 to
which Covey is a party or by which it is bound;
(iii) Covey has not cancelled, compromised, waived, or released any
right or claim (or series of related rights and claims) either involving
more than $25,000 or outside the Ordinary Course of Business;
(iv) Covey has not granted any license or sublicense of any rights
under or with respect to any Intellectual Property other than to Covey's
customers in the Ordinary Course of Business;
(v) Covey has not experienced any material damage, destruction, or
loss (whether or not covered by insurance) to its property (other than
ordinary wear and tear not caused by neglect);
(vi) Covey has not created, incurred, assumed, or guaranteed any
purchase commitment involving more than $100,000 in the aggregate or
outside the Ordinary Course of Business;
(vii) Covey has not imposed any Security Interest upon any of its
assets, tangible or intangible, except for Permitted Exceptions;
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<PAGE> 155
(viii) Covey has not issued, sold, or otherwise disposed of any of
its capital stock, or granted any options, warrants, or other rights to
purchase or obtain (including upon conversion or exercise) any of its
capital stock;
(ix) Covey has not declared, set aside, or paid any dividend or
distribution with respect to its capital stock or redeemed, purchased,
or otherwise acquired any of its capital stock;
(x) Covey has not made any loan to, or entered into any other
transaction with, any of its directors, officers, and employees or
shareholders outside the Ordinary Course of Business giving rise to any
claim or right on its part against the person or on the part of the
person against it.
(xi) Covey has not entered into any other material transaction
outside the Ordinary Course of Business;
(xii) Covey has not amended or modified in any respect (beyond any
amendments and modifications reflected in true and complete copies of
such plans delivered to Franklin) any profit sharing, bonus, incentive
compensation, severance, employee benefit or multiemployer plans;
(xiii) Covey has not granted any increase in excess of $10,000 in
the salary of any officer or employee of Covey or paid any bonus in
excess of $50,000 to any such officer or employee nor has Covey
committed to grant any such increase or pay any such bonus; and
(xiv) Covey has not committed to any of the foregoing.
(h) Undisclosed Liabilities. Except as set forth in Section 5.1(h) of
the Covey Disclosure Schedule, Covey does not have any Liability (and to
the Knowledge of Covey there is no Basis for any present or future charge,
complaint, action, suit, proceeding, hearing, investigation, claim, or
demand against Covey giving rise to any Liability), which could have a
material adverse effect on the financial condition or operations of Covey,
taken as a whole, except for (i) Liabilities set forth on the face of the
Most Recent Fiscal Year End Financial Statements (rather than in any notes
thereto), (ii) Liabilities which have arisen after the Most Recent Fiscal
Year End Financial Statements in the Ordinary Course of Business (none of
which relates to any breach of contract, breach of warranty, tort,
infringement, or violation of law or arose out of any charge, complaint,
action, suit, proceeding, hearing, investigation, claim, or demand) and
(iii) Liabilities otherwise expressly disclosed in or contemplated by this
Agreement or the Covey Disclosure Schedule.
(i) Conduct of Business; Records and Books of Account. Covey has
conducted its business in the ordinary course, consistent with past
practice, since December 31, 1996. The records and books of account of
Covey have been regularly kept and maintained in conformity with GAAP
applied on a consistent basis with preceding years, subject only to normal
year-end adjustments.
(j) Tax Matters. (i) Except as set forth in Section 5.1(j) of the
Covey Disclosure Schedule, Covey has timely filed (or received an
appropriate extension of time to file) all Tax Returns required to be filed
by it. Covey has paid all Taxes shown to be due on such Tax Returns or
otherwise due and all such Tax Returns were, are, and will be true, correct
and complete. Covey has never filed, or been required to file, any Tax
Returns as a member of an Affiliated Group, nor does it have any liability
for Taxes of any Person under Treas. Reg. sec. 1.1502-6 (or any similar
provision of state, local, foreign, or other law) as a transferee or
successor by contract or otherwise. No Tax Return described above contains
or will contain a disclosure statement under Code Section
6662(d)(2)(B)(ii)(I) or any similar provision of state, local, foreign, or
other law. Covey is not a party to, nor has any obligation under, any tax
sharing agreement, arrangement, or practice, written or oral, express or
implied. Neither Covey nor the Shareholders have received notice of any
claim made by an authority in a jurisdiction where Covey does not file Tax
Returns that Covey is or may be subject to taxation by that jurisdiction.
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<PAGE> 156
(ii) With respect to Taxes owed by Covey and Covey's Tax Returns:
(A) All Tax deficiencies asserted or assessed against Covey have
been paid or finally settled;
(B) Covey has made all payments of estimated Taxes required to be
made under Code Section 6655 and any comparable provisions of state,
local, foreign or other law;
(C) All amounts that are required to be collected or withheld by
Covey in connection with amounts paid or owing to any employee,
creditor, independent contractor, or other third party have been duly
collected or withheld by Covey and have been duly remitted or deposited
in accordance with law;
(D) There is no outstanding request by Covey for any extension of
time within which to pay any Taxes or file any Tax Returns;
(E) There has been no waiver or extension for or on behalf of Covey
of any applicable statute of limitations for the assessment or
collection of any Taxes;
(F) There is no pending or threatened action, audit, proceeding, or
investigation for the assessment or collection of any Taxes of Covey;
(G) No taxing authority has raised any issue with respect to the
liability of Covey for any Tax that, by application of similar
principles, might result in the issuance of a notice of deficiency or
similar notice of intention to assess Taxes by any other taxing
authority;
(H) Covey has not taken any action that would have the effect of
deferring any liability for Taxes for Covey from any taxable period
ending on or before the Effective Time to any subsequent taxable period;
(I) None of the income recognized for federal, state, local,
foreign, or other income tax purposes by Covey during the taxable year
during which the Effective Time occurs will be derived other than in the
Ordinary Course of Business; or will arise from transactions of a type
not reflected in the relevant Tax Returns for the taxable period
immediately preceding the taxable period in which the Effective Time
occurs;
(J) No consent has been filed under Code Section 341(f) with
respect to Covey;
(K) Covey is not required to include in income any adjustment
pursuant to Code Section 481(a) (or any similar provision of law or
regulations) by reason of a change in accounting method nor is the
Internal Revenue Service ("IRS") or any other taxing authority
considering any such change in accounting method;
(L) Covey has not disposed of any property which has been accounted
for Tax purposes under the installment method pursuant to Code Section
453;
(M) Except as set forth in Section 5.1(j)(ii)(M) of the Covey
Disclosure Schedule, Covey does not own an interest in any entity that
is characterized as a partnership for federal income tax purposes;
(N) There are no requests for rulings, subpoenas, or requests for
information pending with respect to any taxing authority of, against, or
concerning Covey;
(O) Any adjustment of Taxes made by the Internal Revenue Service in
any examination of Covey, which is required to be reported to state,
local, foreign, or other taxing authorities has been so reported, and
any additional Taxes due with respect thereto have been paid;
(P) No power of attorney has been granted by Covey which is
currently in force, with respect to any matter relating to Taxes; and
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(Q) Section 5.1(j)(ii)(Q) of the Covey Disclosure Schedule lists
all of the jurisdictions in which Covey has filed Tax Returns during the
1997, 1996, 1995, 1994 and 1993 calendar years. Such jurisdictions were
the only jurisdictions in which Covey was required to file Tax Returns.
(iii) Covey made a valid S Corporation election and maintained its
qualified S Corporation status for all tax periods in which it has filed
returns as an S Corporation and through the Effective Date.
(k) Real and Personal Property and Related Matters. (i) Except as set
forth in Schedule 5.1(k) and subject to other Permitted Exceptions, Covey
owns all of the real estate, inventory and equipment currently utilized in
its operations and has good and marketable fee simple title to, or, to the
extent disclosed in Schedule 5.1(k), a valid leasehold interest in or
license to use, (A) all of the real property reflected in the Most Recent
Fiscal Year End Financial Statements or acquired thereafter or used in its
operations, (B) all other properties and assets (personal and mixed,
tangible and intangible), reflected in the Most Recent Fiscal Year End
Financial Statements or acquired thereafter, (C) all properties or assets
which are subject to operating leases as defined in Financial Accounting
Standards Board Statement No. 13 and are not reflected in the Most Recent
Fiscal Year End Financial Statements, and (D) all other properties and
assets owned, leased or licensed by Covey, except in each of the foregoing
clauses for any of such properties or assets sold or otherwise disposed of
in the Ordinary Course of Business or with respect to which the lease has
expired or has been terminated, since the date of the Most Recent Fiscal
Year End Financial Statements (A) through (D), collectively the
"Properties").
(ii) All of the land, buildings, structures and other improvements
presently used in connection with the operation of Covey's business are
included in the Properties.
(iii) Except as set forth on Section 5.1(k) of the Covey Disclosure
Schedule, Covey does not own or hold, is not obligated under and is not a
party to, any option, right of first refusal or other contractual right to
purchase, acquire, sell or dispose of any real property or interest in real
property, including, without limitation, the Properties or any portion
thereof or interest therein.
(iv) To the Knowledge of Covey, the continued use, occupancy and
operation of the Properties as currently used, occupied and operated will
comply in all material respects with all applicable Legal Requirements. No
dispute that, if adversely decided, would have a material adverse effect
currently exists with any Governmental Body having jurisdiction over the
Properties with respect to any Law or the application thereof to the
Properties or the use, occupancy or operation thereof.
(v) Covey has not received any written notice of (nor does Covey have
any knowledge of) any pending, threatened or contemplated condemnation,
zoning or administrative proceeding affecting the Properties or any
material part thereof or of any sale or other disposition of the Properties
or any material portion thereof in lieu of condemnation.
(vi) Except as disclosed through recorded or otherwise publicly
available documents, there is no pending or, to the Knowledge of Covey,
contemplated assessment of or charge against any parcel of real property
included in the Properties which, when taken together with all similar
assessments and charges against the balance of the Properties, would result
in any material change in the aggregate amount of Taxes payable in respect
of the Properties. All Taxes, the non-payment of which might become a lien
on any part of the Properties (or for which Covey is responsible pursuant
to any lease) and which are due and payable prior to the Effective Date,
have been, or on the Effective Date will be, paid in full.
(vii) Covey has not received written notice of any material
encroachment upon any of the parcels of real property comprising the
Properties and, to the Knowledge of Covey, there are no other facts or
conditions affecting any such parcel that an accurate survey or careful
physical inspection thereof would reveal which would, individually or in
the aggregate, (i) interfere (except to an extent that would not have a
material adverse effect) with the use, occupancy or operation thereof as
currently used, occupied and operated, or (ii) reduce (except to an extent
that would not have a material adverse effect) the fair market value
thereof below the fair market value such parcel would have had but for such
encroachment or other fact or condition. Covey will deliver to the
Purchaser (or will make delivery to the Purchaser at least 10 days prior to
the Closing Date) copies of any surveys in its possession relating to the
Properties.
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(viii) All documents, reports, plans, specifications, studies,
architectural and engineering drawings, contracts, permits, title insurance
policies, completion bonds, arrangements, warranties, commitments and other
similar items or instruments relating to or affecting the Properties or the
use, operation or occupancy thereof have been or will be made available by
Covey to Franklin, to the extent that such materials are already in the
possession or under the control of Covey and relate to the ownership and
operation of its business and the Properties, and any such contracts which,
individually or in the aggregate, are material are in full force and effect
(unless otherwise provided therein). Covey has paid in full or accrued all
amounts currently due thereunder and has satisfied in full or provided for
all of its liabilities thereunder to the extent required to be satisfied or
provided for on the date hereof and on the Effective Date, as the case may
be.
(ix) Except as set forth on Schedule 5.1(k), to the Knowledge of
Covey, all components of all buildings, structures and other improvements
which are currently being used in the operation of its business, including,
but not limited to, the roofs and structural elements thereof and the
hearing, ventilation, air conditioning, plumbing, electrical, mechanical,
sewer, waste water, storm water, paving and parking equipment, systems and
facilities included therein, are in all material respects in satisfactory
operating condition and repair, subject to continued repair and replacement
in accordance with past practice.
(x) No insurer has suspended, revoked, modified, cancelled or refused
to issue any policy or casualty or liability insurance to Covey with
respect to any of the real property due to conditions existing at such real
property.
(xi) No portion of the real property has suffered any material damage
or had its operation curtailed in any material respect by fire, flood or
other casualty which has not heretofore been repaired and restored to its
original condition and paid or provided for, all in accordance with all
applicable Law.
(xii) Except as set forth in Section 5.1(k) of the Covey Disclosure
Schedule, Covey has good and marketable title to or a valid leasehold
interest in or license to use all of the personal property, tangible or
intangible, used by or located upon its premises whether shown on the Most
Recent Fiscal Year End Financial Statements or not or acquired thereafter
in the Ordinary Course of Business, free and clear of all Encumbrances,
except for Permitted Exceptions and except for property and assets disposed
of in the Ordinary Course of Business since the date of the Most Recent
Fiscal Year End Financial Statement and except for Encumbrances disclosed
on the Most Recent Fiscal Year End Financial Statements (including the
notes thereto). Except as described in Section 5.1(k) of the Covey
Disclosure Schedule, to Covey's Knowledge, all of Covey's equipment,
machinery, fixtures, improvements and other tangible assets (whether owned
or leased) are in good condition or repair (except for ordinary wear and
tear) and are fit for use in the ordinary course of Covey's business as
presently conducted and as presently proposed to be conducted.
(xiii) Except as set forth on Section 5.1(k) of the Covey Disclosure
Schedule, Covey owns, has a leasehold interest in, has a license to use all
of the material assets, properties and rights, whether tangible or
intangible, which are necessary of the conduct of Covey's business as
presently conducted.
(l) Environmental Compliance. (i) There have been no Releases by
Covey, or to the Knowledge of Covey, by any other Person at any Properties
owned or operated by Covey that is reasonably likely to have a material
adverse effect on Covey or its operations.
(ii) To the Knowledge of Covey, there has not been any Release at any
facility that has received or treated Hazardous Materials generated by
Covey or any predecessor-in-interest.
(iii) To the Knowledge of Covey, the operations of Covey are in full
compliance with Environmental Laws, except for such violations which are
not reasonably likely to have a material adverse effect on Covey or its
operations.
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(iv) There is no Environmental Claim asserted or threatened to be
asserted against Covey or any predecessor-in-interest, or to the Knowledge
of Covey, against any facility which received Hazardous Materials generated
by Covey or any predecessor-in-interest.
