- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO ______________
FRANKLIN COVEY CO.
- --------------------------------------------------------------------------------
(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 84119-2331
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 817-1776
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which
Title of Each Class Registered
----------------------------------- ---------------------------------------
Common Stock, $.05 Par Value New York Stock Exchange
[ ] Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant on November 1, 1999, based upon the closing sale price of the
Common Stock of $8.38 per share on that date, was approximately $172,068,417.
Shares of the Common Stock held by each officer and director and by each person
who may be deemed to be an affiliate of the Registrant have been excluded.
As of November 1, 1999, the Registrant had 20,533,224 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents
are incorporated by reference in Parts II, III and IV of this Form 10-K: Proxy
Statement for Registrant's Annual Meeting of Shareholders, which is scheduled to
be held on January 28, 2000 (Part III).
- ------------------------------------------------------------------------------
<PAGE>
INDEX TO FORM 10-K
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I .............................................................................................1
Item 1. BUSINESS.....................................................................................1
General......................................................................................1
Franklin Covey Products......................................................................3
Paper Planners .......................................................................3
Binders .............................................................................3
Electronic Solutions .................................................................3
Personal Development Products.........................................................3
Training, Facilitation and Consulting Services...............................................4
Training and Education Programs........................................................4
Personal Coaching.....................................................................5
Sales and Marketing..........................................................................5
Domestic Consumer Products ............................................................6
Catalog ....................................................................6
Retail Stores................................................................6
Other Channels...............................................................6
Domestic Training and Education Sales..................................................7
International Operations...............................................................7
Printing Services .....................................................................8
Strategic Distribution Alliances.............................................................8
Clients......................................................................................8
Competition..................................................................................8
Training .............................................................................8
Consulting............................................................................8
Products .............................................................................8
Manufacturing and Distribution...............................................................9
Trademarks, Copyrights and Intellectual Property............................................10
Employees...................................................................................10
Item 2. PROPERTIES..................................................................................11
Item 3. LEGAL PROCEEDINGS...........................................................................11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................11
PART II ............................................................................................12
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS....................12
Item 6. SELECTED FINANCIAL DATA.....................................................................12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......13
Overview..............................................................................13
Restructuring.........................................................................14
Year 2000 Issues......................................................................15
State of Readiness...............................................................15
Cost to Address Y2K Issues.......................................................16
Risk of the Company's Y2K Issues.................................................16
Contingency Plans................................................................17
Results of Operations.................................................................17
Gross Margin.....................................................................19
Operating Expenses...............................................................19
Restructuring Costs..............................................................20
Loss on Impaired Assets..........................................................20
Interest Expense.................................................................20
Income Taxes.....................................................................20
Preferred Stock Dividends........................................................21
Fiscal 1998 Compared with Fiscal 1997.................................................21
Sales ...........................................................................21
Gross Margin.....................................................................21
Operating Expenses...............................................................22
Interest Expense.................................................................22
Income Taxes.....................................................................22
Change in Accounting Principle...................................................22
Quarterly Results.....................................................................22
Liquidity and Capital Resources.......................................................23
Market Risk of Financial Instruments..................................................26
"Safe Harbor" Statement...............................................................26
ii
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................27
Consolidated Balance Sheets...........................................................28
Consolidated Statements of Income and Comprehensive Income............................29
Consolidated Statements of Shareholders' Equity.......................................30
Consolidated Statements of Cash Flows.................................................31
Notes to Consolidated Financial Statements............................................32
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........51
PART III ............................................................................................52
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................52
Item 11. EXECUTIVE COMPENSATION......................................................................52
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................52
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................52
PART IV ............................................................................................53
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................53
(a) Documents Filed......................................................................53
1. Financial Statements........................................................53
2. Exhibit List................................................................53
(b) Reports on Form 8-K..................................................................54
(c) Exhibits.............................................................................57
(d) Financial Statement Schedule........................................................132
SIGNATURES ............................................................................................55
</TABLE>
iii
<PAGE>
PART I
Item 1. BUSINESS
GENERAL
Franklin Covey Co. (the "Company" or "Franklin Covey") is an
international learning and performance solutions company dedicated to increasing
the effectiveness of individuals and organizations. To achieve that goal, the
Company provides consulting services, training and education programs,
educational materials, publications, assessment and measurement tools,
implementation processes, application tools and products designed to empower
individuals and organizations to become more effective. The Company's offerings
include a comprehensive time and life management system that enables individuals
to better manage their time by identifying goals and prioritizing the tasks
necessary to achieve them. The Company also provides training and education,
consulting services and products designed to improve organizational
effectiveness, leadership skills, written and oral business communication
skills, sales skills, performance skills and the ability to measure the impact
of training investments. Franklin Covey also offers book and commercial printing
services. To facilitate implementation of the principles it teaches, the Company
produces and markets its primary product, the Franklin Planner(R).
The original Franklin Planner consists of a paper-based, two-page per
day Franklin Covey planning system combined with a seven-ring binder, a variety
of planning aids, weekly, monthly and annual calendars and personal management
sections. The Franklin Planner can also be purchased in one-page per day or
two-page per week versions. The Company offers various forms and accessories
that allow users to expand and customize their Franklin Planner. Franklin Covey
markets the Franklin Planner and accessory products directly to organizations,
and through its sales catalog, its retail stores, and its e-commerce Internet
site at www.franklincovey.com. At August 31, 1999, Franklin Covey had 125
domestic retail stores located in 36 states and the District of Columbia. A
significant percentage of the users of the original Franklin Planner continue to
purchase a renewal planner each year, creating substantial recurring sales. In
recent years, the Company has also made the Franklin Planner system available in
desktop software and as an add-on to the popular 3Com Palm(R) Computing
organizers and Windows CE(R) hand-held devices. The Company also recently
released an extension to Microsoft Outlook(R) that incorporates Franklin Planner
principles into the Outlook calendar system.
The principles taught in the Company's curriculum have also been
published, in many cases, in book and audio tape form. Books sold by the Company
include The 7 Habits of Highly Effective People, Principle-Centered Leadership,
First Things First, The 7 Habits of Highly Effective Families, Nature of
Leadership and Living the 7 Habits, all by Stephen R. Covey, The 10 Natural Laws
of Time and Life Management by Hyrum W. Smith, The Power Principle by Blaine Lee
and The 7 Habits of Highly Effective Teens, by Sean Covey. These books, as well
as audio tape versions of many of these products, are sold through general
retail channels, as well as through the Company's own catalog and retail stores.
Domestic consumer product sales, consisting primarily of the Franklin
Planner and related products, accounted for 48% of the Company's sales during
the year ended August 31, 1999.
Franklin Covey provides its effectiveness solutions to business,
industry, educational institutions, government entities, communities and
individuals. The Company sells its services to the organizational market through
its own direct sales force. The Company delivers its training services to
organizations in one of three ways:
1. Franklin Covey consultants provide on-site consulting or training
classes for organizations. In these situations, the Franklin Covey
consultant can tailor the curriculum to the client's specific business
and objectives.
2. The Company also conducts public seminars in more than 200 cities
throughout the United States, where organizations can send their
employees in smaller numbers. These public seminars are also marketed
directly to the public through the Company's catalog, e-commerce
website, retail stores, and by direct mail.
1
<PAGE>
3. The Company's programs are also designed to be facilitated by licensed
professional trainers and managers in client organizations, reducing
dependence on the Company's professional presenters, and creating
continuing revenue as participant materials are purchased for trainees
by these facilitators.
In fiscal 1999, the Company provided products and services to 83 of the
Fortune 100 and more than 75% of the Fortune 500 companies. The Company also
provides its products and services to a number of U.S. and foreign governmental
agencies, including the U.S. Department of Defense, as well as educational
institutions.
Domestic training and education sales, including training presented by
client facilitators, accounted for 38% of the Company's sales, representing
approximately 530,000 individuals trained, during the year ended August 31,
1999.
The Company also provides products, consulting and training services
internationally, either through directly operated offices, or through licensed
providers. At August 31, 1999, Franklin Covey had direct operations in Canada,
Japan, Australia, New Zealand, Mexico, Bahrain, Belgium and the United Kingdom.
The Company also had licensed operations in 33 countries, including Mexico and
the United Kingdom. During the year ended August 31, 1999, the total sales of
the direct operations and royalties from the licensed operations were $50.5
million and accounted for 9% of total Company revenue.
Effective October 1, 1996, the Company acquired the assets of TrueNorth
Corporation ("Personal Coaching"), a training company headquartered in Salt Lake
City, Utah. Personal Coaching provides post-instruction personalized coaching to
corporations and individuals to augment the effectiveness and duration of
quality training curricula.
Effective March 4, 1997, the Company acquired the assets of Premier
Agendas, Inc., and Premier School Agendas, Ltd. (collectively, "Premier"), the
leading provider of academic and personal planners for students from
kindergarten to college throughout the United States and Canada. Premier has a
user base of approximately twelve million students.
Effective June 2, 1997, Covey Leadership Center, Inc. ("Covey") was
merged with and into the Company (the "Merger") and the name of the Company was
changed to Franklin Covey Co. Management believes that the Merger positions the
Company as a leading provider of products and training services designed to
increase the effectiveness of individuals and organizations. The Merger
broadened the range of products and services offered to include Covey's
top-rated leadership programs, "The 7 Habits of Highly Effective People(R)" and
"Four Roles of Leadership(R)," increased the Company's capacity to develop and
market new programs and products and created the potential for significant
efficiencies and synergies as distribution and production facilities were
combined.
In January 1999, the Company acquired the assets of Khalsa Associates,
a leading sales training company. In July 1999, Microsoft announced that it had
signed an agreement with Franklin Covey to train its world-wide sales force and
its 21,000 sales channel partners utilizing Franklin Covey's unique consultative
sales training program.
In September 1999, the Company acquired the assets of the Professional
Resources Organization (the Jack Phillips Group), a leading measurement
assessment firm specializing in measuring the impact and return on investment in
training and consulting.
Unless the context requires otherwise, all references to the "Company"
or to "Franklin Covey" herein refer to Franklin Covey Co. and each of its
operating divisions and subsidiaries. The Company's principal executive offices
are located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331 and
its telephone number is (801) 817-1776.
2
<PAGE>
FRANKLIN COVEY PRODUCTS
Based upon its belief that organizational and individual productivity
require effective time management, the Franklin Planner has been developed as
the basic tool for implementing the principles of Franklin Covey's time
management system. The original Franklin Planner consists of a paper-based
Franklin Covey planning system, a binder in which to carry it, various planning
aids, weekly, monthly and annual calendars as well as personal management
sections. Franklin Covey offers a broad line of renewal planners, forms and
binders for the Franklin Planner, which are available in various sizes and
styles. Franklin Covey also offers a variety of electronic solutions
incorporating the same principles as the original Franklin Planner. During the
fiscal year ended August 31, 1999, domestic product sales, consisting primarily
of the Franklin Planner and related products, amounted to $264.3 million and
accounted for 48% of Franklin Covey's sales during the period.
PAPER PLANNERS. Paper planner renewals are available for the Franklin
Planner in five sizes and various styles and consist of daily or weekly formats,
appointment schedules, task lists, monthly calendars, daily expense records,
daily record of events, and personal management pages for an entire year. Annual
Renewal Planners range in price from $19.00 to $50.00. The Master Pack, which
includes personal management tabs, a guide to using the planner, a pagefinder
and weekly compass cards completes a Franklin Planner.
The Master Pack price ranges from $6.00 to $7.00.
BINDERS. Franklin Covey offers binders and accessories (briefcases,
portfolios, wallets/purses, leather care products, etc.) in a variety of
materials, styles and Franklin Planner sizes. These materials include high
quality leathers, fabrics, synthetics and vinyls in a variety of color and
design options. Binder styles include zipper closures, snap closures, and open
formats with pocket configurations to accommodate credit cards, business cards,
checkbooks and writing instruments. The Company's binder products range in price
from $19.00 to $330.00.
ELECTRONIC SOLUTIONS. The Company also offers its time and life
management methodology within a complete Personal Information Management ("PIM")
system known as the Franklin Planner Software (formerly ASCEND(R)) program. This
system can be used in conjunction with the paper-based Franklin Planner or used
as a stand-alone planning and information management system. The Franklin
Planner Software permits users to generate and print data on Franklin Covey
paper that can be inserted directly into the Franklin Planner. The program
operates in the Windows(R) 95, 98 and NT 4.0 operating systems. Franklin Covey
offers Franklin Planner Software at a retail price of $99.95, which includes all
necessary software, related tutorials and reference manuals. The Company offers
the software through nationwide retail software stores, as well as in its own
retail stores, catalog, and e-commerce Internet site.
Franklin Covey is also an OEM provider of the Palm Computing organizer
that includes the Franklin Planner Software when sold through Franklin Covey
channels. The Palm Computing organizer is a handheld electronic device
manufactured by 3Com(R). The Palm has become another successful planning tool
offered by the Company through all of its channels. The Company has introduced
products that can add paper-based planning to the electronic planner as well as
binders and carrying cases specific to the Palm.
The Company also recently introduced a version of its Franklin Planner
Software that is designed to operate as an extension to Microsoft's Outlook
software. This is intended especially for companies that have already
standardized on Microsoft for group scheduling, but wish to make the Franklin
Planner available to their employees without creating the need to support two
separate systems. As this kind of extension proves its value in the market, the
Franklin Planner Software extension model will be expanded to other platforms.
PERSONAL DEVELOPMENT PRODUCTS. To supplement its principal products,
Franklin Covey offers a number of accessories and related products, including
books, videotapes and audio cassettes focused on time management, leadership,
personal improvement and other topics. The Company also markets a variety of
content-based personal development products. These products include books,
PrioritiesO magazine, audio learning systems such as multi-tape and workbook
sets, CD-ROM software products, calendars, posters and other specialty name
3
<PAGE>
brand items. The Company offers numerous accessory forms, including check
registers, spread sheets, stationery, mileage logs, maps, menu planners,
shopping lists and other information management and project planning forms. The
Company's accessory products and forms are generally available in the Franklin
Planner sizes.
TRAINING, FACILITATION AND CONSULTING SERVICES
Franklin Covey's training, facilitation and consulting services are
marketed and delivered in the United States by the Company's Professional
Services Group, which consists of talented consultants, selected through a
competitive and demanding process, and highly qualified sales professionals.
Franklin Covey currently employs 155 training consultants in ajor
metropolitan areas of the United States with an additional 38 training
consultants outside of the United States. Training consultants are selected from
a large number of experienced applicants. These consultants generally have
several years of training and/or consulting experience and excellent
presentation skills. Once selected, the training consultant goes through a
rigorous training program including multiple live presentations. The training
program ultimately results in the Company's certification of the consultant.
Franklin Covey believes that the caliber of its training consultants has helped
build its reputation of providing high quality seminars. The Company's
Professional Services Group can also help organizational clients diagnose
inefficiencies in their organization and design the core components of a
client's organizational solutions. The efforts of the consultants are enhanced
by several proprietary consulting tools the Company has designed for their use:
Organizational Health Assessment(TM) ("OHA"), used to assess client needs; the
Organizational Effectiveness Cycle(TM) ("OE-Cycle(TM)"), utilized for
organizational diagnosis and re-design; and the Principle-Centered
Organizational Change Process(TM) ("PCOC Process(TM)"), a rigorous methodology
for organizational change management.
Franklin Covey's Professional Services Group is organized in sales
teams in order to assure that both the consultant and the client sales
professional participate in the development of new business and the assessment
of client needs. Consultants are then entrusted with the actual delivery of
content, seminars, processes and other solutions. Consultants follow up
continuously with client service teams, working with them to develop lasting
client impact and ongoing business opportunities.
TRAINING AND EDUCATION PROGRAMS. Franklin Covey offers a range of
training programs designed to significantly and measurably improve the
effectiveness of individuals and organizations. The Company's workshops are
oriented to address each of the four levels of leadership needs: personal,
interpersonal, managerial and organizational. In addition, the Company believes
each of its workshops provides an impactful experience and frequently generates
additional business. During fiscal 1999, more than 530,000 individuals were
trained using the Company's curriculum in its single and multiple-day workshops
and seminars.
Franklin Covey's single-day What Matters Most workshop competes in the
time management industry. This time management seminar is conducted by the
Company's training consultants for employees of clients and in public seminars
throughout the United States and in many foreign countries. This is the
Company's single most popular workshop, generating approximately 29% of the
training revenue for the Company. The Company offers a number of other
single-day seminars and workshops including Presentation Advantage(TM), a
seminar helping individuals and organizations make more effective business
presentations; Writing Advantage(R), a seminar that teaches effective business
writing and communication skills; Planning for Results(TM); Building Trust(TM);
Managing Change(TM); and Power of Understanding(TM). The Company's training
consultants conduct these seminars and workshops for employees of institutional
clients and public seminar participants.
Franklin Covey also delivers multiple-day workshops, primarily in the
Leadership area. Included in these offerings is its three-day 7 Habits workshop
based upon the material presented in The 7 Habits of Highly Effective People.
The 7 Habits workshop provides the foundation for continued client relationships
and generates more business as the Company's content and application tools are
delivered deeper into the organization. Additionally, a three-day 4 Roles of
Leadership course is offered, which focuses on the managerial aspects of client
needs. Franklin Covey Leadership Week, which management believes is one of the
premier leadership programs in the United States, consists of a five-day session
4
<PAGE>
focused on materials from Franklin Covey's The 7 Habits of Highly Effective
People and The 4 Roles of Leadership courses. Franklin Covey Leadership Week is
reserved for executive level management. As a part of the week's agenda,
executive participants design strategies for long-term implementation of the
Company's principles and content within their organizations. The courses offered
in the leadership area generate over 27% of the training revenue for the
Company.
In addition to providing consultants and presenters, Franklin Covey
also trains and certifies client facilitators to teach selected Company
workshops within the client's organization. Franklin Covey believes
client-facilitated training is important to its fundamental strategy to create
recurring client revenue streams. After having been certified, clients can
purchase manuals, profiles, planners and other products to conduct training
workshops within their organization, generally without the Company repeating the
sales process. This creates an annuity-type business, providing recurring
revenue, especially when combined with the fact that curriculum content in one
course leads the client to additional participation in other Company courses.
Since 1988, Franklin Covey has trained more than 19,000 client facilitators.
Client facilitators are certified only after graduating from one of Franklin
Covey's certification workshops and completing post-course certification
requirements.
Franklin Covey regularly sponsors public seminars in cities throughout
the United States and in several foreign countries. The frequency of seminars in
each city or country depends on the concentration of Franklin Covey clients, the
level of promotion and resulting demand, and generally ranges from semi-monthly
to quarterly. Smaller institutional clients often utilize the public seminars to
train their employees.
In fiscal 1996, Franklin Covey introduced the Franklin Covey Leadership
Library series of video workshops. The Franklin Covey Leadership Library is a
series of stand-alone video workshops that can be used in informal settings as
discussion starters, in staff meetings or as part of an in-house leadership
development program.
PERSONAL COACHING. Franklin Covey offers post-seminar training in the
form of personal coaching. The Company employs 41 coaches that interact with
clients on the telephone to help them implement the training from the seminar
they have taken. The Company offers personal coaching for some of its own
curriculum as well as seminars offered by other training companies.
Sales of training and education services for the year ended August 31,
1999 were $210.6 million and accounted for 38% of Franklin Covey's total sales
during the period.
SALES AND MARKETING
The following table sets forth, for the periods indicated, the
Company's revenue and percentage of total revenue for each of its principal
distribution channels:
<TABLE>
<CAPTION>
Year Ended August 31,
(dollars in thousands)
--------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- -------------------------
<S> <C> <C> <C> C> <C> <C>
Domestic Consumer Products $264,333 47.6% $258,973 47.4% $223,135 51.5%
Domestic Training and Education 210,621 38.0 207,015 37.9 154,595 35.7
International 50,535 9.1 45,068 8.2 23,927 5.5
All Other 29,434 5.3 35,556 6.5 31,615 7.3
================================================================================
Total Sales $554,923 100.0% $546,612 100.0% $433,272 100.0%
================================================================================
</TABLE>
5
<PAGE>
DOMESTIC CONSUMER PRODUCTS. Franklin Covey uses catalogs, retail
stores, its own Web site and other distribution channels to market its products
to organizations and individuals.
CATALOG. Franklin Covey periodically mails catalogs to its
clients, including a reference catalog, holiday catalog, catalogs timed to
coincide with planner renewals and catalogs related to special events, such as
store openings or new product offerings. Catalogs may be targeted to specific
geographic areas or user groups as appropriate. Catalogs are typically printed
in full color with an attractive selling presentation highlighting product
benefits and features.
Franklin Covey maintains a client service department which
clients may call toll-free, 24 hours a day, Monday through Saturday, to inquire
about a product or to place an order. Through Franklin Covey's computerized
order entry system, client representatives have access to client preferences,
prior orders, billings, shipments and other information on a real-time basis.
Each of the Company's more than 375 customer service representatives has the
authority to immediately solve any client service problem.
Franklin Covey utilizes a zone picking system for processing
orders. This system enables the Company to respond rapidly to client orders.
Client information stored within the order entry system is also used for
additional purposes, including target marketing of specific products to existing
clients and site selection for Company retail stores. Franklin Covey believes
that its order entry system helps assure client satisfaction through both rapid
delivery and accurate order shipment.
RETAIL STORES. Beginning in late 1985, Franklin Covey began
opening retail stores in areas of high client density. The initial stores were
generally located in lower traffic destination locations. The Company has since
adopted a strategy of locating retail stores in high-traffic retail centers,
primarily large shopping malls, to serve existing clients and to attract
increased numbers of walk-in clients. Franklin Covey believes that higher costs
associated with locating retail stores in these centers have been offset by
increased sales in these locations. Franklin Covey's retail stores, which
average approximately 2,000 square feet, are stocked almost entirely with
Franklin Covey products. The Company's retail stores strategy focuses on
providing exceptional client service at the point of sale. Franklin Covey
believes this approach increases client satisfaction as well as the frequency
and volume of purchases. At August 31, 1999, Franklin Covey had 125 domestic
retail stores located in 36 states and the District of Columbia.
Franklin Covey attracts existing clients to its retail stores
by informing them of store openings through direct mail advertising. The Company
believes that its retail stores encourage walk-through traffic and
impulse-buying and that store clients are a source of participants for Franklin
Covey's public seminars. The stores have also provided the Company with an
opportunity to assess client reaction to new product offerings.
Franklin Covey believes that its retail stores have a high-end
image consistent with its marketing strategy. Franklin Covey's products are
generally grouped in sections supporting the different sizes of the Franklin
Planner. Products are attractively presented and displayed with an emphasis on
integration of related products and accessories. Stores are staffed with a
manager, an assistant manager and additional sales personnel as needed. Franklin
Covey employees have been trained to use the original Franklin Planner, as well
as its various electronic versions, enabling them to assist and advise clients
in selection and use of the Company's products. During peak periods, additional
personnel are added to promote prompt and courteous client service.
OTHER CHANNELS. In November 1998, the Company completed a
pilot agreement to sell selected Franklin Planners and binders through Office
Depot, a mass-market retail operation with approximately 580 stores. The
agreement allowed Office Depot to market and sell selected Franklin Planners,
renewal planners, master packs, binders and accessories in a four-foot retail
shelf location in their stores. The results of this initial arrangement were not
satisfactory. The Company has discontinued its relationship with Office Depot
and does not intend to market its basic products through this channel in the
near future.
6
<PAGE>
In January 1998, the Company formed an alliance with the
At-A-Glance group to sell its products through the category contract stationer
channel. At-A-Glance wholesales other products to contract stationer businesses
such as Boise Cascade, Office Express and Staples, which in turn sell office
products through catalog order entry systems to businesses and organizations.
The Company signed an agreement to have At-A-Glance represent a selected
Franklin Planner product line through this office products channel. The Company
believes that additional revenues have more than offset the anticipated lower
margins from selling product through this channel.
DOMESTIC TRAINING AND EDUCATION SALES. Franklin Covey's sales
professionals market the Company's training, consulting and measurement services
to institutional clients and public seminar clients.
Franklin Covey employs 220 sales professionals who service major
metropolitan areas throughout the United States and sell training services to
institutional clients. Franklin Covey employs an additional 53 sales
professionals outside of the United States. Sales professionals must have
significant selling experience prior to employment by the Company and are
trained and evaluated at Franklin Covey and in their respective sales
territories during the first six months of employment. Sales professionals
typically call upon persons responsible for corporate employee training, such as
corporate training directors or human resource officers. Sales professionals
work closely with training consultants in their territories to schedule and
tailor seminars and workshops to meet specific objectives of institutional
clients.
Franklin Covey also employs 155 training consultants throughout the
United States who present institutional and public seminars in their respective
territories and an additional 38 training consultants outside of the United
States. Training consultants work with sales professionals and institutional
clients to incorporate a client's policies and objectives in seminars and
present ways that employee goals may be aligned with those of the institution.
Public seminars are planned, implemented and coordinated with training
consultants by a staff of marketing and administrative personnel at the
Company's corporate offices. These seminars provide training for the general
public and are also used as a marketing tool for attracting corporate and other
institutional clients. Corporate training directors are often invited to attend
public seminars to preview the seminar content prior to engaging Franklin Covey
to train in-house employees. Smaller institutional clients often enroll their
employees in public seminars when a private seminar is not cost effective. In
the public seminars, attendees are also invited to provide names of potential
persons and companies who may be interested in Franklin Covey's seminars and
products. These referrals are generally used as prospects for Franklin Covey's
sales professionals.
Premier markets agendas to schools and school districts in order to
help teachers and students enhance the learning process. Premier sold more than
14.5 million agendas in fiscal 1999, mostly in the United States and Canada.
Premier has a direct sales force of 146 sales professionals. An agenda consists
of a wire-bound notebook with dated pages to help the student keep track of
assignments and due dates, and to encourage regular communication among the
student, the parents and the teacher. Most agendas are customized to include the
individual school's rules, regulations, administrators and scheduled events.
INTERNATIONAL OPERATIONS. The Company provides products, training and
printing services internationally through Company-owned and licensed operations.
Franklin Covey has Company-owned operations and offices in Australia, Bahrain,
Belgium, Canada, Japan, Mexico, New Zealand and the United Kingdom. Mainland
Europe is represented by an affiliate and agent network. The Company also has
licensed operations in Bermuda, Indonesia, Ireland, Korea, Malaysia, India,
Egypt, Lebanon, Saudi Arabia, Turkey, UAE, Israel, Estonia, Nigeria,
Philippines, Singapore, China, Hong Kong, Taiwan, South Africa, Chile, Panama,
Netherlands Antilles, Argentina, Colombia, Uruguay, Bahamas, Ecuador, Puerto
Rico, Venezuela and Trinidad/Tobago. Franklin Covey operates retail operations
in Australia, Canada, Japan, Hong Kong, Singapore, Taiwan and Mexico. Franklin
Covey's seven most popular books, The 7 Habits of Highly Effective People,
Principle-Centered Leadership, The 10 Natural Laws of Time and Life Management,
First Things First, The Power Principle, The 7 Habits of Highly Effective
Families and The 7 Habits of Highly Effective Teens are currently published in
multiple languages.
7
<PAGE>
The international operations of the Company generated $50.5 million in
revenue in the year ended August 31, 1999. Training and education services
generated 53% of the revenue, consumer product generated 43%, and the balance
came from publishing activities in Japan. After grossing up royalties from
licensed operations to their actual sales level, total sales generated in the
international area were $68.3 million.
PRINTING SERVICES. Through the acquisition of Publishers Press in
December 1994, Franklin Covey acquired greater control over printing of the
materials for the Franklin Planner and of other related products. Publishers
Press also provides book and commercial printing services to clients in the
western United States. The Company has announced its intention to sell the
commercial part of this printing operation, and expects that transaction to be
completed in fiscal 2000.
STRATEGIC DISTRIBUTION ALLIANCES
Franklin Covey has pursued an aggressive strategy to create strategic
alliances with innovative and respected organizations in an effort to develop
effective distribution of its products and services. The principal distribution
alliances currently maintained by Franklin Covey are: Simon & Schuster and Saint
Martin's Press in publishing books for the Company; Wyncom to promote and
facilitate Dr. Covey's personal appearances and teleconferences;
Nightingale-Conant to market and distribute audio and video tapes of the
Company's book titles; At-A-Glance to market and distribute selected Franklin
Planners and accessories through catalog office supply channels; and 3Com to
serve as the official training organization for their Palm Computing products.
CLIENTS
Franklin Covey has developed a broad base of institutional and
individual clients. The Company has more than 8,000 institutional clients
consisting of corporations, governmental agencies, educational institutions and
other organizations. The Company believes its products, workshops and seminars
encourage strong client loyalty. Employees in each of Franklin Covey's
distribution channels focus on providing timely and courteous responses to
client requests and inquiries. Institutional clients may choose to receive
assistance in designing and developing customized forms, tabs, pagefinders and
binders necessary to satisfy specific needs.
COMPETITION
TRAINING. Competition in the performance skills organizational training
industry is highly fragmented with few large competitors. Franklin Covey
estimates that the industry represents more than $6 billion in annual revenues
and that the largest traditional organizational training firms have sales in the
$200 million range. Based upon Franklin Covey's fiscal 1999 domestic training
and education sales of approximately $210 million, the Company believes it is a
leading competitor in the organizational training market. Other significant
competitors in the leadership training market are Development Dimensions
International, Achieve Global (formerly Zenger Miller), Organizational Dynamics
Inc., Provant, Forum Corporation, EPS Solutions and the Center for Creative
Leadership.
CONSULTING. Franklin Covey's PCOC change management methodology, which
it initiated in 1996, is directly linked to organization and culture change.