(m) Legal Compliance. To the Knowledge of Covey, except as set forth
on Section 5.1(m) of the Covey Disclosure Schedule, Covey is not in
violation of any applicable permit, license, ordinance or other law,
regulation or requirement, federal, state or local, relating to the
operation of any real property or any of the other assets of Covey
(including applicable occupational health and safety laws and regulations)
or the conduct of Covey's business, which violations, individually or in
the aggregate, could have a material adverse effect on the assets,
Liabilities, business, financial condition, operations, results of
operations, or future prospects of Covey taken as a whole.
(n) Intellectual Property. (i) Covey owns or has the right to use all
Intellectual Property necessary for the operation of or used in Covey's
businesses as presently conducted. Each item of Intellectual Property owned
or used by Covey immediately prior to the Effective Time hereunder will be
owned or available for use by the Surviving Corporation on identical terms
and conditions immediately subsequent to the Effective Time. Covey has
taken all necessary and desirable action to protect each item of
Intellectual Property that Covey owns or uses.
(ii) Covey has not interfered with, infringed upon, misappropriated,
or otherwise come into conflict with any Intellectual Property rights of
third parties, and none of the Shareholders or the directors and officers
(and employees with responsibility for Intellectual Property matters) of
Covey has ever received any charge, complaint, claim, or notice alleging
any such interference, infringement, misappropriation, or violation. To the
Knowledge of Covey (and employees with responsibility for Intellectual
Property matters), no third party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual
Property rights of Covey.
(iii) Covey has delivered or made available to Franklin correct and
complete copies of each patent, trademark or copyright registration which
has been issued to Covey with respect to any of its Intellectual Property
and has made available to Franklin correct and complete copies of all other
written documentation evidencing ownership and prosecution (if applicable)
of each such item. With respect to each item of Intellectual Property that
Covey owns:
(A) Covey possesses all right, title, and interest in and to the
item;
(B) the item is not subject to any outstanding judgment, order,
decree, stipulation, injunction, or charge; and
(C) no charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand is pending or, to the Knowledge of Covey
(and employees with responsibility for Intellectual Property matters) of
Covey is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item.
(iv) Section 5.1(n)(iv) of the Covey Disclosure Schedule identifies
each item of Intellectual Property that Covey owns and which is material to
the conduct of its business and any item of Intellectual Property that any
third party owns and that Covey uses pursuant to license, sublicense,
agreement, or permission (other than "off-the-shelf" software purchased for
use in the day-to-day operations of Covey) which is material to the conduct
of Covey's business. Covey has supplied Franklin with correct and complete
copies of all such licenses, sublicenses, agreements, and permissions (as
amended to date). With respect to each such item of used Intellectual
Property (including any such "off-the-shelf" software):
(A) the license, sublicense, agreement, or permission covering the
item is (and will continue to be on substantially identical terms
immediately following the Effective Time) legal, valid, binding,
enforceable, and in full force and effect;
(B) the underlying item of Intellectual Property is not subject to
any outstanding judgment, order, decree, stipulation, injunction, or
charge; and
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(C) no charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand is pending, or, to the Knowledge of
Covey (and employees with responsibility for Intellectual Property
matters), is threatened which challenges the legality, validity, or
enforceability of the underlying item of Intellectual Property.
(o) Contracts. Section 5.1(o) of the Covey Disclosure Schedule lists
each of the following contracts, agreements, and other written arrangements
to which Covey is a party:
(i) any written arrangement (or group of related written
arrangements) for the lease of real or personal property from or to
third parties other than the real property interests described on
Section 5.1(k) of the Covey Disclosure Schedule;
(ii) any written arrangement concerning a partnership or joint
venture;
(iii) any written arrangement (or group of related written
arrangements) under which it has (A) created, incurred, assumed, or
guaranteed (or may create, incur, assume or guarantee) Indebtedness in
excess of $25,000 or (B) imposed (or may impose) a Security Interest on
any of its assets, tangible or intangible;
(iv) any written arrangement concerning confidentiality or any
written arrangement concerning noncompetition;
(v) any written arrangement not disclosed in the Covey Disclosure
Schedule pursuant to any other provision in this Section 5.1 under which
the consequences of a default or termination could have a material
adverse effect on the assets, Liabilities, business, financial
condition, operations, results of operations, or future prospects of
Covey;
(vi) any contract for the employment of any officer, individual
employee or other person on a full-time, part-time or consulting basis;
(vii) any guaranty of any obligation for borrowed money or
otherwise, other than endorsements made for collection in the ordinary
course of business;
(viii) any agreement or commitment with respect to the lending or
investing of funds to or in other Persons;
(ix) any license or royalty agreement (other than with respect to
"off-the-shelf" software purchased for use in the day-to-day operations
of Covey);
(x) any contract for the purchase or sale of products, services or
real or personal property other than in the Ordinary Course of Business;
or
(xi) any lease agreement under which Covey is the lessee of or
holds or operates any personal property by another party, except for any
lease of such property where the actual annual rental payments do not
exceed $25,000;
(xii) any contract or group of related contracts with the same
party or group of affiliated parties for the purchase of raw materials,
commodities, supplies, products, equipment or other personal property or
for the receipt of services under which the undelivered balance of such
products and services has a selling price in excess of $25,000;
(xiii) any contracts or group of related contracts with the same
party or group of affiliated parties for the sale of commodities,
supplies, products, or other personal property or for the furnishings of
services under which the undelivered balance of such products or
services due from Covey has a selling price in excess of $25,000;
(xiv) any contract related to the marketing, sale, advertising or
promotion of Covey's products;
(xv) any contract with any officer, director, Shareholder or other
Affiliate;
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(xvi) any broker, agent, sales representative, sales or
distribution agreement pursuant to which any party is entitled to a
percentage of profits of Covey or is paid on a commission or other
basis;
(xvii) any contract or agreement prohibiting Covey from freely
engaging in any business or competing anywhere in the world;
(xviii) any other written arrangement or group of related written
arrangements not entered into in the Ordinary Course of Business.
All of the contracts, agreements and instruments set forth or required
to be set forth on the attached Schedule 5.1(o) are valid, binding and
enforceable in accordance with their respective terms, except when such
enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws from time to time in effect
which effect the enforcement of creditors' rights generally and shall be
in full force and effect without penalty in accordance with their terms
upon consummation of the transactions contemplated hereby. Covey has
performed all obligations which are required to be performed by Covey
and it is not in default under or in breach of or in receipt of any
claim of default or breach under any contract, agreement, or instrument
to which Covey is subject and no event has occurred which, with the
passage of time or the giving of notice or both, would result in a
default, breach or event of noncompliance by Covey under any contract,
agreement or instrument to which Covey is subject. Covey has no present
expectation or intention of not fully performing on a timely basis all
such obligations required to be performed by Covey under any contract,
agreement or instrument to which Covey is subject and Covey has no
Knowledge of any breach or cancellation by the other parties to any
contract, agreement, instrument or commitment to which Covey is a party.
Except as set forth on Section 5.1(o) of the Covey Disclosure Schedule,
Covey is not a party to any verbal contract, agreement, or other
arrangement which, if reduced to written form, would be required to be
listed in Section 5.1(o) of the Covey Disclosure Schedule under the
terms of this Section 5.1(o).
(p) Insurance. Covey has made available to Franklin all policies or
binders of casualty, liability, worker's compensation, vehicular, or other
insurance held by or on behalf of Covey (specifying the insurer, the policy
number or covering note number with respect to binders, and describing each
pending claim thereunder of more than $25,000, setting forth the aggregate
amounts paid out under each such policy through the date hereof and the
aggregate limit of any insurer's liability thereunder). Such policies and
binders are in full force and effect and to the Knowledge of Covey
sufficiently insure against risks and liabilities customary for the
businesses in which Covey is engaged. To the Knowledge of Covey, Covey is
not in material default with respect to any provision contained in any such
policy or binder and has not failed to give any notice or present any
pending material claim under any such policy or binder in due and timely
fashion. There are no material outstanding unpaid claims under any such
policy or binder. Covey has not received a notice of cancellation or
nonrenewal of any such policy or binder. Covey has no knowledge of any
material inaccuracy in any application for such policies or binders, any
failure to pay premiums when due or any similar state of facts which might
form the basis for termination or material adverse modification of any such
insurance. Except as disclosed in writing to Franklin by Covey, Covey has
no knowledge of any act, event or occurrence that could give rise to a
claim under any director and officer insurance policy held by or on behalf
of Covey.
(q) Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of Covey.
(r) Litigation. Except as set forth on Schedule 5.1(r), Covey is not
(i) subject to any unsatisfied judgment, order, decree, stipulation,
injunction, or charge or (ii) a party or, to the Knowledge of Covey, is not
threatened to be made a party to any charge, complaint, action, suit,
proceeding, hearing, or investigation of or in any court or quasi-judicial
or administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator. To the Knowledge of Covey, there
exists no basis on which any such charge, complaint, action, suit,
proceeding, hearing, or investigation may be brought or
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threatened against Covey, where such charge, complaint, action, suit,
proceeding, hearing or investigation would have a material adverse effect
on Covey's business or operations.
(s) Employees; Employment Practices: Compensation and Vacations.
Section 5.1(s) of the Covey Disclosure Schedule contains a true and
complete listing, of all officers, directors and executive employees of
Covey as of the date hereof, their annual salary, date of hire, date of
next review and date of last review. Except as set forth on Section 5.1(s)
of the Covey Disclosure Schedule, there are no vacation pay, bonuses,
commissions, sick pay, or other fees or benefits in respect of work done
earned or due to or expected by any present, former or prospective
employees, not fully paid or accrued on the Most Recent Fiscal Year End
Financial Statements except as incurred in the Ordinary Course of Business.
Covey has not received notice of any non-compliance and, to the Knowledge
of Covey, Covey is in compliance with the Fair Labor Standards Act and any
similar state, county or local legislation, ordinance or regulation. Except
as set forth on Section 5.1(s) of the Covey Disclosure Schedule, Covey is
not currently involved in any Claim, nor, to the Knowledge of Covey, is any
Claim threatened, involving an unfair employment practice, wage and hour
violation, or occupational safety and health violation under any federal,
state, county or local law, including, but not limited to, those arising
out of the Civil Rights Act of 1964 (as amended), the Fair Labor Standards
Act, or the Occupational Safety and Health Act. Except as set forth on
Section 5.1(s) of the Covey Disclosure Schedule, since December 31, 1996,
except in the Ordinary Course of Business and consistent as to timing and
amount with past practices, Covey has not: (i) increased the compensation
payable or to become payable to or for the benefit of any of its employees
in excess of the amount specified in Section 5.1(g)(xiii) of this
Agreement, (ii) provided any of its employees with increased security or
tenure of employment, (iii) increased the amount payable to any of its
employees upon the termination of any such person's employment, or (iv)
increased, augmented or improved benefits granted to or for the benefit of
any of its employees under any bonus, stock option, profit sharing,
pension, retirement, deferred compensation, insurance or other direct or
indirect benefit plan or arrangement.
(t) Employee Benefit Plans. (i) Set forth in Section 5.1(t) of the
Covey Disclosure Schedule is a complete and accurate list of all of Covey's
Employee Benefit Plans, and a description of the essential provisions
thereof. Except as set forth on Section 5.1(t) of the Covey Disclosure
Schedule, Covey has no actual or potential liability or obligation with
respect to any employee benefit, policy, arrangement or agreement
(including without limitation, any Employee Benefit Plans). With respect to
each Employee Benefit Plan, Covey has heretofore delivered to Franklin true
and complete copies of the following documents, where applicable: (i) the
text of the Employee Benefit Plan (including any amendments thereto) and of
any trust or insurance contract maintained in connection therewith, (ii)
the three most recent annual reports (IRS Form 5500 series), together with
required schedules filed with the IRS and any financial statements or
opinions required under ERISA, (iii) the most recent summary plan
description and all modifications, and (iv) the most recent determination
letter issued by the IRS.
(ii) Neither Covey nor any other corporation or other trade or
business that is or has been under common control with Covey (as determined
under Section 414(b), (c), (m) or (o) of the Code) has ever maintained,
contributed to or incurred any obligation or liability with respect to (i)
any "multiemployer plan", as defined in Section 3(37) or 4001(a)(3) or
ERISA or Section 414(f) of the Code (either as an employer or a joint
employer) or (ii) any other plan covered by Title IV of ERISA or subject to
the requirements of Section 412 of the Code and Covey has no actual or
contingent liability under Title IV of ERISA or Section 412 of the Code to
any person or entity, including the Pension Benefit Guaranty Corporation,
the IRS, any such plan or the participants (or their beneficiaries) in any
such plan and there is no basis for any such liability as the result of or
after the consummation of the transactions contemplated by this Agreement.
(iii) Except as set forth in Section 5.1(t) of the Covey Disclosure
Schedule, each Employee Benefit Plan that is intended to be qualified under
Section 401 of the Code is so qualified and has been so qualified during
the period from its adoption to date, and each trust forming a part thereof
is exempt from tax pursuant to Section 501 of the Code and all
contributions made thereto have been deductible by Covey. A favorable
determination letter has been issued by the IRS with respect to each such
plan and
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trust, which letter includes a determination with respect to the
qualification of the plan under the Tax Reform Act of 1986 and subsequent
tax legislation (or if such letter has not yet been received, an
application has been made to the IRS for such determination within the
remedial amendment period so that such letter will have retroactive effect
to the effective date of such legislation) and, to the Knowledge of Covey,
there are no facts and nothing has occurred that would adversely affect the
qualification of such plan.
(iv) No Employee Benefit Plan is a "voluntary employees' beneficiary
association" within the meaning of Section 501(c)(9) of the Code and there
are no other "welfare benefit funds" within the meaning of Section 419 of
the Code relating to any of the employees or former employees of Covey.
Except as set forth on Section 5.1(t) of the Covey Disclosure Schedule, no
Employee Benefit Plan provides health, dental, life insurance or other
welfare benefits (whether on an insured or self-insured basis) to any of
such employees after their retirement or other termination of employment
from Covey (other than continuation coverage required under Section 601
through 609 of ERISA and Section 4980B of the Code that may be purchased at
the sole expense of the employee).
(v) Each Employee Benefit Plan has, in all material respects, been
maintained and administered in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and
regulations, including, but not limited to, ERISA and the Code, which are
applicable to such plan and there is no audit, investigation, dispute,
arbitration, claim, suit, or grievance, pending or, to the Knowledge of
Covey, threatened, involving an Employee Benefit Plan (other than routine
claims for benefits), and, to the Knowledge of Covey after due inquiry,
there is no basis for such a claim. There have been no "prohibited
transactions" (within the meaning of Section 4975 of the Code or Section
406 of ERISA) with respect to any Employee Benefit Plan.
(vi) All contributions have been, or prior to the Closing will be,
made under, and all obligations to any of the employees or former employees
of Covey (including vacation entitlements) have been, or, prior to the
Closing will be, satisfied with respect to, each Employee Benefit Plan for
all periods up to the Closing, except as set forth in the Financial
Statements. Except as set forth on Section 5.1(t) of the Covey Disclosure
Schedule, the costs of all Employee Benefit Plans are fully accrued and
reflected in the Financial Statements.
(vii) Except as otherwise set forth on Section 5.1(t) of the Covey
Disclosure Schedule, none of the Employee Benefit Plans provides for the
payment of separation, severance, termination or similar-type benefits to
any person or the acceleration of any rights to benefits under any Employee
Benefit Plan or obligates Covey to pay separation, severance, termination
or similar-type benefits solely as a result of any transaction contemplated
by this Agreement or any agreement related thereto or as a result of a
"change in control" (within the meaning of such term under Section 280G of
the Code).
(u) Compliance with Laws; Certain Operations. Covey is in compliance
with and has not violated in any way which would have a material adverse
effect on the business of Covey and its Subsidiary, taken as a whole, any
law, rule or regulation of any federal, state, local or foreign government
or agency thereof which affects Covey's business, properties, or assets and
no notice, claim, charge, complaint, action, suit, proceeding,
investigation or hearing has been received by Covey or filed, commenced or
threatened against Covey alleging any such violation.
(v) Indebtedness. Section 5.1(v) of the Covey Disclosure Schedule
lists the total Indebtedness of Covey, and the parties to whom such
Indebtedness is owed, and a description of any Security Interest relating
thereto except for items (iv), (v) and (vi) contained in the definition of
Permitted Exceptions.
(w) Labor Discussions and Troubles. Covey is not currently, nor during
the past 24 months has it been, involved in any labor discussions with any
unit or group seeking to become a bargaining unit for any of its employees.
There are no strikes or other labor troubles now pending or, to the
Knowledge of Covey, threatened against Covey.
(x) Notes and Accounts Receivable. All of the notes and accounts
receivable of Covey are actual and bona fide notes and accounts receivable,
representing obligations for the total dollar amount thereof
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shown on the books of Covey (less reserves, if any), that resulted from
Covey's Ordinary Course of Business, and there are no Encumbrances on any
such notes or accounts receivable. The detailed agings of the accounts
receivable as at March 31, 1997 are set forth in Section 5.1(x) of the
Covey Disclosure Schedule.
(y) No Bankruptcy Proceedings. To the Knowledge of Covey and the
Shareholders, there are no bankruptcy, insolvency or receivership
proceedings outstanding against Covey and none of the Shareholders or Covey
has made any assignment for the benefit of any creditors and no execution
or attachment has been levied against any of the Shareholders or Covey in
connection with such proceedings.
(z) Bank Accounts and Safe Deposit Boxes; Powers of Attorney. Section
5.1(z) of the Covey Disclosure Schedule hereto sets forth (i) the names of
all banks in which Covey has an account and the account numbers of all
accounts (including without limitation any trust account) or safe deposit
box, and (ii) the names of all Persons, if any, having signatory authority
over such accounts.
(aa) Potential Conflicts of Interest. To the Knowledge of Covey,
except as set forth on Section 5.1(aa) of the Covey Disclosure Schedule, no
officer or director or Shareholder of Covey or any member of the immediate
family of any of the foregoing:
(i) owns, directly or indirectly, any material interest in or is an
owner, sole proprietor, shareholder, partner, director, officer,
employee, consultant or agent of any person which is a competitor,
lessor, lessee, customer or supplier of Covey;
(ii) owns or has an interest in, directly or indirectly, in whole
or in part, any material property, patent, trademark, service mark,
trade name, copyright, franchise, invention, permit, license or secret
or confidential information related to the current activities or the
activities currently contemplated by Covey; or
(iii) has any material cause of action whatsoever against, or owes
any material amount to, Covey, except for claims in the ordinary course
of business, such as for accrued vacation pay, accrued benefits under
Covey Employer Benefit Plans and similar matters.
(bb) Brokers' Fees. Covey has no Liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which Franklin, Covey or
any other Party could become liable or otherwise obligated.
(cc) Disclosure. Neither this Section 5.1 nor the Covey Disclosure
Schedule contains any untrue statement of a material fact or omits a
material fact necessary to make the statements contained herein or therein,
in light of the circumstances in which they were made, not misleading.
There is no material fact affecting Covey which has not been disclosed to
Franklin which materially adversely affects or could reasonably be
anticipated to materially adversely affect Covey's business, Liabilities,
financial condition, operations, future prospects, properties or assets.
Each Shareholder represents and warrants to Franklin, individually as
to such Shareholder and not with respect to any other Shareholder, that the
following statements are, as of the date hereof and will be as of the
Effective Date, true and correct:
(dd) Ownership of Stock. Except as set forth on Section 5.1(ad) of the
Covey Disclosure Schedule, the Shareholder owns of record and beneficially
the number of shares of Covey Common indicated opposite such Shareholder's
name in Schedule 1.1(d)(ii) hereto, with full right and authority to
transfer such shares hereunder, and upon delivery of such shares hereunder,
the Surviving Corporation will receive good title thereto, free and clear
of all mortgages, pledges, security interests or the rights of any third
party, and not subject to any agreements or understandings among any
Persons with respect to the voting or transfer of such shares.
Notwithstanding the provisions of this Section 5.1(ad) to the contrary,
Stephen R. Covey shall have the right, after the date of this Agreement and
prior to the Effective Date, to transfer a portion of his Covey Common to
the Redhill Foundation, a Utah non-profit corporation (the "Redhill
Foundation"), subject to the condition that the Redhill Foundation shall
execute this Agreement and become a party hereto for all purposes. No order
has been given under any applicable
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family law legislation, nor is there any application pending under any
family laws by the spouse of any Shareholder which would affect the shares
of Covey Common and the ability of the Shareholder to comply with the terms
of this Agreement in any manner whatsoever. No Shareholder is a resident of
any community property state, except as set forth on Schedule 5.1(ad)
hereof, and if such Shareholder is a resident of a community property
state, such Shareholder's spouse has entered into and executed a consent to
such Shareholder agreeing to perform the obligations under this Agreement.
None of the Shareholders have granted to any other party, and no third
party has, any options, warrants, rights, contracts, rights of first
refusal or first offer, calls, puts, or other agreements or commitments for
the disposition or acquisition of any of the capital stock of Covey owned
by such Shareholder.
(ee) Execution, Delivery and Enforceability of Agreement; No
Violation. This Agreement has been duly executed and delivered by or on
behalf of the Shareholder, and at the Effective Time any other documents
required hereunder to be executed and delivered by or on behalf of the
Shareholder will have been duly executed and delivered. This Agreement
constitutes the legal, valid and binding obligation of the Shareholder,
enforceable against such Shareholder in accordance with its terms, except
as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws affecting
creditor's rights generally. Any other agreements required hereunder to be
executed and delivered by the Shareholder at the Effective Time will
constitute the legal, valid and binding agreements of the Shareholder
executing the same, enforceable against such Shareholder in accordance with
their respective terms, except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium
or other laws affecting creditor's rights generally. Neither the execution
of this Agreement nor the consummation of the transactions provided for
herein by the Shareholder will violate, or constitute a default under, or
permit the acceleration of maturity of, except to the extent waived, any
indentures, mortgages, promissory notes, contracts or agreements to which
such Shareholder is a party or by which such Shareholder or such
Shareholder's properties are bound.
(ff) Residence and Domicile. The Shareholder is a resident of, and
domiciled in, the State of Utah.
(gg) Investment Representations. (i) Each Shareholder understands and
agrees that (A) the Shares into which Covey Common will be converted at the
Effective Time have not been, and will not be, registered under the
Securities Act as of the Effective Time or under any state securities laws,
(B) such Shares are being offered and sold in reliance upon federal and
state exemptions for transactions not involving any public offering, and
(C) a "stop transfer" order will be placed against the certificates
representing the Shares and such certificates will bear the following
legend:
THE SHARES OF COMMON STOCK OF THE COMPANY EVIDENCED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF
1933, AS AMENDED, AND VARIOUS APPLICABLE STATE SECURITIES LAWS. THE
SHARES OF COMMON STOCK MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR ASSIGNED
OR A SECURITY INTEREST CREATED THEREIN, UNLESS THE PURCHASER,
TRANSFEREE, ASSIGNEE, PLEDGEE OR HOLDER OF SUCH SECURITY INTEREST
COMPLIES WITH ALL STATE AND FEDERAL SECURITIES LAWS (I.E., SUCH SHARES
ARE REGISTERED UNDER SUCH LAWS OR AN EXEMPTION FROM REGISTRATION IS
AVAILABLE THEREUNDER) AND UNLESS THE SELLER, TRANSFEROR, ASSIGNOR,
PLEDGOR OR GRANTOR OF SUCH SECURITY INTEREST PROVIDES AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE TRANSACTION
CONTEMPLATED WOULD NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THE SHARES OF COMMON
STOCK EVIDENCED BY THIS CERTIFICATE ARE ALSO SUBJECT TO A "LOCKUP"
AGREEMENT WHICH EXPIRES ON , 1999.
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(ii) Each Shareholder will deliver, at or prior to the Effective Time,
the Investment Letter contemplated by Section 2.2(s).
(hh) Brokers or Finders. No Shareholder or any of such Shareholder's
agents have incurred any obligation or liability, contingent or otherwise,
for brokerage or finders' fees or agents' commissions or other similar
payment in connection with this Agreement or the transactions contemplated
hereby.
(ii) Additional Information. Each Shareholder covenants and agrees to
provide all information reasonably requested by Franklin or its counsel in
order to determine such Shareholder's eligibility to acquire any of the
Shares and to execute and deliver to Franklin any and all documents
reasonably requested by Franklin in order to support such a determination.
(jj) Name; Shareholder Claims Against Covey. Except as set forth in
Schedule 5.1(aj), each of the Shareholders hereby acknowledges and agrees
that except for such Shareholder's ownership of Covey Common, such
Shareholder has no other claim against, or contract or agreement with,
Covey except for the obligations specifically set forth in this Agreement,
or in Section 5.1(aj) of the Covey Disclosure Schedule, and Covey does not
owe to such Shareholders any amount or have any Liability to obligations,
debts, or based on any other claim, or cause of action, of any nature.
5.2 Representations and Warranties of Franklin. Franklin hereby
represents and warrants to Covey and to each of the Shareholders that all
of the statements contained in this Section 5.2 (a) through (c) are correct
and complete as of the date of this Agreement and that all of the
statements contained in this Section 5.2(a) through (l) will be correct and
complete as of the Effective Time (as though made at the Effective Time and
as though the Effective Time were substituted for the date of this
Agreement throughout this Section 5.2), except as exceptions are permitted
to be set forth in the disclosure schedule attached to this Agreement (the
"Franklin Disclosure Schedule"). The Franklin Disclosure Schedule will be
arranged in paragraphs corresponding to the lettered and numbered
paragraphs contained in this Section 5.2.
(a) Organization. (i) Franklin is a corporation duly organized,
validly existing and in good standing under the laws of the State of Utah.
Franklin has full corporate power and authority to carry on the businesses
in which it is engaged and to own and use the property owned and used by
it. Each of Franklin's subsidiaries is a corporation, limited liability
company or limited partnership, duly organized, validly existing and in
good standing under the state of its formation. Each of such subsidiaries
has full corporate, limited liability company or partnership, as the case
may be, power and authority to carry on the business in which it is engaged
and to own and use the property owned and used by it.
(ii) Franklin and each of its subsidiaries is qualified to conduct
business and is in good standing under the laws of each jurisdiction
wherein the nature of its business or its ownership of property requires it
to be so qualified, except where the failure to be so qualified will not
have a material adverse effect on the business properties or operations of
Franklin and all of its subsidiaries, taken as a whole.
(b) Authorization of Transaction. Franklin has full corporate power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The Board of Directors of Franklin have duly
authorized the execution, delivery and performance of (i) this Agreement,
the Plan of Merger and all related agreements, and (ii) the issuance of the
Shares required to be issued by Franklin in order to carry out the
provisions of this Agreement and the Plan of Merger. The shareholders of
Franklin have not approved this Agreement or the transactions contemplated
hereby as of the date of this Agreement, but will have approved this
transaction as required by the URBCA by the Effective Time if Franklin
proceeds with the Closing. Franklin's Board of Directors has approved the
Plan of Merger in the manner required by the URBCA and will promptly take
such steps as necessary to submit it to the shareholders of Franklin for
their approval. This Agreement constitutes the valid and legally binding
obligation of Franklin, enforceable against Franklin in accordance with its
terms, except where such enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
arrangement or other similar laws affecting creditors' rights generally and
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law). After obtaining the
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<PAGE> 167
approval of Franklin's shareholders, upon the execution and delivery
thereof by Franklin, the Plan of Merger will constitute the valid and
legally binding obligation of Franklin, enforceable against Franklin in
accordance with its terms, except where such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation,
arrangement or other similar laws affecting creditors' rights generally and
general principles of equity (regardless or whether such enforceability is
considered in a proceeding in equity or at law).
(c) Noncontravention. Neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation of the transactions
contemplated hereby or thereby will (i) violate any statute, regulation or
rule; (ii) violate any judgment, order, decree, stipulation, injunction,
charge or other restriction of any government, governmental agency, or
court to which Franklin is subject or any provision of the Articles of
Incorporation or the Bylaws of Franklin; or (iii) conflict with, result in
a breach of, constitute a default under, result in the acceleration of, or
create in any Person the right to accelerate, terminate, modify, or cancel,
or require any notice under any contract, lease, sublease, license,
sublicense, franchise, permit, indenture, agreement or mortgage for
borrowed money, instrument representing Indebtedness, Security Interest or
other arrangement to which Franklin is a party or by which it is bound, or
to which it or any of its assets is subject. Other than in connection with
compliance with the requirements of HSR, the URBCA, applicable securities
laws in connection with the issuance of the Shares to the Shareholders,
including, without limitation, all applicable notices and filings with the
NYSE, and the filing of the Proxy Statement and completion of the
requirements set forth in Section 1.3 hereof, Franklin is not required to
give any notice to, make any filings with or obtain any authorization,
consent or approval of any government or governmental agency in order for
the Parties to consummate the transactions contemplated by this Agreement.