Effective change is achieved through creating a principle-centered foundation
within an organization and by aligning systems and structures with that
foundation. Franklin Covey believes its approach to organization and culture
change is distinguishable from the approach taken by more traditional change
management and re-engineering firms, as Franklin Covey's approach complements
rather than competes with the offerings of such firms.
PRODUCTS. The paper-based time management and personal organization
products market is intensely competitive and subject to rapid change. Franklin
Covey competes directly with other companies that manufacture and market
calendars, planners, personal organizers, appointment books, diaries and related
products through retail, mail order and other direct sales channels. In this
market, several competitors have widespread name recognition. The Company
believes its principal competitors include DayTimer, At-A-Glance and Day Runner.
Franklin Covey also competes, to a lesser extent, with companies that market
8
<PAGE>
substitutes for paper-based products, such as electronic organizers, software
PIMs and hand-held computers. The Company's Franklin Planner Software competes
directly with numerous other PIMs. Many of Franklin Covey's competitors have
significant marketing, product development, financial and other resources. An
emerging potential source of competition is the appearance of calendars and
event-planning services available at no charge on the Web. There is no
indication that the current level of features has proven to be attractive to the
traditional planner customer as a stand-alone service, but as these products
evolve and improve, they are likely to pose a competitive threat. In response,
Franklin Covey intends to combine online planning services with 3Com's Palm
Computing organizers, Software and paper planners to provide a competitive,
complete planning solution to its clients.
Given the relative ease of entry in Franklin Covey's product markets,
the number of competitors could increase, many of whom may imitate the Company's
methods of distribution, products and seminars, or offer similar products and
seminars at lower prices. Some of these companies may have greater financial and
other resources than the Company. Franklin Covey believes that the Franklin
Planner and related products compete primarily on the basis of user appeal,
client loyalty, design, product breadth, quality, price, functionality and
client service. Franklin Covey also believes that the Franklin Planner has
obtained market acceptance primarily as a result of the concepts embodied in its
Franklin Planner, the high quality of materials, innovative design, the
Company's attention to client service, and the strong loyalty and referrals of
its existing clients. Franklin Covey believes that its integration of training
services with products has become a competitive advantage. Moreover, management
believes that the Company is a market leader in the United States among a small
number of integrated providers of time management products and services.
Increased competition from existing and future competitors could, however, have
a materially adverse effect on the Company's sales and profitability.
MANUFACTURING AND DISTRIBUTION
The manufacturing and distribution operations of Franklin Covey consist
primarily of printing, collating, assembling, packaging, warehousing and
shipping components used in connection with the Franklin Covey product line.
Franklin Covey operates its central manufacturing and distribution
services out of Salt Lake City. At that location, the Company prints, packages
and distributes its products to its worldwide customers. By operating in this
fashion, Franklin Covey has gained greater control of production costs,
schedules and quality control of printed materials. This has also allowed the
Company to develop partner printers, both domestic and international, who can
meet the Company's quality standards, thereby facilitating efficient delivery of
product in a global market. The Company believes this has positioned it for
greater flexibility and growth capacity. Automated production, assembly and
material handling equipment is used in the manufacturing process to insure
consistent quality of production materials and to control costs and maintain
efficiencies.
Binders used for Franklin Covey's products are produced from either
leather, simulated leather, tapestry or vinyl materials. These binders are
produced by multiple and alternative product suppliers. Franklin Covey believes
it enjoys good relations with its suppliers and vendors and does not anticipate
any difficulty in obtaining the required binders and materials needed in its
business. The Company has implemented special procedures to insure a high
standard of quality for its binders, most of which are manufactured by suppliers
in the United States, Europe, Canada, Korea, Mexico and China.
Franklin Covey also purchases numerous accessories, including pens,
books, videotapes, calculators and other products, from various suppliers for
resale to its clients. These items are manufactured by a variety of outside
contractors located in the United States and abroad. The Company does not
believe that it is dependent on any one or more of such contractors and
considers its relationships with such suppliers to be good.
9
<PAGE>
TRADEMARKS, COPYRIGHTS AND INTELLECTUAL PROPERTY
Franklin Covey seeks to protect its intellectual property through a
combination of trademarks, copyrights and confidentiality agreements. The
Company claims rights for more 120 trademarks in the United States and has
obtained registration in the United States and many foreign countries for many
of its trademarks, including Franklin Covey, The 7 Habits of Highly Effective
People, Principle-Centered Leadership, What Matters Most, Franklin Planner,
Writing Advantage, and The Seven Habits. Franklin Covey considers its trademarks
and other proprietary rights to be important and material to its business. Each
of the marks set forth in italics above is a registered mark or a mark for which
protection is claimed.
Franklin Covey owns all copyrights on its planners, books, manuals,
text and other printed information provided in its training seminars, the
programs contained within Franklin Planner Software and its instructional
materials, and its software and electronic products, including audio tapes and
video tapes. Franklin Covey licenses rather than sells all facilitator workbooks
and other seminar and training materials in order to limit its distribution and
use. Franklin Covey places trademark and copyright notices on its instructional,
marketing and advertising materials. In order to maintain the proprietary nature
of its product information, Franklin Covey enters into written confidentiality
agreements with certain executives, product developers, sales professionals,
training consultants, other employees and licensees. Although Franklin Covey
believes its protective measures with respect to its proprietary rights are
important, there can be no assurance that such measures will provide significant
protection from competitors.
EMPLOYEES
As of August 31, 1999, Franklin Covey had 4,165 full and part-time
associates, including 1,230 in sales, marketing and training; 1,530 in customer
service and retail; 930 in production operations and distribution; and 475 in
administration and support staff. None of Franklin Covey's associates are
represented by a union or other collective bargaining group. Management believes
that its relations with its associates are good. Franklin Covey does not
currently foresee a shortage in qualified personnel needed to operate the
Company's business.
10
<PAGE>
Item 2. PROPERTIES
Franklin Covey's principal business operations and executive offices
are located in Salt Lake City, Utah and Provo, Utah. The Company's Salt Lake
City facilities currently consist of seven buildings with approximately 860,000
available square feet, including approximately 551,000 square feet for
manufacturing, distribution and warehousing, and approximately 309,000 square
feet for administration. All of Franklin Covey's Salt Lake City facilities are
owned by the Company, subject to mortgages of approximately $3.3 million as of
August 31, 1999. The Company's Provo, Utah operations consist of four buildings
located within a fifteen-mile area. Franklin Covey occupies all or a portion of
each of these buildings, with total leased space of approximately 173,000 square
feet as of August 31, 1999. Lease contracts on the Provo buildings terminate
intermittently through the year 2009. As part of its restructuring plan, the
Company plans to formally exit two of the Provo buildings, representing
approximately 119,000 square feet of office space, during fiscal 2000. In
connection with the restructuring plan, the Company will move its sales and
marketing functions for the training and education business from its Provo
facilities to eight leased regional sales offices located in New York, Chicago,
Los Angeles, San Francisco, Columbus, Dallas, Atlanta and Washington, D.C. The
regional offices are expected to become fully operational during fiscal 2000.
Remaining business functions previously located in the two Provo buildings will
be moved to the Company's Salt Lake City headquarters. The Company estimates the
cost to exit the Provo buildings to be $4.6 million and has charged this amount
to current operations during the fourth quarter of fiscal 1999.
Franklin Covey also operates 125 retail stores currently under lease,
with remaining terms of up to seven years; some of these leases include rentals
based on a percentage of sales.
In addition, the Company maintains sales, administrative and/or
warehouse facilities in or near Salt Lake City; Phoenix; Atlanta; Dallas;
Washington, D.C.; and Bellingham, Washington. The Company also has foreign
offices and facilities located in Tokyo, London, Brussels, Toronto, Vancouver,
Montreal, Brisbane, Mexico City, Monterrey and Auckland all under leases which
expire intermittently through the year 2006. Franklin Covey's facilities are
used exclusively by Franklin Covey and its divisions and are believed to be
adequate and suitable for its current needs.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to,
any material pending legal proceedings, nor are any such proceedings known to
the Company to be contemplated.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended August 31, 1999.
11
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is listed and traded on the New York Stock
Exchange ("NYSE") under the symbol "FC." The following table sets forth, for the
periods indicated, the high and low sale prices for the Company's common stock,
as reported on the NYSE Composite Tape, for the fiscal years ended August 31,
1999 and 1998, respectively.
<TABLE>
<CAPTION>
High Low
------------ ------------
Fiscal Year Ended August 31, 1999:
<S> <C> <C>
Fourth Quarter................................ $ 7 13/16 $ 7 11/16
Third Quarter................................. 9 13/16 9 9/16
Second Quarter................................ 12 15/16 11 7/8
First Quarter................................. 18 3/4 18 3/8
Fiscal Year Ended August 31, 1998:
Fourth Quarter................................ $ 21 1/8 $ 18 9/16
Third Quarter................................. 25 3/4 19 1/4
Second Quarter................................ 24 11/16 20 3/4
First Quarter................................. 28 1/8 21 1/8
</TABLE>
The Company did not pay or declare dividends on its common stock during
the fiscal years ended August 31, 1998 and 1999. The Company currently
anticipates that it will retain all available funds to finance its future growth
and business expansion. The Company does not presently intend to pay cash
dividendson its common stock in the foreseeable future.
During fiscal 1999, the Company issued 750,000 shares of Series A
Preferred Stock (the "Preferred Stock") for $75.0 million in cash. The Preferred
Stock dividends accrue at an annual rate of 10% and are payable quarterly in
cash or additional shares of Preferred Stock until July 1, 2002. Accordingly,
the Company accrued $1.9 million in Preferred Stock divdends as of August 31,
1999 which were subsequently paid with additional shares of Preferred Stock.
As of November 1, 1999, the Company had 20,533,224 shares of its
common stock outstanding, held by approximately 360 shareholders of record.
Item 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
August 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
In thousands, except per share data
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Sales $554,923 $546,612 $433,272 $332,006 $277,122
Net (Loss) Income (8,772) 40,058 38,865 34,239 38,746
Preferred Stock Dividends 1,875
Diluted Earnings Per Share (0.51) 1.62 1.76 1.53 1.71
BALANCE SHEET DATA:
Total Assets $623,303 $597,277 $572,187 $268,445 $263,305
Current Liabilities 203,508 93,353 86,903 28,677 32,155
Long-Term Obligations 6,543 126,413 94,144 5,500 4,521
Shareholders' Equity 378,434 341,654 355,405 231,835 224,342
</TABLE>
12
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Franklin Covey Co. (the "Company") provides integrated learning and
performance solutions to organizations and individuals to increase productivity
and improve skills for leadership, sales, communication and other areas. Each
solution set includes capabilities in training, consulting and assessment, and
various application tools that are generally available in paper-based or
electronic formats. The Company's products and services are available through
professional consulting services, public workshops, catalogs, retail stores and
the Internet at www.franklincovey.com. The Company's best known products include
the Franklin Planner and the best-selling book, The 7 Habits of Highly Effective
People.
During the first quarter of fiscal 1999, the Company aligned its
operations into the following three Strategic Business Units ("SBUs"):
o Consumer Products
o Training and Education
o International
Although the Company is currently in the process of restructuring its
operations, the above SBUs represent the primary management measurement tool
until the new reporting structure is completed and implemented. The Consumer
Products SBU is responsible for distribution of the Company's products through
its retail stores, catalog sales, mass markets, contract stationers, government
channels, wholesale channel and the Internet. The Training and Education SBU,
which includes Premier Agendas and Personal Coaching, is responsible for
training, consulting and implementation services, and delivery of products to
corporations, business, government and educational institutions. The
International SBU is responsible for the delivery of both products and services
outside the United States. Other revenue primarily consists of the Company's
commercial printing operations and the National Institute of Fitness, which was
sold during fiscal 1998. In addition, corporate functions, which consist
primarily of essential internal support services such as finance, legal,
information systems and manufacturing and distribution, were aligned to support
the operational SBUs.
Subsequent to August 31, 1999, the Company acquired the assets of the
Professional Resources Organization (the Jack Phillips Group) for $1.5 million.
The Professional Resources Organization is a leading measurement assessment firm
specializing in measuring the impact and return on investment of training and
consulting programs.
In January 1999, the Company acquired the assets of Khalsa Associates
for $2.7 million. Khalsa Associates is a leading sales training company.
Effective April 1, 1998, the Company acquired King Bear, Inc. ("King
Bear"), a Tokyo, Japan based company. King Bear, a former Covey licensee,
provides leadership and time management training as well as publishing services.
The publishing division of King Bear translated and currently publishes The 7
Habits of Highly Effective People in Japanese. The cash purchase price was $5.3
million with additional contingent payments to be made over the following five
years based upon the operating results of King Bear over that same period. No
contingent payments have been paid or accrued based upon King Bear's fiscal 1999
operating results.
During fiscal 1997, Franklin Quest Co. merged (the "Merger") with
Covey Leadership Center ("Covey") to form Franklin Covey Co. In connection with
13
<PAGE>
the Merger, the Company issued 5,030,894 shares of its common stock, valued at
$22.16 per share, in exchange for all of the issued and outstanding capital
stock of Covey. All outstanding options to purchase Covey common stock were
converted into 382,100 options to purchase the Company's common stock,
exerciseable at $5.97 per share. In addition, the Company also acquired certain
license rights for $27.0 million in cash.
On March 1, 1997, the Company acquired Premier Agendas, Inc., and
Premier School Agendas, Ltd., located in Bellingham, Washington, and Abbotsford,
British Columbia, respectively (collectively, "Premier"). Premier manufactures
and markets academic and personal planners for students from kindergarten to
college throughout the United States and Canada. Premier's business is seasonal
in nature and nearly all of its revenue is recognized during the Company's
fourth fiscal quarter. The combined cash purchase price was $23.2 million with
additional contingent payments to be paid over the following three years, based
upon Premier's operating performance over that same time period. As of August
31, 1999, the Company has made aggregate contingent payments of $21.5 million
and has accrued an additional $10.9 million at August 31, 1999 for the final
contingent payment.
Effective October 1, 1996, the Company acquired the net assets of
TrueNorth Corporation ("Personal Coaching"). Personal Coaching, a Utah
Corporation, is a provider of post-instructional personal coaching to
corporations and individuals. Personal Coaching 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 with
additional contingent payments to be paid over the following five years, based
on the operating results of Personal Coaching. As of August 31, 1999, the
Company has made aggregate contingent payments of $5.3 million and has accrued
an additional $5.0 million at August 31, 1999 for the third contingent payment.
RESTRUCTURING
During the fourth quarter of fiscal 1999, the Company's Board of
Directors approved a plan to restructure the Company's operations, reduce its
workforce and formally exit the majority of its leased office space located in
Provo, Utah. These changes are intended to align the Company's products,
services and channels in a manner that focuses Company resources on providing
integrated learning and performance solutions to both individuals and
organizations. The restructure is also intended to lay strategic, operational,
organizational and financial foundations for profitable growth. In connection
with the restructuring plan, the Company recorded a fourth quarter restructuring
charge of $16.3 million, which is included in the Company's statement of income
for the fiscal year ended August 31, 1999. Included in the restructuring charge
are costs to provide severance and related benefits as well as costs to formally
exit the leased office space. The Company anticipates completion of the
restructuring plan by the end of fiscal 2000 and may incur additional expenses
to complete the plan.
As part of the restructuring, the Company will provide severance and
related benefits to employees affected by the changes. The cost to provide these
benefits under the restructuring plan is estimated to be $11.7 million and
covers a reduction of approximately 600 employees across all areas of the
business. As of August 31, 1999, 115 employees had left the Company as part of
the reduction plan. Subsequent to August 31, 1999, an additional 61 employees
have left the Company in connection with this plan.
Also included in the restructuring provision is a charge to exit the
majority of the Company's leased office space in Provo, Utah. These facilities
14
<PAGE>
currently contain sales, marketing and other functions primarily aligned with
the Training and Education SBU. Before exiting the lease, sales and other sales
support functions located in Provo will be moved to regional offices located in
New York, Chicago, Los Angeles, San Francisco, Columbus, Dallas, Atlanta and
Washington, D.C. Remaining business and support functions will be moved to the
Company's corporate headquarters located in Salt Lake City, Utah. The Company
anticipates the costs to exit the facilities and sublease the space to be
approximately $4.6 million.
YEAR 2000 ISSUES
The Company has been actively engaged in assessing and correcting
potential year 2000 ("Y2K") information system concerns throughout fiscal 1999.
During fiscal 1997, the Company initiated a business reengineering and
information system implementation project (the "Project") that affects nearly
every aspect of the Company's operations. In an effort to address Y2K compliance
issues, the scope of the Project was expanded to ensure Y2K compliance for newly
acquired software and hardware as well as test existing systems for compliance.
From this process, a team representing different areas of the Company was
assembled to specifically work toward timely Y2K compliance. As of August 31,
1999, the Company's progress toward completion of Y2K remediation projects is as
follows:
State of Readiness
The Project has three significant phases that are designed to improve
both operating processes and information systems capabilities. The first phase
of the Project included hardware and software for the Company's financial
reporting and manufacturing operations and was made operational in August 1998.
Phase two focused on payroll and human resource applications and became
operational in January 1999. Phase three addresses the "Order to Collect"
systems and is expected to be completed in various stages through the year 2000
with critical applications to be made Y2K compliant before the end of 1999.
Within the framework of this Project, the Company's information
systems fall into four general categories: (i) Financial, (ii) Supply Chain,
(iii) Order to Collect, and (iv) Office Support. The Financial system includes
the general ledger, accounts payable, sales and use tax calculations, payroll
and human resources applications. Phase one of the Project provided systems and
hardware that are Y2K compliant for the general ledger, accounts payable and
sales and use tax calculations. Payroll and human resource systems were the
subject of phase two, which was made operational with compliant hardware and
software in January 1999. The Supply Chain system includes applications for
production planning, purchasing and product management. During the fourth
quarter of fiscal 1999, the Company completed upgrading Supply Chain systems
with the implementation of a new inventory management system. Supply Chain
systems were elements of phases one and three and have been certified by the
hardware and software manufacturers as Y2K compliant. The Company's Order to
Collect system includes legacy applications for order entry, seminar
registration, retail sales, order fulfillment, order shipping, invoicing and
collections. These systems will be affected by phase three of the Project and
completion is expected in various stages through the year 2000. The Office
Support system includes network hardware and operating systems, servers, desktop
and laptop computers and includes applications not specifically addressed by the
Project.
In order to correct possible Y2K problems, the Company has developed a
plan to assess potential Y2K problems, prioritize identified problems as
critical or non-critical, test compliance of critical systems and implement
solutions for all critical systems. To ensure Y2K readiness, all significant
15
<PAGE>
Company systems, including completed Project modules, were subject to assessment
and testing. The Company has completed its assessment of office support systems
and applications that could have a significant impact on the Company's ability
to sell and deliver its products and services. Following the assessment, all
problems were prioritized in order to mitigate problems with business-critical
systems. This includes network hardware and operating systems, servers and
desktop and laptop computers. The Company's office support systems compliance
analysis is also completed. The operating systems, server hardware and desktop
computers are tested and are Y2K compliant. The networking environment is 90%
completed with the remaining 10% representing architectural changes that
eliminate software and hardware that will not be made compliant by the vendor or
are deemed unnecessary by changing technology. The completion date for this
phase of testing is expected to be November 30, 1999.
The Company's support system applications include two categories of
products. The first category represents purchased, or "off the shelf"
applications. The second category represents applications developed inside the
company. Certifications of compliance for purchased applications have been
obtained from the various software vendors. The Company is confident that all
necessary updates have been made based on vendor instructions and at this point,
the Company is reliant on the latest compliance information gathered from its
vendors. The Company is currently monitoring its software vendors for changes to
their Y2K compliance statements. Applications developed in-house have also been
reviewed. Code analysis and process tests will continue through December 31,
1999. The Company is confident, based on current analysis and test results that
it will not be adversely affected by Y2K related problems. In addition, the
Company's electronic data interface ("EDI") system has been replaced, tested and
certified as Y2K compliant.
The Company is currently testing interfaces between processes of
critical systems in a specially developed test environment that does not
compromise current operations. Cross-functional processes include the
interaction of the Company's Financial, Supply Chain, Order-to-Collect and
Office Support systems. The Company expects that all critical systems will be
tested and certified as Y2K compliant prior to December 31, 1999.
The Company's telecommunications department has completed all testing
and analysis of equipment and services. Telecommunication vendor certification
has also been completed. The telecommunication systems support the Company's
call center and business voice systems, as well as data services connecting the
Company to outside services including Internet and point-to-point connections.
Cost to Address Y2K Issues
As of August 31, 1999, the Company has acquired $10.0 million of
hardware and $13.7 million of software in connection with the Project.
Consultants were also engaged to implement software modules and improve business
processes, but not necessarily to provide specific Y2K remediation services. The
Company does not expect to spend further material amounts for direct costs
related to the assessment and correction of potential Y2K issues.
Risk of the Company's Y2K Issues
The primary Y2K risk to the Company is from external vendors and
service providers. As part of its assessment of Y2K issues, the Company has
gathered information from its suppliers and other external vendors regarding
their Y2K compliance status. Based upon information received, the most
significant risk to the Company appears to be from certain critical
international suppliers that, despite their best efforts, may be affected by
utility outages and may not be able to meet delivery deadlines. The Company has
16
<PAGE>
obtained Y2K compliance information from its two largest shipping service
providers and does not believe that Y2K issues will adversely affect product
shipments. Based upon inquiry responses, the Company does not anticipate any
significant problems from its utility, telephone and financial service
providers. Although the Company is not aware of any other external risks, the
Company has no means of ensuring that all external vendors and service providers
will be Y2K compliant. The inability of certain external vendors or service
providers to complete their Y2K remediation efforts in a timely manner could
materially affect the operations of the Company. However, the effect of Y2K
non-compliance by external vendors is not readily determinable.
The Company has also assessed Y2K compliance issues related to its
products available for sale and does not believe that Y2K presents a material
exposure to the Company related to its products.
Contingency Plans
The Company is finalizing contingency plans and testing manual process
scenarios for the critical functions within the business units. The plans are
expected to be complete prior to December 31, 1999.
The Company's plan to complete Y2K remediation efforts is based upon
management's best estimates, which are subject to numerous assumptions regarding
future events, including the availability of certain resources and other
circumstances beyond the control of management. Estimated completion dates and
total costs are based upon current levels of activity and specific efforts to
correct potential Y2K problems. However, there can be no guarantee that stated
estimates can be achieved and actual results may differ materially from current
expectations. Specific factors that may result in material differences include,
but are not limited to, availability of critical application corrections, the
availability of required hardware and other similar uncertainties.
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data and
other selected operating data expressed as percentages of total sales:
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 1999 1998 1997
- --------------------------- ------------ ---------- ----------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 43.8 39.1 40.5
------------ ---------- ----------
Gross margin 56.2 60.9 59.5
------------ ---------- ----------
Operating expenses:
Selling, general and
administrative 42.4 40.5 37.9
Depreciation and
amortization 7.1 6.1 4.8
Merger related expenses 1.3
Restructuring costs 2.9
Loss on impaired assets 3.0
------------ ---------- ----------
Total operating expenses 55.4 46.6 44.0
------------ ---------- ----------
Income from operations 0.8 14.3 15.5
------------ ---------- ----------
Interest income 0.2 0.4 0.3
Interest expense (1.8) (1.5) (0.5)
------------ ---------- ----------
Net interest expense (1.6) (1.1) (0.2)
------------ ---------- ----------
(Loss) income before
provision for income
taxes and change in
accounting principle (0.8) 13.2 15.3
Provision for income
taxes (0.8) 5.5 6.3
------------ ---------- ----------
(Loss) income before
change in accounting
principle (1.6) 7.7 9.0
Cumulative effect of
change in accounting
principle, net of tax (0.4)
------------ ---------- ----------
Net (loss) income (1.6) 7.3 9.0
Preferred dividends (0.3)
------------ ---------- ----------
(Loss) income
available to common
shareholders (1.9)% 7.3% 9.0%
------------ ---------- ----------
17
<PAGE>
Sales Data:
Consumer Products 47.6% 47.4% 51.5%
Training and Education 38.0 37.9 35.7
International 9.1 8.2 5.5
Other 5.3 6.5 7.3
</TABLE>
FISCAL 1999 COMPARED WITH FISCAL 1998
Sales
The Company's sales, by reportable segment, were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
- ------------------------- ----------- ------------ -----------
1999 1998 1997
- ------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
Consumer Products $ 264,333 $ 258,973 $ 223,135
Training and Education 210,621 207,015 154,595
International 50,535 45,068 23,927
Other 29,434 35,556 31,615
----------- ------------ -----------
$ 554,923 $ 546,612 $ 433,272
----------- ------------ -----------
</TABLE>
Consumer Products sales increased $5.4 million, or 2%, compared to the
prior year. Sales increases from the Company's retail stores, contract stationer
channels, and the Internet were offset by decreased sales from catalog
operations and government products. Retail store sales increased due to five
additional stores and a 2% increase in comparable store sales. At August 31,
1999, the Company was operating 125 retail stores compared to 120 stores at
August 31, 1998. Comparable store sales growth was primarily attributable to
increased sales of technology-related products such as the Palm V(TM) by 3Com(R)
bundled with the Company's new Franklin Planner(TM) software, as well as the
introduction of limited edition planners such as the Hallmark(R) and Shoebox(R)
planners. The Company also had increased sales from contract stationer channels
due to increased demand from new marketing and distribution agreements. Sales
from the Internet channel have increased due to general changes in consumer
buying habits and ongoing enhancements to the Company's electronic commerce
infrastructure. Increased sales from these channels were partially offset by
decreased sales from the government products group and the Company's catalog
operations. Product sales to the U.S. government continued to be adversely
affected by changes in the government procurement process. Sales growth in other
distribution channels, including retail stores, contract stationers and the
Internet, continue to have an adverse affect on catalog sales. Price increases
did not have a material effect on sales growth between the periods.
Training and Education sales increased by $3.6 million, or 2%,
compared to the prior year. Sales increases from Premier, Personal Coaching and
direct product channels were partially offset by sales decreases in core
training programs and a decline in book royalties. Premier continues to expand
its share of the school agenda market and recognized a 22% increase in sales,
primarily from new customers. New business in both Personal Coaching and the
direct-products channel resulted in increased sales during fiscal 1999. These
increases in training and education sales were partially offset by decreased
sales in core training sales, primarily from corporate/on-site and facilitated
programs for leadership training. In response to disappointing sales performance
in core training programs, the Company is relocating its sales force to eight
regional sales offices. These sales offices are designed to bring customers and
the sales force closer together to achieve deeper market penetration and growth.
The field offices are expected to become fully operational during fiscal 2000.
In connection with the move to regional sales offices and other restructuring
activities, the Company anticipates that training program sales performance in
fiscal 2000 may be adversely affected. The Company anticipates the benefits
associated with the restructuring of its sales force to favorably impact sales
performance beginning in late fiscal 2000. In addition, book royalties decreased
due to the decline in royalties received from The 7 Habits of Highly Effective
Families book that was released in fiscal 1998.
International sales increased by $5.5 million, or 12%, compared to the
prior year. The increase was primarily due to the acquisition of a former
18
<PAGE>
licensee in Japan, which occurred during the fourth quarter of fiscal 1998.
Partially offsetting this increase were decreased sales in Canada and the Middle
East. The Company's Canadian operations were adversely affected as a result of
labor disputes at one of its largest clients. Also during fiscal 1999, the
Company converted its Middle Eastern direct office into a licensee operation.
Although this conversion reduced expenses and certain other business risks, the
Company only receives licensee royalties on qualifying sales. Other geographic
regions recorded nominal sales fluctuations compared to the prior year.
Other sales, which consist of the Company's commercial printing
services and fitness training sales, decreased $6.1 million, or 17%, compared to
the prior year. The decrease was due to the sale of the Company's Institute of
Fitness, which recognized sales of $6.8 million during fiscal 1998, but was sold
during the fourth quarter of fiscal 1998. The decrease resulting from the
Institute of Fitness sale was partially offset by increased commercial printing
sales at Publishers' Press.
Gross Margin
Gross margin consists of sales less cost of sales. Cost of sales
includes materials used in the production of planners and related products,
assembly and manufacturing labor costs, commissions of training consultants,
direct costs of conducting seminars, freight and certain other overhead costs.
Gross margin may be affected by, among other things, prices of materials, labor
rates, product mix, changes in product discount levels, production efficiency,
training consultant commissions and freight costs. Gross margin was 56.2% of
sales for fiscal 1999, compared to 60.9% in the prior year. The Company's gross
margin was adversely affected during fiscal 1999 by inventory write-offs,
changes in product mix, channel pricing, decreased core training volume and
declining book royalties. The Company's product mix continues to be affected by
an overall decrease in high-margin planner sales and an increase in lower-margin
technology-related product sales. Increased sales from the contract stationer
channel also adversely affected gross margin due to contracted pricing terms
that have resulted in higher unit sales volume, but at reduced margins. Core
training programs offered by the Company have gross margins that are generally
higher than the Company's gross margin on product sales. Continued declining
sales of these higher-margin programs resulted in a lower total gross margin for
the Company during fiscal 1999. Additionally, book royalties received in the
prior year reflect the impact of The 7 Habits of Highly Effective Families,
which was released in fiscal 1998 and had declining sales during the year, thus
directly impacting the Company's gross margin in fiscal 1999.
Operating Expenses
Selling, general and administrative ("SG&A") expenses increased $13.7
million, to 42.4% of sales, compared to 40.5% in the prior year. The increase
was primarily due to the development of electronic-based products and electronic
commerce channels, increased promotional spending during the fourth quarter and
the acquisition of King Bear. In addition, SG&A expenses increased due to the
opening of five new stores during fiscal 1999. During the year, the Company
invested heavily to develop and market new electronic-based products, such as
the Franklin Planner for Microsoft OutlookTM. The Company has also spent
significant amounts to improve its electronic commerce infrastructure to meet
changing consumer preferences and has committed significant resources to
development of its Internet web site and other on-line products and services.