As of the Effective Date (but not as of the date of this Agreement), except
as set forth in Section 5.2(c) of the Franklin Disclosure Schedule, neither
the execution nor delivery of this Agreement or the Plan of Merger or the
consummation or performance of any of the transactions contemplated thereby
will, directly or indirectly with or without the notice or lapse of time:
(i) give any governmental authority the right to revoke, withdraw, suspend,
cancel or modify any governmental authorizations held by Franklin or which
otherwise relate to the business of any of the assets owned, used or leased
by Franklin; (ii) cause Franklin to become subject to or become liable for
the payment of any Tax; (iii) cause any of the assets owned by Franklin to
be reassessed or revalued by any Taxing authority or any other governmental
authority; or (iv) result in the imposition or creation of any Encumbrance
upon or with respect to any of the assets owned, leased or used by
Franklin.
(d) Capital Structure of Franklin. The authorized capital stock of
Franklin consisted at February 28, 1997 of 40,000,000 shares of Franklin
Common and 4,000,000 shares of Preferred Stock, no par value, of which
19,736,172 shares of Franklin Common were issued and outstanding. All
outstanding hares of Franklin capital stock have been duly issued and are
validly outstanding, fully paid and nonassessable. None of the shares of
Franklin's capital stock has been issued in violation of the preemptive
rights of any person. The Shares to be issued in connection with the Merger
have been duly authorized and, when issued in accordance with the terms of
this Merger Agreement and the Plan of Merger, will be validly issued, fully
paid, nonassessable and free and clear of any preemptive rights or
Encumbrances. As of February 28, 1997, no shares of Franklin's capital
stock were reserved for issuance, except that 4,547,819 shares of Franklin
Common were reserved for issuance pursuant to Franklin's stock option
plans. Except as set forth in Franklin's SEC Documents, there are no
outstanding authorized common or preferred shares, options, warrants,
rights of first refusal or first offer, calls, puts, rights to subscribe,
conversion rights, or other agreements or commitments to which Franklin is
a party or which are binding upon Franklin providing for the issuance,
disposition or acquisition of any of either entity's capital stock. Except
as set forth in Franklin's SEC Documents, there are no outstanding or
authorized stock appreciation, phantom stock or similar rights with respect
to Franklin and there are no contractual or statutory or preemptive rights
or similar restrictions with respect to the issuance or transfer of any
shares of Franklin Common. There are no voting trusts, proxies or any other
agreements restrictions or understandings to which Franklin is a party with
respect to the voting of Franklin Common, other than proxies solicited by
Franklin in connection with the transactions contemplated by this Agreement
and
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other than the Shareholder Agreement contemplated to be entered into by
certain of the Shareholders of Franklin and Covey pursuant to the terms of
this Agreement.
(e) SEC Documents. Franklin has made available to Covey a true and
complete copy of each report, schedule, registration statement and
definitive proxy statement filed by Franklin with the SEC since June, 1992
and prior to the date of this Agreement (the "Franklin SEC Documents")
which are all the documents that Franklin was required to file with the SEC
since such date. As of their respective dates, the Franklin SEC Documents
complied in all material respects with the requirements of the Securities
Act or the Exchange Act, as the case may be, and the rules and regulations
of the SEC thereunder applicable to such Franklin SEC Documents, and none
of the Franklin SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. As of their respective dates,
the financial statements of Franklin included in the Franklin SEC Documents
complied as to form in all material respects with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance
with GAAP, during the periods involved (except as may be indicated in the
notes thereto or, in the case of the unaudited statements, as permitted by
Rule 10-01 of Regulation S-X of the SEC) and fairly presented in accordance
with applicable requirements of GAAP (subject, in the case of the unaudited
statements, to normal, recurring adjustments, none of which are material)
the consolidated financial position of Franklin and its consolidated
Subsidiaries as of their respective dates and the consolidated results of
operations and the consolidated cash flows of Franklin and its consolidated
Subsidiaries for the periods presented therein.
(f) Information Supplied. None of the information supplied or to be
supplied by Franklin for inclusion or incorporation by reference in the
Proxy Statement to be filed with the SEC by Franklin in connection with
this transaction will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading. If at any time prior to the
Effective Time any event with respect to Franklin or any of its
Subsidiaries, or with respect to other information supplied by Franklin for
inclusion in the Proxy Statement, shall occur which is required to be
described in an amendment of, or a supplement to, the Proxy Statement, such
event shall be so described, and such amendment or supplement shall be
promptly filed with the SEC. The Proxy Statement will comply as to form in
all material respects with the provisions of the Exchange Act and the rules
and regulations promulgated thereunder.
(g) No Default. Franklin is not in material default or violation (and
to the Knowledge of Franklin no event has occurred which, with notice or
the lapse of time or both, would constitute a default or violation) of any
term, condition or provision of (i) Franklin's Articles of Incorporation
and Bylaws, (ii) except as disclosed in Section 5.2(g), any note, bond,
mortgage, indenture, license, agreement or other instrument or obligation
to which Franklin is now a party or by which Franklin or any of its
respective properties or assets may be bound, or (iii) any order, writ,
injunction, decree, statute, rule or regulation applicable to Franklin,
except in the case of (ii) and (iii) for defaults or violations which in
the aggregate would not reasonably be expected to have a material adverse
effect on the business and operations of Franklin taken as a whole.
(h) Compliance with Applicable Laws. Franklin and its Subsidiaries
hold all material permits, licenses, variances, exemptions, orders,
franchises and approvals of all governmental entities necessary for the
lawful conduct of their businesses (the "Franklin Permits"), except where
the failure so to hold would reasonably be expected to not have a material
adverse effect on the business and operations of Franklin and its
Subsidiaries, taken as a whole. Franklin and its Subsidiaries are in
material compliance with the terms of the Franklin Permits, except where
the failure so to comply would reasonably be expected to not have a
material adverse effect on the business and operations of Franklin and its
Subsidiaries, taken as a whole. Except as disclosed in the Franklin SEC
Documents, the business of Franklin is not being conducted in violation of
any law, ordinance or regulation of any governmental entity, except for
possible violations which would not reasonably be expected to have a
material adverse effect on the business or operations of Franklin and its
Subsidiaries, taken as a whole. Except as set forth on Schedule 5.2(h), as
of the date of this Agreement, no investigation or review by any
governmental
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entity with respect to Franklin or any of its Subsidiaries is pending or,
to the Knowledge of Franklin, threatened, other than those the outcome of
which would not reasonably be expected to have a material adverse effect on
the business or operations of Franklin or any of its Subsidiaries, taken as
a whole.
(i) Litigation. Except as disclosed in the Franklin SEC Documents or
on Schedule 5.2(i) hereto, there is no suit, action or proceeding pending
or, to the Knowledge of Franklin, threatened against or affecting Franklin
or its Subsidiaries, the effect of which might reasonably be expected to
have a material adverse effect on the business or operations of Franklin or
its Subsidiaries, taken as a whole (the "Franklin Litigation"), and
Franklin has no knowledge of any facts which are likely to give rise to any
Franklin Litigation which (in any case) might reasonably be expected to
have a material adverse effect on the business or operations of Franklin or
its Subsidiaries, taken as a whole, nor is there any judgment, decree,
injunction, rule or order of any governmental entity or arbitrator
outstanding against Franklin which might reasonably be expected to have a
material adverse effect on the business or operations of Franklin or its
Subsidiaries, taken as a whole, or Franklin's ability to consummate the
transactions contemplated by this Agreement.
(j) Events Subsequent to the Most Recent Fiscal Quarter End. Since
Franklin's Most Recent Fiscal Quarter End, neither Franklin nor any of its
Subsidiaries has engaged in any material transaction outside the Ordinary
Course of Business, except as set forth on Section 5.2(j) of the Franklin
Disclosure Schedule. For purposes of this Section 5.2(j), a material
transaction outside the Ordinary Course of Business is a transaction which
is not engaged in in the Ordinary Course of Business and which was in
excess of $100,000.
(k) Undisclosed Liabilities. Except as set forth in Section 5.2(k) of
the Franklin Disclosure Schedule, Franklin and its Subsidiaries, taken as a
whole, do not have any Liability, which Liability would have a material
adverse impact on the financial condition or operations of Franklin and its
Subsidiaries, taken as a whole, except for (i) Liabilities set forth on the
face of the Most Recent Year End Financial Statements and Most Recent
Fiscal Quarter End Financial Statements, (ii) Liabilities which have arisen
after the Most Recent Fiscal Year End Financial Statements in the Ordinary
Course of Business, and (iii) Liabilities otherwise expressly disclosed and
are contemplated by this Agreement or the Franklin Disclosure Schedule.
(l) Disclosure. Neither this Section 5.2 nor the Franklin Disclosure
Schedule contains any untrue statement of a material fact or omits to state
a material fact necessary to make the statements contained herein or
therein, in light of the circumstances in which they were made, not
misleading. There is no material fact affecting Franklin and its
Subsidiaries, taken as a whole, which has not been disclosed to Covey which
materially adversely affects or is reasonably anticipated to materially
adversely affect Franklin's and its Subsidiaries' business, taken as a
whole, Liabilities, financial condition, operations, future prospects,
properties or assets.
ARTICLE 6 -- MISCELLANEOUS
6.1 Termination. This Agreement may be terminated as provided below:
(a) The Parties hereto may terminate this Agreement by written consent
of all Parties at any time prior to the Effective Time;
(b) Franklin may terminate this Agreement by giving written notice to
Covey and the Shareholders at any time prior to the Effective Time in the
event Covey or any of the Shareholders is in breach of any material
representation, warranty, or covenant contained in this Agreement in any
material respect;
(c) Covey or the Shareholders may terminate this Agreement by giving
written notice to Franklin at any time prior to the Effective Time in the
event Franklin is in breach of any material representation, warranty, or
covenant contained in this Agreement in any material respect;
(d) Franklin may terminate this Agreement by giving written notice to
Covey and the Shareholders at any time prior to the Effective Time in the
event that Franklin shall determine, in its sole discretion,
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that any matter discovered by Franklin in its due diligence is unacceptable
to Franklin with respect to the business or operations of Covey;
(e) Covey may terminate this Agreement by giving written notice to
Franklin at any time prior to the Effective Time in the event that Covey
shall determine, in its sole discretion, that any matter discovered by
Covey in its due diligence is unacceptable to Covey with respect to the
business or operations of Franklin;
(f) Franklin may terminate this Agreement by giving written notice to
Covey and the Shareholders at any time prior to the Effective Time in the
event any of the conditions precedent to closing set forth in Sections 2.1
or 2.2 hereof are not satisfied on or prior to the Effective Time unless
the failure results from Franklin breaching any representation, warranty or
covenant hereunder;
(g) Covey or the Shareholders may terminate this Agreement by giving
written notice to Franklin at any time prior to the Effective Time in the
event any of the conditions precedent to closing set forth in Sections 2.1
and 2.3 hereof are not satisfied by the Effective Time, unless the failure
results from Covey or the Shareholders breaching any representation,
warranty or covenant hereunder.
Any notice of such termination pursuant to this Section 6.1 shall be promptly
given by the Party terminating this Agreement to the other Parties in writing.
If Franklin or Covey shall terminate this Agreement, all obligations of the
parties hereunder shall terminate except for any liability of any party
hereunder which is in breach of this Agreement to the other parties hereunder
and except that the Confidentiality provisions of Section 3.1(j) and the
liquidated damages provisions of Section 6.2 hereof shall survive the
termination of this Agreement.
6.2 Liquidated Damages. (a) Each of Franklin, Covey and the Shareholders
understands and acknowledges that Franklin (the "Franklin Side") on the one hand
and Covey and the Shareholders (collectively the "Covey Side") on the other hand
will spend time and effort and incur significant expenses in going forward with
the transactions contemplated by this Agreement, including but not limited to,
preparing and filing the Proxy Statement and completing the due diligence
necessary to go forward with the transactions. If either the Franklin Side on
the one hand or the Covey Side on the other shall: (i) terminate this Agreement
as provided herein other than as a result of a breach of the representations,
warranties or covenants of the other Side; or (ii) shall fail or refuse for any
reason (not caused solely by the other Side) to go forward with the transactions
contemplated by this Agreement; (iii) if any condition to closing required to be
done by one Side in order to satisfy a condition to closing of the other Side is
not completed; (or (iv) if one Side shall breach its representations or
warranties or covenants and as a result of such breach the other Side shall
elect not to go forward with the transactions contemplated hereby, then the Side
which has terminated this Agreement or which has so failed to go forward with
the transaction or which has so failed to satisfy a condition necessary for the
other Side to proceed with the transaction or which has breached its
representations, warranties, or covenants, and as a result of such breach caused
the other Side to terminate this Agreement, shall pay to the other Side as
liquidated damages, and not as a penalty, the total amount of Five Hundred
Thousand Dollars ($500,000) to reimburse the other Side for the cost and expense
incurred by such Side in this transaction. It is intended by the Parties that,
because damages will be difficult to determine, Five Hundred Thousand Dollars
($500,000) represents the best estimate of the parties as to the costs, expenses
and damages of each Side going forward with the transaction. Entitlement to the
payment of such Five Hundred Thousand Dollars ($500,000) shall be the sole and
exclusive remedy of the Franklin Side and the Covey Side in connection with a
termination or failure to go forward with the transactions contemplated by this
Agreement or the failure by one Side to satisfy the conditions necessary for the
other Side to proceed. Specifically, if the Franklin Side shall terminate this
Agreement for any reason or shall fail to go forward with this Agreement or fail
to satisfy the conditions they are required to satisfy in order for the Covey
Side to go forward with the Closing, or to close the transactions contemplated
hereby, or breach any representation, warranty or covenant which causes the
Covey Side not to go forward with the transactions contemplated hereby, Franklin
shall pay to Covey Five Hundred Thousand Dollars ($500,000) as liquidated
damages. Similarly, if Covey or any of Stephen R. Covey, Stephen M. R. Covey,
Blaine Lee, Roger Merrill, Brad Anderson, Sean Covey, David Covey or the Redhill
Foundation (if the Redhill Foundation shall become a
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Shareholder between the date of this Agreement and the Effective Date pursuant
to the provisions of Section 5.1(ad) hereof) shall terminate this Agreement for
any reason or shall fail to go forward with this Agreement or fail to satisfy
the conditions they are required to satisfy in order for the Franklin Side to go
forward with the Closing, or to close the transactions contemplated hereby or
breach any representation, warranty or covenant which causes the Franklin Side
not to go forward with the transactions contemplated hereby, Covey shall pay to
Franklin Five Hundred Thousand Dollars ($500,000) as liquidated damages. Each of
the Parties acknowledges that the sum to be paid pursuant to this Section 6.2
represents a reasonable and good faith attempt by the Parties to ascertain the
damages that would be suffered by one Side in the event that the other Side
failed to close the transaction or satisfy the conditions necessary for the
other Side to close the transaction. Each Side waives any right or claim to any
damages resulting from a termination of this Agreement and a failure to go
forward with the transactions contemplated hereby except as set forth in this
Section 6.2.