During the fourth quarter, the Company increased its promotional spending,
primarily for catalogs and direct mailings, to advertise new products, such as
the Millennium edition of the Franklin Planner, and to improve training program
sales performance. Increased SG&A expenses can also be attributed to the
19
<PAGE>
acquisition of King Bear during fiscal 1998, which added $5.9 million of
incremental expenses to fiscal 1999. These increases were partially offset by
the sale of the Institute of Fitness, which recorded $3.8 million of SG&A
expenses prior to its sale in fiscal 1998.
Depreciation charges increased by $3.5 million over the prior year
primarily due to new computer software and hardware purchased in conjunction
with the Project and the addition of leasehold improvements for new stores.
Equipment and software purchased in connection with the Project are depreciated
over estimated useful lives of three to five years. Amortization charges
increased by $3.0 million due to amortization of contingent earnout payments
made during the second quarter of fiscal 1999 and the amortization of certain
Project costs.
Restructuring Costs
During the fourth quarter of fiscal 1999, the Company initiated a
restructuring plan designed to restructure the Company's operations, reduce its
workforce and formally exit the majority of its leased office space located in
Provo, Utah. As part of the restructuring plan, the Company intends to reduce
its workforce from 4,200 employees to approximately 3,600 employees. The cost to
provide severance and related benefits is estimated to be $11.7 million. As of
October 31, 1999, 176 employees had left the Company as part of the
restructuring plan. Also included in the restructuring provision is a charge to
exit certain leased office space in Provo, Utah. These facilities currently
accommodate sales, marketing and other functions primarily aligned with the
Training and Education SBU. The Company anticipates the costs to exit the
facilities and sublease the space to be $4.6 million. The restructuring plan is
expected to be completed by the end of fiscal 2000 and other restructuring costs
may be incurred in order to complete the plan.
Loss on Impaired Assets
At each balance sheet date, the Company reviews its goodwill, other
intangible assets and other long-term assets to determine whether events or
circumstances may have occurred which indicate possible impairment. As part of
the restructuring plan initiated during the fourth quarter, all programs,
products and curriculum were evaluated to determine their future value in the
restructured Company. As a result of this evaluation, certain products, services
and curricula were discontinued. Other intangible and long-term assets were also
reviewed for future value using undiscounted cash flows or other appropriate
valuation methodologies. Based upon the results of its most recent analysis, the
Company recognized a $16.6 million loss on impaired long-lived assets for the
year ended August 31, 1999.
Interest Expense
Interest expense increased $1.6 million, primarily due to increased
borrowing on the Company's long-term line of credit to purchase treasury stock
during fiscal 1999.
Income Taxes
During fiscal 1999, the Company recognized income tax expense of $4.5
million. Although the Company had a loss before income taxes of $4.2 million,
non-deductible goodwill amortization from the Merger and other acquisitions,
foreign income tax expense and losses in foreign countries resulted in a net
taxable position for the year. The effect of foreign losses is primarily
comprised of losses sustained in Japan for which no offsetting tax benefit could
be recognized due to uncertain future taxable income to offset such losses.
Based upon anticipated taxable income, the Company expects to incur an effective
tax rate of approximately 45.1% during fiscal 2000. The increase over prior
20
<PAGE>
years is primarily due to additional non-deductible goodwill generated from the
final Premier contingent earnout payment.
Preferred Stock Dividends
During fiscal 1999, the Company issued 750,000 shares of Series A
Preferred Stock (the "Preferred Stock") for $75.0 million in cash to a private
investor. The Preferred Stock dividends accrue at an annual rate of 10% and are
payable quarterly in cash or additional shares of Preferred Stock until July 1,
2002. Accordingly, the Company accrued $1.9 million in Preferred Stock dividends
as of August 31, 1999. Subsequent to August 31, 1999, the Company paid the
Preferred Stock dividend with the issuance of additional shares of Preferred
Stock.
FISCAL 1998 COMPARED WITH FISCAL 1997
Sales
Total sales for the fiscal year ended August 31, 1998 increased $113.3
million, or 26%, compared to the prior year. The increase in sales was primarily
the result of the Merger, an increase in the number of seminar participants and
an increase in the number of planners, agendas and related products sold. Price
increases did not have a material effect on increased sales between the periods
Consumer Products sales increased $35.8 million, or 16%, compared to
the prior year. Increased sales from the Company's retail stores, catalog
operation and wholesale channel were partially offset by decreased sales at the
government products group (formerly Productivity Plus). Retail store sales
increased $17.1 million over the prior year, primarily as a result of 10 new
stores that were opened during fiscal 1998. In addition, comparable store sales
increased 3.0% compared to the prior year. At the end of fiscal 1998, the
Company operated 120 retail stores. Catalog sales increased $9.7 million
compared to the prior year due to the Merger and new customers. The Company's
wholesale channel recognized increased sales due to the addition of new
marketing agreements. Product sales to the U.S. government decreased due to
changes in the government's procurement process.
Training and Education sales increased $52.4 million, or 34%, as
compared to the prior year. The increase was primarily attributable to
additional training program sales related to the Merger. In addition, school
agenda sales through Premier increased $10.3 million compared to the prior year
due to increased unit sales in the U.S. Sales from the Personal Coaching
division also increased compared to the prior year due to new customers.
Partially offsetting these increases were decreased sales through the Company's
direct products channel. The decrease in direct product business was primarily
due to the loss of a large customer in that channel.
International sales increased $21.1 million, or 88% compared to fiscal
1997. The increase was primarily due to the Merger and the fourth quarter
acquisition of King Bear, a former Covey licensee, which operates in Japan.
Other sales increased $3.9 million, or 12%, compared to the prior year
due to increased commercial sales at the Company's printing services subsidiary.
Gross Margin
Gross margin was 60.9% compared to 59.5% for the prior year. The
increase was primarily due to an increase in higher margin training program
sales resulting from the Merger. Generally, training sales have a higher gross
margin than product sales, and during fiscal 1998, training program sales, which
represent a significant portion of total Training and Education SBU sales,
increased compared to the prior year.
21
<PAGE>
Operating Expenses
Operating expenses include selling, general and administrative
expenses as well as depreciation and amortization charges that occur in the
normal course of business. Selling, general and administrative expenses
increased to 40.5% of sales compared to 37.9% of sales during the prior year.
The increase reflects the higher operating expenses, as a percentage of sales,
of Covey, a full year of Premier operating expenses, the addition of 10 new
retail stores and additional direct operations in Japan and Australia. Premier
has seasonal sales which occur primarily in the Company's fourth fiscal quarter,
but continues to incur selling, general and administrative expenses during the
entire year.
Depreciation expense increased $6.0 million over the prior year due to
purchases of computer hardware and software in connection with the Project, the
addition of new printing presses and leasehold improvements related to the
opening of new retail stores. Amortization charges increased $6.2 million
compared to the prior year due to the amortization of intangibles acquired in
connection with the Merger and contingent payments made to Premier and Personal
Coaching during fiscal 1998.
Interest Expense
Interest expense increased $6.0 million compared to the prior year
primarily due to increased debt used to purchase treasury stock during fiscal
1998.
Income Taxes
Income taxes were accrued using an effective rate of 41.5% for fiscal
1998 compared to 41.4% for the prior year. The increase was due primarily to
additional non-deductible goodwill generated from the Merger and certain
acquisitions.
Change in Accounting Principle
During fiscal 1998, the Emerging Issues Task Force (the "EITF") of the
Financial Accounting Standards Board issued consensus ruling 97-13 which
specifies the accounting treatment of certain business reengineering and
information technology implementation costs. In connection with the Project, the
Company has capitalized costs in accordance with generally accepted accounting
principles. Certain previously capitalized costs of the Project were written off
in accordance with EITF 97-13 as a cumulative adjustment during the Company's
first quarter of fiscal 1998. The cumulative amount written off in fiscal 1998
was $2.1 million, net of tax.
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly
consolidated financial data for the most recent eight quarters. The quarterly
consolidated financial data reflects, in the opinion of Management, all
adjustments necessary to fairly present the results of operations for such
periods. Results of any one or more quarters are not necessarily indicative of
continuing trends.
Quarterly Financial Information:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1999
- ------------------ ---------- ---------- ---------- ----------
Q1 Q2 Q3 Q4
- ------------------ ---------- ---------- ---------- ----------
In thousands, except per share amounts
<S> <C> <C> <C> <C>
Sales $ 140,362 $137,089 $109,267 $168,205
Gross margin 86,431 79,128 58,522 87,710
Restructuring
costs 16,282
Loss on impaired
assets 16,559
Income (loss)
before
provision for
income taxes 18,815 11,305 (7,922) (26,424)
Net income
(loss) 10,913 6,557 (4,595) (21,647)
Preferred
dividends 1,875
Income (loss)
available to
common
shareholders 10,913 6,557 (4,595) (23,522)
Diluted income
(loss) per share .50 .31 (.22) (1.15)
22
<PAGE>
YEAR ENDED AUGUST 31, 1998
- ------------------ ---------- ---------- ---------- ----------
Q1 Q2 Q3 Q4
- ------------------ ---------- ---------- ---------- ----------
In thousands, except per share amounts
Sales $ 143,919 $138,564 $107,542 $156,587
Gross margin 87,269 85,068 64,814 95,573
Income before
provision for
income taxes 23,267 21,303 803 26,658
Income before
accounting
change 13,611 12,462 470 15,595
Cumulative
effect of
accounting
change, net
of tax (2,080)
Income
available to
common
hareholders 11,531 12,462 470 15,595
Diluted income
from continuing
operations
per share .53 .49 .02 .67
Diluted net
income per share .45 .49 .02 .67
</TABLE>
The Company's quarterly results of operations reflect seasonal trends
that are primarily the result of customers who renew their Franklin Planners on
a calendar year basis. Training and Education sales are moderately seasonal
because of the timing of corporate training, which is not typically scheduled
during holiday and vacation periods and the timing of Premier's sales, which
occur primarily in the Company's fourth quarter. In the Company's experience,
catalog sales, retail store sales and income tend to be lower during the third
quarter of each fiscal year. The seasonal nature of the Company's operations has
historically resulted in higher sales and significantly higher operating margins
during the first, second and fourth quarters, with declines in sales and income
occurring during the third quarter of each fiscal year. The Company believes
that the seasonal pattern of sales and earnings during its fiscal year will
continue as in the past, exclusive of restructuring and other similar charges.
During the fourth quarter of fiscal 1999, the Company initiated a
restructuring plan that resulted in a $16.3 million charge to operations. In
connection with the restructuring plan and upon review of certain goodwill,
intangibles and other long-term assets, the Company also recognized a loss on
impaired assets totaling $16.6 million. Also during the fourth quarter of fiscal
1999, the Company issued 750,000 shares of Preferred Stock for $75.0 million.
The Preferred Stock dividends accrue at an annual rate of 10% and are payable
quarterly in cash or additional shares of Preferred Stock until July 1, 2002. At
August 31, 1999 the Company had accrued $1.9 million of Preferred Stock
dividends which were paid subsequent to August 31, 1999 with the issuance of
additional shares of Preferred Stock.
Quarterly fluctuations may also be affected by other factors including
the addition of new institutional customers, the introduction of new products,
the timing of large institutional orders and the opening of new retail stores.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of capital have been net
cash provided by operating activities, long-term borrowings and proceeds from
the sale of common stock. Working capital requirements have also been financed
through short-term borrowing and line-of-credit financing. During the fourth
quarter of fiscal 1999, the Company issued 750,000 shares of Series A Preferred
Stock for $75.0 million in cash to a private investor. The Preferred Stock
dividends accrue at an annual rate of 10%, and are payable quarterly, at the
Company's option, in additional shares of Preferred Stock until July 1, 2002.
Subsequent to that date, all Preferred Stock dividends must be paid in cash.
23
<PAGE>
Accrued Preferred Stock dividends at August 31, 1999 totaling $1.9 million were
subsequently paid with issuance of additional shares of Preferred Stock.
Net cash provided by operating activities during fiscal years 1999 and
1998 was $36.0 million and $74.1 million, respectively. During fiscal 1999,
adjustments to net loss included $43.5 million of amortization and depreciation,
$16.6 million for losses on impaired assets and a net increase of $10.5 million
in deferred tax assets. The change in deferred taxes primarily represents an
increase in current deferred tax assets generated in fiscal 1999. The primary
uses of cash for operations were increases in inventory of $12.0 million and
increased receivables of $8.9 million. Inventories increased primarily due to an
increase in the number of Franklin Planner designs, new binder models in stock
and higher costs associated with electronic products. Accounts receivable
increased due to increased sales at Premier, which has seasonal sales that occur
primarily during the Company's fourth quarter. In connection with its
restructuring plan, the Company recorded a $16.2 million accrual for expected
costs to reduce the workforce and exit certain leased office space. Cash outlays
for restructuring costs are expected to occur throughout fiscal 2000. Cash used
to pay income taxes is the result of quarterly payments on expected taxable
earnings that exceeded actual taxable income for the year. The increase in
payables and accrued liabilities is primarily due to the timing of goods and
services received and corresponding payments. During fiscal 1998, adjustments to
net income included $38.6 million of depreciation and amortization charges. The
Company used $26.5 million to finance an increase in accounts receivable from
seasonal sales by Premier, an increase in other assets and a decrease in
accounts payable and accrued liabilities. A decrease in inventory and an
increase in income taxes payable provided approximately $20.3 million of cash to
operations.
Net cash used for investing activities during fiscal years 1999 and
1998 was $40.7 million and $43.8 million, respectively. During fiscal 1999, the
Company paid $14.8 million in contingent earnout payments in connection with
certain acquisitions. An additional $4.2 million was spent to acquire other
businesses during the year, including Khalsa Associates, a sales training
company. The Company also received $1.3 million in cash from the sale of certain
land and a non-business related building. In fiscal 1998, $11.9 million was paid
as contingent payments related to the acquisitions of Premier and Personal
Coaching, and $4.9 million of cash was used to acquire King Bear, a former
licensee located in Japan. During fiscal 1998, the Company also sold its
Institute of Fitness and certain consulting business units. The net cash
received for these divestitures was $12.1 million. Funds invested in property,
plant and equipment during fiscal years 1999 and 1998 were $23.0 million and
$39.2 million, respectively. Capital expenditures during 1999 consisted
primarily of an addition to one of the Company's buildings, new store leasehold
improvements, computer hardware and software, and other manufacturing equipment.
Fiscal 1998 expenditures were primarily for new computer hardware and software
in connection with the Project, new store leasehold improvements, printing
presses and other manufacturing equipment.
The Company had net cash proceeds of $2.4 million from financing
activities for the year ended August 31, 1999. During fiscal 1999, the Company
used $40.7 million for payments on long-term debt, primarily on its long-term
line of credit. In addition, the Company used $32.7 million to purchase
2,126,000 shares of its common stock during fiscal 1999. At August 31, 1999, the
Company had approximately 1,000,000 shares remaining under Board authorized
treasury stock purchase plans. The primary source of cash from financing
activities during fiscal 1999 was the issuance of 750,000 shares of Series A
Preferred Stock for $75.0 million. During fiscal 1998, the Company used $21.6
million of cash for financing activities. Fiscal 1998 financing activity was the
result of $120.0 million received from the issuance of unsecured senior notes
24
<PAGE>
and borrowings on the Company's long-term line of credit, combined with payments
of $87.2 million on long-term debt instruments, and $57.0 million used to
purchase treasury stock.
At August 31, 1999, the Company had unsecured bank lines of credit
available for working capital needs totaling $75.0 million. The Company's lines
of credit consisted of a $10.0 million short-term line of credit and a $65.0
million long-term credit facility. On August 31, 1999, the Company had $1.4
million outstanding on the short-term line of credit with interest at the lesser
of the prime rate less .75% or the LIBOR rate plus 1.00%. No amounts were
outstanding on the long-term line of credit at August 31, 1999. The line of
credit agreement required the Company to maintain certain financial ratios and
working capital levels. As a result of restructuring charges and losses on
impaired assets, the Company was not in compliance with certain covenants of the
line of credit agreement at August 31, 1999. Subsequent to August 31, 1999, the
Company obtained a new line of credit agreement with existing lenders that
maintained the $10.0 million short-term line of credit and increased the
long-term line of credit to $100.0 million. The new line of credit requires the
Company to maintain certain financial ratios and minimum net worth levels,
excluding the financial impact of 1999 restructuring charges. Interest on the
new line of credit agreement is at the lesser of the prime rate or the LIBOR
rate plus 1.50%. The new line of credit agreement expires October 1, 2001.
During fiscal 1998, the Company privately issued $85.0 million of
unsecured senior notes payable (the "Notes Payable"). The Notes Payable were due
May 4, 2008 with interest at a fixed rate of 6.6%. The Notes Payable purchase
agreement required the Company to maintain certain financial ratios and net
worth levels until the Notes Payable are paid in full. As a result of the
restructuring charge, the Company was not in compliance with certain terms of
the Notes Payable at August 31, 1999. The Company did not obtain a waiver on the
terms of the debt covenants, and subsequent to August 31, 1999, the Company
retired the $85.0 million notes payable at par plus accrued interest. The
Company utilized its expanded long-term line of credit to retire the Notes
Payable.
Subsequent to August 31, 1999, the Company announced that it had filed
a registration statement with the Securities and Exchange Commission ("SEC")
related to a subscription offering for up to an additional 750,000 shares of
Series A Preferred Stock. Shareholders of record on November 8, 1999 will
receive a non-transferable right to purchase one share of Series A Preferred
stock for every 27 common shares owned at a subscription price of $100 per
share. The subscription offering is expected to expire on November 30, 1999.
This offering is being made in connection with the issuance of Preferred Stock
to a private investor during the Company's fourth quarter of fiscal 1999. The
Preferred Stock shares being offered to shareholders are substantially identical
to the Preferred Stock issued to the private investor. The Company's Board of
Directors is making no recommendation as to whether shareholders should exercise
or restrain from exercising their subscription rights.
Going forward, the Company will continue to incur costs necessary for
the development of electronic commerce channels, retail store buildouts and
renovations, regional office leasehold improvements and other costs related to
the growth of the business. Cash provided by operations, available lines of
credit and other financing alternatives will be used for these expenditures.
Management anticipates that its existing capital resources will be sufficient to
enable the Company to maintain its current level of operations and its planned
internal growth for the foreseeable future. The Company also continues to pursue
additional financing alternatives as it repositions itself for future growth.
25
<PAGE>
The Company is registered in all states that have a sales tax and
collects and remits sales or use tax on retail sales made through its stores and
catalog sales. Compliance with environmental laws or regulations has not had a
material effect on the Company's operations. Inflation has not had a material
effect on the Company's operations. However, future inflation may have an impact
on the price of materials used in planners and related products, including paper
and leather materials. The Company may not be able to pass on such increased
costs to its customers.
MARKET RISK OF FINANCIAL INSTRUMENTS
The Company has exposure to market risk from foreign currency exchange
rates and changes in interest rates. To manage the volatility related to
currency exchange rates, the Company entered into limited derivative
transactions to manage well-defined foreign exchange risks during fiscal 1999.
However, at August 31, 1999 the Company did not have any derivative instruments
outstanding. Corresponding gains and losses on derivative contracts were also
immaterial for the year ended August 31, 1999. As the Company continues to
expand internationally, the Company's use of foreign exchange contracts may grow
in order to manage the foreign currency risks to the Company. As of August 31,
1999, the Company had not entered into derivative instruments to hedge its
exposure to interest rate risk.
"Safe Harbor" Statement Under the Private Securities Litigation
Reform Act of 1995
With the exception of historical information (information relating to
the Company's financial condition and results of operations at historical dates
or for historical periods), the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. Such uncertainties include, but
are not limited to, unanticipated developments in any one or more of the
following areas: the integration of acquired or merged businesses, management of
growth, unanticipated costs, delays or outcomes relating to the Company's
restructuring plan, availability of financing sources, dependence on products or
services, the rate and consumer acceptance of new product introductions,
competition, Y2K issues, the number and nature of customers and their product
orders, pricing, pending and threatened litigation, and other risk factors which
may be detailed from time to time in the Company's press releases, reports to
shareholders and in filings with the Securities and Exchange Commission.
These forward-looking statements are based on management's
expectations as of the date hereof, and the Company does not undertake any
responsibility to update any of these statements in the future. Actual future
performance and results will differ and may differ materially from that
contained in or suggested by these forward-looking statements as a result of the
factors set forth in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in the Company's filings with
the Securities and Exchange Commission.
26
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Franklin Covey Co.:
We have audited the accompanying consolidated balance sheets of
Franklin Covey Co. (a Utah corporation) and subsidiaries as of August 31, 1999
and 1998, and the related consolidated statements of income and comprehensive
income, shareholders' equity and cash flows for each of the three years in the
period ended August 31, 1999. 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 Franklin Covey Co.
and subsidiaries as of August 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
October 8, 1999
27
<PAGE>
FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1999 1998
- -------------------------------------------------------------------------------- ---------------- -----------------
In thousands, except share data
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 26,781 $ 27,760
Accounts receivable, less allowance for doubtful
accounts of $4,074 and $2,840 92,500 83,621
Inventories 59,780 47,799
Income taxes receivable 3,912
Other assets 28,673 16,113
---------------- -----------------
Total current assets 211,646 175,293
Property and equipment, net 127,863 127,268
Goodwill and other intangibles, net 267,185 270,202
Other assets 16,609 24,514
---------------- -----------------
$ 623,303 $ 597,277
---------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,038 $ 24,496
Accrued compensation 10,414 14,051
Accrued acquisition earnouts 15,900 12,960
Accrued restructuring costs 16,200
Other accrued liabilities 37,388 31,596
Income taxes payable 5,900
Current portion of long-term debt 90,010 3,562
Current portion of capital lease obligations 558 788
---------------- -----------------
Total current liabilities 203,508 93,353
Line of credit 35,000
Long-term debt, less current portion 5,624 89,929
Deferred income taxes 34,818 35,857
Capital lease obligations, less current portion 919 1,484
---------------- -----------------
Total liabilities 244,869 255,623
---------------- -----------------
Commitments and contingencies (Notes 1, 6, 7, 9 and 18)
Shareholders' equity:
Preferred stock - Series A, no par value; convertible into common
stock at $14 per share; 4,000,000 shares authorized, 750,000
shares issued at $100 per share 75,000
Common stock, $.05 par value; 40,000,000 shares
authorized, 27,055,894 shares issued 1,353 1,353
Additional paid-in capital 235,632 238,052
Retained earnings 199,125 209,772
Deferred compensation (320) (843)
Accumulated other comprehensive loss (782) (2,250)
Treasury stock at cost, 6,676,373 and 4,813,242 shares (131,574) (104,430)
---------------- -----------------
Total shareholders' equity 378,434 341,654
---------------- -----------------
$ 623,303 $ 597,277
---------------- -----------------
See accompanying notes to consolidated financial statements.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED AUGUST 31, 1999 1998 1997
- -------------------------------------------------------------------------- ----------------- ---------------- -----------------
In thousands, except per share data
<S> <C> <C> <C>
Sales $ 554,923 $ 546,612 $ 433,272
Cost of sales 243,132 213,888 175,602
----------------- ---------------- -----------------
Gross margin 311,791 332,724 257,670
Selling, general and administrative 235,003 221,303 164,057
Depreciation and amortization 39,539 33,028 20,800
Merger and integration costs 5,450
Provision for restructuring costs 16,282
Loss on impaired assets 16,559
----------------- ---------------- -----------------
Income from operations 4,408 78,393 67,363
Interest income 1,278 1,954 1,344
Interest expense (9,912) (8,316) (2,344)
----------------- ---------------- -----------------
(Loss) income before provision for income taxes
and cumulative effect of accounting change (4,226) 72,031 66,363
Provision for income taxes 4,546 29,893 27,498
----------------- ---------------- -----------------
(Loss) income before cumulative effect of accounting change (8,772) 42,138 38,865
Cumulative effect of accounting change, net of tax (Note 14) (2,080)
----------------- ---------------- -----------------
Net (loss) income (8,772) 40,058 38,865
Preferred stock dividends 1,875
----------------- ---------------- -----------------
Net (loss) income available to common shareholders $ (10,647) $ 40,058 $ 38,865
----------------- ---------------- -----------------
(Loss) income from continuing operations per share:
Basic $ (.51) $ 1.75 $ 1.83
Diluted (.51) 1.70 1.76
Cumulative effect of accounting change, net of tax, per share:
Basic (.09)
Diluted (.08)
----------------- ---------------- -----------------
Net (loss) income per share:
Basic $ (.51) $ 1.66 $ 1.83
Diluted (.51) 1.62 1.76
----------------- ---------------- -----------------
Weighted average number of common and common equivalent shares:
Basic 20,881 24,091 21,201
Diluted 20,881 24,726 22,117
----------------- ---------------- -----------------
COMPREHENSIVE INCOME:
Net (loss) income available to common shareholders $ (10,647) $ 40,058 $ 38,865
Foreign currency translation adjustments 1,468 (1,316) 6
----------------- ---------------- -----------------
Comprehensive (loss) income $ (9,179) $ 38,742 $ 38,871
----------------- ---------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUM-
ULATED
SERIES A ADDITION- OTHER TOTAL
PREFFERED STOCK COMMON STOCK AL DEFERRED COMPRE- TREASURY STOCK SHARE-
----------------- ---------------- PAID-IN RETAINED COMPEN- HENSIVE ------------------ HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SATION LOSS SHARES AMOUNT EQUITY
- ---------------------------- -------- -------- -------- ------- -------- -------- ------- ------- ------- --------- ---------
In thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1996 22,025 $ 1,101 $132,959 $130,849 $(1,240) $ (940) (1,497) $ (30,894) $231,835
Issuance of common stock
in connection with merger 5,031 252 111,246 111,498
Value of options granted
in merger 4,331 4,331
Tax benefit from exercise
of affiliate stock options 1,654 1,654
Issuance of common stock
from treasury (11,340) 844 14,340 3,000
Purchase of treasury shares (1,720) (36,378) (36,378)
Deferred compensation 849 (255) 594
Other comprehensive income 6 6
Net income 38,865 38,865
-------- -------- ------- ------- -------- -------- ------- ------- ------- --------- ---------
Balance at August 31, 1997 27,056 1,353 239,699 169,714 (1,495) (934) (2,373) (52,932) 355,405
Tax benefit from exercise
ofaffiliate stock options 266 266
Issuance of common stock
from treasury (1,913) 247 5,515 3,602
Purchase of treasury shares (2,687) (57,013) (57,013)
Deferred compensation 652 652
Other comprehensive loss (1,316) (1,316)
Net income 40,058 40,058
-------- -------- ------- ------- -------- -------- ------- ------- ------- --------- ---------
Balance at August 31, 1998 27,056 1,353 238,052 209,772 (843) (2,250) (4,813) (104,430) 341,654
Issuance of Series A
Preferred Stock 750 $ 75,000 75,000
Preferred stock dividends (1,875) (1,875)
Tax benefit from exercise
of affiliate stock options 1,320 1,320
Issuance of common stock
from treasury (3,740) 263 5,566 1,826
Purchase of treasury shares (2,126) (32,710) (32,710)
Deferred compensation 523 523
Other comprehensive income 1,468 1,468
Net loss (8,772) (8,772)
-------- -------- ------- ------- -------- -------- ------- ------- ------- --------- --------
Balance at August 31, 1999 750 $ 75,000 27,056 $ 1,353 $235,632 $199,125 $ (320) $ (782) (6,676) $(131,574) $378,434
-------- -------- ------- ------- -------- -------- ------- ------- ------- --------- ---------
See accompanying notes to consolidated financial statements.
</TABLE>
30
<PAGE>
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1999 1998 1997
- -------------------------------------------------------------------------- ----------------- ---------------- -----------------
In thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income $ (8,772) $ 40,058 $ 38,865
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 43,547 38,626 23,576
Loss on impaired assets 16,559
Deferred income taxes (10,503) 613 (3,178)
Deferred compensation 522 652 594
Loss on sale of assets 673 317 8
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable (8,879) (9,995) (18,983)
(Increase) decrease in inventories (11,981) 8,061 (1,068)
Increase in other assets (3,868) (12,044) (13,397)
Increase (decrease) in accounts payable
and accrued liabilities 10,966 (4,495) 18,783
Increase in accrued restructuring costs 16,200
Increase (decrease) in income taxes payable (8,491) 12,261 465
----------------- ---------------- -----------------
Net cash provided by operating activities 35,973 74,054 45,665
----------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, including earnout payments (19,025) (16,786) (33,188)
Disposal of businesses 12,126
Purchase of license rights (27,000)
Purchases of property and equipment, net of effects from
acquisitions (22,996) (39,239) (20,189)
Proceeds from sale of property and equipment 1,288 84 366
----------------- ---------------- -----------------
Net cash used for investing activities (40,733) (43,815) (80,011)
----------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in short-term borrowings (2,229) (889) 2,858
Proceeds from long-term debt and line of credit, net of effects
from acquisitions 1,142 119,969 64,419
Payments on long-term debt and capital leases (40,652) (87,221) (3,211)
Proceeds from issuance of Series A Preferred Stock 75,000
Purchases of common stock for treasury (32,710) (57,013) (36,378)
Proceeds from issuance of treasury stock 1,826 3,602 3,000
----------------- ---------------- -----------------
Net cash provided by (used for) financing activities 2,377 (21,552) 30,688
----------------- ---------------- -----------------
Effect of foreign exchange rates 1,404 (1,316) 6
----------------- ---------------- -----------------
Net (decrease) increase in cash and cash equivalents (979) 7,371 (3,652)
Cash and cash equivalents at beginning of year 27,760 20,389 24,041
----------------- ---------------- -----------------
Cash and cash equivalents at end of year $ 26,781 $ 27,760 $ 20,389
----------------- ---------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Franklin Covey Co. (the "Company") provides integrated training and
performance solutions to organizations and individuals in productivity,
leadership, sales, communication and other areas. Each solution set may include
components for training and consulting, assessment and other application tools
that are generally available in electronic or paper-based formats. The Company's
products and services are available through professional consulting services,
public workshops, catalogs, retail stores and the Internet at
www.franklincovey.com. The Company's best known products include the Franklin
Planner and the best-selling book, The 7 Habits of Highly Effective People.