(b) Each Party understands and acknowledges that the Covey Disclosure
Schedule and the Franklin Disclosure Schedule have not been prepared as of
the date of this Agreement and will not be prepared and finalized until the
dates set forth in Section 3.3 hereof. Notwithstanding anything contained
in Section 6.2(a) to the contrary, each Side shall have the right, until
May 2, 1997 (the "Termination Review Date"), to review the other Side's
Disclosure Schedule as part of its due diligence and if anything on such
Disclosure Schedule is unacceptable to the reviewing Side, to terminate
this Agreement as provided in Section 6.1(d) or (e), as the case may be,
without cost or damages, and in such event the provisions of Section 6.2(a)
shall not apply to such termination. For the provisions of this Section
6.2(b) to be effective, the terminating Side must deliver notice of
termination to the other Side on or before the Termination Review Date. If
either Side shall amend its Disclosure Schedule after April 25, 1997 as a
result of a material event which has occurred after April 25, 1997, as
permitted by Section 3.3 hereof, then the other Side shall have five days
after receipt of such amended Disclosure Schedule to determine whether to
terminate this Agreement and not go forward with the transaction without
the liquidated damages provisions of Section 6.1(a) applying. If the Side
receiving such amended Disclosure Schedule shall notify the other Side
within such five day period that it has elected not to go forward with the
transaction, then the provisions of Section 6.2(a) shall not apply. Nothing
in this Section 6.2 is intended to supersede or restrict a Party's right to
terminate this Agreement as allowed by Section 6.1 hereof, but rather only
to determine damages and remedies if termination is caused by certain
events or within specified time periods.
6.3 Press Releases and Announcements. Neither Franklin nor Covey shall
issue any press release or announcement relating to the subject matter of this
Agreement without the prior written approval of the other Party; provided,
however, that any Party may make any public disclosure it believes in good faith
is required by law or regulation (in which case the disclosing Party will advise
the other Parties prior to making the disclosure).
6.4 No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; provided that the provisions regarding
indemnification and insurance in Section 4.1(c) and 4.1(f) are intended for the
benefit of the individual entities specified therein.
6.5 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement between the Parties and supersedes any
prior understandings, agreements, or representations by or between the Parties,
written or oral, that may have related in any way to the subject matter hereof.
6.6 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties hereto.
6.7 Counterparts. This Agreement and the Plan of Merger may be executed
in one or more counterparts, each of which shall be deemed an original but all
of which together will constitute one and the
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same instrument. Any document executed by a party hereto and thereafter conveyed
to the other party in facsimile form shall be considered an original document,
signed in counterpart.
6.8 Headings. The Table of Contents and the article and section headings
contained in this Agreement and the Plan of Merger are inserted for convenience
only and shall not affect in any way the meaning or interpretation of this
Agreement.
6.9 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given (i) when delivered
personally, (ii) when sent by telecopier (with receipt confirmed), (iii) when
received by the addressee, if sent by Express Mail, Federal Express or other
express delivery service (receipt requested), or (iv) three business days after
being sent by registered or certified mail, return receipt requested, in each
case to the other party at the following addresses and telecopier numbers (or to
such other address or telecopier number for a party as shall be specified by
like notice; provided that notices of a change of address or telecopier number
shall be effective only upon receipt thereof):
if to Franklin to:
Franklin Quest Co.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
Attn: Jon H. Rowberry, President and Chief Operating Officer
Fax No. (801) 977-6098
with a copy to:
Franklin Quest Co.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
Attn: Val John Christensen, Executive Vice President and General
Counsel
Fax No. (801) 977-1431
and with a copy to:
Kimball, Parr, Waddoups, Brown & Gee
185 South State Street, Suite 1300
Salt Lake City, Utah 84119
Attn: Richard G. Brown, Esq.
Fax No. (801) 532-7750
if to Covey to:
Covey Leadership Center, Inc.
3507 North University Avenue
Provo, Utah 84604-4478
Attn: Stephen M. R. Covey, President
Fax No. (801) 377-1927
with a copy to:
Covey Leadership Center, Inc.
3507 North University Avenue
Provo, Utah 84604-4478
Attn: Richard Hill, General Counsel
Fax No. (801) 375-3865
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if to the Shareholders to:
The address set forth below each Shareholder's signature on the
signature page hereof.
6.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Utah, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
Utah or any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of Utah. Each of the parties hereto hereby
irrevocably waives the right to a trial by jury in any and all actions or
proceedings brought with respect to any provision of this Agreement or the
enforceability thereof and/or with respect to any claims arising out of, or
related to, this Agreement. The Parties hereto irrevocably waive and agree to
waive any objection which any party may now or hereafter have to the laying of
the venue of any suit, action or proceeding arising out of or relating to this
Agreement brought in the jurisdiction of Salt Lake City, State of Utah and
hereby further irrevocably waive and agree to waive any claim that any such
suit, action or proceeding brought in any such court has been brought in an
inconvenient forum.
6.11 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
Franklin, Covey and each of the Shareholders. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder or under
the Plan of Merger, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
6.12 Severability. Any term or provision of this Agreement, or the Plan
of Merger that is invalid or unenforceable in any situation in any jurisdiction
shall not affect the validity or enforceability of the remaining terms and
provisions hereof or thereof or the validity or enforceability of the offending
term or provision in any other situation or in any other jurisdiction. If the
final judgment of a court of competent jurisdiction declares that any term or
provision hereof or thereof is invalid or unenforceable, the Parties agree that
the court making the determination of invalidity or unenforceability shall have
the power to reduce the scope, duration, or area of the term or provision, to
delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement and the Plan of Merger shall be
enforceable as so modified after the expiration of the time within which the
judgment may be appealed.
6.13 Expenses. Except as set forth in Sections 1.4 and 3.2 of this
Agreement, each of the Parties will bear his, her or its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
6.14 Construction. The Parties have jointly participated in the
negotiation and drafting of this Agreement and the Plan of Merger. In the event
an ambiguity or question of intent or interpretation arises, this Agreement and
the Plan of Merger shall be construed as if drafted jointly by all Parties and
no presumptions or burdens of proof shall arise favoring any Party by virtue of
the authorship of any of the provisions of this Agreement or the Plan of Merger.
Any reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise. The Parties acknowledge that certain of the
representations and warranties herein and in the Plan of Merger, together with
the indemnification provisions herein, are intended to allocate risk and
economic cost as between Franklin, Covey and the Shareholders in the event such
representations, warranties and covenants are breached.
6.15 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
6.16 Remedies. Each of the Parties acknowledges and agrees that each
other Party would be damaged irreparably in the event any of the provisions of
this Agreement or the Plan of Merger are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that each other Party shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and the Plan of Merger
and to enforce specifically this Agreement and the Plan of Merger and the
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terms and provisions hereof and thereof in any action instituted in any court of
the United States or any state thereof, having jurisdiction over the Parties and
the matter, in addition to any other remedy to which it may be entitled, at law
or in equity.
6.17 Directly or Indirectly. Where any provision in this Agreement refers
to action to be taken by any person or entity, or which such person or entity is
prohibited from taking, such provision shall be applicable whether the action in
question is taken directly or indirectly by such person or entity.
6.18 Attorney's Fees. If a legal action or other proceeding is brought
for enforcement of this Agreement or the Plan of Merger because of an alleged
dispute, breach, default, or misrepresentation in connection with any of the
provisions of this Agreement or the Plan of Merger, the successful or prevailing
party shall be entitled to recover reasonable attorney's fees and costs
incurred, both before and after judgment, in addition to any other relief to
which they may be entitled.
ARTICLE 7 -- DEFINITIONS
7.1 Definitions. For purposes of this Agreement, unless the context
otherwise clearly requires, the following terms shall have the meanings
specified or referred to below:
"Adverse Consequences" means all charges, complaints, actions, suits,
proceedings, hearings, investigations, claims, demands, judgments, orders,
decrees, stipulations, injunctions, damages, dues, penalties, fines, costs,
amounts paid in settlement, Liabilities, obligations, Taxes, liens, losses,
reasonable expenses, and reasonable fees, including all reasonable attorneys'
fees and court costs, excluding incidental, consequential or special damages.
"Affiliate" means, with respect to any particular Person, any Person
controlling, controlled by or under common control with such Person.
"Affiliated Group" means any affiliated group within the meaning of Code
Section 1504.
"Articles of Merger" has the meaning set forth in Section 1.1(c).
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms or could form the basis for any
specified consequence.
"Claim" means any claim, cause of action, investigation, suit or
proceeding, whether at law or in equity, or before any governmental department,
commission, board, agency or instrumentality, which involves a demand for any
judgment or liability.
"Closing" has the meaning set forth in Section 1.2(d).
"Code" means the Internal Revenue Service Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of Covey or Franklin, respectively, other than any such information
that (i) is generally available to or known by the public immediately prior to
the time of disclosure, (ii) is available on a non-confidential basis or (iii)
has been acquired or developed independent from Covey or Franklin, as the case
may be.
"Covey Common" means the issued and outstanding common stock of Covey,
$.001 par value per share, immediately preceding the Effective Time.
"Disclosure Schedule" has the meaning set forth in Section 5.1.
"Dissenting Shares" means shares of Covey Common held by Shareholders who
have not voted in favor of the Merger or consented thereto in writing and who
have demanded appraisal rights with respect thereto in accordance with Sections
16-10a-1301 through 1331 of the URBCA.
"Effective Date" means the date on which the Merger becomes effective under
the URBCA.
"Effective Time" means the time the Merger becomes effective under the
URBCA.
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"Employee Benefit Plans" means any employee benefit plan, policy,
arrangement or agreement (including, without limitation, any savings,
retirement, fringe benefit, stock option, bonus, incentive compensation,
deferred compensation, excess, supplemental executive compensation, employee
stock purchase, vacation, sickness or disability, severance or separation,
restricted stock plan, policy or arrangement) or employment or consulting
contracts or agreements (including without limitation, any "employee benefit
plan", as defined in ERISA), whether or not subject to ERISA, whether written or
oral.
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section
3(1).
"Encumbrance" means any charge, claim, community property interest,
condition, equitable interest, lien, pledge, security interest, right of first
refusal, option or restriction of any kind, including any restriction on use,
voting (in the case of any security), transfer, receipt of income, or exercise
of any other attribute of ownership.
"Environmental Claim" means any complaint, summons, citation, notice,
directive, order, claim, litigation, investigation, judicial or administrative
proceeding, judgment, letter or other communication from any Governmental
Authority or any third party involving violations of Environmental Laws or
Releases of Hazardous Materials from (i) any assets, properties or businesses of
Covey; (ii) from adjoining properties or businesses; or (iii) from any
facilities which received Hazardous Materials generated by Covey.
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. sec. 9601 et seq., as
amended; the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. sec.
6901 et seq., as amended; the Clean Air At ("CAA"), 42 U.S.C. sec. 7401 et seq.,
as amended; the Clean Water Act ("CWA"), 33 U.S.C. sec. 1251 et seq., as
amended; and any other federal, state, local or municipal laws, statutes,
regulations, rules or ordinances imposing liability or establishing standards of
conduct for protection of the environment.
"Environmental Liabilities" shall mean any money obligations, losses,
liabilities (including strict liability), damages, punitive damages,
consequential damages, treble damages, costs and expenses (including all
reasonable out-of-pocket fees, disbursements and expenses of counsel,
out-of-pocket expert and consulting fees and out-of-pocket costs for
environmental site assessments, remedial investigation and feasibility studies),
fines, penalties, sanctions and interest incurred as a result of any
Environmental Claim filed by any Governmental Authority or any third party which
relate to any violations of Environmental Laws, Remedial Actions, Releases or
threatened Releases of Hazardous Materials from or onto (i) any property
presently or formerly owned by Covey, or (ii) any facility which received
Hazardous Materials generated by Covey.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934.
"Franklin Common" means the capital common stock of Franklin, $10.05 par
value.
"Franklin Parties" means, collectively, Franklin, its Affiliates and their
respective shareholders, officers, directors and employees.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Governmental Authorization" means any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"Governmental Body" means any:
(a) nation, state, province, county, city, town, village, district, or
other governmental jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity
and any court or other tribunal);
44
<PAGE> 176
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority
or power of any nature, whether in the United States or any other
jurisdiction.
"Hazardous Materials" means (a) any element, compound, or chemical that is
defined, listed or otherwise classified as a contaminant, pollutant, toxic
pollutant, toxic or hazardous substance, extremely hazardous substance or
chemical, hazardous waste, medical waste, biohazardous or infectious waste,
special waste, or solid waste under Environmental Laws; (b) petroleum,
petroleum-based or petroleum-derived products; (c) polychlorinated biphenyls;
(d) any substance exhibiting a hazardous waste characteristic, including, but
not limited to, corrosivity, ignitibility, toxicity or reactivity as well as any
radioactive or explosive materials; and (e) any raw materials, building
components, including but not limited to, asbestos-containing materials and
manufactured products containing Hazardous Materials.
"Indebtedness" of any Person means all obligations of such Person which in
accordance with GAAP should be classified upon a balance sheet of such Person as
liabilities of such Person, and in any event, regardless of how classified in
accordance with GAAP, shall include (i) all obligations of such Person for
borrowed money or which has been incurred in connection with the acquisition of
property or assets, (ii) obligations secured by any lien or other charge upon
property or assets owned by such Person, even though such Person has not assumed
or become liable for the payment of such obligations, and (iii) obligations
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person, notwithstanding the fact that
the rights and remedies of such seller, lender or lessor under such agreement in
the event of default are limited to repossession or sale of the property.
"Intellectual Property" means all (a) patents, patent applications, patent
disclosures, and improvements thereto, (b) trademarks, service marks, trade
dress, logos, trade names, and corporate names and registrations and
applications for registration thereof, (c) copyrights and registrations and
applications for registration thereof, (d) mask works and registrations and
applications for registration thereof, (e) computer software, data and
documentation, (f) trade secrets and confidential business information
(including ideas, formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
software products, books, programs, tapes or other projects in development,
drawings, specifications, designs, plans, proposals, technical data,
copyrightable works, financial, marketing, and business data, pricing and cost
information, business and marketing plans, and customer and supplier lists and
information), (g) other proprietary rights, and (h) copies and tangible
embodiments thereof (in whatever form or medium).
"Knowledge" means knowledge that a reasonable person under similar
circumstances would have after reasonable investigation and inquiry (including
with legal counsel). The phrase "Knowledge of Covey" or "Knowledge of Franklin"
refers to the Knowledge of their respective officers and directors.
"Legal Requirement" means any federal, state, provincial, local, municipal,
foreign, international, multinational, or other constitution, law, ordinance,
principle of common law, regulation, statute, or treaty.
"Liability" means any liability (whether absolute or contingent, whether
liquidated or unliquidated, and whether due or to become due), including any
liability for Taxes.
"Merger" means the merger described in Article 1 of this Agreement.
"Order" means any award, decision, injunction, judgment, order, directive,
ruling, subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"Ordinary Course of Business" means the ordinary course of business of a
Party consistent with its past custom and practice (including with respect to
quantity, value, amount and frequency).
"Permitted Exceptions" mean and include (i) those exceptions to title to
the properties and assets of Covey specifically set forth in the Schedule
referred to in the applicable Sections of this Agreement;
45
<PAGE> 177
(ii) mortgages, liens, pledges, charges, encumbrances and restrictions which
secure debt that is reflected as a liability on the Most Recent Fiscal Year End
Financial Statements or which are otherwise reflected in the Most Recent Fiscal
Year End Financial Statements or disclosed in the notes thereto; (iii)
mortgages, liens, pledges, charges, encumbrances and restrictions incurred in
connection with the purchase of properties and assets by Covey after the date of
the Most Recent Fiscal Year End Financial Statements securing all or a portion
of the purchase price therefor; (iv) statutory liens for current taxes or
assessments not yet due or delinquent or the validity of which is being
contested in good faith by appropriate proceedings; (v) mechanics', carriers',
workers', repairers' and other similar liens arising or incurred in the ordinary
course of business relating to obligations as to which there is no default on
the part of Covey; and (vi) such other liens, imperfections in title, charges,
easements, restrictions, and encumbrances which do not materially detract from
the value of or interfere with the present use of the properties subject thereto
or affected thereby.
"Person" means any natural person, corporation, limited liability company,
partnership, association, venture, trust, estate, foundation, union, syndicate,
association, society, firm, company or any other natural or juridical entity of
any nature.
"Plan of Merger" has the meaning set forth in Section 1.1.
"Registration Statement" has the meaning specified in Section 1.3.
"Release" means any spilling, leaking, pumping, emitting, emptying,
discharging, injecting, escaping, leaching, migrating, dumping, or disposing of
Hazardous Materials (including the abandonment or discarding of barrels,
containers or other closed receptacles containing Hazardous Materials) into the
environment.
"Remedial Action" means all actions taken to (i) clean up, remove,
remediate, contain, treat, monitor, assess, evaluate or in any other way address
Hazardous Materials in the indoor or outdoor environment; (ii) prevent or
minimize a Release or threatened Release of Hazardous Materials so they do not
migrate or endanger or threaten to endanger public health or welfare or the
indoor or outdoor environment; (iii) perform pre-remedial studies and
investigations and postremedial operation and maintenance activities; or (iv)
any other actions authorized by 42 U.S. C. sec. 9601.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Interest" means any mortgage, pledge, security interest,
encumbrance, charge, or other lien.
"Shareholders" means all of the Shareholders of Covey.
"Shares" means the shares of Franklin Common being received by the
Shareholders in exchange for Covey Common pursuant to the Merger.
"Subsidiary" means any corporation with respect to which another specified
corporation has the power to vote or direct the voting of sufficient securities
to elect a majority of the directors.
"Tax" or "Taxes" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Sec. 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax, levy, fee, impost, charge or duty of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"URBCA" means the Utah Revised Business Corporation Act.
46
<PAGE> 178
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
Franklin Quest Co.
By: /s/ Jon Rowberry
--------------------------------------
Title: President - COO
--------------------------------------
Covey Leadership Center, Inc.
By: /s/ Stephen M. R. Covey
--------------------------------------
Title: President & CEO
--------------------------------------
The Shareholders:
- --------------------------------------
47
<PAGE> 179
EXHIBIT 1.1(C)
ARTICLES OF MERGER
OF
COVEY LEADERSHIP CENTER, INC.
WITH AND INTO
FRANKLIN QUEST CO.
<PAGE> 180
ARTICLES OF MERGER
OF
COVEY LEADERSHIP CENTER, INC.
WITH AND INTO
FRANKLIN QUEST CO.
Pursuant to the provisions of Section 16-10a-1105 of the Utah Revised
Business Corporation Act (the "Act"), Franklin Quest Co., a Utah corporation
("Franklin"), and Covey Leadership Center, Inc., a Utah corporation ("Covey"),
hereby execute the following Articles of Merger:
1. Attached hereto as Exhibit A, and incorporated herein by this
reference, is the Plan of Merger dated , 1997 (the "Plan of
Merger"), which sets forth the terms of the merger of Covey with and into
Franklin (the "Merger").
2. The designation of the voting group of Covey that voted on the
Merger was Common Stock. The number of outstanding shares of Common Stock
of Covey and the number of votes entitled to be cast by the holders of such
shares, as of , was . The number of votes of the
Covey Common Stock voting group cast for the Merger was and the
number of votes of the Covey Common Stock voting group cast against the
Merger was none.
3. The designation of the voting group of Franklin that voted on the
Merger was Common Stock. The number of outstanding shares of Common Stock
of Franklin and the number of votes entitled to be cast by the holders of
such shares, as of , was . The number of votes of the
Franklin Common Stock voting group cast for the Merger was and
the number of votes of the Franklin Common Stock voting group cast against
the Merger was .
EXECUTED as of the day of , 1997.
COVEY LEADERSHIP CENTER, INC., FRANKLIN QUEST CO.,
a Utah corporation a Utah corporation
By
- ----------------------------------------------
By
------------------------------------
- ----------------------------------------------
------------------------------------
(Typed Name and Title) (Typed Name and Title)
<PAGE> 181
EXHIBIT A
PLAN OF MERGER AND REORGANIZATION
FOR THE MERGER OF
COVEY LEADERSHIP CENTER, INC.
WITH AND INTO
FRANKLIN QUEST CO.
<PAGE> 182
PLAN OF MERGER
THIS PLAN OF MERGER (this "Plan") is entered into as of the day
of , 1997, by and among Franklin Quest Co., a Utah corporation
("Franklin") and Covey Leadership Center, Inc., a Utah corporation ("Covey").
RECITALS
A. Franklin is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Utah.
B. Covey is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Utah.
C. The respective Boards of Directors of Franklin and Covey and the
shareholders of Franklin and Covey deem it advisable for good and valid business
reasons and for the mutual benefit of Franklin and Covey that Covey be merged
with and into Franklin (the "Merger") as a statutory merger under Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended, upon the terms
and subject to the conditions set forth herein and in the Merger Agreement among
the parties hereto dated as of March 21, 1997 (the "Merger Agreement"), and in
accordance with the Utah Revised Business Corporation Act (the "Act").
D. Franklin and Covey and their respective Boards of Directors and, to the
extent required by applicable law, their respective shareholders, have approved
this Plan.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1. The Merger. At the Effective Time (as hereinafter defined), in
accordance with the Merger Agreement and Section 16-10a-1105(2) of the Act,
Covey shall be merged with and into Franklin, the separate existence of Covey
shall cease, and Franklin shall continue as the surviving corporation under the
new corporate name of Franklin Covey Co. (Franklin and Covey are herein
sometimes referred to as the "Constituent Corporations," and Franklin, in its
capacity as the corporation surviving the Merger, is sometimes referred to
herein as the "Surviving Corporation.")
2. Effective Time. The Merger shall become effective immediately upon the
filing of Articles of Merger and this Plan with the Utah Department of Commerce,
Division of Corporations and Commercial Code. The date and time of such filing
are sometimes referred to herein as the "Effective Time."
3. Effect of the Merger. At the Effective Time, the Merger shall have the
effect provided for in Section 16-10a-1106 of the Act.
4. Articles of Incorporation and Bylaws; Directors and Officers.
(a) The Revised Articles of Incorporation and Bylaws of Franklin, as in
effect immediately prior to the Effective Time, shall, except as amended as
hereinafter provided, be the Articles of Incorporation and Bylaws of the
Surviving Corporation at the Effective Time and shall thereafter continue to be
its Articles of Incorporation and Bylaws until amended as provided therein and
under applicable law.
(b) Article I of the Revised Articles of Incorporation of Franklin shall be
hereby amended effective as of the Effective Time to read as follows:
ARTICLE I -- NAME
The name of the corporation is Franklin Covey Co.
A-1
<PAGE> 183
(c) The following listed individuals shall be the directors of the
Surviving Corporation at the Effective Time:
Hyrum W. Smith -- Chairman
Stephen R. Covey -- Co-Chairman
Jon R. Rowberry
Stephen M. R. Covey
Robert H. Daines
E. J. "Jake" Garn
Dennis G. Heiner
Daniel P. Howells
Thomas H. Lenagh
James M. Beggs
Robert F. Bennett
Beverly Campbell
Joel Peterson
Kay Stepp
Robert Whitman
Each of Hyrum W. Smith, Jon R. Rowberry, Robert H. Daines, E. J. "Jake"
Garn, Dennis G. Heiner, Daniel P. Howells, Thomas H. Lenagh, James M. Beggs,
Robert F. Bennett and Beverly Campbell, who were directors of Franklin prior to
the Effective Time, shall continue to serve as directors of the Surviving
Corporation until the expiration of their term as currently scheduled to expire.
Each of Joel Peterson, Kay Stepp and Robert Whitman will serve a term as a
director expiring at the annual meeting of shareholders to be held in 2000 and
until their successors shall be duly elected and qualified. Stephen R. Covey
shall serve a term as a director expiring at the annual meeting of shareholders
to be held in 1999 and until his successor shall be duly elected and qualified.
Stephen M. R. Covey shall serve a term as a director expiring at the annual
meeting of shareholders to be held in 1998 and until his successor shall be duly
elected and qualified.
(d) The following listed individuals shall be the officers of the Surviving
Corporation at the Effective Time:
Chairman and Chief Executive Officer -- Hyrum W. Smith
President and Chief Operating Officer -- Jon H. Rowberry
Executive Vice President and
President of the Covey Leadership Center Division -- Stephen M. R. Covey
Executive Vice President and Chief Financial Officer -- John L. "Jack" Theler
Executive Vice President, Secretary and General Counsel -- Val John Christensen
Executive Vice President -- D. Gordon Wilson
Executive Vice President -- Don J. Johnson
Executive Vice President -- Mark W. Stromberg
5. Conversion of Securities. At the Effective Time, by virtue of the Merger
and without any further action on the part of Franklin, Covey or the
shareholders of Franklin or Covey, all of the shares of common stock of Covey
issued and outstanding (the "Covey Common") in the aggregate, except for
dissenting shares, shall automatically be converted into the right to receive
shares of common stock of Franklin (the "Franklin Common") with the right of
each of the holders thereof, as of the Effective Time, to be treated as a
registered holder of shares of Franklin Common as of the Effective Time with all
rights to dividends and other distributions made to registered holders of
Franklin Common as of such date, provided that the aggregate number of shares of
Franklin Common that each of the Shareholders shall be entitled to receive shall
be rounded down to the nearest whole share, and provided further that if the
number of shares of Franklin Common that a Shareholder is entitled to receive is
rounded down to the nearest whole share, such Shareholder shall receive from
Franklin in respect of the fractional share subject to such rounding, the value,
determined to two decimal places, in cash of such fractional share. On the
effective date, each share of Covey Common, except for dissenting shares, will,
by virtue of the Merger, be canceled and converted into the right to receive
number of shares of Franklin Common.
A-2
<PAGE> 184
6. Termination or Abandonment. This Plan may be terminated and the Merger
abandoned as provided in the Merger Agreement.
7. Other Provisions.
(a) Governing Law. This Plan shall be governed in all respects by the laws
of the State of Utah.
(b) Counterparts. This Plan may be executed in counterparts, each of which
shall be an original, but all of which together shall constitute one and the
same agreement.
IN WITNESS WHEREOF, the parties have executed this Plan by their duly
authorized officers as of the date first above written.
FRANKLIN QUEST CO., a Utah corporation
By:
--------------------------------------
Name:
Title:
COVEY LEADERSHIP CENTER, INC., a Utah
corporation
By:
--------------------------------------
Name:
Title:
A-3
<PAGE> 185
EXHIBIT 1.1(C)(II)
DIRECTORS OF FRANKLIN COVEY CO.
Hyrum W. Smith
Stephen R. Covey
Jon H. Rowberry
Stephen M. R. Covey
Robert H. Daines
E. J. "Jake" Garn
Dennis G. Heiner
Daniel P. Howells
Thomas H. Lenagh
James M. Beggs
Robert F. Bennett
Beverly Campbell
Joel Peterson
Kay Stepp
Robert Whitman
<PAGE> 186
EXHIBIT 1.1(C)(III)
OFFICERS OF FRANKLIN COVEY CO.
Chairman and Chief Executive Officer -- Hyrum W. Smith
President and Chief Operating Officer -- Jon H. Rowberry
Executive Vice President and
President of the Covey Leadership Center Division -- Stephen M. R. Covey
Executive Vice President and Chief Financial Officer -- John L. "Jack" Theler
Executive Vice President, Secretary and General Counsel -- Val John Christensen
Executive Vice President -- D. Gordon Wilson
Executive Vice President -- Don J. Johnson
Executive Vice President -- Mark W. Stromberg
<PAGE> 187
EXHIBIT 2.2(K)(I)
Hyrum Smith
Arlen Crouch
Robert Bennett
<PAGE> 188
APPENDIX B
<TABLE>
<S> <C> <C>
JAMES F. FLAHERTY III
LOGO Managing Director
Investment Banking
Corporate and
Institutional
Client Group
Murdock Plaza
10900 Wilshire
Boulevard
Suite 900
Los Angeles, California
90024
310 209 4066
FAX 310 209 4091
[email protected]
</TABLE>
March 17, 1997
Board of Directors
Franklin Quest Co.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119
Attention: Hyrum W. Smith
Gentlemen:
Franklin Quest Co. (the "Company") and Covey Leadership Center, Inc. (the
"Subject Company") propose to enter into an agreement (the "Agreement") pursuant
to which the Subject Company will be merged with the Company in a transaction
(the "Merger") in which each share of the Subject Company's common stock, par
value $0.001 per share (the "Shares"), will be converted into the right to
receive the number of common shares of the Company ("Franklin Common") equal to
the "Share Conversion Amount" as described in Annex A. As part of the Agreement,
the Company will purchase from Stephen R. Covey and from the Trustee of the
Stephen and Sandra Covey Posterity Trust, dated December 30, 1993 (the "Trust")
all rights to a certain licensing agreement executed by and between Stephen R.