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. As of August
31, 1999, the Company had demand deposits at various banks in excess of the
$100,000 limit for insurance by the Federal Deposit Insurance Corporation.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method. Elements of cost in inventories
include raw materials, direct labor and manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation or amortization. Depreciation or amortization is calculated using
the straight-line method over the expected useful lives of the assets as
follows:
Description Useful Lives
- -------------------------------------------------------------
Machinery and equipment 3-7 years
Furniture, fixtures and leasehold
improvements 5-7 years
Buildings 15-39 years
Leasehold improvements are amortized over the lesser of the economic
life of the asset or the contracted lease period. Expenditures for maintenance
and repairs are charged to expense as incurred. Gains and losses on the sale of
property and equipment are recorded in current operations.
32
<PAGE>
Other Long-Term Assets
The Company was recently involved in a business reengineering and
information systems implementation project (the "Project"). Certain costs of the
Project have been capitalized in accordance with authoritative accounting
pronouncements (see Note 14). At August 31, 1999, the Company had $10.6 million
of net capitalized Project costs classified as other long-term assets. Project
costs are amortized over a five-year period following completion of associated
Project phases.
Long-Lived Assets
The Company reviews for impairment of long-lived assets when events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred that indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the remaining life in measuring whether the assets are
recoverable. The Company assesses the impairment of long-lived assets at the
lowest level for which there are identifiable cash flows that are independent of
other groups of assets.
During the fourth quarter of fiscal 1999, the Company initiated a plan
to restructure its operations (Note 2). As part of the restructuring plan, all
programs, products and curriculum were evaluated to determine their future value
in the restructured Company. As a result of this evaluation, certain products,
services and curricula were discontinued which impacted certain related
long-lived assets and related goodwill. Based upon the results of this review,
the Company recognized a $16.6 million charge in the fourth quarter of fiscal
1999 on impaired assets related to the discontinued products and programs. The
loss on impaired assets for the year ended August 31, 1999 is comprised of the
following (in thousands):
Goodwill and other intangibles $ 8,234
Other long-term assets 6,772
Property and equipment 1,553
----------------
$ 16,559
----------------
The Company has disposed of these assets, as the assets have no market
value or future value to the Company. Impaired goodwill and other intangible
assets are primarily comprised of goodwill generated from previous acquisitions
whose products or services have been discontinued. Impaired other long-term
assets primarily consists of capitalized costs for Project modules that were
determined to have no future value. Impaired property and equipment is comprised
of purchased software written off as unusable and a printing press that was
unable to meet printing quality standards.
Foreign Currency Translation and Transactions
The balance sheet accounts of the Company's foreign subsidiaries are
translated into U.S. dollars using the current exchange rate. Revenues and
expenses are translated using an average exchange rate. The resulting
translation gains or losses are recorded as accumulated other comprehensive
income or loss in shareholders' equity. Transaction gains and losses are
reported in current operations.
Revenue Recognition
Revenue is recognized upon shipment of product or presentation of
training seminars.
Pre-Opening Costs
Pre-opening costs associated with new retail stores are charged to
expense as incurred. These amounts were not significant for the periods
presented in the accompanying consolidated financial statements.
33
<PAGE>
Income Taxes
The provision for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", established a standard for reporting
comprehensive income and its components within the financial statements.
Comprehensive income includes charges and credits to equity accounts that are
not the result of transactions with shareholders. Comprehensive income is
comprised of net income or loss and other comprehensive income items. The
Company's comprehensive income and losses consist of changes in the cumulative
translation adjustment account. The changes in the cumulative translation
adjustment account are not adjusted for income taxes as they relate to specific
indefinite investments in foreign subsidiaries.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. In the
normal course of business, the Company provides credit terms to its customers.
Accordingly, the Company performs ongoing credit evaluations of its customers
and maintains allowances for possible losses which, when realized, have been
within the range of management's expectations.
Fair Value of Financial Instruments
The book value of the Company's financial instruments approximates
fair value. The estimated fair values have been determined using appropriate
market information and valuation methodologies.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either an asset
or liability measured at fair value. The statement also requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. In June 1999, the FASB issued SFAS No. 137,
which deferred the application of SFAS No. 133 from fiscal years beginning after
June 15, 1999 to fiscal years beginning after June 15, 2000. The application of
SFAS No. 133 is not expected to have a material impact on the Company's
financial statements.
Reclassifications
Certain reclassifications have been made in the prior periods'
consolidated financial statements to conform with the current year presentation.
2. RESTRUCTURING COSTS
During the fourth quarter of fiscal 1999, the Company's Board of
Directors approved a plan to restructure the Company's operations, reduce its
workforce and formally exit the majority of its leased office space located in
34
<PAGE>
Provo, Utah. These changes are intended to align the Company's products,
services and channels in a manner that focuses Company resources on providing
integrated training and performance solutions to both individuals and
organizations. The restructure is also intended to lay strategic, operational,
organizational and financial foundations for profitable growth. In connection
with the restructuring plan, the Company recorded a fourth quarter restructuring
charge of $16.3 million, which is included in the accompanying statement of
income for the fiscal year ended August 31, 1999. Included in the restructuring
charge are costs to provide severance and related benefits as well as costs to
formally exit the leased office space. The Company anticipates completion of the
restructuring plan by the end of fiscal 2000 and may incur additional expenses
necessary to complete the plan.
The cost to provide severance and related benefits is estimated to be
$11.7 million and covers a reduction of approximately 600 employees across all
areas of the business. As of August 31, 1999, 115 employees had left the Company
as part of the reduction plan. Subsequent to August 31, 1999, an additional 61
employees have left the Company in connection with this plan.
Also included in the restructuring provision is a charge to exit the
majority of the Company's leased office space in Provo, Utah. These facilities
currently contain sales, marketing and other functions primarily aligned with
the Training and Education SBU. Before exiting the lease, sales and other sales
support functions located in Provo will be moved to regional offices located in
New York, Chicago, Los Angeles, San Francisco, Columbus, Dallas, Atlanta and
Washington, D.C. Remaining business and support functions will be moved to the
Company's corporate headquarters located in Salt Lake City, Utah. The Company
anticipates the costs to exit the facilities and sublease the space to be
approximately $4.6 million.
3. INVENTORIES
Inventories are comprised of the following (in thousands):
AUGUST 31,
- ------------------------------------ --------------- ---------------
1999 1998
- ------------------------------------ --------------- ---------------
Finished goods $ 42,594 $ 32,141
Work-in-process 4,186 5,261
Raw materials 13,000 10,397
--------------- ---------------
$ 59,780 $ 47,799
--------------- ---------------
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following (in thousands):
AUGUST 31,
- ------------------------------------ --------------- ---------------
1999 1998
- ------------------------------------ --------------- ---------------
Land and improvements $ 7,616 $ 10,382
Buildings 48,787 42,797
Machinery and equipment 113,592 91,841
Furniture, fixtures and
leasehold improvements
50,209 52,128
--------------- --------------
220,204 197,148
Less accumulated depreciation and
amortization
(92,341) (69,880)
--------------- ---------------
$ 127,863 $ 127,268
-------------- ---------------
Certain land and buildings represent collateral for debt obligations (see Note
6).
35
<PAGE>
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in
thousands):
AUGUST 31,
- ----------------------------------- ------------- -------------
1999 1998
- ----------------------------------- ------------- -------------
Goodwill $ 131,595 $ 115,290
License rights 27,000 27,000
Curriculum rights 61,752 62,685
Trade names and other 94,777 98,476
------------- -------------
315,124 303,451
Less accumulated amortization (47,939) (33,249)
------------- -------------
$ 267,185 $ 270,202
------------- -------------
Goodwill, representing the excess of cost over the net tangible and
identifiable intangible assets of acquired businesses, and other intangible
assets are amortized on a straight-line basis over the following estimated
useful lives:
Useful Lives
-----------------
Goodwill 5-30 years
License rights 40 years
Curriculum rights 14-30 years
Trade names and other 4-40 years
6. DEBT
Lines of Credit
At August 31, 1999, the Company had unsecured bank lines of credit
available for working capital needs totaling $75.0 million. The Company's lines
of credit consisted of a $10.0 million short-term line of credit and a $65.0
million long-term credit facility. On August 31, 1999, the Company had $1.4
million outstanding on the short-term line of credit with interest at the lesser
of the prime rate less .75% or the LIBOR rate plus 1.00%. The weighted average
interest rate on short-term borrowings at August 31, 1999 was 7.75%. No amounts
were outstanding on the long-term line of credit at August 31, 1999. In the
accompanying consolidated balance sheets, the current line of credit is reported
as a component of other accrued liabilities.
The line of credit agreement required the Company to maintain certain
financial ratios and working capital levels. As a result of the restructuring
and impaired asset charges, the Company was not in compliance with certain
covenants of the line of credit agreement at August 31, 1999. Subsequent to
August 31, 1999, the Company obtained a new line of credit agreement with
existing lenders that maintained the $10.0 million current line of credit and
increased the long-term line of credit to $100.0 million. The new line of credit
requires the Company to maintain certain financial ratios and minimum net worth
levels, excluding the financial impact of fiscal 1999 restructuring charges.
Interest on the new line of credit agreement is at the lesser of the prime rate
or the LIBOR rate plus 1.50%. The new line of credit agreement expires October
1, 2001.
Commitment fees associated with the lines of credit were immaterial
for fiscal years 1999 and 1998.
Long-Term Debt
Long-term debt is comprised of the following (in thousands):
AUGUST 31,
- ------------------------------------ ------------ ------------
1999 1998
- ------------------------------------ ------------ ------------
Senior unsecured notes payable
with interest at 6.6% due
semi-annually, paid in full during
October 1999 $ 85,000 $ 85,000
Note payable in quarterly
installments of $574 including
interest at 5.0% through April 2001 3,822
36
<PAGE>
Mortgage payable in monthly
installments of $18 including
interest at 8.5% through August
2016, secured by real estate 1,697 1,769
Note payable on demand, plus
interest at 8.0% 1,481 1,749
Note payable to bank, payable
in monthly installments of $20,
including interest at 7.8% through
August 2004, secured by equipment 976
Note payable to bank, payable
in monthly installments of $23,
plus interest at prime plus .5%
payable through September 2002,
secured by real estate 869 1,152
Mortgage payable in monthly
installments of $8 including interest
at 9.9% through October 2014,
secured by real estate 710 728
Note payable to a Japanese bank
for YEN 60,000, payable in quarterly
installments of YEN 20,000, due April
2000 including interest at 2.4% 548 996
Note payable, paid in full during
January 1999 1,000
Other mortgages and notes, payable
in monthly installments, interest ranging
from 2.0% to 9.7%, due at various dates
through 2003, secured by equipment,
inventories and accounts receivable 531 1,097
------------ ------------
95,634 93,491
Less current portion (90,010) (3,562)
------------ ------------
Long-term debt, less current
portion $ 5,624 $ 89,929
------------ ------------
The $85.0 million senior unsecured notes payable required the Company
to maintain certain financial ratios and net worth levels until the notes are
paid in full. As a result of the restructuring and impaired asset charges, the
Company was not in compliance with certain terms of the notes at August 31,
1999. The Company did not obtain a waiver on the terms of the debt covenants,
and subsequent to August 31, 1999 the Company retired the $85.0 million notes
payable at par plus accrued interest. The Company utilized its expanded
long-term line of credit to retire the Notes Payable. Accordingly, the $85.0
million notes payable were reported as a component of the current portion of
long-term debt in the accompanying consolidated balance sheet at August 31,
1999.
Future maturities of long-term debt at August 31, 1999 are as follows
(in thousands):
YEAR ENDING
AUGUST 31,
- -------------------------------- --------------
2000 $ 90,010
2001 2,456
2002 652
2003 372
2004 336
Thereafter 1,808
--------------
$ 95,634
--------------
37
<PAGE>
7. LEASE OBLIGATIONS
Capital Leases
Future minimum lease payments for equipment held under capital lease
arrangements as of August 31, 1999 are as follows (in thousands):
YEAR ENDING
AUGUST 31,
- -------------------------------------------- -- --------------
2000 $ 652
2001 592
2002 391
--------------
Total future minimum lease
payments 1,635
Less amount representing interest (158)
--------------
Present value of future minimum
lease payments 1,477
Less current portion (558)
--------------
$ 919
--------------
Total assets held under capital lease arrangements was $4.0 million
with accumulated amortization of $1.8 million as of August 31, 1999.
Amortization of capital lease assets is included in depreciation and
amortization expense.
Operating Leases
The Company leases certain retail store and office locations under
noncancelable operating lease agreements with remaining terms of one to eight
years. The following summarizes future minimum lease payments under operating
leases at August 31, 1999 (in thousands):
YEAR ENDING
AUGUST 31,
- -------------------------------------------- -- --------------
2000 $ 11,600
2001 8,803
2002 7,932
2003 7,325
2004 5,711
Thereafter 14,409
--------------
$ 55,780
--------------
Total rental expense for leases under operating lease terms was $17.6
million, $16.8 million, and $11.7 million for the years ended August 31, 1999,
1998 and 1997, respectively. Contingent rental expense, primarily from retail
stores, for the fiscal years ended August 31, 1999, 1998, and 1997 totaled $5.4
million, $4.1 million, and $3.5 million, respectively. Contingent rental
payments are generally based upon a percentage of retail store sales, which are
seasonally high during the Company's first and second fiscal quarters.
As described in Note 2, the Company intends to exit certain leased
office space in Provo, Utah. The foregoing operating lease minimum payment
schedule includes future minimum rents on the office space in Provo. Annual rent
expense on the leased office space is approximately $2.1 million and represents
the majority of minimum rent payments after 2004.
8. ADVERTISING
Costs for newspaper, television, radio and other advertising are
expensed as incurred. Direct response advertising costs consist primarily of
printing and mailing costs for catalogs and seminar mailers that are charged to
expense over the period of projected benefit, not to exceed twelve months. Total
advertising costs were $33.0 million, $26.7 million, and $18.9 million for the
years ended August 31, 1999, 1998, and 1997, respectively. Prepaid catalog and
seminar mailer costs reported in other current assets were $5.7 million and $4.4
million at August 31, 1999 and 1998, respectively.
38
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company has various purchase commitments for materials, supplies
and other items incident to the ordinary conduct of business. In aggregate, such
commitments are immaterial to the Company's operations.
Legal Matters
The Company is the subject of certain legal actions, which it
considers routine to its business activities. As of August 31, 1999, management
believes that, after discussion with its legal counsel, any potential liability
to the Company under such actions will not materially affect the Company's
financial position or results of operations.
10. RELATED PARTY TRANSACTIONS
As part of the Preferred Stock transaction completed during fiscal
1999 (Note 11), an affiliate of the investor was named Chairman of the Board of
Directors and interim Chief Executive Officer. The new Chairman and interim CEO
was previously a member of the Company's Board. In addition, two affiliates of
the investor were appointed to the Board of Directors. In connection with the
Preferred Stock offering, the Company pays an affiliate of the investor a
monitoring fee of $100,000 per quarter.
In January 1999, the Company issued 1,450 shares of its common stock
to each member of the Board of Directors for $17.25 per share. The purchase
price was paid in the form of secured promissory notes that are payable in three
annual installments beginning on March 31, 1999. A portion of each note payment
will be forgiven by the Company based on the Company's earnings per share during
the preceding fiscal year. The notes are secured by the shares of stock retained
in the Company's possession pursuant to the terms of a security agreement.
During the fiscal year ended August 31, 1999, the Company purchased
130,000 shares of its common stock for $2.3 million in cash, from an officer of
the Company. The foregoing shares were purchased at the existing fair market
value on the date of the transaction.
During fiscal years 1998 and 1997, the Company purchased 500,000 and
750,000 shares of its common stock for $12.0 million and $18.0 million in cash,
respectively, from the Vice-Chairman of the Board of Directors (formerly the
Chairman of the Board). All shares were purchased at the existing fair market
value on the dates of the transactions.
During the fiscal years ended August 31, 1999, 1998 and 1997, the
Company purchased 92,000, 100,000 and 110,000 shares of its common stock for
$1.2 million, $2.5 million and $2.4 million in cash, respectively, from a former
officer and director of the Company. The shares were purchased at the existing
fair market value on the dates of the transactions.
The Company purchased 194,000 shares of its common stock from a
director of the Company for $3.7 million in cash during the year ended August
31, 1998. Also during fiscal 1998, the Company purchased 57,094 shares of its
common stock from a former officer of the Company for $1.1 million. The shares
were purchased at the existing fair market value on the dates of the
transactions.
Premier Agendas ("Premier"), a subsidiary of the Company, had trade
accounts payable to various companies which are partially owned by certain
former owners of Premier totaling $3.3 million and $1.5 million at August 31,
1999 and 1998, respectively. In addition, Premier had notes payable to key
employees totaling $1.5 million and $1.8 million at August 31, 1999 and 1998,
respectively (Note 6). The notes payable were used for working capital, are due
upon demand, and have interest rates which approximate prevailing market rates.
39
<PAGE>
The Company, under a long-term agreement, leases buildings from a
partnership that is partially owned by a Vice-Chairman of the Board of Directors
(formerly the Co-Chairman) and certain officers of the Company. Rental expense
paid to the partnership totaled $2.1 million, $1.8 million, and $0.4 million
during fiscal years 1999, 1998, and 1997, respectively.
The Company pays a Vice-Chairman of the Board of Directors (formerly
the Co-Chairman) a percentage of the proceeds received for seminars that are
presented by the Vice-Chairman. During the years ended August 31, 1999, 1998,
and 1997, the Company paid approximately $3.0 million, $2.4 million, and $0.2
million, respectively, for such seminars.
During fiscal 1998, the Company sold one of its consulting units to a
group of former employees for $1.6 million. The amount is payable to the Company
in six annual installments from September 1998 through 2003. The Company also
granted certain employees the option to purchase another consulting unit of the
Company for $1.2 million payable to the Company in equal annual installments
over a ten-year period commencing January 2001. Such option becomes exerciseable
upon the achievement of certain financial thresholds over the next two years.
11. CAPITAL TRANSACTIONS
Preferred Stock
On June 2, 1999, the Company issued 750,000 shares of Series A
Preferred Stock (the "Preferred Stock") for $75.0 million in cash to a private
investor. The Preferred Stock dividends accrue at an annual rate of 10% and are
payable quarterly in cash or additional shares of Preferred Stock until July 1,
2002. Subsequent to that date, Preferred Stock dividends must be paid in cash.
Accordingly, the Company accrued $1.9 million in Preferred Stock dividends as of
August 31, 1999. Subsequent to August 31, 1999, the Company paid the Preferred
Stock dividend in additional shares of Preferred Stock. The Preferred Stock is
convertible at any time into the Company's common stock at a conversion price of
$14.00 per share and will rank senior to the Company's common stock. Holders of
the Preferred Stock have generally the same voting rights as common stock
holders on an "as-converted" basis.
In connection with the issuance of the Preferred Stock, and subsequent
to August 31, 1999, the Company announced that it has filed a registration
statement with the Securities and Exchange Commission ("SEC") related to a
subscription offering for up to an additional 750,000 shares of Series A
Preferred Stock. Shareholders of record on November 8, 1999 will receive a
non-transferable right to purchase one share of Series A Preferred stock for
every 27 common shares owned at a subscription price of $100 per share. The
subscription offering is expected to expire on November 30, 1999. The Preferred
Stock shares being offered to shareholders are substantially identical to the
Preferred Stock issued to the private investor.
Treasury Stock
The Company sold 263,100, 247,069 and 844,342 shares of its common
stock held in treasury as a result of the exercise of stock options and the
purchase of shares under the Company's employee stock purchase plan for the
years ended August 31, 1999, 1998 and 1997, respectively. These shares were sold
for a total of $1.4 million, $3.6 million, and $4.9 million and had a cost of
approximately $5.6 million, $5.5 million, and $14.3 million for the years ended
August 31, 1999, 1998 and 1997, respectively. In October 1998 and March 1998,
the Company's Board of Directors approved the purchase of up to 2,000,000 shares
and 3,000,000 shares, respectively, of the Company's common stock. During fiscal
years 1999, 1998 and 1997, the Company purchased 2,126,000 shares at a cost of
$32.7 million, 2,687,000 shares at a cost of $57.0 million, and 1,720,000 shares
at a cost of $36.4 million, respectively. At August 31, 1999, the Company had
approximately 1,000,000 shares remaining under Board authorized purchase plans.
40
<PAGE>
Tax Benefit from Exercise of Affiliate Stock Options
During fiscal years 1999, 1998 and 1997, certain employees exercised
affiliate stock options (nonqualified stock options received from principal
shareholders of the Company) which resulted in tax benefits to the Company of
$1.3 million, $0.3 million, and $1.7 million, respectively, which were recorded
as increases to additional paid-in capital.
Deferred Compensation
Deferred compensation represents restricted stock granted to key
executives. The stock vests in full four years from the date of grant and was
recorded at the fair market value at the date of grant. Compensation expense is
recognized ratably over the corresponding four-year vesting period.
Stock Options
The Company's Board of Directors has approved an incentive stock
option plan whereby shares of common stock are issued 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. At August 31, 1999, 370,415
shares were available for granting under the current incentive stock option
plan.
A summary of nonqualified and incentive stock option activity is set
forth below:
Number of Weighted Avg.
Options Exercise Price
- ------------------------ ----------------- -------------------
Outstanding at
August 31, 1996 3,738,154 $ 18.36
Granted:
At market value 747,340 19.03
In connection with
the Merger 382,100 5.97
Exercised (838,092) 4.32
Forfeited (127,574) 22.91
-----------------
Outstanding at
August 31, 1997 3,901,928 20.24
Granted 434,800 23.64
Exercised (200,024) 13.62
Forfeited (466,974) 23.72
-----------------
Outstanding at
August 31, 1998 3,669,730 21.89
Granted 2,058,825 12.02
Exercised (231,931) 3.59
Forfeited (212,459) 18.89
-----------------
Outstanding at
August 31, 1999 5,284,165 19.05
-----------------
Options exerciseable at August 31, 1999, 1998 and 1997 were 2,683,966,
2,261,935 and 2,269,399 and had weighted average exercise prices of $23.87,
$22.65 and $22.04, respectively.
41
<PAGE>
The Company applies Accounting Principles Board ("APB") Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock option plans or employee
stock purchase plan. Had compensation cost for the Company's stock option plans
and employee stock purchase plan been determined in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income (loss) and earnings per share would have been the pro forma
amounts indicated below (in thousands, except per share data):
YEAR ENDED
AUGUST 31,
- ---------------------------- ----------- ----------- ------------
1999 1998 1997
- ---------------------------- ----------- ----------- ------------
Net (loss) income
available to common
shareholders as
reported $(10,647) $ 40,058 $ 38,865
Net (loss) income
available pro forma (16,181) 34,978 30,514
Diluted (loss) earnings
per share as reported (.51) 1.62 1.76
Diluted (loss) earnings
per share pro forma (.80) 1.41 1.38
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to September 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The following information applies to options outstanding at August 31,
1999:
o A total of 1,432,341 options outstanding have exercise prices between
$1.11 and $9.69 per share, with a weighted average exercise price of
$8.17 and a weighted average remaining contractual life of 8.9 years.
At August 31, 1999, 156,308 options are exercisable.
o Options for 1,903,799 shares have exercise prices between $11.83 and
$19.31 per share, with a weighted average exercise price of $17.57 and
a weighted average remaining contractual life of 7.0 years of which
938,181 are exercisable at August 31, 1999.
o A total of 1,096,900 options have exercise prices between $20.00 and
$26.82 per share, with a weighted average exercise price of $24.14 and
a weighted average remaining contractual life of 5.9 years. At August
31, 1999, 738,352 options are exercisable.
o The remaining 851,125 options outstanding have exercise prices between
$29.38 and $34.50 per share, with a weighted average exercise price of
$34.15 and a weighted average remaining contractual life of 4.7 years
of which 851,125 are exercisable at August 31, 1999.
The weighted average fair value of options granted under the Company's
stock option plans during the fiscal years ended August 31, 1999 and 1998 were
$4.79 and $11.17, respectively. The weighted average fair value of options
granted under the Company's stock option plans during the year ended August 31,
1997 was estimated at $11.23 for options granted at the market price and $15.08
for options granted below the market price in connection with the Merger (Note
16).
42
<PAGE>
The Black-Scholes option-pricing model was used to calculate the
weighted average fair value of options using the following assumptions for
grants in fiscal years 1999, 1998 and 1997:
YEAR ENDED AUGUST 31,
- -------------------------- ----------- ------------ -----------
1999 1998 1997
- -------------------------- ----------- ------------ -----------
Dividend yield None None None
Volatility 55.8% 57.7% 61.5%
Expected life (years) 4.3 5.2 6.5
Risk free rate of
return 5.3% 5.4% 6.1%
The estimated fair value of options granted is subject to the
assumptions made and if the assumptions were to change, the estimated fair value
amounts could be significantly different. The weighted average fair value of
options exercised during fiscal years 1999, 1998 and 1997 was $7.04, $13.62, and
$4.41, respectively.
12. EMPLOYEE BENEFIT PLANS
Profit Sharing Plans
The Company has defined contribution profit sharing plans that qualify
under Section 401(k) of the Internal Revenue Code. The plans provide retirement
benefits for employees meeting minimum age and service requirements.
Participants may contribute up to 15% of their gross wages, subject to certain
limitations. The plans provide for matching contributions by the Company. The
matching contributions expensed in the years ended August 31, 1999, 1998, and
1997 were $1.7 million, $1.7 million, and $1.4 million, respectively.
Employee Stock Purchase Plan
The Company has 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
66,019, 46,934, and 42,527 have been issued under this plan for the years ended
August 31, 1999, 1998 and 1997, respectively. Shares available for issuance
under this plan at August 31, 1999, were 16,764. The Company accounts for its
employee stock purchase plan under the provisions of APB Opinion 25 and related
interpretations.
13. INCOME TAXES
The provision for income taxes consists of the following (in
thousands):
YEAR ENDED AUGUST 31,
- ------------------------- ----------- ------------ -----------
1999 1998 1997
- ------------------------- ----------- ------------ -----------
Current:
Federal $ 12,545 $ 24,620 $ 24,103
State 2,046 4,067 5,755
Foreign 2,077 1,920 790
Deferred:
Federal (10,422) (614) (2,544)
State (1,700) (100) (606)
----------- ------------ -----------
$ 4,546 $ 29,893 $ 27,498
----------- ------------ -----------
43
<PAGE>
In connection with a change in accounting principle, the Company also
recognized a $1.5 million tax benefit in fiscal 1998.
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:
YEAR ENDED AUGUST 31,
- ------------------------- ------------- ----------- -----------
1999 1998 1997
- ------------------------- ------------- ----------- -----------
Federal statutory
tax rate (35.0)% 35.0% 35.0%
State income
taxes, net of
federal effect (3.5) 3.5 5.0
Goodwill
amortization 44.6 2.3 .8
Effect of foreign
losses and tax
rate differential 63.9
Other 37.6 .7 .6
------------- ----------- -----------
107.6% 41.5% 41.4%
------------- ----------- -----------
Goodwill amortization consists of non-deductible goodwill generated by
the Merger and the acquisitions of Premier Agendas and Publishers' Press. During
the fiscal year ended August 31, 1999, the effect of foreign losses is primarily
comprised of losses sustained in Japan for which no offsetting tax benefit could
be recognized due to uncertain future taxable income to offset such losses.
Other items are comprised of various non-deductible expenses that occur in the
normal course of business, but which had a magnified effect on the tax rate due
to decreased taxable income in fiscal 1999 compared to prior years.
Significant components of the Company's deferred tax assets and
liabilities are comprised of the following (in thousands):
AUGUST 31,
- ------------------------------------ ------------ ------------
1999 1998
- ------------------------------------ ------------ ------------
Deferred income tax assets:
Inventory and bad debt
reserves $ 4,897 $ 3,203
Sales returns and
contingencies 2,248 993
Restructuring cost accrual 6,239
Vacation and other
accruals 2,559 2,454
Interest and other
capitalization 855 431
Other 414 243
------------ ------------
Total deferred income tax assets 17,212 7,324
------------ ------------
Deferred income tax liabilities:
Intangibles and fixed
asset step-up (30,896) (31,647)
Depreciation and
amortization (1,537) (2,203)
Other (3,240) (2,438)
------------ ------------
Deferred income tax
liabilities (35,673) (36,288)
------------ ------------
Net deferred income tax
liabilities $ (18,461) $ (28,964)
------------ ------------
Current deferred tax assets are reported as a component of other current assets.
44
<PAGE>
14. CHANGE IN ACCOUNTING PRINCIPLE
During fiscal 1998, the Emerging Issues Task Force (the "EITF") of the
FASB issued consensus ruling 97-13, which specified the accounting treatment of
certain business reengineering and information technology implementation costs.
EITF 97-13 requires that certain costs which were previously capitalized to now
be expensed as incurred. In addition, any previously capitalized costs that were
incurred, and are addressed by EITF 97-13, were required to be written off.
The Company was involved in a business reengineering and information
system implementation project that was principally completed during fiscal 1999.
During the Project, the Company capitalized certain costs in accordance with
generally accepted accounting principles. Certain previously capitalized costs
of the Project were written off in accordance with EITF 97-13 as a cumulative
adjustment in the Company's first quarter of fiscal 1998. During the remainder
of fiscal 1998 and during fiscal 1999, the majority of the costs associated with
the implementation Project were capitalized in accordance with EITF 97-13 and
other related accounting standards. The Company expects that any remaining costs
of the Project will qualify for capitalization under current accounting
guidelines.
The Company incurred significant costs associated with the Project
during the fourth quarter of fiscal 1997. The following unaudited pro forma
schedule presents the financial results of the Company as if the provisions of
EITF 97-13 were adopted on September 1, 1996 (in thousands, except per share
data):
YEAR ENDED
AUGUST 31, 1997
- ---------------------------------- -------------- --------------
Actual Pro Forma
- ---------------------------------- -------------- --------------
(unaudited)
Sales $ 433,272 $ 433,272
Gross margin 257,670 257,670
Operating income 67,363 64,184
Net income 38,865 37,026
Net income per share:
Basic $ 1.83 $ 1.75
Diluted 1.76 1.67
15. NET INCOME PER SHARE
Basic EPS is calculated by dividing income from continuing operations
by the weighted-average number of common shares outstanding during the period.
Diluted EPS is calculated by dividing income from continuing operations by the
weighted-average number of common shares outstanding plus the assumed exercise
of all dilutive securities using the treasury stock method. During periods of
net operating loss, all common stock equivalents, including the effect of common
shares from the issuance of Preferred Stock on an "as converted" basis, are
excluded from the diluted EPS calculation. Significant components of the
numerator and denominator used for Basic and Diluted EPS are as follows (in
thousands, except per share amounts):
YEAR ENDED
AUGUST 31,
- ------------------------------ ----------- ----------- -----------
1999 1998 1997
- ------------------------------ ----------- ----------- -----------
(Loss) income before
accounting change $ (8,772) $ 42,138 $ 38,865
Cumulative effect of
accounting change,
net of tax (2,080)
----------- ----------- -----------
Net (loss) income (8,772) 40,058 38,865
Preferred stock dividends 1,875
----------- ----------- -----------
(Loss) income available to
common shareholders $(10,647) $ 40,058 $ 38,865
----------- ----------- -----------
45
<PAGE>
Basic weighted-average
shares outstanding 20,881 24,091 21,201
Incremental shares from
Preferred Stock on an
"as converted" basis - - -
Incremental shares from the
assumed exercise of
stock options - 635 916
----------- ----------- -----------
Diluted weighted-average
shares outstanding 20,881 24,726 22,117
----------- ----------- -----------
(Loss) income from
continuing operations
per share:
Basic $ (.51) $ 1.75 $ 1.83
Diluted (.51) 1.70 1.76
Cumulative effect of accounting
change, net of tax, per share:
Basic (.09)
Diluted (.08)
----------- ----------- -----------
Net (loss) income per share:
Basic $ (.51) $ 1.66 $ 1.83
Diluted (.51) 1.62 1.76
----------- ----------- -----------
Due to their antidilutive effect, options to purchase common stock and
the effect of the Preferred Stock on an "as converted" basis totaling 1,511,215
shares have been excluded from the EPS calculation for the year ended August 31,
1999. Options to purchase 1,661,875 shares of common stock with exercise prices
ranging from $23.00 to $34.50 per share were outstanding during fiscal 1998 but
were excluded in the calculation of Diluted EPS because the exercise price was
greater than the average market price of the common shares.
16. STATEMENTS OF CASH FLOWS
The following supplemental disclosures are provided for the
Consolidated Statements of Cash Flows (in thousands):
YEAR ENDED AUGUST 31,
- ------------------------- ----------- ------------ -----------
1999 1998 1997
- ------------------------- ----------- ------------ -----------
Cash paid for:
Income taxes $ 22,701 $ 15,961 $ 27,916
Interest 9,219 5,991 2,042
Fair value of
assets acquired $ 19,025 $ 18,943 $ 88,208
Cash paid for
net assets (19,025) (16,786) (33,188)
----------- ------------ -----------
Liabilities
assumed from
acquisitions $ - $ 2,157 $ 55,020
----------- ------------ -----------
Tax effect of
exercise of
affiliate stock
options $ 1,320 $ 266 $ 1,654
----------- ------------ -----------
46
<PAGE>
Non-Cash Investing and Financing Activities
During the years ended August 31, 1999 and 1998, the Company accrued
$15.9 million and $13.0 million, respectively, for earnout payments in
connection with the acquisition of certain entities.
As of August 31, 1999 the Company had accrued $1.9 million of
Preferred Stock dividends in connection with the issuance of 750,000 shares of
Series A Preferred Stock (Note 11). Subsequent to August 31, 1999, the Company
paid the accrued dividend with additional shares of Preferred Stock.
The Company financed the acquisition of certain software licenses with
a note payable to the software vendor for $5.9 million.
Effective June 2, 1997, Franklin Quest Co. ("Franklin") and Covey
Leadership Center ("Covey") merged (the "Merger") to form Franklin Covey Co. In
the Merger, the Company issued 5,030,894 shares of its common stock in exchange
for all of the issued and outstanding capital stock of Covey. The total value of
the stock exchanged was approximately $111.5 million. In connection with the
foregoing exchange, the Company issued 382,100 stock options, exerciseable at
$5.97 per share and valued at approximately $4.3 million, in exchange for all of
the outstanding options to purchase Covey stock.
In connection with recording the tax effects of the Merger and the
acquisition of Premier, the Company recognized approximately $29.4 million of
net deferred tax liabilities with a corresponding increase to goodwill.
During fiscal 1997, the Company received 84,779 shares of common stock
with a fair market value of approximately $1.9 million as consideration for
684,000 stock options exercised at $2.78 per share. The common stock issued from
treasury for the options exercised had a weighted average cost of $20.35 per
share.
17. SEGMENT INFORMATION
Reportable Segments
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes previous "industry segment" reporting requirements with a
"management" approach for reporting operating segments as well as other
disclosures about products and services, geographic regions and major customers.
During the first quarter of 1999, the Company aligned its operations
into the following three operating segments or Strategic Business Units
("SBUs"):
o Consumer Products
o Training and Education
o International
47
<PAGE>
Although the Company is currently in the process of restructuring its
operations, the above SBUs remain the primary management measurement tool until
the new reporting structure is completed and implemented. The Consumer Products
SBU is responsible for distribution of the Company's products through retail
stores, catalog sales, mass markets, contract stationers, government channels,
technology wholesale and the Internet. The Training and Education SBU, which
includes Premier Agendas and Personal Coaching, is responsible for training,
consulting and implementation services, and delivery of products to
corporations, business, government and educational institutions. The
International SBU is responsible for the delivery of both products and services
outside the United States. The "All Others" group consists primarily of
Publishers' Press and the Institute of Fitness, which was sold during fiscal
1998. Intersegment sales consist primarily of paper planner sales from
Publishers' Press to the related Franklin Covey entities, which prepare and
package the planners for sale to external customers. Corporate expenses consist
primarily of essential internal support services such as finance, legal,
information systems and manufacturing and distribution and are allocated to the
operational SBUs.
Each reportable segment is an operating division of the Company and
has a President who reports directly to the Company's Chief Executive Officer.
Various corporate support departments are operated by an executive
vice-president who also reports directly to the Chief Executive Officer. The
Company accounts for its segment information on the same basis as the
accompanying consolidated financial statements.
SEGMENT INFORMATION
(in thousands)
<TABLE>
<CAPTION>
Reportable Business Segments
-------------------------------------------------------
Corporate,
Adjustments
Consumer Training and
Year ended August 31, 1999 Products and International Total All Others Elimination Consolidated
Education
- --------------------------------- ------------- ------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to external customers $ 264,333 $ 210,621 $ 50,535 $ 525,489 $ 29,434 $ 554,923
Intersegment sales 33,669 $ (33,669)
Gross margin 147,080 132,922 29,448 309,450 2,341 311,791
Depreciation and amortization 11,090 18,741 2,062 31,893 1,395 6,251 39,539
Segment earnings (loss) before
interest and taxes 21,566 2,227 (4,261) 19,532 (3,158) (11,966) 4,408
Significant non-cash items:
Restructuring charge 16,282 16,282
Loss on impaired assets 3,628 2,588 2,180 8,396 653 7,510 16,559
Capital expenditures 3,238 1,812 2,749 7,799 492 14,705 22,996
Segment assets 73,158 302,224 22,213 397,595 44,158 181,550 623,303
Year ended August 31, 1998
- --------------------------------- ------------- ------------- ------------- ------------- ------------- -------------- -------------
Sales to external customers $ 258,973 $ 207,015 $ 45,068 $ 511,056 $ 35,556 $ 546,612
Intersegment sales 29,626 $ (29,626)
Gross margin 162,815 135,768 28,478 327,061 5,663 332,724
Depreciation and amortization 7,563 13,175 989 21,727 1,809 9,492 33,028
Segment earnings (loss) before
interest and taxes 47,741 25,316 5,539 78,596 (3,866) 3,663 78,393
Capital expenditures 3,988 1,406 2,019 7,413 11,681 20,145 39,239
Segment assets 57,853 289,726 25,037 372,616 55,593 169,068 597,277
Year ended August 31,1997
- --------------------------------- ------------- ------------- ------------- ------------- ------------- -------------- -------------
Sales to external customers $ 223,135 $ 154,595 $ 23,927 $ 401,657 $ 31,615 $ 433,272
Intersegment sales 29,186 $ (29,186)
Gross margin 135,751 94,823 13,533 244,107 13,563 257,670
Depreciation and amortization 7,642 7,754 2,042 17,438 1,331 2,031 20,800
Segment earnings (loss) before
interest and taxes 45,817 19,417 (1,823) 63,411 (901) 4,853 67,363
Capital expenditures 4,448 4,111 1,150 9,709 2,296 8,184 20,189
Segment assets 65,648 312,964 14,094 392,706 53,977 125,504 572,187
</TABLE>
48
<PAGE>
The primary measurement tool in segment performance analysis is
earnings before interest and taxes ("EBIT"). Interest expense is primarily
generated at the corporate level and is not allocated to the reporting segments.
Income taxes are likewise calculated and paid on a corporate level (except for
entities that operate within foreign jurisdictions) and are not allocated to
reportable segments. Due to the nature of the restructuring charge, management
has not allocated the components of the charge to the reporting segments in
order to enhance comparability between periods. A reconciliation of reportable
segment EBIT to consolidated EBIT is presented below (in thousands):
YEAR ENDED AUGUST 31,
- ------------------------- ----------- ------------ -----------
1999 1998 1997
- ------------------------- ----------- ------------ -----------
Reportable segment
EBIT $ 19,532 $ 78,596 $ 63,411
All others EBIT (3,158) (3,866) (901)
Corporate items:
Restructuring charge (16,282)
Intercompany rent
charges 4,316 3,663 4,853
----------- ------------ -----------
Consolidated EBIT $ 4,408 $ 78,393 $ 67,363
----------- ------------ -----------
Corporate assets such as cash, accounts receivable, fixed assets and
other assets are not generally allocated to reportable segments for business
analysis purposes. However, inventories, goodwill and identifiable fixed assets
(primarily leasehold improvements in retail stores) are classified by segment.
Intangible assets generated from the Merger are primarily allocated to the
Training and Education SBU. A reconciliation of segment assets to consolidated
assets is as follows (in thousands):
YEAR ENDED AUGUST 31,
- ------------------------- ----------- ------------ -----------
1999 1998 1997
- ------------------------- ----------- ------------ -----------
Reportable segment
assets $397,595 $372,616 $392,706
All others' assets 44,158 55,593 53,977
Corporate assets 230,251 229,764 212,550
Intercompany
accounts receivable (48,701) (60,696) (87,046)
----------- ------------ -----------
Consolidated assets $623,303 $597,277 $572,187
----------- ------------ -----------
Enterprise-Wide Information
The Company's revenues are derived primarily from the United States.
However, the Company operates direct offices or contracts with licensees to
provide products and services to various countries throughout the world. The
Company's consolidated revenues and long-lived assets by geographic region are
as follows (in thousands):
YEAR ENDED AUGUST 31,
- --------------------------- ----------- ------------ -----------
1999 1998 199
- --------------------------- ----------- ------------ -----------
Sales:
United States $504,388 $501,544 $409,345
Americas 15,844 16,587 10,137
Japan/Greater China 16,614 9,741 3,067
Europe/Middle East 8,084 8,265 6,071
Australasia 6,629 6,141 3,396
Others 3,364 4,334 1,256
----------- ----------- ------------
$554,923 $546,612 $433,272
----------- ----------- ------------
Long-Lived Assets:
United States $400,989 $412,688 $397,910
Americas 2,087 946 1,196
Japan/Greater China 6,346 5,046 281
Europe/Middle East 558 591 635
Australasia 1,677 2,713 2,272
Others 150
----------- ----------- ------------
$411,657 $421,984 $402,444
----------- ----------- ------------
49
<PAGE>
Amounts reported under the "Americas" caption include North and South
America except the United States. Australasia consists of Australia, New Zealand
and neighboring countries such as Indonesia and Malaysia. Intersegment sales are
immaterial and eliminated upon consolidation.
18. MERGER, ACQUISITIONS & DIVESTING ACTIVITIES
In January 1999, the Company acquired the assets of Khalsa Associates
for $2.7 million in cash. Khalsa Associates is a leading sales training company.
The acquisition was accounted for using the purchase method of accounting and
generated $2.7 million of intangible assets, which are being amortized over a
ten-year life.
Effective August 1, 1998, the Company sold its Institute of Fitness
located near St. George, Utah for $13.4 million in cash. During fiscal 1998, the
Company also sold certain consulting units and discontinued its operations at
certain international locations. The net impact of these divestitures was
immaterial to the consolidated financial statements of the Company.
Effective April 1, 1998, the Company acquired King Bear, Inc. ("King
Bear") a Tokyo, Japan based company. King Bear, a former Covey licensee,
provides leadership and time management training as well as publishing services.
The publishing division of King Bear translated and currently publishes 7 Habits
of Highly Effective People in Japanese. The cash purchase price was $5.3 million
with additional contingent payments to be made over the next five years based
upon the operating results of King Bear over that same period. No contingent
payments have been paid or accrued based upon King Bear's fiscal 1999 operating
results. The acquisition of King Bear was accounted for using the purchase
method of accounting and generated $4.3 million of intangible assets, which are
being amortized over an estimated useful life of 15 years.
During fiscal 1997, Franklin and Covey merged to form Franklin Covey
Co. In the Merger, the Company issued 5,030,894 shares of its common stock in
exchange for all of the issued and outstanding capital stock of Covey. The
Company's shares were valued at $22.16 per share, which was the average per
share closing sales price of Franklin common stock on the New York Stock
Exchange for the twenty consecutive trading days ended May 28, 1997. In
connection with the Merger, the Company also acquired certain license rights for
$27.0 million in cash.
The Merger was accounted for using the purchase method of accounting
and generated approximately $175.6 million of intangible assets which are being
amortized over estimated useful lives ranging from 12 to 40 years. In connection
with recording the tax effects of the Merger, the Company recognized a net
deferred tax liability totaling $24.0 million with a corresponding increase to
goodwill which is being amortized over 30 years.
On March 1, 1997, the Company acquired Premier with operations located
in Bellingham, Washington and Abbotsford, British Columbia. Premier manufactures
and markets academic and personal planners for students from kindergarten to
college throughout the U.S. and Canada. Premier's business is seasonal in nature
and nearly all of its revenue is recognized in the Company's fourth fiscal
quarter. The combined cash purchase price was $23.2 million with additional
contingent payments to be made over the following three years based upon
Premier's operating performance over that same time period. The Premier
acquisition was accounted for using the purchase method of accounting and
generated $27.6 million of intangible assets that are being amortized over an
estimated useful life of 15 years. In connection with recording the tax effects
of the Premier acquisition, the Company recognized a deferred tax liability
50
<PAGE>
totaling $5.4 million with a corresponding increase to goodwill which is being
amortized over 15 years. As of August 31, 1999, the Company has made aggregate
contingent payments of $21.5 million. Such payments were classified as goodwill
and are being amortized over the remaining life of the original purchased
goodwill. As of August 31, 1999, $10.9 million has been accrued for the final
contingent payment.
Effective October 1, 1996, the Company acquired the net assets of
TrueNorth Corporation ("Personal Coaching"). Personal Coaching, a Utah
Corporation, is a provider of post-instructional personal coaching to
corporations and individuals. Personal Coaching 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
Personal Coaching's operating performance. The acquisition of Personal Coaching
was accounted for using the purchase method of accounting and generated $9.3
million of intangible assets that are being amortized over an estimated useful
life of 15 years. As of August 31, 1999, the Company has made aggregate
contingent payments of $5.3 million. Such payments were classified as goodwill
and are being amortized over the remaining life of the original purchased
goodwill. As of August 31, 1999, $5.0 million has been accrued for the third
contingent payment.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The unaudited quarterly financial information included on page 22 of
the annual report to shareholders is an integral part of the consolidated
financial statements.
20. SUBSEQUENT EVENTS
Subsequent to August 31, 1999, the Company was negotiating the sale of
the commercial printing division of Publishers' Press, a wholly owned printing
services subsidiary. The Company intends to retain printing operations dedicated
to the production of its paper-based planners. The transaction is expected to
close during fiscal 2000. Total sales price is contingent upon various factors,
including normal due diligence procedures. The Company does not expect to incur
a loss from the sale of these assets.
During September 1999, the Company acquired the assets of the
Professional Resources Organization (the Jack Phillips Group) for $1.5 million
in cash. The Professional Resources Organization is a leading measurement
assessment firm specializing in measuring the impact and return on investment of
training and consulting programs. The acquisition was accounted for using the
purchase method of accounting and generated $1.5 million of intangible assets,
which are being amortized over a ten-year life.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
51
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors," "Executive Officers" and
"Executive Compensation" in the Company's definitive Proxy Statement for the
annual meeting of shareholders which is scheduled to be held on January 28,
2000. The definitive Proxy Statement will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the sections titled "Election of Directors--Director Compensation" and
"Executive Compensation" in the Company's definitive Proxy Statement for the
annual meeting of shareholders which is scheduled to be held on January 28,
2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the section titled "Principal Holders of Voting Securities" in the Company's
definitive Proxy Statement for the annual meeting of shareholders which is
scheduled to be held on January 28, 2000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the section titled "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement for the annual meeting of shareholders
which is scheduled to be held on January 28, 2000.
52
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed
1. Financial Statements. The following Consolidated Financial
Statements of the Company and Report of Independent Public
Accountants for the year ended August 31, 1999, are
included herewith:
o Report of Arthur Andersen LLP, Independent Public
Accountants, for the years ended August 31, 1999,
1998 and 1997
o Consolidated Balance Sheets at August 31, 1999 and
1998
o Consolidated Statements of Income for the years
ended August 31, 1999, 1998 and 1997
o Consolidated Statements of Shareholders' Equity
for the years ended August 31, 1999, 1998 and 1997
o Consolidated Statements of Cash Flows for the
years ended August 31, 1999, 1998 and 1997
o Notes to Consolidated Financial Statements
2. Exhibit List.
<TABLE>
<CAPTION>
Exhibit Incorporated Filed
No. Exhibit by Reference Herewith
-------- ------------------------------------------------- ------------- ----------
<S> <C> <C> <C>
3.1 Revised Articles of Incorporation of the Registrant (1)
3.2 Amended and Restated Bylaws of the Registrant (1)
3.3 Articles of Amendment to Revised Articles of (7)
Incorporation of the Registrant (filed as Exhibit
2 to Schedule 13D)
4.1 Specimen Certificate of the Registrant's Common (2)
Stock par value $.05 per share
4.2 Stockholder Agreements, dated May 11, 1999 and (7)
June 2, 1999 (filed as Exhibits 1 and 3 to
Schedule 13D)
4.3 Registration Rights Agreement, dated June 2, 1999 (7)
(filed as Exhibit 4 to Schedule 13D)
4.4 Subscription Offering of Nontransferrable Rights (8)
to Purchasee up to 750,000 Series A Preferred
Shares at $100 per share
10.1 Amended and Restated 1992 Employee Stock (3)
Purchase Plan
10.2 First Amendment to Amended and Restated 1992 (4)
Stock Initiative Plan
10.3 Franklin 401(k) Profit Sharing Plan (1)
10.4 Forms of Nonstatutory Stock Options (1)
10.5 Lease Agreements, as amended and proposed to be (5)
amended by and between Covey Corporate Campus One,
LLC and Covey Corporate Campus Two, LLC (Landlord)
and Covey Leadership Center, Inc. (Tenant) which
were assumed by Franklin Covey Co. in the Merger
with Covey Leadership Center, Inc.
53
<PAGE>
10.6 Notes Payable Purchase Agreement for $85.0 million (6)
of 6% unsecured senior notes payable, due May 2008
10.7 Credit Agreement with Bank One, NA and Zions (9)
First National Bank, dated October 8, 1999
21 Subsidiaries of the Registrant (9)
23.1 Consent of Arthur Andersen LLP, Independent Public (9)
Accountants
27 Financial Data Schedule (9)
99.1 Report of Arthur Andersen LLP, Independent Public (9)
Accountants, Consolidated Financial Statement Schedule
for the years ended August 31, 1999, 1998 and 1997
99.2 Valuation and Qualifying Accounts and Reserves (9)
Schedule. Financial statements and schedules
other than those listed are omitted for the reason
that they are not required or are not applicable,
or the required information is shown in the
Financial Statements or Notes thereto, or contained
in this Report.
- ------------------------------------------------------------
(1) Incorporated by reference to Registration Statement on Form S-1 filed
with the Commission on April 17, 1992, Registration No. 33-47283.
(2) Incorporated by reference to Amendment No. 1 to Registration Statement
on Form S-1 filed with the Commission on May 26, 1992, Registration
No. 33-47283.
(3) Incorporated by reference to Report on Form 10-K filed November 27,
1992, for the year ended August 31, 1992.
(4) Incorporated by reference to Registration Statement on Form S-1 filed
with the Commission on January 3, 1994, Registration No. 33-73728.
(5) Incorporated by reference to Report on Form 10-K filed December 1,
1997, for the year ended August 31, 1997.
(6) Incorporated by reference to Report on Form 10-Q filed July 14, 1998,
for the quarter ended May 31, 1998.
(7) Incorporated by reference to Schedule 13D (CUSIP No. 353469109) as
filed with the Commission on June 2, 1999.
(8) Incorporated by reference to Registration Statement on Form S-3 filed
with the Commission on October 22, 1999, Registration No. 333-89541.
(9) Filed herewith and attached to this report.
</TABLE>
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 22, 1999.
FRANKLIN COVEY CO.
By: /s/ ROBERT A. WHITMAN
------------------------------------------
Robert A. Whitman, Chairman of the Board
of Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ ROBERT A. WHITMAN Chairman of the Board and Chief November 22, 1999
- ----------------------------------------------- Executive Officer
Robert A. Whitman
/s/ HYRUM W. SMITH Vice Chairman of the Board November 22, 1999
- -----------------------------------------------
Hyrum W. Smith
/s/ STEPHEN R. COVEY Vice Chairman of the Board November 22, 1999
- -----------------------------------------------
Stephen R. Covey
/s/ STEPHEN M. R. COVEY Executive Vice President and November 22, 1999
- ----------------------------------------------- Director
Stephen M. R. Covey
/s/ JOHN L. THELER Executive Vice President and November 22, 1999
- ----------------------------------------------- Chief Financial Officer
John L. Theler
/s/ J. SCOTT NIELSEN Chief Accounting Officer November 22, 1999
- -----------------------------------------------
J. Scott Nielsen
55
<PAGE>
/s/ ROBERT H. DAINES Director November 22, 1999
- -----------------------------------------------
Robert H. Daines
/s/ E. J. "JAKE" GARN Director November 22, 1999
- -----------------------------------------------
E. J. "Jake" Garn
/s/ DENNIS G. HEINER Director November 22, 1999
- -----------------------------------------------
Dennis G. Heiner
/s/ BRIAN A. KRISAK Director November 22, 1999
- -----------------------------------------------
Brian A. Krisak
/s/ DONALD J. MCNAMARA Director November 22, 1999
- -----------------------------------------------
Donald J. McNamara
/s/ JOEL C. PETERSON Director November 22, 1999
- -----------------------------------------------
Joel C. Peterson
/s/ KAY E. STEPP Director November 22, 1999
- -----------------------------------------------
Kay E. Stepp
/s/ STEVEN C. WHEELWRIGHT Director November 22, 1999
- -----------------------------------------------
Steven C. Wheelwright
</TABLE>
56
<PAGE>
Exhibit
No. Exhibit Page No.
-------- ------------------------------------------------- -------------
3.1 Revised Articles of Incorporation of the Registrant
3.2 Amended and Restated Bylaws of the Registrant
3.3 Articles of Amendment to Revised Articles of
Incorporation of the Registrant (filed as Exhibit
2 to Schedule 13D)
4.1 Specimen Certificate of the Registrant's Common
Stock par value $.05 per share
4.2 Stockholder Agreements, dated May 11, 1999 and
June 2, 1999 (filed as Exhibits 1 and 3 to
Schedule 13D)
4.3 Registration Rights Agreement, dated June 2, 1999
(filed as Exhibit 4 to Schedule 13D)
4.4 Subscription Offering of Nontransferrable Rights
to Purchasee up to 750,000 Series A Preferred
Shares at $100 per share
10.1 Amended and Restated 1992 Employee Stock
Purchase Plan
10.2 First Amendment to Amended and Restated 1992
Stock Initiative Plan
10.3 Franklin 401(k) Profit Sharing Plan
10.4 Forms of Nonstatutory Stock Options
10.5 Lease Agreements, as amended and proposed to be
amended by and between Covey Corporate Campus One,
LLC and Covey Corporate Campus Two, LLC (Landlord)
and Covey Leadership Center, Inc. (Tenant) which
were assumed by Franklin Covey Co. in the Merger
with Covey Leadership Center, Inc.
10.6 Notes Payable Purchase Agreement for $85.0 million
of 6% unsecured senior notes payable, due May 2008
10.7 Credit Agreement with Bank One, NA and Zions 58
First National Bank, dated October 8, 1999
21 Subsidiaries of the Registrant 128
23.1 Consent of Arthur Andersen LLP, Independent Public 129
Accountants
27 Financial Data Schedule 132
99.1 Report of Arthur Andersen LLP, Independent Public 130
Accountants, Consolidated Financial Statement Schedule
for the years ended August 31, 1999, 1998 and 1997
99.2 Valuation and Qualifying Accounts and Reserves 131
Schedule. Financial statements and schedules
other than those listed are omitted for the reason
that they are not required or are not applicable,
or the required information is shown in the
Financial Statements or Notes thereto, or contained
in this Report.
57
<PAGE>
EXHIBIT 10.6
CREDIT AGREEMENT
This Agreement, dated as of October 8, 1999, is among FRANKLIN COVEY
CO., a Utah corporation (the "Borrower"), the lenders from time to time party
hereto (the "Lenders"), with BANK ONE, NA ("Bank One") and ZIONS FIRST NATIONAL
BANK ("Zions") being the initial Lenders hereunder, BANK ONE, acting in the
capacity as managing agent for the Lenders (in such capacity, the "Managing
Agent"), ZIONS, acting in the capacity as letter of credit issuer (in such
capacity, the LC Issuer"), and BANK ONE AND ZIONS, acting in the capacity as
co-agents for the Lenders (in such capacity, the "Co-Agents"). The parties
hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
As used in this Agreement:
"Acquisition" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which the
Borrower or any of its Subsidiaries (i) acquires any going business or all or
substantially all of the assets of any firm, corporation or limited liability
company, or division thereof, whether through purchase of assets, merger or
otherwise or (ii) directly or indirectly acquires (in one transaction or as the
most recent transaction in a series of transactions) at least a majority (in
number of votes) of the securities of a corporation which have ordinary voting
power for the election of directors (other than securities having such power
only by reason of the happening of a contingency) or a majority (by percentage
or voting power) of the outstanding ownership interests of a partnership or
limited liability company.
"Advance" means a borrowing hereunder, (i) made by the Lenders on the
same Borrowing Date, or (ii) converted or continued by the Lenders on the same
date of conversion or continuation, consisting, in either case, of the aggregate
amount of the several Loans of the same Type and, in the case of Eurodollar
Loans, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person owns 10% or
more of any class of voting securities (or other ownership interests) of the
controlled Person or possesses, directly or indirectly, the power to direct or
cause the direction of the management or policies of the controlled Person,
whether through ownership of stock, by contract or otherwise.
"Aggregate Commitment" means the aggregate of the Commitments of all
the Lenders, as reduced from time to time pursuant to the terms hereof.
58
<PAGE>
"Aggregate Outstanding Credit Exposure" means, at any time, the
aggregate of the Outstanding Credit Exposure of all the Lenders.
"Agreement" means this credit agreement, as it may be amended or
modified and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time, applied in a manner consistent with
that used in preparing the financial statements referred to in Section 5.4.
"Arranger" means Banc One Capital Markets, Inc., a Delaware
corporation, and its successors, in its capacity as Lead Arranger and Sole Book
Runner.
"Article" means an article of this Agreement unless another document is
specifically referenced.
"Authorized Officer" means any of the following Persons: John L.
Theler, Richard R. Putnam, Val John Christensen or J. Scott Nielsen, acting
singly.
"Available Aggregate Commitment" means, at any time, the Aggregate
Commitment then in effect minus the Aggregate Outstanding Credit Exposure at
such time.
"Bank One" means Bank One, NA, a national banking association having
its principal office in Chicago, Illinois, in its individual capacity, and its
successors.
"Borrower" means Franklin Covey Co., a Utah corporation, and its
successors and assigns.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in Section 2.8.