Covey and Covey Leadership Center, Inc., dated November 1, 1990 (the "Licensing
Agreement") for $27.0 million payable to Stephen R. Covey and the Trust, at
their election, in common stock of the Company at a price equal to the average
closing price of the Franklin Common on the New York Stock Exchange for the 20
days ending on the second trading day prior to the effective date of the Merger,
or cash or a combination thereof (the "License Purchase Price" and, together
with the Franklin Common to be delivered in exchange for the Shares, the
"Transaction Consideration").
You have asked us whether, in our opinion, the Transaction Consideration is
fair from a financial point of view to the Company.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Subject Company's financial statements, and related
financial information for the three fiscal years ended December,
1996;
(2) Reviewed the Company's Annual Reports, Forms 10-K and related
financial information for the three fiscal years ended August 30,
1996 and the Company's Form 10-Q and the related unaudited
financial information for the quarterly period ending November 30,
1996;
(3) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities
and prospects of the Subject Company and the Company, as well as
the synergies and related cost savings and expenses expected to
result from the Merger (the "Expected Synergies") furnished to us
by the Subject Company and the Company, respectively;
<PAGE> 189
LOGO
(4) Conducted discussions with members of senior management and
representatives of the Subject Company and the Company concerning
their respective businesses and prospects before and after giving
effect to the Merger;
(5) Reviewed the market prices and valuation multiples for the Company
Shares and compared them with those of certain publicly traded
companies which we deemed to be relevant;
(6) Reviewed the results of operations of the Subject Company and the
Company and compared them with those of certain companies which we
deemed relevant;
(7) Compared the proposed financial terms of the Merger with the
financial terms, to the extent publicly available, of certain
other transactions which we deemed to be relevant;
(8) Reviewed the potential pro forma impact of the Merger;
(9) Reviewed a draft dated March 17, 1997 of the Agreement; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us or
publicly available. With respect to the financial forecast information and the
Expected Synergies furnished to or discussed with us by the Subject Company and
the Company, we have assumed that they have been reasonably prepared and reflect
the best currently available estimates and judgment of the Subject Company's or
the Company's management as to the expected future financial performance of the
Subject Company or the Company, as the case may be, and the Expected Synergies.
We have not assumed any responsibility for independently verifying such
information or undertaken an independent evaluation or appraisal of any of the
assets or liabilities of the Subject Company or the Company or been furnished
with any such evaluation or appraisal. In addition, we have not conducted any
physical inspection of the properties or facilities of the Subject Company or
the Company. We have assumed that the Merger will be consummated on the terms
substantially similar to those set forth in the draft of the Agreement dated
March 17, 1997.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on the date hereof. It should be understood
that subsequent developments may affect this opinion and that we do not have any
obligation to update, revise or reaffirm this opinion.
We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services. In addition,
the Company has agreed to indemnify us for certain liabilities arising out of
our engagement. We have also performed various investment banking services for
the Company in the past and have received customary fees for such services. In
the ordinary course of our business, we may actively trade the Company Shares
and other securities of the Company for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Merger, and does not constitute a recommendation to
any shareholder as to how such shareholder should vote on the proposed Merger.
This opinion may not be disclosed, referred to, or communicated (in whole or in
part) to any third party for any purpose whatsoever except with our prior
written consent in each instance.
We are not expressing any opinion herein as to the prices at which the
Company Shares will trade following the announcement or consummation of the
Merger.
<PAGE> 190
LOGO
On the basis of, and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Transaction Consideration is fair from a financial
point of view to the Company.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By /s/ James F. Flaherty III
--------------------------------------
Managing Director
Investment Banking Group
<PAGE> 191
LOGO
ANNEX A
On the effective date, each share of the Shares (except for dissenting
shares) will, by virtue of the Merger, be cancelled and converted into the right
to receive the number of shares of Franklin Common equal to the "Share
Conversion Amount". The Share Conversion Amount shall be the number of shares of
Franklin Common calculated in accordance with the following formula:
Share Conversion Amount = 6,631,272 - X - Y
A
where: X equals the number of shares of Franklin Common to be issued to Stephen
R. Covey and to the Trustees of the Trust for all rights in and to the
Licensing Agreement which, when combined with Y, shall have a value equal
to $27,000,000. For purposes of determining the value of the number of
shares of Franklin Common received by Stephen R. Covey and the Trust
which are to be subtracted from $27,000,000, each such share of Franklin
Common shall have a value equal to Z; and
where: Y = the amount of cash received by
Stephen R. Covey and the Trust ; and
Z
where: Z shall equal the average closing price of the Franklin Common on the New
York Stock Exchange for the twenty (20) trading days ending on the second
trading day prior to the effective date of the Merger; and
where: A equals the aggregate number of Shares outstanding on the business day
immediately preceding the effective date of the Merger (determined on a
fully diluted basis and assuming, for purposes of the calculation, the
exercise of all options or warrants to purchase Covey common stock).
<PAGE> 192
APPENDIX C
UTAH REVISED BUSINESS CORPORATION ACT
PART 13
DISSENTERS' RIGHTS
16-10A-1301. DEFINITIONS.
For purposes of Part 13:
(1) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 16-10a-1302 and who exercises that right
when and in the manner required by Sections 16-10a-1320 through
16-10a-1328.
(4) "Fair value" with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action
to which the dissenter objects, excluding any appreciation or depreciation
in anticipation of the corporate action.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the statutory rate set forth in
Section 15-1-1, compounded annually.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares that are registered in the name of a nominee to the extent the
beneficial owner is recognized by the corporation as the shareholder as
provided in Section 16-10a-723.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. 1992
16-10A-1302. RIGHT TO DISSENT.
(1) A shareholder, whether or not entitled to vote, is entitled to dissent
from, and obtain payment of the fair value of shares held by him in the event
of, any of the following corporate actions:
(a) consummation of a plan of merger to which the corporation is a
party if:
(i) shareholder approval is required for the merger by Section
16-10a-1103 or the articles of incorporation; or
(ii) the corporation is a subsidiary that is merged with its parent
under Section 16-10a-1104;
(b) consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired;
(c) consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of the corporation for which a
shareholder vote is required under Subsection 16-10a-1202(1), but not
including a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of a sale; and
(d) consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of an entity controlled by the
corporation if the shareholders of the corporation were entitled to vote
upon the consent of the corporation to the disposition pursuant to
Subsection 16-10a-1202(2).
<PAGE> 193
(2) A shareholder is entitled to dissent and obtain payment of the fair
value of his shares in the event of any other corporate action to the extent the
articles of incorporation, bylaws, or a resolution of the board of directors so
provides.
(3) Notwithstanding the other provisions of this part, except to the extent
otherwise provided in the articles of incorporation, bylaws, or a resolution of
the board of directors, and subject to the limitations set forth in Subsection
(4), a shareholder is not entitled to dissent and obtain payment under
Subsection (1) of the fair value of the shares of any class or series of shares
which either were listed on a national securities exchange registered under the
federal Securities Exchange Act of 1934, as amended, or on the National Market
System of the National Association of Securities Dealers Automated Quotation
System, or were held of record by more than 2,000 shareholders, at the time of:
(a) the record date fixed under Section 16-10a-707 to determine the
shareholders entitled to receive notice of the shareholders' meeting at
which the corporate action is submitted to a vote;
(b) the record date fixed under Section 16-10a-704 to determine
shareholders entitled to sign writings consenting to the proposed corporate
action; or
(c) the effective date of the corporate action if the corporate action
is authorized other than by a vote of shareholders.
(4) The limitation set forth in Subsection (3) does not apply if the
shareholder will receive for his shares, pursuant to the corporate action,
anything except:
(a) shares of the corporation surviving the consummation of the plan
of merger or share exchange;
(b) shares of a corporation which at the effective date of the plan of
merger or share exchange either will be listed on a national securities
exchange registered under the federal Securities Exchange Act of 1934, as
amended, or on the National Market System of the National Association of
Securities Dealers Automated Quotation System, or will be held of record by
more than 2,000 shareholders;
(c) cash in lieu of fractional shares; or
(d) any combination of the shares described in Subsection (4), or cash
in lieu of fractional shares.
(5) A shareholder entitled to dissent and obtain payment for his shares
under this part may not challenge the corporate action creating the entitlement
unless the action is unlawful or fraudulent with respect to him or to the
corporation. 1992
16-10A-1303. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if the shareholder dissents with respect
to all shares beneficially owned by any one person and causes the corporation to
receive written notice which states the dissent and the name and address of each
person on whose behalf dissenters' rights are being asserted. The rights of a
partial dissenter under this subsection are determined as if the shares as to
which the shareholder dissents and the other shares held of record by him were
registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(a) the beneficial shareholder causes the corporation to receive the
record shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
(b) the beneficial shareholder dissents with respect to all shares of
which he is the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents
with respect to the shares held by any one or more beneficial shareholders, each
beneficial shareholder must certify to the corporation that both he and the
record shareholders of all shares owned beneficially by him have asserted, or
will timely assert,
<PAGE> 194
dissenters' rights as to all the shares unlimited on the ability to exercise
dissenters' rights. The certification requirement must be stated in the
dissenters' notice given pursuant to Section 16-10a-1322. 1992
16-10A-1320. NOTICE OF DISSENTERS' RIGHTS.
(1) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is submitted to a vote at a shareholders' meeting, the
meeting notice must be sent to all shareholders of the corporation as of the
applicable record date, whether or not they are entitled to vote at the meeting.
The notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this part. The notice must be accompanied by a copy of
this part and the materials, if any, that under this chapter are required to be
given the shareholders entitled to vote on the proposed action at the meeting.
Failure to give notice as required by this subsection does not affect any action
taken at the shareholders' meeting for which the notice was to have been given.
(2) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is authorized without a meeting of shareholders pursuant to
Section 16-10a-704, any written or oral solicitation of a shareholder to execute
a written consent to the action contemplated by Section 16-10a-704 must be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this part, by a copy of this
part, and by the materials, if any, that under this chapter would have been
required to be given to shareholders entitled to vote on the proposed action if
the proposed action were submitted to a vote at a shareholders' meeting. Failure
to give written notice as provided by this subsection does not affect any action
taken pursuant to Section 16-10a-704 for which the notice was to have been
given. 1992
16-10A-1321. DEMAND FOR PAYMENT -- ELIGIBILITY AND NOTICE OF INTENT.
(1) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights:
(a) must cause the corporation to receive, before the vote is taken,
written notice of his intent to demand payment for shares if the proposed
action is effectuated; and
(b) may not vote any of his shares in favor of the proposed action.
(2) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is authorized without a meeting of shareholders pursuant to
Section 16-10a-704, a shareholder who wishes to assert dissenters' rights may
not execute a writing consenting to the proposed corporate action.
(3) In order to be entitled to payment for shares under this part, unless
otherwise provided in the articles of incorporation, bylaws, or a resolution
adopted by the board of directors, a shareholder must have been a shareholder
with respect to the shares for which payment is demanded as of the date the
proposed corporate action creating dissenters' rights under Section 16-10a-1302
is approved by the shareholders, if shareholder approval is required, or as of
the effective date of the corporate action if the corporate action is authorized
other than by a vote of shareholders.
(4) A shareholder who does not satisfy the requirements of Subsections (1)
through (3) is not entitled to payment for shares under this part. 1992
16-10A-1322. DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under Section
16-10a-1302 is authorized, the corporation shall give a written dissenters'
notice to all shareholders who are entitled to demand payment for their shares
under this part.
<PAGE> 195
(2) The dissenters' notice required by Subsection (1) must be sent no later
than ten days after the effective date of the corporate action creating
dissenters' rights under Section 16-10a-1302, and shall:
(a) state that the corporate action was authorized and the effective
date or proposed effective date of the corporate action;
(b) state an address at which the corporation will receive payment
demands and an address at which certificates for certificated shares must
be deposited;
(c) inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(d) supply a form for demanding payment, which form requests a
dissenter to state an address to which payment is to be made;
(e) set a date by which the corporation must receive the payment
demand and by which certificates for certificated shares must be deposited
at the address indicated in the dissenters' notice, which dates may not be
fewer than 30 nor more than 70 days after the date the dissenters' notice
required by Subsection (1) is given;
(f) state the requirement contemplated by Subsection 16-10a-1303(3),
if the requirement is imposed; and (g) be accompanied by a copy of this
part. 1992
16-10A-1323. PROCEDURE TO DEMAND PAYMENT.
(1) A shareholder who is given a dissenters' notice described in Section
16-10a-1322, who meets the requirements of Section 16-10a-1321, and wishes to
assert dissenters' rights must, in accordance with the terms of the dissenters'
notice:
(a) cause the corporation to receive a payment demand, which may be
the payment demand form contemplated in Subsection 16-10a-1322(2)(d), duly
completed, or may be stated in another writing;
(b) deposit certificates for this certificated shares in accordance
with the terms of the dissenters' notice; and
(c) If required by the corporation in the dissenter's notice described
in Section 16-10a-1322, as contemplated by Section 16-10a-1327, certify in
writing, in or with the payment demand, whether or not he or the person on
whose behalf he asserts dissenters' rights acquired beneficial ownership of
the shares before the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action creating
dissenters' rights under Section 16-10a-1302.
(2) A shareholder who demands payment in accordance with Subsection (1)
retains all rights of a shareholder except the right to transfer the shares
until the effective date of the proposed corporate action giving rise to the
exercise of dissenters' rights and has only the right to receive payment for the
shares after the effective date of the corporate action.
(3) A shareholder who does not demand payment and deposit share
certificates as required, by the date or dates set in the dissenters' notice, is
not entitled to payment for shares under this part. 1992
16-10A-1324. UNCERTIFICATED SHARES.
(1) Upon receipt of a demand for payment under Section 16-10a-1323 for a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
of the shares until the proposed corporate action is taken or the restrictions
are released under Section 16-10a-1326.
(2) In all other respects, the provisions of Section 16-10a-1323 apply to
shareholders who own uncertificated shares. 1992
<PAGE> 196
16-10A-1325. PAYMENT.