"Business Day" means (i) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Salt Lake City, Utah, Chicago, Illinois and
New York, New York for the conduct of substantially all of their commercial
lending activities, interbank wire transfers can be made on the Fedwire system
and dealings in United States dollars are carried on in the London interbank
market and (ii) for all other purposes, a day (other than a Saturday or Sunday)
on which banks generally are open in Chicago for the conduct of substantially
all of their commercial lending activities and interbank wire transfers can be
made on the Fedwire system.
"Capital Expenditures" means, without duplication, any expenditures for
any purchase or other acquisition of any asset which would be classified as a
fixed or capital asset on a consolidated balance sheet of the Borrower and its
Subsidiaries prepared in accordance with Agreement Accounting Principles
excluding (i) the cost of assets acquired with Capitalized Lease Obligations,
and (ii) expenditures of insurance proceeds to rebuild or replace any asset
after a casualty loss.
"Capitalized Lease" of a Person means any lease of Property by such
Person as lessee which would be capitalized on a balance sheet of such Person
prepared in accordance with Agreement Accounting Principles.
59
<PAGE>
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
"Cash Equivalent Investments" means (i) short-term obligations of, or
fully guaranteed by, the United States of America, (ii) commercial paper rated
A-1 or better by S&P or P-1 or better by Moody's, (iii) demand deposit accounts
maintained in the ordinary course of business, and (iv) certificates of deposit
issued by and time deposits with commercial banks (whether domestic or foreign)
having capital and surplus in excess of $100,000,000; provided in each case that
the same provides for payment of both principal and interest (and not principal
alone or interest alone) and is not subject to any contingency regarding the
payment of principal or interest.
"Change in Control" means the acquisition by any Person, or two or more
Persons acting in concert, of beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934) of 20% or more of the outstanding shares of voting stock of the
Borrower.
"Co-Agents" means Bank One and Zions in their capacities as contractual
representative of the Lenders and not in their individual capacities as Lenders.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Collateral Shortfall Amount" is defined in Section 8.1.
"Commitment" means, for each Lender, the obligation of such Lender to
make Loans to, and participate in Facility LCs issued upon the application of,
the Borrower in an aggregate amount not exceeding the amount set forth on the
current Commitment Schedule.
"Commitment Schedule" means a schedule setting forth for each Lender
such Lender's current Commitment, as such amount may be modified from time to
time pursuant to the terms hereof, with the Commitment Schedule in effect at the
date of this Agreement attached hereto as Schedule 3.
"Consolidated Capital Expenditures" means, with reference to any
period, the Capital Expenditures of the Borrower and its Subsidiaries calculated
on a consolidated basis for such period.
"Consolidated EBITDA" means Consolidated Net Income plus, to the extent
deducted from revenues in determining Consolidated Net Income, (i) Consolidated
Interest Expense, (ii) expense for taxes paid or accrued, (iii) depreciation,
(iv) amortization and (v) extraordinary losses incurred other than in the
ordinary course of business, minus, to the extent included in Consolidated Net
Income, extraordinary gains realized other than in the ordinary course of
business, all calculated for the Borrower and its Subsidiaries on a consolidated
basis and adjusted, on a one time basis, for a charge actually taken on August
31, 1999 in an amount not to exceed $27,000,000.00.
"Consolidated Funded Indebtedness" means at any time the aggregate
dollar amount of Consolidated Indebtedness which has actually been funded and is
outstanding at such time, whether or not such amount is due or payable at such
time.
60
<PAGE>
"Consolidated Indebtedness" means at any time the Indebtedness of the
Borrower and its Subsidiaries calculated on a consolidated basis as of such
time.
"Consolidated Interest Expense" means, with reference to any period,
the interest expense of the Borrower and its Subsidiaries calculated on a
consolidated basis for such period.
"Consolidated Net Income" means, with reference to any period, the net
income (or loss) of the Borrower and its Subsidiaries calculated on a
consolidated basis for such period.
"Consolidated Net Worth" means at any time the consolidated
stockholders' equity of the Borrower and its Subsidiaries calculated on a
consolidated basis as of such time.
"Consolidated Rentals" means, with reference to any period, the Rentals
of the Borrower and its Subsidiaries calculated on a consolidated basis for such
period.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement, take-or-pay contract or the obligations of any such Person as general
partner of a partnership with respect to the liabilities of the partnership.
"Conversion/Continuation Notice" is defined in Section 2.9.
"Controlled Group" means all members of a controlled group of
corporations or other business entities and all trades or businesses (whether or
not incorporated) under common control which, together with the Borrower or any
of its Subsidiaries, are treated as a single employer under Section 414 of the
Code.
"Corporate Base Rate" means a rate per annum equal to the corporate
base rate or prime rate of interest announced by Bank One or by its parent, BANK
ONE CORPORATION, from time to time, changing when and as said corporate base
rate or prime rate changes.
"Credit Extension" means the making of an Advance or the issuance of a
Facility LC hereunder.
"Credit Extension Date" means the Borrowing Date for an Advance or the
issuance date for a Facility LC.
"Default" means an event described in Article VII.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
(i) the protection of the environment, (ii) the effect of the environment on
human health, (iii) emissions, discharges or releases of pollutants,
contaminants, hazardous substances or wastes into surface water, ground water or
land, or (iv) the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, hazardous
substances or wastes or the clean-up or other remediation thereof.
61
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any rule or regulation issued thereunder.
"Eurodollar Advance" means an Advance which, except as otherwise
provided in Section 2.11, bears interest at the applicable Eurodollar Rate.
"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for
the relevant Interest Period, the applicable British Bankers' Association
Interest Settlement Rate for deposits in U.S. dollars appearing on Reuters
Screen FRBD as of 11:00 a.m. (London time) two Business Days prior to the first
day of such Interest Period, and having a maturity equal to such Interest
Period, provided that, (i) if Reuters Screen FRBD is not available to the
Managing Agent for any reason, the applicable Eurodollar Base Rate for the
relevant Interest Period shall instead be the applicable British Bankers'
Association Interest Settlement Rate for deposits in U.S. dollars as reported by
any other generally recognized financial information service as of 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest Period,
and having a maturity equal to such Interest Period, and (ii) if no such British
Bankers' Association Interest Settlement Rate is available to the Managing
Agent, the applicable Eurodollar Base Rate for the relevant Interest Period
shall instead be the rate determined by the Managing Agent to be the rate at
which Bank One or one of its Affiliate banks offers to place deposits in U.S.
dollars with first-class banks in the London interbank market at approximately
11:00 a.m. (London time) two Business Days prior to the first day of such
Interest Period, in the approximate amount of Bank One's relevant Eurodollar
Loan and having a maturity equal to such Interest Period.
"Eurodollar Loan" means a Loan which, except as otherwise provided in
Section 2.11, bears interest at the applicable Eurodollar Rate.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base
Rate applicable to such Interest Period, divided by (b) one minus the Reserve
Requirement (expressed as a decimal) applicable to such Interest Period, plus
(ii) during the period from September 1, 1999 to but not including April 1,
2000, 1.50%, and, thereafter, 2.00%.
"Excluded Taxes" means, in the case of each Lender or applicable
Lending Installation and the Managing Agent, taxes imposed on its overall net
income, and franchise taxes imposed on it, by (i) the jurisdiction under the
laws of which such Lender or the Managing Agent is incorporated or organized or
(ii) the jurisdiction in which the Managing Agent's or such Lender's principal
executive office or such Lender's applicable Lending Installation is located.
"Exhibit" refers to an exhibit to this Agreement, unless another
document is specifically referenced.
"Facility LC" is defined in Section 2.19.1.
"Facility LC Application" is defined in Section 2.19.3.
"Facility LC Collateral Account" is defined in Section 2.19.11.
"Facility Termination Date" means October 1, 2001 or any earlier date
on which the Aggregate Commitment is reduced to zero or otherwise terminated
pursuant to the terms hereof.
62
<PAGE>
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago
time) on such day on such transactions received by the Managing Agent from three
Federal funds brokers of recognized standing selected by the Managing Agent in
its sole discretion.
"Floating Rate Advance" means an Advance which, except as otherwise
provided in Section 2.11, bears interest at the Corporate Base Rate.
"Floating Rate Loan" means a Loan which, except as otherwise provided
in Section 2.11, bears interest at the Corporate Base Rate.
"Indebtedness" of a Person means such Person's (i) obligations for
borrowed money, (ii) obligations representing the deferred purchase price of
Property or services (other than accounts payable arising in the ordinary course
of such Person's business payable on terms customary in the trade), (iii)
obligations, whether or not assumed, secured by Liens or payable out of the
proceeds or production from Property now or hereafter owned or acquired by such
Person, (iv) obligations which are evidenced by notes, acceptances, or other
instruments, (v) obligations of such Person to purchase securities or other
Property arising out of or in connection with the sale of the same or
substantially similar securities or Property, (vi) Capitalized Lease
Obligations, (vii) any liabilities for accrued and unpaid earnout or similar
obligations associated with Acquisitions, (viii) Contingent Obligations, (ix)
the dollar amount of any revolving securitization of trade or notes receivable,
and (x) any other obligation for borrowed money or other financial accommodation
which in accordance with Agreement Accounting Principles would be shown as a
liability on the consolidated balance sheet of such Person.
"Interest Period" means, with respect to a Eurodollar Advance, a period
of one, two, three or six months commencing on a Business Day selected by the
Borrower pursuant to this Agreement. Such Interest Period shall end on the day
which corresponds numerically to such date one, two, three or six months
thereafter, provided, however, that if there is no such numerically
corresponding day in such next, second, third or sixth succeeding month, such
Interest Period shall end on the last Business Day of such next, second, third
or sixth succeeding month. If an Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall end on the next
succeeding Business Day, provided, however, that if said next succeeding
Business Day falls in a new calendar month, such Interest Period shall end on
the immediately preceding Business Day.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in the
trade) or contribution of capital by such Person; stocks, bonds, mutual funds,
partnership interests, notes, debentures or other securities owned by such
Person; any deposit accounts and certificate of deposit owned by such Person;
and structured notes, derivative financial instruments and other similar
instruments or contracts owned by such Person.
"LC Fee" is defined in Section 2.19.4.
63
<PAGE>
"LC Issuer" means Zions, in its capacity as issuer of Facility LCs
hereunder.
"LC Obligations" means, at any time, the sum, without duplication, of
(i) the aggregate undrawn stated amount under all Facility LCs outstanding at
such time plus (ii) the aggregate unpaid amount at such time of all
Reimbursement Obligations.
"LC Payment Date" is defined in Section 2.19.5.
"Lenders" means the lending institutions listed on the signature pages
of this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Managing
Agent, the office, branch, subsidiary or affiliate of such Lender or the
Managing Agent listed on the signature pages hereof or on a Schedule or
otherwise selected by such Lender or the Managing Agent pursuant to Section
2.17.
"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"Lien" means any lien (statutory or other), mortgage, pledge,
hypothecation, assignment, deposit arrangement, encumbrance or preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including, without limitation, the interest of a vendor or
lessor under any conditional sale, Capitalized Lease or other title retention
agreement).
"Loan" means, with respect to a Lender, such Lender's loan made
pursuant to Article II (or any conversion or continuation thereof).
"Loan Documents" means this Agreement, the Facility LC Applications and
any Notes issued pursuant to Section 2.13.
"Maintenance Capital Expenditures" means for any fiscal period Capital
Expenditures for the repair or maintenance of existing assets of the Borrower or
a Subsidiary in the normal course of business during such fiscal period, with
such amount being automatically deemed to be 4% of sales of the Borrower and its
Subsidiaries for such fiscal period.
"Managing Agent" means Bank One in its capacity as contractual
representative of the Lenders pursuant to Article X, and not in its individual
capacity as a Lender, and any successor Administrative Agent appointed pursuant
to Article X.
"Material Adverse Effect" means a material adverse effect on (i) the
business, Property, condition (financial or otherwise), results of operations,
or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the
ability of the Borrower to perform its obligations under the Loan Documents, or
(iii) the validity or enforceability of any of the Loan Documents or the rights
or remedies of the Managing Agent, the LC Issuer or the Lenders thereunder.
"Modify" and "Modification" are defined in Section 2.19.1.
"Moody's" means Moody's Investors Service, Inc.
64
<PAGE>
"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"Non-U.S. Lender" is defined in Section 3.5(iv).
"Note" means any promissory note issued at the request of a Lender
pursuant to Section 2.13 in the form of Exhibit E.
"Notice of Assignment" is defined in Section 12.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Loans, all Reimbursement Obligations, all accrued and unpaid
fees and all expenses, reimbursements, indemnities and other obligations of the
Borrower to the Lenders or to any Lender, the Managing Agent, the LC Issuer or
any indemnified party arising under the Loan Documents.
"Off-Balance Sheet Liability" of a Person means (i) any repurchase
obligation or liability of such Person with respect to accounts or notes
receivable sold by such Person, (ii) any liability under any Sale and Leaseback
Transaction which is not a Capitalized Lease, (iii) any liability under any
so-called "synthetic lease" transaction entered into by such Person, or (iv) any
obligation arising with respect to any other transaction which is the functional
equivalent of or takes the place of borrowing but which does not constitute a
liability on the balance sheets of such Person, but excluding from this clause
(iv) Operating Leases.
"Operating Lease" of a Person means any lease of Property (other than a
Capitalized Lease) by such Person as lessee which has an original term
(including any required renewals and any renewals effective at the option of the
lessor) of one year or more.
"Operating Lease Obligations" means, as at any date of determination,
the amount obtained by aggregating the present values, determined in the case of
each particular Operating Lease by applying a discount rate (which discount rate
shall equal the discount rate which would be applied under Agreement Accounting
Principles if such Operating Lease were a Capitalized Lease) from the date on
which each fixed lease payment is due under such Operating Lease to such date of
determination, of all fixed lease payments due under all Operating Leases of the
Borrower and its Subsidiaries.
"Other Taxes" is defined in Section 3.5(ii).
"Outstanding Credit Exposure" means, as to any Lender at any time, the
sum of (i) the aggregate principal amount of its Loans outstanding at such time,
plus (ii) an amount equal to its Pro Rata Share of the LC Obligations at such
time.
"Participants" is defined in Section 12.2.1.
"Payment Date" means the 1st day of each calendar month.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor thereto.
65
<PAGE>
"Person" means any natural person, corporation, firm, joint venture,
partnership, limited liability company, association, enterprise, trust or other
entity or organization, or any government or political subdivision or any
agency, department or instrumentality thereof.
"Plan" means an employee pension benefit plan which is covered by Title
IV of ERISA or subject to the minimum funding standards under Section 412 of the
Code as to which the Borrower or any member of the Controlled Group may have any
liability.
"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets owned,
leased or operated by such Person.
"Pro Rata Share" means, with respect to a Lender, a portion equal to a
fraction the numerator of which is such Lender's Commitment and the denominator
of which is the Aggregate Commitment.
"Purchasers" is defined in Section 12.3.1.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor thereto
or other regulation or official interpretation of said Board of Governors
relating to reserve requirements applicable to member banks of the Federal
Reserve System.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.
"Reimbursement Obligations" means, at any time, the aggregate of all
obligations of the Borrower then outstanding under Section 2.19 to reimburse the
LC Issuer for amounts paid by the LC Issuer in respect of any one or more
drawings under Facility LCs.
"Rentals" of a Person means the aggregate fixed amounts payable by such
Person under any Operating Lease.
"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC has by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event, provided, however, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of the
notice requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
"Reports" is defined in Section 9.6.
"Required Lenders" means Lenders in the aggregate having at least 51%
of the Aggregate Commitment or, if the Aggregate Commitment has been terminated,
Lenders in the aggregate holding at least 51% of the Aggregate Outstanding
Credit Exposure; provided, however, that if there are only two Lenders
hereunder, the term "Required Lenders" shall mean both.
66
<PAGE>
"Reserve Requirement" means, with respect to an Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.
"S&P" means Standard and Poor's Ratings Services, a division of The
McGraw Hill Companies, Inc.
"Sale and Leaseback Transaction" means any sale or other transfer of
Property by any Person with the intent to lease such Property as lessee.
"Schedule" refers to a specific schedule to this Agreement, unless
another document is specifically referenced.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Senior Unsecured Notes" means the $85,000,000.00 of senior unsecured
notes issued by the Borrower, due in 2008, bearing interest at a rate per annum
of 6.64% and having principal repayments beginning in 2004, together with all
amendments, modifications, extensions or replacements thereof.
"Single Employer Plan" means a Plan maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group.
"Subordinated Indebtedness" of a Person means any Indebtedness of such
Person the payment of which is subordinated to payment of the Obligations to the
written satisfaction of the Required Lenders.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, limited liability company, association, joint venture or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
Unless otherwise expressly provided, all references herein to a "Subsidiary"
shall mean a Subsidiary of the Borrower.
"Substantial Portion" means, with respect to the Property of the
Borrower and its Subsidiaries, Property which (i) represents more than 10% of
the consolidated assets of the Borrower and its Subsidiaries as would be shown
in the consolidated financial statements of the Borrower and its Subsidiaries as
at the beginning of the twelve-month period ending with the month in which such
determination is made, or (ii) is responsible for more than 10% of the
consolidated net sales or of the consolidated net income of the Borrower and its
Subsidiaries as reflected in the financial statements referred to in clause (i)
above.
"Taxes" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings, and any and all liabilities with
respect to the foregoing, but excluding Excluded Taxes and Other Taxes.
"Transferee" is defined in Section 12.4.
67
<PAGE>
"Type" means, with respect to any Advance, its nature as a Floating
Rate Advance or a Eurodollar Advance.
"Unfunded Liabilities" means the amount (if any) by which the present
value of all vested and unvested accrued benefits under all Single Employer
Plans exceeds the fair market value of all such Plan assets allocable to such
benefits, all determined as of the then most recent valuation date for such
Plans using PBGC actuarial assumptions for single employer plan terminations.
"Unmatured Default" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Default.
"Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of
the outstanding voting securities of which shall at the time be owned or
controlled, directly or indirectly, by such Person or one or more Wholly-Owned
Subsidiaries of such Person, or by such Person and one or more Wholly-Owned
Subsidiaries of such Person, or (ii) any partnership, limited liability company,
association, joint venture or similar business organization 100% of the
ownership interests having ordinary voting power of which shall at the time be
so owned or controlled.
"Year 2000 Issues" means anticipated costs, problems and uncertainties
associated with the inability of certain computer applications to effectively
handle data including dates on and after January 1, 2000, as such inability
affects the business, operations and financial condition of the Borrower and its
Subsidiaries and of the Borrower's and its Subsidiaries' material customers,
suppliers and vendors.
"Year 2000 Program" is defined in Section 5.19.
"Zions" means Zions First National Bank, a national banking association
having its principal office in Salt Lake City, Utah, in its individual capacity,
and its successors.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms.
ARTICLE II
THE CREDITS
-----------
2.1. COMMITMENT. From and including the date of this Agreement and
prior to the Facility Termination Date, each Lender severally agrees, on the
terms and conditions set forth in this Agreement, to (i) make Loans to the
Borrower and (ii) participate in Facility LCs issued upon the request of the
Borrower, provided that, after giving effect to the making of each such Loan and
the issuance of each such Facility LC, such Lender's Outstanding Credit Exposure
shall not exceed its Commitment. Subject to the terms of this Agreement, the
Borrower may borrow, repay and reborrow at any time prior to the Facility
Termination Date. The Commitments to lend hereunder shall expire on the Facility
Termination Date.
2.2. REQUIRED PAYMENTS; TERMINATION. The Aggregate Outstanding Credit
Exposure and all other unpaid Obligations shall be paid in full by the Borrower
on the Facility Termination Date.
68
<PAGE>
2.3. RATABLE LOANS. Each Advance hereunder shall consist of Loans made
from the several Lenders ratably in proportion to the ratio that their
respective Commitments bear to the Aggregate Commitment.
2.4. TYPES OF ADVANCES. The Advances may be Floating Rate Advances or
Eurodollar Advances, or a combination thereof, selected by the Borrower in
accordance with Sections 2.8 and 2.9.
2.5. COMMITMENT FEE; REDUCTIONS IN AGGREGATE COMMITMENT. The Borrower
agrees to pay to the Agent for the account of each Lender a commitment fee equal
to 0.25% per annum on the daily unused portion of such Lender's Commitment from
the date hereof to and including the Facility Termination Date, payable on the
first day of each fiscal quarter of the Company for the immediately preceding
fiscal quarter or portion thereof hereafter and on the Facility Termination
Date. The Borrower may permanently reduce the Aggregate Commitment in whole, or
in part ratably among the Lenders in integral multiples of $5,000,000.00, upon
at least five Business Days' written notice to the Managing Agent, which notice
shall specify the amount of any such reduction, provided, however, that the
amount of the Aggregate Commitment may not be reduced below the Aggregate
Outstanding Credit Exposure. All accrued commitment fees shall be payable on the
effective date of any termination of the obligations of the Lenders to make
Credit Extensions hereunder.
2.6. MINIMUM AMOUNT OF EACH ADVANCE. Each Eurodollar Advance shall be
in the minimum amount of $5,000,000.00 (and in multiples of $1,000,000.00 if in
excess thereof), and each Floating Rate Advance shall be in the minimum amount
of $1,000,000.00 (and in multiples of $100,000.00 if in excess thereof),
provided, however, that any Floating Rate Advance may be in the amount of the
unused Aggregate Commitment.
2.7. OPTIONAL PRINCIPAL PAYMENTS. The Borrower may from time to time
pay, without penalty or premium, all outstanding Floating Rate Advances, or, in
a minimum aggregate amount of $1,000,000.00 or any integral multiple of
$100,000.00 in excess thereof, any portion of the outstanding Floating Rate
Advances upon two Business Days' prior notice to the Managing Agent. The
Borrower may from time to time pay, subject to the payment of any funding
indemnification amounts required by Section 3.4 but without penalty or premium,
all outstanding Eurodollar Advances, or, in a minimum aggregate amount of
$5,000,000.00 or any integral multiple of $1,000,000.00 in excess thereof, any
portion of the outstanding Eurodollar Advances upon three Business Days' prior
notice to the Managing Agent.
2.8. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW ADVANCES.
The Borrower shall select the Type of Advance and, in the case of each
Eurodollar Advance, the Interest Period applicable thereto from time to time.
The Borrower shall give the Managing Agent irrevocable notice (a "Borrowing
Notice") not later than 10:00 a.m. (Chicago time) at least one Business Day
before the Borrowing Date of each Floating Rate Advance and three Business Days
before the Borrowing Date for each Eurodollar Advance, specifying:
(i) the Borrowing Date, which shall be a Business Day, of such
Advance,
(ii) the aggregate amount of such Advance,
(iii) the Type of Advance selected, and
(iv) in the case of each Eurodollar Advance, the Interest Period
applicable thereto.
69
<PAGE>
Not later than noon (Chicago time) on each Borrowing Date, each Lender shall
make available its Loan or Loans in funds immediately available in Chicago to
the Managing Agent at its address specified pursuant to Article XIII. The
Managing Agent will make the funds so received from the Lenders available to the
Borrower at the Managing Agent's aforesaid address.
2.9. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES. Floating Rate
Advances shall continue as Floating Rate Advances unless and until such Floating
Rate Advances are converted into Eurodollar Advances pursuant to this Section
2.9 or are repaid in accordance with Section 2.7. Each Eurodollar Advance shall
continue as a Eurodollar Advance until the end of the then applicable Interest
Period therefor, at which time such Eurodollar Advance shall be automatically
converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or
was repaid in accordance with Section 2.7 or (y) the Borrower shall have given
the Managing Agent a Conversion/Continuation Notice (as defined below)
requesting that, at the end of such Interest Period, such Eurodollar Advance
continue as a Eurodollar Advance for the same or another Interest Period.
Subject to the terms of Section 2.6, the Borrower may elect from time to time to
convert all or any part of a Floating Rate Advance into a Eurodollar Advance.
The Borrower shall give the Managing Agent irrevocable notice (a
"Conversion/Continuation Notice") of each conversion of a Floating Rate Advance
into a Eurodollar Advance or continuation of a Eurodollar Advance not later than
10:00 a.m. (Chicago time) at least three Business Days prior to the date of the
requested conversion or continuation, specifying:
(i) the requested date, which shall be a Business Day, of such
conversion or continuation,
(ii) the aggregate amount and Type of the Advance which is to be
converted or continued, and
(iii) the amount of such Advance which is to be converted into or
continued as a Eurodollar Advance and the duration of the Interest Period
applicable thereto.
2.10. CHANGES IN INTEREST RATE, ETC. Each Floating Rate Advance shall
bear interest on the outstanding principal amount thereof, for each day from and
including the date such Advance is made or is automatically converted from a
Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.9, to but
excluding the date it is paid or is converted into a Eurodollar Advance pursuant
to Section 2.9 hereof, at a rate per annum equal to the Floating Rate for such
day. Changes in the rate of interest on that portion of any Advance maintained
as a Floating Rate Advance will take effect simultaneously with each change in
the Corporate Base Rate. Each Eurodollar Advance shall bear interest on the
outstanding principal amount thereof from and including the first day of the
Interest Period applicable thereto to (but not including) the last day of such
Interest Period at the interest rate determined by the Managing Agent as
applicable to such Eurodollar Advance based upon the Borrower's selections under
Sections 2.8 and 2.9 and otherwise in accordance with the terms hereof. No
Interest Period may end after the Facility Termination Date.
2.11. RATES APPLICABLE AFTER DEFAULT. Notwithstanding anything to the
contrary contained in Section 2.8 or 2.9, during the continuance of a Default or
Unmatured Default the Required Lenders may, at their option, by notice to the
Borrower, which notice may be revoked at the option of the Required Lenders
notwithstanding any provision of Section 8.2 requiring unanimous consent of the
Lenders to changes in interest rates, declare that no Advance may be made as,
converted into or continued as a Eurodollar Advance. During the continuance of a
Default the Required Lenders may, at their option, by notice to the Borrower,
70
<PAGE>
which notice may be revoked at the option of the Required Lenders
notwithstanding any provision of Section 8.2 requiring unanimous consent of the
Lenders to changes in interest rates, declare that (i) each Eurodollar Advance
shall bear interest for the remainder of the applicable Interest Period at the
rate otherwise applicable to such Interest Period plus 2% per annum, (ii) each
Floating Rate Advance shall bear interest at a rate per annum equal to the
Floating Rate in effect from time to time plus 2% per annum, and (iii) the LC
Fee shall be increased by 2% per annum, provided that, during the continuance of
a Default under Section 7.6 or 7.7, the interest rates set forth in clauses (i)
and (ii) above and the increase in the LC Fee set forth in clause (iii) above
shall be applicable to all Credit Extensions without any election or action on
the part of the Managing Agent or any Lender.
2.12. METHOD OF PAYMENT. All payments of the Obligations hereunder
shall be made, without setoff, deduction, or counterclaim, in immediately
available funds to the Managing Agent at the Managing Agent's address specified
pursuant to Article XIII, or at any other Lending Installation of the Managing
Agent specified in writing by the Managing Agent to the Borrower, by noon (local
time) on the date when due and shall (except in the case of Reimbursement
Obligations for which the LC Issuer has not been fully indemnified by the
Lenders, or as otherwise specifically required hereunder) be applied ratably by
the Managing Agent among the Lenders. Each payment delivered to the Managing
Agent for the account of any Lender shall be delivered promptly by the Managing
Agent to such Lender in the same type of funds that the Managing Agent received
at its address specified pursuant to Article XIII or at any Lending Installation
specified in a notice received by the Managing Agent from such Lender. The
Managing Agent is hereby authorized to charge the account of the Borrower
maintained with Bank One for each payment of principal, interest, Reimbursement
Obligations and fees as it becomes due hereunder.
2.13. NOTELESS AGREEMENT; EVIDENCE OF INDEBTEDNESS. (i) Each Lender
shall maintain in accordance with its usual practice an account or accounts
evidencing the indebtedness of the Borrower to such Lender resulting from each
Loan made by such Lender from time to time, including the amounts of principal
and interest payable and paid to such Lender from time to time hereunder.
(ii) The Managing Agent shall also maintain accounts in which it will
record (a) the amount of each Loan made hereunder, the Type thereof and the
Interest Period with respect thereto, (b) the amount of any principal or
interest due and payable or to become due and payable from the Borrower to each
Lender hereunder, (c) the original stated amount of each Facility LC and the
amount of LC Obligations outstanding at any time, and (d) the amount of any sum
received by the Managing Agent hereunder from the Borrower and each Lender's
share thereof.
(iii) The entries maintained in the accounts maintained pursuant to
paragraphs (i) and (ii) above shall be prima facie evidence of the existence and
amounts of the Obligations therein recorded; provided, however, that the failure
of the Managing Agent or any Lender to maintain such accounts or any error
therein shall not in any manner affect the obligation of the Borrower to repay
the Obligations in accordance with their terms.
(iv) Any Lender may request that its Loans be evidenced by a promissory
note (a "Note"). In such event, the Borrower shall prepare, execute and deliver
to such Lender a Note payable to the order of such Lender in a form supplied by
the Managing Agent. Thereafter, the Loans evidenced by such Note and interest
thereon shall at all times (including after any assignment pursuant to Section
12.3) be represented by one or more Notes payable to the order of the payee
named therein or any assignee pursuant to Section 12.3, except to the extent
71
<PAGE>
that any such Lender or assignee subsequently returns any such Note for
cancellation and requests that such Loans once again be evidenced as described
in paragraphs (i) and (ii) above.
2.14. TELEPHONIC NOTICES. The Borrower hereby authorizes the Lenders
and the Managing Agent to extend, convert or continue Advances, effect
selections of Types of Advances and to transfer funds based on telephonic
notices made by any person or persons the Managing Agent or any Lender in good
faith believes to be acting on behalf of the Borrower, it being understood that
the foregoing authorization is specifically intended to allow Borrowing Notices
and Conversion/Continuation Notices to be given telephonically. The Borrower
agrees to deliver promptly to the Managing Agent a written confirmation, if such
confirmation is requested by the Managing Agent or any Lender, of each
telephonic notice signed by an Authorized Officer. If the written confirmation
differs in any material respect from the action taken by the Managing Agent and
the Lenders, the records of the Managing Agent and the Lenders shall govern
absent manifest error.
2.15. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest accrued
on each Floating Rate Advance shall be payable on each Payment Date, commencing
with the first such date to occur after the date hereof, on any date on which
the Floating Rate Advance is prepaid, whether due to acceleration or otherwise,
and at maturity. Interest accrued on that portion of the outstanding principal
amount of any Floating Rate Advance converted into a Eurodollar Advance on a day
other than a Payment Date shall be payable on the date of conversion. Interest
accrued on each Eurodollar Advance shall be payable on the last day of its
applicable Interest Period, on any date on which the Eurodollar Advance is
prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued
on each Eurodollar Advance having an Interest Period longer than three months
shall also be payable on the last day of each three-month interval during such
Interest Period. Interest, commitment fees and LC Fees shall be calculated for
actual days elapsed on the basis of a 360-day year. Interest shall be payable
for the day an Advance is made but not for the day of any payment on the amount
paid if payment is received prior to noon (local time) at the place of payment.
If any payment of principal of or interest on an Advance shall become due on a
day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and, in the case of a principal payment, such extension
of time shall be included in computing interest in connection with such payment.
2.16. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND
COMMITMENT REDUCTIONS. Promptly after receipt thereof, the Managing Agent will
notify each Lender of the contents of each Aggregate Commitment reduction
notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice
received by it hereunder. Promptly after notice from the LC Issuer, the Managing
Agent will notify each Lender of the contents of each request for issuance of a
Facility LC hereunder. The Managing Agent will notify each Lender of the
interest rate applicable to each Eurodollar Advance promptly upon determination
of such interest rate and will give each Lender prompt notice of each change in
the Corporate Base Rate.
2.17. LENDING INSTALLATIONS. Each Lender may book its Loans and its
participation in any LC Obligations and the LC Issuer may book the Facility LCs
at any Lending Installation selected by such Lender or the LC Issuer, as the
case may be, and may change its Lending Installation from time to time. All
terms of this Agreement shall apply to any such Lending Installation and the
Loans, Facility LCs, participations in LC Obligations and any Notes issued
hereunder shall be deemed held by each Lender or the LC Issuer, as the case may
be, for the benefit of any such Lending Installation. Each Lender and the LC
Issuer may, by written notice to the Managing Agent and the Borrower in
accordance with Article XIII, designate replacement or additional Lending
72
<PAGE>
Installations through which Loans will be made by it or Facility LCs will be
issued by it and for whose account Loan payments or payments with respect to
Facility LCs are to be made.
2.18. NON-RECEIPT OF FUNDS BY THE MANAGING AGENT. Unless the Borrower
or a Lender, as the case may be, notifies the Managing Agent prior to the date
on which it is scheduled to make payment to the Managing Agent of (i) in the
case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a
payment of principal, interest or fees to the Managing Agent for the account of
the Lenders, that it does not intend to make such payment, the Managing Agent
may assume that such payment has been made. The Managing Agent may, but shall
not be obligated to, make the amount of such payment available to the intended
recipient in reliance upon such assumption. If such Lender or the Borrower, as
the case may be, has not in fact made such payment to the Managing Agent, the
recipient of such payment shall, on demand by the Managing Agent, repay to the
Managing Agent the amount so made available together with interest thereon in
respect of each day during the period commencing on the date such amount was so
made available by the Managing Agent until the date the Managing Agent recovers
such amount at a rate per annum equal to (x) in the case of payment by a Lender,
the Federal Funds Effective Rate for such day for the first three days and,
thereafter, the interest rate applicable to the relevant Loan or (y) in the case
of payment by the Borrower, the interest rate applicable to the relevant Loan.
2.19. FACILITY LCS.
2.19.1 ISSUANCE. The LC Issuer hereby agrees, on the terms
and conditions set forth in this Agreement, to issue standby and
commercial letters of credit (each, a "Facility LC") and to renew,
extend, increase, decrease or otherwise modify each Facility LC
("Modify," and each such action a "Modification"), from time to time
from and including the date of this Agreement and prior to the
Facility Termination Date upon the request of the Borrower; provided
that immediately after each such Facility LC is issued or Modified,
(i) the aggregate amount of the outstanding LC Obligations shall not
exceed $5,000,000.00 and (ii) the Aggregate Outstanding Credit
Exposure shall not exceed the Aggregate Commitment. No Facility LC
shall have an expiry date later than the earlier of (x) the fifth
Business Day prior to the Facility Termination Date and (y) one year
after its issuance.
2.19.2 PARTICIPATIONS. Upon the issuance or Modification by
the LC Issuer of a Facility LC in accordance with this Section 2.19,
the LC Issuer shall be deemed, without further action by any party
hereto, to have unconditionally and irrevocably sold to each Lender,
and each Lender shall be deemed, without further action by any party
hereto, to have unconditionally and irrevocably purchased from the LC
Issuer, a participation in such Facility LC (and each Modification
thereof) and the related LC Obligations in proportion to its Pro Rata
Share.
2.19.3. NOTICE. Subject to Section 2.19.1, the Borrower
shall give the LC Issuer notice prior to 10:00 a.m. (Chicago time) at
least five Business Days prior to the proposed date of issuance or
Modification of each Facility LC, specifying the beneficiary, the
proposed date of issuance (or Modification) and the expiry date of
such Facility LC, and describing the proposed terms of such Facility
LC and the nature of the transactions proposed to be supported
thereby. Upon receipt of such notice, the LC Issuer shall promptly
notify the Managing Agent, and the Managing Agent shall promptly
notify each Lender, of the contents thereof and of the amount of such
Lender's participation in such proposed Facility LC. The issuance or
Modification by the LC Issuer of any Facility LC shall, in addition to
the conditions precedent set forth in Article IV (the satisfaction of
which the LC Issuer shall have no duty to ascertain), be subject to
the conditions precedent that such Facility LC shall be satisfactory
to the LC Issuer and that the Borrower shall have executed and
73
<PAGE>
delivered such application agreement and/or such other instruments and
agreements relating to such Facility LC as the LC Issuer shall have
reasonably requested (each, a "Facility LC Application"). In the event
of any conflict between the terms of this Agreement and the terms of
any Facility LC Application, the terms of this Agreement shall
control.
2.19.4. LC FEES. The Borrower shall pay to the Managing
Agent, for the account of the Lenders ratably in accordance with their
respective Pro Rata Shares, (i) with respect to each standby Facility
LC, a letter of credit fee at a per annum rate equal to: (A) with
respect to any Facility LC issued during the period from the date
hereto to but not including April 1, 2000, 1.50%, and (B) with respect
to any Facility LC issued thereafter, 2.00% on the average daily
undrawn stated amount under such standby Facility LC, such fee to be
payable in arrears on each Payment Date, and (ii) with respect to each
commercial Facility LC, a one-time letter of credit fee in an amount
equal to such percentage of the initial stated amount (or, with
respect to a Modification of any such commercial Facility LC which
increases the stated amount thereof, such increase in the stated
amount) as the LC Issuer may require consistent with its customary
practices for similar letters of credit, such fee to be payable on the
date of such issuance or increase (each such fee described in this
sentence an "LC Fee"). The Borrower shall also pay to the LC Issuer
for its own account (x) at the time of issuance of each Facility LC, a
fronting fee in an amount to be agreed upon between the LC Issuer and
the Borrower, and (y) documentary and processing charges in connection
with the issuance or Modification of and draws under Facility LCs in
accordance with the LC Issuer's standard schedule for such charges as
in effect from time to time.
2.19.5. ADMINISTRATION; REIMBURSEMENT BY LENDERS. Upon
receipt from the beneficiary of any Facility LC of any demand for
payment under such Facility LC, the LC Issuer shall notify the
Managing Agent and the Managing Agent shall promptly notify the
Borrower and each other Lender as to the amount to be paid by the LC
Issuer as a result of such demand and the proposed payment date (the
"LC Payment Date"). The responsibility of the LC Issuer to the
Borrower and each Lender shall be only to determine that the documents
(including each demand for payment) delivered under each Facility LC
in connection with such presentment shall be in conformity in all
material respects with such Facility LC. The LC Issuer shall endeavor
to exercise the same care in the issuance and administration of the
Facility LCs as it does with respect to letters of credit in which no
participations are granted, it being understood that in the absence of
any gross negligence or willful misconduct by the LC Issuer, each
Lender shall be unconditionally and irrevocably liable without regard
to the occurrence of any Default or any condition precedent
whatsoever, to reimburse the LC Issuer on demand for (i) such Lender's
Pro Rata Share of the amount of each payment made by the LC Issuer
under each Facility LC to the extent such amount is not reimbursed by
the Borrower pursuant to Section 2.19.6 below, plus (ii) interest on
the foregoing amount to be reimbursed by such Lender, for each day
from the date of the LC Issuer's demand for such reimbursement (or, if
such demand is made after 11:00 a.m. (Chicago time) on such date, from
the next succeeding Business Day) to the date on which such Lender
pays the amount to be reimbursed by it, at a rate of interest per
annum equal to the Federal Funds Effective Rate for the first three
days and, thereafter, at a rate of interest equal to the rate
applicable to Floating Rate Advances.
2.19.6. REIMBURSEMENT BY BORROWER. The Borrower shall be
irrevocably and unconditionally obligated to reimburse the LC Issuer
on or before the applicable LC Payment Date for any amounts to be paid
by the LC Issuer upon any drawing under any Facility LC, without
presentment, demand, protest or other formalities of any kind;
provided that neither the Borrower nor any Lender shall hereby be
precluded from asserting any claim for direct (but not consequential)
damages suffered by the Borrower or such Lender to the extent, but
only to the extent, caused by (i) the willful misconduct or gross
negligence of the LC Issuer in determining whether a request presented
under any Facility LC issued by it complied with the terms of such
Facility LC or (ii) the LC Issuer's failure to pay under any Facility
LC issued by it after the presentation to it of a request strictly
74
<PAGE>
complying with the terms and conditions of such Facility LC. All such
amounts paid by the LC Issuer and remaining unpaid by the Borrower
shall bear interest, payable on demand, for each day until paid at a
rate per annum equal to (x) the rate applicable to Floating Rate
Advances for such day if such day falls on or before the applicable LC
Payment Date and (y) the sum of 2% plus the rate applicable to
Floating Rate Advances for such day if such day falls after such LC
Payment Date. The LC Issuer will pay to each Lender ratably in
accordance with its Pro Rata Share all amounts received by it from the
Borrower for application in payment, in whole or in part, of the
Reimbursement Obligation in respect of any Facility LC issued by the
LC Issuer, but only to the extent such Lender has made payment to the
LC Issuer in respect of such Facility LC pursuant to Section 2.19.5.
Subject to the terms and conditions of this Agreement (including
without limitation the submission of a Borrowing Notice in compliance
with Section 2.8 and the satisfaction of the applicable conditions
precedent set forth in Article IV), the Borrower may request an
Advance hereunder for the purpose of satisfying any Reimbursement
Obligation.
2.19.7. OBLIGATIONS ABSOLUTE. The Borrower's obligations
under this Section 2.19 shall be absolute and unconditional under any
and all circumstances and irrespective of any setoff, counterclaim or
defense to payment which the Borrower may have or have had against the
LC Issuer, any Lender or any beneficiary of a Facility LC. The
Borrower further agrees with the LC Issuer and the Lenders that the LC
Issuer and the Lenders shall not be responsible for, and the
Borrower's Reimbursement Obligation in respect of any Facility LC
shall not be affected by, among other things, the validity or
genuineness of documents or of any endorsements thereon, even if such
documents should in fact prove to be in any or all respects invalid,
fraudulent or forged, or any dispute between or among the Borrower,
any of its Affiliates, the beneficiary of any Facility LC or any
financing institution or other party to whom any Facility LC may be
transferred or any claims or defenses whatsoever of the Borrower or of
any of its Affiliates against the beneficiary of any Facility LC or
any such transferee. The LC Issuer shall not be liable for any error,
omission, interruption or delay in transmission, dispatch or delivery
of any message or advice, however transmitted, in connection with any
Facility LC. The Borrower agrees that any action taken or omitted by
the LC Issuer or any Lender under or in connection with each Facility
LC and the related drafts and documents, if done without gross
negligence or willful misconduct, shall be binding upon the Borrower
and shall not put the LC Issuer or any Lender under any liability to
the Borrower. Nothing in this Section 2.19.7 is intended to limit the
right of the Borrower to make a claim against the LC Issuer for
damages as contemplated by the proviso to the first sentence of
Section 2.19.6.
2.19.8. ACTIONS OF LC ISSUER. The LC Issuer shall be
entitled to rely, and shall be fully protected in relying, upon any
Facility LC, draft, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document believed by it to be
genuine and correct and to have been signed, sent or made by the
proper Person or Persons, and upon advice and statements of legal
counsel, independent accountants and other experts selected by the LC
Issuer. The LC Issuer shall be fully justified in failing or refusing
to take any action under this Agreement unless it shall first have
received such advice or concurrence of the Required Lenders as it
reasonably deems appropriate or it shall first be indemnified to its
reasonable satisfaction by the Lenders against any and all liability
and expense which may be incurred by it by reason of taking or
continuing to take any such action. Notwithstanding any other
provision of this Section 2.19, the LC Issuer shall in all cases be
fully protected in acting, or in refraining from acting, under this
Agreement in accordance with a request of the Required Lenders, and
such request and any action taken or failure to act pursuant thereto
shall be binding upon the Lenders and any future holders of a
participation in any Facility LC.
2.19.9. INDEMNIFICATION. The Borrower hereby agrees to
indemnify and hold harmless each Lender, the LC Issuer and the
Managing Agent, and their respective directors, officers, agents and
75
<PAGE>
employees from and against any and all claims and damages, losses,
liabilities, costs or expenses which such Lender, the LC Issuer or the
Managing Agent may incur (or which may be claimed against such Lender,
the LC Issuer or the Managing Agent by any Person whatsoever) by
reason of or in connection with the issuance, execution and delivery
or transfer of or payment or failure to pay under any Facility LC or
any actual or proposed use of any Facility LC, including, without
limitation, any claims, damages, losses, liabilities, costs or
expenses which the LC Issuer may incur by reason of or in connection
with (i) the failure of any other Lender to fulfill or comply with its
obligations to the LC Issuer hereunder (but nothing herein contained
shall affect any rights the Borrower may have against any defaulting
Lender) or (ii) by reason of or on account of the LC Issuer issuing
any Facility LC which specifies that the term "Beneficiary" included
therein includes any successor by operation of law of the named
Beneficiary, but which Facility LC does not require that any drawing
by any such successor Beneficiary be accompanied by a copy of a legal
document, satisfactory to the LC Issuer, evidencing the appointment of
such successor Beneficiary; PROVIDED that the Borrower shall not be
required to indemnify any Lender, the LC Issuer or the Managing Agent
for any claims, damages, losses, liabilities, costs or expenses to the
extent, but only to the extent, caused by (x) the willful misconduct
or gross negligence of the LC Issuer in determining whether a request
presented under any Facility LC complied with the terms of such
Facility LC or (y) the LC Issuer's failure to pay under any Facility
LC after the presentation to it of a request strictly complying with
the terms and conditions of such Facility LC. Nothing in this Section
2.19.9 is intended to limit the obligations of the Borrower under any
other provision of this Agreement.
2.19.10. LENDERS' INDEMNIFICATION. Each Lender shall,
ratably in accordance with its Pro Rata Share, indemnify the LC
Issuer, its affiliates and their respective directors, officers,
agents and employees (to the extent not reimbursed by the Borrower)
against any cost, expense (including reasonable counsel fees and
disbursements), claim, demand, action, loss or liability (except such
as result from such indemnitees' gross negligence or willful
misconduct or the LC Issuer's failure to pay under any Facility LC
after the presentation to it of a request strictly complying with the
terms and conditions of the Facility LC) that such indemnitees may
suffer or incur in connection with this Section 2.19 or any action
taken or omitted by such indemnitees hereunder.
2.19.11. FACILITY LC COLLATERAL ACCOUNT. The Borrower agrees
that it will, upon the request of the Managing Agent or the Required
Lenders and until the final expiration date of any Facility LC and
thereafter as long as any amount is payable to the LC Issuer or the
Lenders in respect of any Facility LC, maintain a special collateral
account pursuant to arrangements satisfactory to the Managing Agent
(the "Facility LC Collateral Account") at the Managing Agent's office
at the address specified pursuant to Article XIII, in the name of such
Borrower but under the sole dominion and control of the Managing
Agent, for the benefit of the Lenders and in which such Borrower shall
have no interest other than as set forth in Section 8.1. The Borrower
hereby pledges, assigns and grants to the Managing Agent, on behalf of
and for the ratable benefit of the Lenders and the LC Issuer, a
security interest in all of the Borrower's right, title and interest
in and to all funds which may from time to time be on deposit in the
Facility LC Collateral Account to secure the prompt and complete
payment and performance of the Obligations. The Managing Agent will
invest any funds on deposit from time to time in the Facility LC
Collateral Account in certificates of deposit of Bank One having a
maturity not exceeding 30 days. Nothing in this Section 2.19.11 shall
either obligate the Managing Agent to require the Borrower to deposit
any funds in the Facility LC Collateral Account or limit the right of
the Managing Agent to release any funds held in the Facility LC
Collateral Account in each case other than as required by Section 8.1.
2.19.12. RIGHTS AS A LENDER. In its capacity as a Lender,
the LC Issuer shall have the same rights and obligations as any other
Lender.
76
<PAGE>
ARTICLE III
YIELD PROTECTION; TAXES
-----------------------
3.1. YIELD PROTECTION. If, on or after the date of this Agreement, the
adoption of any law or any governmental or quasi-governmental rule, regulation,
policy, guideline or directive (whether or not having the force of law), or any
change in the interpretation or administration thereof by any governmental or
quasi-governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Lender or
applicable Lending Installation or the LC Issuer with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency:
(i) subjects any Lender or any applicable Lending Installation or the
LC Issuer to any Taxes, or changes the basis of taxation of payments (other than
with respect to Excluded Taxes) to any Lender or the LC Issuer in respect of its
Eurodollar Loans, Facility LCs or participation therein, or
(ii) imposes or increases or deems applicable any reserve, assessment,
insurance charge, special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by, any Lender or any
applicable Lending Installation or the LC Issuer (other than reserves and
assessments taken into account in determining the interest rate applicable to
Eurodollar Advances), or
(iii) imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation or the LC Issuer
of making, funding or maintaining its Eurodollar Loans, or of issuing or
participating in Facility LCs, or reduces any amount receivable by any Lender or
any applicable Lending Installation or the LC Issuer in connection with its
Eurodollar Loans, Facility LCs or participations therein, or requires any Lender
or any applicable Lending Installation or the LC Issuer to make any payment
calculated by reference to the amount of Eurodollar Loans, Facility LCs or
participations therein held or interest or LC Fees received by it, by an amount
deemed material by such Lender or the LC Issuer as the case may be,
and the result of any of the foregoing is to increase the cost to such Lender or
applicable Lending Installation or the LC Issuer, as the case may be, of making
or maintaining its Eurodollar Loans or Commitment or of issuing or participating
in Facility LCs or to reduce the return received by such Lender or applicable
Lending Installation or the LC Issuer, as the case may be, in connection with
such Eurodollar Loans, Commitment, Facility LCs or participations therein, then,
within 15 days of demand by such Lender or the LC Issuer, as the case may be,
the Borrower shall pay such Lender or the LC Issuer, as the case may be, such
additional amount or amounts as will compensate such Lender or the LC Issuer, as
the case may be, for such increased cost or reduction in amount received.
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender or the LC
Issuer determines the amount of capital required or expected to be maintained by
such Lender or the LC Issuer, any Lending Installation of such Lender or the LC
Issuer, or any corporation controlling such Lender or the LC Issuer is increased
as a result of a Change, then, within 15 days of demand by such Lender or the LC
Issuer, the Borrower shall pay such Lender or the LC Issuer the amount necessary
77
<PAGE>
to compensate for any shortfall in the rate of return on the portion of such
increased capital which such Lender or the LC Issuer determines is attributable
to this Agreement, its Outstanding Credit Exposure or its Commitment to make
Loans and issue or participate in Facility LCs, as the case may be, hereunder
(after taking into account such Lender's or the LC Issuer's policies as to
capital adequacy). "Change" means (i) any change after the date of this
Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of or change
in any other law, governmental or quasi-governmental rule, regulation, policy,
guideline, interpretation, or directive (whether or not having the force of law)
after the date of this Agreement which affects the amount of capital required or
expected to be maintained by any Lender or the LC Issuer or any Lending
Installation or any corporation controlling any Lender or the LC Issuer.
"Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in
effect in the United States on the date of this Agreement, including transition
rules, and (ii) the corresponding capital regulations promulgated by regulatory
authorities outside the United States implementing the July 1988 report of the
Basle Committee on Banking Regulation and Supervisory Practices Entitled
"International Convergence of Capital Measurements and Capital Standards,"
including transition rules, and any amendments to such regulations adopted prior
to the date of this Agreement.
3.3. AVAILABILITY OF TYPES OF ADVANCES. If any Lender determines that
maintenance of its Eurodollar Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, or if the Required Lenders determine that (i) deposits
of a type and maturity appropriate to match fund Eurodollar Advances are not
available or (ii) the interest rate applicable to Eurodollar Advances does not
accurately reflect the cost of making or maintaining Eurodollar Advances, then
the Managing Agent shall suspend the availability of Eurodollar Advances and
require any affected Eurodollar Advances to be repaid or converted to Floating
Rate Advances, subject to the payment of any funding indemnification amounts
required by Section 3.4.
3.4. FUNDING INDEMNIFICATION. If any payment of a Eurodollar Advance
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration, prepayment or otherwise, or a Eurodollar
Advance is not made on the date specified by the Borrower for any reason other
than default by the Lenders, the Borrower will indemnify each Lender for any
loss or cost incurred by it resulting therefrom, including, without limitation,
any loss or cost in liquidating or employing deposits acquired to fund or
maintain such Eurodollar Advance.
3.5. TAXES. (i) All payments by the Borrower to or for the account of
any Lender, the LC Issuer or the Managing Agent hereunder or under any Note or
Facility LC application shall be made free and clear of and without deduction
for any and all Taxes. If the Borrower shall be required by law to deduct any
Taxes from or in respect of any sum payable hereunder to any Lender, the LC
Issuer or the Managing Agent, (a) the sum payable shall be increased as
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 3.5) such Lender, the
LC Issuer or the Managing Agent (as the case may be) receives an amount equal to
the sum it would have received had no such deductions been made, (b) the
Borrower shall make such deductions, (c) the Borrower shall pay the full amount
deducted to the relevant authority in accordance with applicable law and (d) the
Borrower shall furnish to the Managing Agent the original copy of a receipt
evidencing payment thereof within 30 days after such payment is made.
(ii) In addition, the Borrower hereby agrees to pay any present or
future stamp or documentary taxes and any other excise or property taxes,
charges or similar levies which arise from any payment made hereunder or under
any Note or Facility LC Application or from the execution or delivery of, or
otherwise with respect to, this Agreement or any Note or Facility LC Application
("Other Taxes").
78
<PAGE>
(iii) The Borrower hereby agrees to indemnify the Managing Agent, the
LC Issuer and each Lender for the full amount of Taxes or Other Taxes
(including, without limitation, any Taxes or Other Taxes imposed on amounts
payable under this Section 3.5) paid by the Managing Agent, the LC Issuer or
such Lender and any liability (including penalties, interest and expenses)
arising therefrom or with respect thereto. Payments due under this
indemnification shall be made within 30 days of the date the Managing Agent, the
LC Issuer or such Lender makes demand therefor pursuant to Section 3.6.
(iv) Each Lender that is not incorporated under the laws of the United
States of America or a state thereof (each a "Non-U.S. Lender") agrees that it
will, not less than ten Business Days after the date of this Agreement, (i)
deliver to each of the Borrower and the Managing Agent two duly completed copies
of United States Internal Revenue Service Form 1001 or 4224, certifying in
either case that such Lender is entitled to receive payments under this
Agreement without deduction or withholding of any United States federal income
taxes, and (ii) deliver to each of the Borrower and the Managing Agent a United
States Internal Revenue Form W-8 or W-9, as the case may be, and certify that it
is entitled to an exemption from United States backup withholding tax. Each
Non-U.S. Lender further undertakes to deliver to each of the Borrower and the
Managing Agent (x) renewals or additional copies of such form (or any successor
form) on or before the date that such form expires or becomes obsolete, and (y)
after the occurrence of any event requiring a change in the most recent forms so
delivered by it, such additional forms or amendments thereto as may be
reasonably requested by the Borrower or the Managing Agent. All forms or
amendments described in the preceding sentence shall certify that such Lender is
entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes, unless an event
(including without limitation any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would prevent such
Lender from duly completing and delivering any such form or amendment with
respect to it and such Lender advises the Borrower and the Managing Agent that
it is not capable of receiving payments without any deduction or withholding of
United States federal income tax.
(v) For any period during which a Non-U.S. Lender has failed to provide
the Borrower with an appropriate form pursuant to clause (iv), above (unless
such failure is due to a change in treaty, law or regulation, or any change in
the interpretation or administration thereof by any governmental authority,
occurring subsequent to the date on which a form originally was required to be
provided), such Non-U.S. Lender shall not be entitled to indemnification under
this Section 3.5 with respect to Taxes imposed by the United States; provided
that, should a Non-U.S. Lender which is otherwise exempt from or subject to a
reduced rate of withholding tax become subject to Taxes because of its failure
to deliver a form required under clause (iv), above, the Borrower shall take
such steps as such Non-U.S. Lender shall reasonably request to assist such
Non-U.S. Lender to recover such Taxes.
(vi) Any Lender that is entitled to an exemption from or reduction of
withholding tax with respect to payments under this Agreement or any Note
pursuant to the law of any relevant jurisdiction or any treaty shall deliver to
the Borrower (with a copy to the Managing Agent), at the time or times
prescribed by applicable law, such properly completed and executed documentation
prescribed by applicable law as will permit such payments to be made without
withholding or at a reduced rate.
(vii) If the U.S. Internal Revenue Service or any other governmental
authority of the United States or any other country or any political subdivision
thereof asserts a claim that the Managing Agent did not properly withhold tax
from amounts paid to or for the account of any Lender (because the appropriate
form was not delivered or properly completed, because such Lender failed to
notify the Managing Agent of a change in circumstances which rendered its
79
<PAGE>
exemption from withholding ineffective, or for any other reason), such Lender
shall indemnify the Managing Agent fully for all amounts paid, directly or
indirectly, by the Managing Agent as tax, withholding therefor, or otherwise,
including penalties and interest, and including taxes imposed by any
jurisdiction on amounts payable to the Managing Agent under this subsection,
together with all costs and expenses related thereto (including attorneys fees
and time charges of attorneys for the Managing Agent, which attorneys may be
employees of the Managing Agent). The obligations of the Lenders under this
Section 3.5(vii) shall survive the payment of the Obligations and termination of
this Agreement.
3.6. LENDER STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Loans to reduce any liability of the Borrower to such
Lender under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of
Eurodollar Advances under Section 3.3, so long as such designation is not, in
the judgment of such Lender, disadvantageous to such Lender. Each Lender shall
deliver a written statement of such Lender to the Borrower (with a copy to the
Managing Agent) as to the amount due, if any, under Section 3.1, 3.2, 3.4 or
3.5. Such written statement shall set forth in reasonable detail the
calculations upon which such Lender determined such amount and shall be final,
conclusive and binding on the Borrower in the absence of manifest error.
Determination of amounts payable under such Sections in connection with a
Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar
Loan through the purchase of a deposit of the type and maturity corresponding to
the deposit used as a reference in determining the Eurodollar Rate applicable to
such Loan, whether in fact that is the case or not. Unless otherwise provided
herein, the amount specified in the written statement of any Lender shall be
payable on demand after receipt by the Borrower of such written statement. The
obligations of the Borrower under Sections 3.1, 3.2, 3.4 and 3.5 shall survive
payment of the Obligations and termination of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
--------------------
4.1. INITIAL CREDIT EXTENSION. The Lenders shall not be required to
make the initial Credit Extension hereunder unless the Borrower has furnished to
the Managing Agent with sufficient copies for the Lenders:
(i) Copies of the articles or certificate of incorporation of the
Borrower, together with all amendments, and a certificate of good standing, each
certified by the appropriate governmental officer in its jurisdiction of
incorporation
(ii) Copies, certified by the Secretary or Assistant Secretary of the
Borrower, of its by-laws and of its Board of Directors' resolutions and of
resolutions or actions of any other body authorizing the execution of the Loan
Documents to which the Borrower is a party.
(iii) An incumbency certificate, executed by the Secretary or Assistant
Secretary of the Borrower, which shall identify by name and title and bear the
signatures of the Authorized Officers and any other officers of the Borrower
authorized to sign the Loan Documents to which the Borrower is a party, upon
80
<PAGE>
which certificate the Managing Agent and the Lenders shall be entitled to rely
until informed of any change in writing by the Borrower.
(iv) A certificate, signed by the chief financial officer of the
Borrower, stating that on the initial Credit Extension Date no Default or
Unmatured Default has occurred and is continuing.
(v) A written opinion of the Borrower's counsel, addressed to the
Lenders in substantially the form of Exhibit A.
(vi) Any Notes requested by a Lender pursuant to Section 2.13 payable
to the order of each such requesting Lender.