(1) Except as provided in Section 16-10a-1327, upon the later of the
effective date of the corporate action creating dissenters' rights under Section
16-10a-1302, and receipt by the corporation of each payment demand pursuant to
Section 16-10a-1323, the corporation shall pay the amount the corporation
estimates to be the fair value of the dissenter's shares, plus interest to each
dissenter who has complied with Section 16-10a-1323, and who meets the
requirements of Section 16-10a-1321, and who has not yet received payment.
(2) Each payment made pursuant to Subsection (1) must be accompanied by:
(a) (i) (A) the corporation's balance sheet as of the end of its most
recent fiscal year, or if not available, a fiscal year ending not more than
16 months before the date of payment;
(B) an income statement for that year;
(C) a statement of changes in shareholders' equity for that year and a
statement of cash flow for that year, if the corporation customarily
provides such statements to shareholders; and
(D) the latest available interim financial statements, if any;
(ii) the balance sheet and statements referred to in Subsection (i)
must be audited if the corporation customarily provides audited financial
statements to shareholders;
(b) a statement of the corporation's estimate of the fair value of the
shares and the amount of interest payable with respect to the shares;
(c) a statement of the dissenter's right to demand payment under
Section 16-10a-1328; and
(d) a copy of this part. 1992
16-10A-1326. FAILURE TO TAKE ACTION.
(1) If the effective date of the date of the corporate action creating
dissenters' rights under Section 16-10a-1302 does not occur within 60 days after
the date set by the corporation as the date by which the corporation must
receive payment demands as provided in Section 16-10a-1322, the corporation
shall return all deposited certificates and release the transfer restrictions
imposed on uncertificated shares, and all shareholders who submitted a demand
for payment pursuant to Section 16-10a-1323 shall thereafter have all rights of
a shareholder as if no demand for payment had been made.
(2) If the effective date of the corporate action creating dissenters'
rights under Section 16-10a-1302 occurs more than 60 days after the date set by
the corporation as the date by which the corporation must receive payment
demands as provided in Section 16-10a-1322, then the corporation shall send a
new dissenters' notice, as provided in Section 16-10a-1322, and the provisions
of Sections 16-10a-1323 through 16-10a-1328 shall again be applicable. 1992
16-10A-1327. SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER ANNOUNCEMENT
OF PROPOSED CORPORATE ACTION.
(1) A corporation may, with the dissenters' notice given pursuant to
Section 16-10a-1322, state the date of the first announcement to news media or
to shareholders of the terms of the proposed corporate action creating
dissenters' rights under Section 16-10a-1302 and state that a shareholder who
asserts dissenters' rights must certify in writing, in or with the payment
demand, whether or not he or the person on whose behalf he asserts dissenters'
rights acquired beneficial ownership of the shares before that date. With
respect to any dissenter who does not certify in writing, in or with the payment
demand that he or the person on whose behalf the dissenters' rights are being
asserted, acquired beneficial ownership of the shares before that date, the
corporation may, in lieu of making the payment provided in Section 16-10a-1325,
offer to make payment if the dissenter agrees to accept it in full satisfaction
of his demand.
(2) An offer to make payment under Subsection (1) shall include or be
accompanied by the information required by Subsection 16-10a-1325(2). 1992
<PAGE> 197
16-10A-1328. PROCEDURE FOR SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter who has not accepted an offer made by a corporation under
Section 16-10a-1327 may notify the corporation in writing of his own estimate of
the fair value of his shares and demand payment of the estimated amount, plus
interest, less any payment made under Section 16-10a-1325, if:
(a) the dissenter believes that the amount paid under Section
16-10a-1325 or offered under Section 16-10a-1327 is less than the fair
value of the shares;
(b) the corporation fails to make payment under Section 16-10a-1325
within 60 days after the date set by the corporation as the date by which
it must receive the payment demand; or
(c) the corporation, having failed to take the proposed corporate
action creating dissenters' rights, does not return the deposited
certificates or release the transfer restrictions imposed on uncertificated
shares as required by Section 16-10a-1326.
(2) A dissenter waives the right to demand payment under this section
unless he causes the corporation to receive the notice required by Subsection
(1) within 30 days after the corporation made or offered payment for his
shares. 1992
16-10A-1330. JUDICIAL APPRAISAL OF SHARES -- COURT ACTION.
(1) If a demand for payment under Section 16-10a-1328 remains unresolved,
the corporation shall commence a proceeding within 60 days after receiving the
payment demand contemplated by Section 16-10a-1328, and petition the court to
determine the fair value of the shares and the amount of interest. If the
corporation does not commence the proceeding with the 60-day period, it shall
pay each dissenter whose demand remains unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in Subsection
(1) in the district court of the county in this state where the corporation's
principal office, or if it has no principal office in this state, the county
where its registered office is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence the
proceeding in the county in this state where the registered office of the
domestic corporation merged with, or whose shares were acquired by, the foreign
corporation was located.
(3) The corporation shall make all dissenters who have satisfied the
requirements of Sections 16-10a-1321, 16-10a-1323, and 16-10a-1328, whether or
not they are residents of this state whose demands remain unresolved, parties to
the proceeding commenced under Subsection (2) as an action against their shares.
All such dissenters who are named as parties must be served with a copy of the
petition. Service on each dissenter may be by registered or certified mail to
the address stated in his payment demand made pursuant to Section 16-10a-1328.
If no address is stated in the payment demand, service may be made at the
address stated in the payment demand given pursuant to Section 16-10a-1323. If
no address is stated in the payment demand, service may be made at the address
shown on the corporation's current record of shareholders for the record
shareholder holding the dissenter's shares. Service may also be made otherwise
as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under Subsection (2) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
Subsection (2) is entitled to judgment:
(a) for the amount, if any, by which the court finds that the fair
value of his shares, plus interest, exceeds the amount paid by the
corporation pursuant to Section 16-10a-1325; or
(b) for the fair value, plus interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under Section 16-10a-1327. 1992
<PAGE> 198
16-10A-1331. COURT COSTS AND COUNSEL FEES.
(1) The court in an appraisal proceeding commenced under Section
16-10a-1330 shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court finds
equitable, to the extent the court finds that the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under Section 16-10a-
1328.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of Sections 16-10a-1320 through 16-10a-1328; or
(b) against either the corporation or one or more dissenters, in favor
of any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this part.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to those counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited. 1992
<PAGE> 199
PROXY FRANKLIN QUEST CO.
Special Meeting of Stockholders-- To Be Held May 30, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (a) acknowledges receipt of the Notice of
Special Meeting of Stockholders (the "Special Meeting") of Franklin Quest Co., a
Utah corporation ("Franklin"), and the Joint Proxy Statement delivered to the
undersigned in connection therewith, and (b) appoints Hyrum W. Smith, Jon H.
Rowberry and Val John Christensen, and each of them, individually, as the
attorney, agent and proxy of the undersigned, with full power of substitution,
for and in the name, place and stead of the undersigned to vote upon and act, as
designated below, with respect to all of the shares of Common Stock, par value
$0.05 per share ("Common Stock"), of Franklin standing in the name of the
undersigned, or with respect to which the undersigned is entitled to vote and
act, at the Special Meeting and at any adjournment or postponement thereof.
1. To consider and vote upon a proposal to approve and adopt (a) the
Merger Agreement dated as of March 21, 1997 by and among Franklin, Covey
Leadership Center, Inc., a Utah corporation ("Covey"), and the stockholders of
Covey and the related Plan of Merger to be executed by Franklin and Covey and
filed with the Utah Department of Commerce, Division of Corporations, (b) the
merger of Covey with and into Franklin (the "Merger") whereby, among other
things, (i) Franklin will survive the Merger and the outstanding shares of Covey
Common Stock, $0.001 par value per share ("Covey Common Stock"), other than
dissenting shares, will be converted into the right to receive 6,631,272 shares
of Franklin Common Stock, $0.05 par value ("Franklin Common Stock"), less that
number of shares which would be equal to the $27 million to be paid in cash or
Franklin Common Stock for the License Rights divided by the Average Franklin
Price and, less the number of shares of Franklin Common Stock to be reserved
upon conversion of outstanding options to purchase Covey Common Stock (the
"Covey Options") at the Share Exchange Ratio, (ii) each Covey Option will be
converted into an option to purchase shares of Franklin Common Stock, with the
number of options and the exercise price adjusted to reflect the Share Exchange
Ratio, (iii) the Articles of Incorporation of Franklin will be amended to change
the name of Franklin to Franklin Covey Co., and (iv) Franklin will separately
acquire from Stephen R. Covey an exclusive, perpetual, worldwide, royalty free,
transferrable license to make, use, sell, sublicense and otherwise deal in the
products and materials and all other tangible and intangible assets, including
all derivative works, which are the subject matter of and are described in that
certain License Agreement dated November 1, 1990, for an aggregate of $27
million, to be paid in cash or Franklin Common Stock valued at the Average
Franklin Price. (Capitalized terms used herein without definition shall have the
same meaning as in the accompanying Joint Proxy Statement.)
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR the approval and adoption
of the Merger Agreement and the Merger.
2. In their discretion, upon any other matter which may properly come
before the Special Meeting or any adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT.
Please complete, sign and date this proxy where indicated and return it
promptly in the accompanying prepaid envelope.
DATED: _______________________, 1997 _________________________________
Signature
_________________________________
Signature if held jointly
(Please sign above exactly as the shares are issued. When shares are
held by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by authorized
person.)
<PAGE> 1
Exhibit 99.1
FRANKLIN COVEY CO. For Further Information
2200 West Parkway Boulevard Jon H. Rowberry
Salt Lake City, UT 84119-2331 President
NEWS BULLETIN Greg D. Link
Public Relations
Richard R. Putnam
Investor Relations
(801) 975-1776
===============================================================================
FRANKLIN COVEY CLAIMS MODEL MERGER, FORMING INDUSTRY LEADER
SALT LAKE CITY, UTAH (NYSE: FC) -- May 30, 1997 -- Franklin Quest Co.,
a leading provider of training seminars and the creator of the Franklin Day
Planner, and Covey Leadership Center, whose products include books, seminars,
videos, corporate consulting and training programs based on the international
best sellers, "The 7 Habits of Highly Effective People" and
"Principled-Centered Leadership", today announced the closing of their merger.
The merged company, to be known as Franklin Covey Co., will have fiscal
1998 revenues in excess of $500 million, making it, arguably, the largest
entity in the corporate training industry. Franklin Covey operates more than
100 retail stores, and has a client base that includes 82 of the Fortune 100,
more than two-thirds of the Fortune 500 companies, thousands of midsize and
small companies, government entities, educational institutions, communities,
families and millions of individual consumers.
"This merger will allow both companies to better meet the challenges of
a fast growing global market, which is demanding products and programs that
increase productivity and develop leadership and life skills,'' said Stephen R.
Covey, Co-Chairman of Franklin Covey. "Our organizations share a common
philosophy and approach based on our mutual belief in the power of principles
to improve individual and organizational effectiveness. We anticipate
continued success based on a portfolio of proprietary concepts and intellectual
property assets that have proven their value in the marketplace. We intend to
apply our organizational expertise to our own merger, thereby creating a model
merger for corporate industry."
"Franklin Covey plans to create added value from synergy," said Hyrum
W. Smith, Chairman and CEO of Franklin Covey. "We look forward to exploring
and taking advantage of the many areas of synergy that exist so naturally
between our companies. To this end, we started months ago to guide the
integration of our companies by writing an interim mission statement in which
many associates of both companies participated. We have also established
numerous synergy teams that have already integrated and aligned the structure
and leadership of the new company so we will hit the ground running as the
merger closes. The purpose of this synergy team process is to generate
operational savings as well as increased revenues and shareholder value."
On the consumer side of the business, Franklin Covey's retail stores
are located in top retail centers throughout the nation. The stores will be
renamed: Franklin Covey 7 Habits, to leverage the brand equity and wide
recognition of the 7 Habits name. The stores and catalog provide products that
meet the growing demand for tools for effective living.
<PAGE> 2
The merger strategically positions Franklin Covey as the leading
complete solutions provider to aid organizations in aligning their strategies
with proven principles. The Company hopes to be particularly valuable to
clients who want to accelerate the benefits of their mergers and acquisitions.
Franklin Covey will provide a broad range of curriculum including leadership,
time management, team building, business development, business and technical
communication, change management, productivity, strategic alignment and custom
solutions.
Clients will have access to Franklin Covey curriculum through
consulting services, personal coaching, custom on-site training, and client
facilitated training, as well as open enrollment training offered in more than
300 cities in North America and 40 countries worldwide. Educational and
training implementation tools, including the Franklin Day Planner, the 7 Habits
Organizer and a broad offering of audio and video tapes, books and computer
software enable clients to retain and effectively utilize educational and
training concepts and skill.
Jon H. Rowberry, President of Franklin Covey Co., said, "Our clients
have responded with a high level of enthusiasm to the news of this merger.
Clients of both Covey and Franklin, including United Parcel Service, Marriott,
Allied Signal, NationsBank, Bell Canada, WalMart, Starbucks and Brunswick feel
that the combined Franklin Covey company will become an even more significant
resource for their training and educational needs."
Franklin Covey has more than 15 million students and individuals using
agendas, organizers and planners and training products and materials printed in
28 languages throughout the world. Franklin Covey has more than 12 million
books in print with more than 1.5 million being sold each year. "Business
Week" magazine lists Franklin Covey's "The 7 Habits of Highly Effective People"
as the #1 best selling trade business book for the year 1996 and its "First
Things First" time management as #3. The newly released Japanese translation
of 7 Habits is #1 best seller in Japan as reported in the "Nikkei" business
magazine. Franklin Covey has more than 7,000 licensed client facilitators
teaching its curriculum within their organizations and trains in excess of
750,000 participants annually in training seminars teaching principles to help
them become more effective.
"The unique market niche of Franklin Covey will be the development and
distribution of intellectual property products, training and educational
services, combined with the Franklin Day Planner and the 7 Habits Organizer,
powerful implementation tools for such concepts," said Messrs. Covey and
Smith. "We believe this merger will position Franklin Covey as the dominant
global provider of the content, training and educational programs and
implementation tools necessary to increase individual client productivity and
help institutions build highly skilled, high trust, high performance
organizational cultures."
Franklin Covey will introduce two new books this year: "The Power
Principle: Influence with Honor" by Dr. Blaine Lee in May and "The 7 Habits of
Highly Effective Families" by Stephen R. Covey in October.