(vii) Written money transfer instructions, in substantially the form of
Exhibit D, addressed to the Managing Agent and signed by an Authorized Officer,
together with such other related money transfer authorizations as the Managing
Agent may have reasonably requested.
(viii) Information satisfactory to the Managing Agent and the Required
Lenders regarding the Borrower's Year 2000 Program.
(ix) The insurance certificate described in Section 5.21.
(x) Such other documents as any Lender or its counsel may have
reasonably requested.
(xi) Evidence satisfactory to the Managing Agent that upon the funding
of the first Advance all amounts outstanding under that certain Loan Agreement
dated as of October 16, 1996 among Zions, Bank One and the Borrower, as amended
to date, shall have been paid in full and the credit facility evidenced thereby
terminated.
Notwithstanding anything contained herein, in the event the Borrower is unable
to timely deliver the items required pursuant to subsections (viii) and (ix)
above, the Required Lenders may, in their sole discretion, agree to waive such
requirements as a condition to the funding of the first Advance and the Borrower
shall deliver the same no later than October 22, 1999, it being expressly agreed
and understood by the Borrower that the failure of the Borrower to so deliver
such items shall be an Event of Default and there shall be no further cure
period with respect thereto.
4.2. EACH CREDIT EXTENSION. The Lenders shall not be required to make
any Credit Extension unless on the applicable Credit Extension Date:
(i) There exists no Default or Unmatured Default.
(ii) The representations and warranties contained in Article V are true
and correct as of such Credit Extension Date except to the extent any such
representation or warranty is stated to relate solely to an earlier date, in
which case such representation or warranty shall have been true and correct on
and as of such earlier date.
(iii) All legal matters incident to the making of such Credit Extension
shall be satisfactory to the Lenders and their counsel.
81
<PAGE>
Each Borrowing Notice or request for issuance of a Facility LC with
respect to each such Credit Extension shall constitute a representation and
warranty by the Borrower that the conditions contained in Sections 4.2(i) and
(ii) have been satisfied. Any Lender may require a duly completed compliance
certificate in substantially the form of Exhibit B as a condition to making a
Credit Extension.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower represents and warrants to the Lenders that:
5.1. EXISTENCE AND STANDING. Each of the Borrower and its Subsidiaries
is a corporation, partnership (in the case of Subsidiaries only) or limited
liability company duly and properly incorporated or organized, as the case may
be, validly existing and (to the extent such concept applies to such entity) in
good standing under the laws of its jurisdiction of incorporation or
organization and has all requisite authority to conduct its business in each
jurisdiction in which its business is conducted.
5.2. AUTHORIZATION AND VALIDITY. The Borrower has the power and
authority and legal right to execute and deliver the Loan Documents and to
perform its obligations thereunder. The execution and delivery by the Borrower
of the Loan Documents and the performance of its obligations thereunder have
been duly authorized by proper corporate proceedings, and the Loan Documents to
which the Borrower is a party constitute legal, valid and binding obligations of
the Borrower enforceable against the Borrower in accordance with their terms,
except as enforceability may be limited by bankruptcy, insolvency or similar
laws affecting the enforcement of creditors' rights generally and subject also
to the availability of equitable remedies if equitable remedies are sought.
5.3. NO CONFLICT; GOVERNMENT CONSENT. Neither the execution and
delivery by the Borrower of the Loan Documents, nor the consummation of the
transactions therein contemplated, nor compliance with the provisions thereof
will violate (i) any law, rule, regulation, order, writ, judgment, injunction,
decree or award binding on the Borrower or any of its Subsidiaries or (ii) the
Borrower's or any Subsidiary's articles or certificate of incorporation,
partnership agreement, certificate of partnership, articles or certificate of
organization, by-laws, or operating or other management agreement, as the case
may be, or (iii) the provisions of any indenture, instrument or agreement to
which the Borrower or any of its Subsidiaries is a party or is subject, or by
which it, or its Property, is bound, or conflict with or constitute a default
thereunder, or result in, or require, the creation or imposition of any Lien in,
of or on the Property of the Borrower or a Subsidiary pursuant to the terms of
any such indenture, instrument or agreement. No order, consent, adjudication,
approval, license, authorization, or validation of, or filing, recording or
registration with, or exemption by, or other action in respect of any
governmental or public body or authority, or any subdivision thereof, which has
not been obtained by the Borrower or any of its Subsidiaries, is required to be
obtained by the Borrower or any of its Subsidiaries in connection with the
execution and delivery of the Loan Documents, the borrowings under this
Agreement, the payment and performance by the Borrower of the Obligations or the
legality, validity, binding effect or enforceability of any of the Loan
Documents.
82
<PAGE>
5.4. FINANCIAL STATEMENTS. The May 31, 1999 consolidated financial
statements of the Borrower and its Subsidiaries heretofore delivered to the
Lenders were prepared in accordance with generally accepted accounting
principles in effect on the date such statements were prepared and fairly
present the consolidated financial condition and operations of the Borrower and
its Subsidiaries at such date and the consolidated results of their operations
for the period then ended.
5.5. MATERIAL ADVERSE CHANGE. Since June 1, 1999 there has been no
change in the business, Property, prospects, condition (financial or otherwise)
or results of operations of the Borrower and its Subsidiaries which could
reasonably be expected to have a Material Adverse Effect, except the one time
charge taken August 30, 1999 in an amount not to exceed $45,000,000.00.
5.6. TAXES. The Borrower and its Subsidiaries have filed all United
States federal tax returns and all other tax returns which are required to be
filed and have paid all taxes due pursuant to said returns or pursuant to any
assessment received by the Borrower or any of its Subsidiaries, except such
taxes, if any, as are being contested in good faith and as to which adequate
reserves have been provided in accordance with Agreement Accounting Principles
and as to which no Lien exists. No tax liens have been filed and no claims are
being asserted with respect to any such taxes. The charges, accruals and
reserves on the books of the Borrower and its Subsidiaries in respect of any
taxes or other governmental charges are adequate.
5.7. LITIGATION AND CONTINGENT OBLIGATIONS. There is no litigation,
arbitration, governmental investigation, proceeding or inquiry pending or, to
the knowledge of any the Chief Executive Officer of the Company or any of the
Authorized Officers, threatened against or affecting the Borrower or any of its
Subsidiaries which could reasonably be expected to have a Material Adverse
Effect or which seeks to prevent, enjoin or delay the making of any Credit
Extensions. Other than any liability incident to any litigation, arbitration or
proceeding which could not reasonably be expected to have a Material Adverse
Effect, the Borrower has no material contingent obligations not provided for or
disclosed in the financial statements referred to in Section 5.4.
5.8. SUBSIDIARIES. Schedule 1 contains an accurate list of all
Subsidiaries of the Borrower as of the date of this Agreement, setting forth
their respective jurisdictions of organization and the percentage of their
respective capital stock or other ownership interests owned by the Borrower or
other Subsidiaries. All of the issued and outstanding shares of capital stock or
other ownership interests of such Subsidiaries have been (to the extent such
concepts are relevant with respect to such ownership interests) duly authorized
and issued and are fully paid and non-assessable.
5.9. ERISA. There are no Unfunded Liabilities under any Single Employer
Plans. Each Plan complies in all material respects with all applicable
requirements of law and regulations, no Reportable Event has occurred with
respect to any Plan, neither the Borrower nor any other member of the Controlled
Group has withdrawn from any Plan or initiated steps to do so, and no steps have
been taken to reorganize or terminate any Plan.
5.10. ACCURACY OF INFORMATION. No information, exhibit or report
furnished by the Borrower or any of its Subsidiaries to the Managing Agent or to
any Lender in connection with the negotiation of, or compliance with, the Loan
Documents contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statements contained therein not
misleading.
83
<PAGE>
5.11. REGULATION U. Margin stock (as defined in Regulation U)
constitutes less than 25% of the value of those assets of the Borrower and its
Subsidiaries which are subject to any limitation on sale, pledge, or other
restriction hereunder.
5.12. MATERIAL AGREEMENTS. Neither the Borrower nor any Subsidiary is a
party to any agreement or instrument or subject to any charter or other
corporate restriction which could reasonably be expected to have a Material
Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in (i) any agreement to which it is a party, which default
could reasonably be expected to have a Material Adverse Effect or (ii) any
agreement or instrument evidencing or governing Indebtedness. The Lenders hereby
acknowledge that they have previously been informed of the possible existence of
a default under the Senior Unsecured Notes and that the existence of such a
default shall not constitute a breach of the representation and warranty set
forth herein.
5.13. COMPLIANCE OF LAWS. The Borrower and its Subsidiaries have
complied with all applicable statutes, rules, regulations, orders and
restrictions of any domestic or foreign government or any instrumentality or
agency thereof having jurisdiction over the conduct of their respective
businesses or the ownership of their respective Property.
5.14. OWNERSHIP OF PROPERTIES. Except as set forth on Schedule 2, on
the date of this Agreement, the Borrower and its Subsidiaries will have good
title, free of all Liens other than those permitted by Section 6.15, to all of
the Property and assets reflected in the Borrower's most recent consolidated
financial statements provided to the Managing Agent as owned by the Borrower and
its Subsidiaries.
5.15. PLAN ASSETS; PROHIBITED TRANSACTIONS. The Borrower is not an
entity deemed to hold "plan assets" within the meaning of 29 C.F.R. ss.
2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA)
which is subject to Title I of ERISA or any plan (within the meaning of Section
4975 of the Code), and neither the execution of this Agreement nor the making of
Credit Extensions hereunder gives rise to a prohibited transaction within the
meaning of Section 406 of ERISA or Section 4975 of the Code.
5.16. ENVIRONMENTAL MATTERS. In the ordinary course of its business,
the officers of the Borrower consider the effect of Environmental Laws on the
business of the Borrower and its Subsidiaries, in the course of which they
identify and evaluate potential risks and liabilities accruing to the Borrower
due to Environmental Laws. On the basis of this consideration, the Borrower has
concluded that Environmental Laws cannot reasonably be expected to have a
Material Adverse Effect. Neither the Borrower nor any Subsidiary has received
any notice to the effect that its operations are not in material compliance with
any of the requirements of applicable Environmental Laws or are the subject of
any federal or state investigation evaluating whether any remedial action is
needed to respond to a release of any toxic or hazardous waste or substance into
the environment, which non-compliance or remedial action could reasonably be
expected to have a Material Adverse Effect.
5.17. INVESTMENT COMPANY ACT. Neither the Borrower nor any Subsidiary
is an "investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
5.18. PUBLIC HOLDING COMPANY ACT. Neither the Borrower nor any
Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
84
<PAGE>
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
5.19. YEAR 2000. The Borrower has made an assessment of the Year 2000
Issues and has a realistic and achievable program for remediating the Year 2000
Issues on a timely basis (the "Year 2000 Program"). Based on such assessment and
on the Year 2000 Program the Borrower does not reasonably anticipate that Year
2000 Issues will have a Material Adverse Effect.
5.20. SUBORDINATED INDEBTEDNESS. The Obligations constitute senior
indebtedness which is entitled to the benefits of the subordination provisions
of all outstanding Subordinated Indebtedness.
5.21. INSURANCE. The certificate signed by the President or Chief
Financial Officer of the Borrower, that attests to the existence and adequacy
of, and summarizes, the property and casualty insurance program carried by the
Borrower with respect to itself and its Subsidiaries and that has been furnished
by the Borrower to the Managing Agent and the Lenders, is complete and accurate.
This summary includes the insurer's or insurers' name(s), policy number(s),
expiration date(s), amount(s) of coverage, type(s) of coverage, exclusion(s),
and deductibles. This summary also includes similar information, and describes
any reserves, relating to any self-insurance program that is in effect.
ARTICLE VI
COVENANTS
---------
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
6.1. FINANCIAL REPORTING. The Borrower will maintain, for itself and
each Subsidiary, a system of accounting established and administered in
accordance with generally accepted accounting principles, and furnish to the
Lenders:
(i) Within 90 days after the close of each of its fiscal years, an
unqualified audit report certified by independent certified public accountants
acceptable to the Lenders, prepared in accordance with Agreement Accounting
Principles on a consolidated and consolidating basis (consolidating statements
need not be certified by such accountants) for itself and its Subsidiaries,
including balance sheets as of the end of such period, related profit and loss
and reconciliation of surplus statements, and a statement of cash flows,
accompanied by (a) any management letter prepared by said accountants, and (b) a
certificate of said accountants that, in the course of their examination
necessary for their certification of the foregoing, they have obtained no
knowledge of any Default or Unmatured Default, or if, in the opinion of such
accountants, any Default or Unmatured Default shall exist, stating the nature
and status thereof.
(ii) Within 45 days after the close of the first three quarterly
periods of each of its fiscal years, for itself and its Subsidiaries,
consolidated and consolidating unaudited balance sheets as at the close of each
such period and consolidated and consolidating profit and loss and
reconciliation of surplus statements and a statement of cash flows for the
85
<PAGE>
period from the beginning of such fiscal year to the end of such quarter, all
certified by its chief financial officer.
(iii) Together with the financial statements required under Sections
6.1(i) and (ii), a compliance certificate in substantially the form of Exhibit B
signed by its chief financial officer showing the calculations necessary to
determine compliance with this Agreement and stating that no Default or
Unmatured Default exists, or if any Default or Unmatured Default exists, stating
the nature and status thereof.
(iv) Within 270 days after the close of each fiscal year, a statement
of the Unfunded Liabilities of each Single Employer Plan, certified as correct
by an actuary enrolled under ERISA.
(v) As soon as possible and in any event within 10 days after the
Borrower knows that any Reportable Event has occurred with respect to any Plan,
a statement, signed by the chief financial officer of the Borrower, describing
said Reportable Event and the action which the Borrower proposes to take with
respect thereto.
(vi) As soon as possible and in any event within 10 days after receipt
by the Borrower, a copy of (a) any notice or claim to the effect that the
Borrower or any of its Subsidiaries is or may be liable to any Person as a
result of the release by the Borrower, any of its Subsidiaries, or any other
Person of any toxic or hazardous waste or substance into the environment, and
(b) any notice alleging any violation of any federal, state or local
environmental, health or safety law or regulation by the Borrower or any of its
Subsidiaries, which, in either case, could reasonably be expected to have a
Material Adverse Effect.
(vii) Promptly upon the furnishing thereof to the shareholders of the
Borrower, copies of all financial statements, reports and proxy statements so
furnished.
(viii) Promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular reports which the
Borrower or any of its Subsidiaries files with the Securities and Exchange
Commission.
(ix) As soon as available, but in any event within 90 days after the
beginning of each fiscal year of the Borrower, a copy of the plan and forecast
(including a projected consolidated and consolidating balance sheet, income
statement and funds flow statement) of the Borrower for such fiscal year, broken
down on a fiscal quarter by fiscal quarter basis.
(x) Such other information (including non-financial information) as the
Managing Agent or any Lender may from time to time reasonably request.
6.2. USE OF PROCEEDS. The Borrower will use the proceeds of the Credit
Extensions for general corporate purposes, including, without limitation, to
repay all or a portion of the Senior Unsecured Notes. The Borrower will not, nor
will it permit any Subsidiary to, use any of the proceeds of the Advances to
purchase or carry any "margin stock" (as defined in Regulation U).
86
<PAGE>
6.3. NOTICE OF DEFAULT. The Borrower will, and will cause each
Subsidiary to, give prompt notice in writing to the Lenders of the occurrence of
any Default or Unmatured Default and of any other development, financial or
otherwise (including, without limitation, developments with respect to Year 2000
Issues), which could reasonably be expected to have a Material Adverse Effect.
6.4. CONDUCT OF BUSINESS. The Borrower will, and will cause each
Subsidiary to, carry on and conduct its business in substantially the same
manner and in substantially the same fields of enterprise as it is presently
conducted and do all things necessary to remain duly incorporated or organized,
validly existing and (to the extent such concept applies to such entity) in good
standing as a domestic corporation, partnership or limited liability company in
its jurisdiction of incorporation or organization, as the case may be, and
maintain all requisite authority to conduct its business in each jurisdiction in
which its business is conducted.
6.5. TAXES. The Borrower will, and will cause each Subsidiary to,
timely file complete and correct United States federal and applicable foreign,
state and local tax returns required by law and pay when due all taxes,
assessments and governmental charges and levies upon it or its income, profits
or Property, except those which are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves have been set aside in
accordance with Agreement Accounting Principles.
6.6. INSURANCE. The Borrower will, and will cause each Subsidiary to,
maintain with financially sound and reputable insurance companies insurance on
all their Property in such amounts and covering such risks as is consistent with
sound business practice, and the Borrower will furnish to any Lender upon
request full information as to the insurance carried.
6.7. COMPLIANCE WITH LAWS. The Borrower will, and will cause each
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject including,
without limitation, all Environmental Laws.
6.8. MAINTENANCE OF PROPERTIES. The Borrower will, and will cause each
Subsidiary to, do all things necessary to maintain, preserve, protect and keep
its Property in good repair, working order and condition, and make all necessary
and proper repairs, renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times.
6.9. INSPECTION. The Borrower will, and will cause each Subsidiary to,
permit the Managing Agent and the Lenders, by their respective representatives
and agents, to inspect any of the Property, books and financial records of the
Borrower and each Subsidiary, to examine and make copies of the books of
accounts and other financial records of the Borrower and each Subsidiary, and to
discuss the affairs, finances and accounts of the Borrower and each Subsidiary
with, and to be advised as to the same by, their respective officers at such
reasonable times and intervals as the Managing Agent or any Lender may
designate.
6.10. DIVIDENDS. The Borrower will not, nor will it permit any
Subsidiary to, declare or pay any dividends or make any distributions on its
capital stock (other than dividends payable in its own capital stock) or redeem,
repurchase or otherwise acquire or retire any of its capital stock at any time
outstanding, except that: (i) any Subsidiary may declare and pay dividends or
make distributions to the Borrower or to a Wholly-Owned Subsidiary, and (ii) so
long as there does not exist a Default or an Unmatured Default and the same
would not exist following the making of such payment, the Borrower may pay
dividends on preferred stock in a face amount not to exceed $150,000,000.00.
87
<PAGE>
6.11. INDEBTEDNESS. The Borrower will not, nor will it permit any
Subsidiary to, create, incur or suffer to exist any Indebtedness, except:
(i) The Loans and the Reimbursement Obligations.
(ii) Indebtedness existing on the date hereof and described in Schedule
2.
(iii) Other Indebtedness which when added to the Indebtedness
outstanding and permitted under subsection (ii) above does not exceed
$10,000,000.00.
6.12. MERGER. The Borrower will not, nor will it permit any Subsidiary
to, merge or consolidate with or into any other Person, except that a Subsidiary
may merge into the Borrower or a Wholly-Owned Subsidiary.
6.13. SALE OF ASSETS. The Borrower will not, nor will it permit any
Subsidiary to, lease, sell or otherwise dispose of its Property to any other
Person, except:
(i) Sales of inventory in the ordinary course of business.
(ii) Leases, sales or other dispositions of its Property that, together
with all other Property of the Borrower and its Subsidiaries previously leased,
sold or disposed of (other than inventory in the ordinary course of business) as
permitted by this Section during the twelve-month period ending with the month
in which any such lease, sale or other disposition occurs, do not constitute a
Substantial Portion of the Property of the Borrower and its Subsidiaries.
6.14. INVESTMENTS AND ACQUISITIONS. The Borrower will not, nor will it
permit any Subsidiary to, make or suffer to exist any Investments (including
without limitation, loans and advances to, and other Investments in,
Subsidiaries), or commitments therefor, or to create any Subsidiary or to become
or remain a partner in any partnership or joint venture, or to make any
Acquisition of any Person, except:
(i) Cash Equivalent Investments.
(ii) Existing Investments in Subsidiaries and other Investments in
existence on the date hereof and described in Schedule 1.
(iii) Other Investments and Acquisitions made during any consecutive
twelve-month period, tested as of the end of each fiscal quarter, for a total
consideration which when added to Capital Expenditures in excess of Maintenance
Capital Expenditures during such period does not exceed: (a) for any single or
series of related transactions, 10% of Consolidated Net Worth as of the date of
consummation of such Investment or Acquisition, or (b) for all such
transactions, 20% of Consolidated Net Worth as of the date of consummation of
the most recent of such Investment or Acquisition.
6.15. LIENS. The Borrower will not, nor will it permit any Subsidiary
to, create, incur, or suffer to exist any Lien in, of or on the Property of the
Borrower or any of its Subsidiaries, except:
88
<PAGE>
(i) Liens for taxes, assessments or governmental charges or levies on
its Property if the same shall not at the time be delinquent or thereafter can
be paid without penalty, or are being contested in good faith and by appropriate
proceedings and for which adequate reserves in accordance with Agreement
Accounting Principles shall have been set aside on its books.
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the ordinary course of
business which secure payment of obligations not more than 60 days past due or
which are being contested in good faith by appropriate proceedings and for which
adequate reserves shall have been set aside on its books.
(iii) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions, or other social
security or retirement benefits, or similar legislation.
(iv) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature generally
existing with respect to properties of a similar character and which do not in
any material way affect the marketability of the same or interfere with the use
thereof in the business of the Borrower or its Subsidiaries.
(v) Liens existing on the date hereof and described in Schedule 2.
6.16. CAPITAL EXPENDITURES. The Borrower will not, nor will it permit
any Subsidiary to, expend, or be committed to expend, for Capital Expenditures
during any fiscal period that dollar amount which would cause the Borrower to be
in violation of the provisions of Section 6.14(iii) above.
6.17. YEAR 2000. The Borrower will take and will cause each of its
Subsidiaries to take all such actions as are reasonably necessary to
successfully implement the Year 2000 Program and to assure that Year 2000 Issues
will not have a Material Adverse Effect. At the request of the Managing Agent,
the Borrower will provide a description of the Year 2000 Program, together with
any updates or progress reports with respect thereto.
6.18. AFFILIATES. The Borrower will not, and will not permit any
Subsidiary to, enter into any transaction (including, without limitation, the
purchase or sale of any Property or service) with, or make any payment or
transfer to, any Affiliate except in the ordinary course of business and
pursuant to the reasonable requirements of the Borrower's or such Subsidiary's
business and upon fair and reasonable terms no less favorable to the Borrower or
such Subsidiary than the Borrower or such Subsidiary would obtain in a
comparable arms-length transaction.
6.19. AMENDMENTS TO AGREEMENTS. The Borrower will not, and will not
permit any Subsidiary to, amend, extend or otherwise modify the Senior Unsecured
Notes or any document relating thereto (it being expressly agreed and understood
by the parties hereto that the prepayment of the Senior Unsecured Notes at par
shall not constitute a violation of this Section 6.19).
6.20. SUBORDINATED INDEBTEDNESS. The Borrower will not, and will not
permit any Subsidiary to, make any amendment or modification to the indenture,
note or other agreement evidencing or governing any Subordinated Indebtedness,
or directly or indirectly voluntarily prepay, defease or in substance defease,
purchase, redeem, retire or otherwise acquire, any Subordinated Indebtedness.
89
<PAGE>
6.21. SALE OF ACCOUNTS. The Borrower will not, nor will it permit any
Subsidiary to, sell or otherwise dispose of any notes receivable or accounts
receivable, with or without recourse.
6.22. SALE AND LEASEBACK TRANSACTIONS AND OTHER OFF-BALANCE SHEET
LIABILITIES. The Borrower will not, nor will it permit any Subsidiary to, enter
into or suffer to exist any (i) Sale and Leaseback Transaction or (ii) any other
transaction pursuant to which it incurs or has incurred Off-Balance Sheet
Liabilities.
6.23. CONTINGENT OBLIGATIONS. The Borrower will not, nor will it permit
any Subsidiary to, make or suffer to exist any Contingent Obligation (including,
without limitation, any Contingent Obligation with respect to the obligations of
a Subsidiary), except (i) by endorsement of instruments for deposit or
collection in the ordinary course of business, (ii) the Reimbursement
Obligations and (iii) Contingent Obligations set forth on SCHEDULE 2 hereto.
6.24. FINANCIAL COVENANTS.
6.24.1. FIXED CHARGE COVERAGE RATIO. The Borrower will not
permit the ratio, determined as of the end of each of its fiscal
quarters for the then most-recently ended four fiscal quarters, of (i)
Consolidated EBITDA plus Consolidated Rentals and minus Maintenance
Capital Expenditures, expenses for taxes paid or accrued and cash
dividends paid or accrued, to (ii) Consolidated Interest Expense, plus
Consolidated Rentals, plus current maturities of Indebtedness
(including the principal portion of Capitalized Lease Obligations but
excluding the current portion of the Obligations hereunder), all
calculated for the Borrower and its Subsidiaries on a consolidated
basis, to be less than 1.75 to 1.0.
6.24.2. LEVERAGE RATIO. The Borrower will not permit the
ratio, determined as of the end of each of its fiscal quarters, of (i)
Consolidated Funded Indebtedness to (ii) Consolidated EBITDA for the
then most-recently ended four fiscal quarters to be greater than 2.0 to
1.0.
6.24.3. MINIMUM NET WORTH. The Borrower will at all times
maintain Consolidated Net Worth of not less than the sum of (i) 80% of
its Consolidated Net Worth at August 31, 1999, plus (ii) 40% of
Consolidated Net Income earned in each fiscal quarter beginning with
the quarter ending November 30, 1999 (without deduction for losses),
and plus (iii) 80% of the net proceeds of any equity offering
consummated after August 31, 1999.
ARTICLE VII
DEFAULTS
--------
The occurrence of any one or more of the following events shall
constitute a Default:
7.1. Any representation or warranty made or deemed made by or on
behalf of the Borrower or any of its Subsidiaries to the Lenders or the Managing
Agent under or in connection with this Agreement, any Credit Extension, or any
certificate or information delivered in connection with this Agreement or any
other Loan Document shall be materially false on the date as of which made.
90
<PAGE>
7.2. Nonpayment of principal of any Loan when due, nonpayment of any
Reimbursement Obligation within one Business Day after the same becomes due, or
nonpayment of interest upon any Loan or of any commitment fee, LC Fee or other
obligations under any of the Loan Documents within five days after the same
becomes due.
7.3. The breach by the Borrower of any of the terms or provisions of
Article VI.
7.4. The breach by the Borrower (other than a breach which constitutes
a Default under another Section of this Article VII) of any of the terms or
provisions of this Agreement which is not remedied within five days after
written notice from the Managing Agent or any Lender.
7.5. Failure of the Borrower or any of its Subsidiaries to pay when
due any other Indebtedness, including, without limitation, the Senior Unsecured
Notes or the default by the Borrower or any of its Subsidiaries in the
performance (beyond the applicable grace period with respect thereto, if any) of
any term, provision or condition contained in any agreement under which any such
Indebtedness was created or is governed, or any other event shall occur or
condition exist, the effect of which default or event is to cause, or to permit
the holder or holders of such Indebtedness to cause, such Indebtedness to become
due prior to its stated maturity; or any Indebtedness of the Borrower or any of
its Subsidiaries shall be declared to be due and payable or required to be
prepaid or repurchased (other than by a regularly scheduled payment) prior to
the stated maturity thereof; or the Borrower or any of its Subsidiaries shall
not pay, or admit in writing its inability to pay, its debts generally as they
become due.
7.6. The Borrower or any of its Subsidiaries shall (i) have an order
for relief entered with respect to it under the Federal bankruptcy laws as now
or hereafter in effect, (ii) make an assignment for the benefit of creditors,
(iii) apply for, seek, consent to, or acquiesce in, the appointment of a
receiver, custodian, trustee, examiner, liquidator or similar official for it or
any Substantial Portion of its Property, (iv) institute any proceeding seeking
an order for relief under the Federal bankruptcy laws as now or hereafter in
effect or seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, winding up, liquidation, reorganization, arrangement, adjustment or
composition of it or its debts under any law relating to bankruptcy, insolvency
or reorganization or relief of debtors or fail to file an answer or other
pleading denying the material allegations of any such proceeding filed against
it, (v) take any corporate or partnership action to authorize or effect any of
the foregoing actions set forth in this Section 7.6 or (vi) fail to contest in
good faith any appointment or proceeding described in Section 7.7.
7.7. Without the application, approval or consent of the Borrower or
any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar
official shall be appointed for the Borrower or any of its Subsidiaries or any
Substantial Portion of its Property, or a proceeding described in Section
7.6(iv) shall be instituted against the Borrower or any of its Subsidiaries and
such appointment continues undischarged or such proceeding continues undismissed
or unstayed for a period of 60 consecutive days.
7.8. Any court, government or governmental agency shall condemn, seize
or otherwise appropriate, or take custody or control of, all or any portion of
the Property of the Borrower and its Subsidiaries which, when taken together
with all other Property of the Borrower and its Subsidiaries so condemned,
seized, appropriated, or taken custody or control of, during the twelve-month
period ending with the month in which any such action occurs, constitutes a
Substantial Portion.
91
<PAGE>
7.9. The Borrower or any of its Subsidiaries shall fail within 30 days
to pay, bond or otherwise discharge one or more (i) judgments or orders for the
payment of money in excess of $5,000,000.00 (or the equivalent thereof in
currencies other than U.S. Dollars) in the aggregate, or (ii) nonmonetary
judgments or orders which, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect, which judgment(s), in any such case,
is/are not stayed on appeal or otherwise being appropriately contested in good
faith.
7.10. The Unfunded Liabilities of all Single Employer Plans shall
exceed in the aggregate $5,000,000.00 or any Reportable Event shall occur in
connection with any Plan.
7.11. Any Change in Control shall occur.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
----------------------------------------------
8.1. ACCELERATION; FACILITY LC COLLATERAL ACCOUNT.
(i) If any Default described in Section 7.6 or 7.7 occurs with respect
to the Borrower, the obligations of the Lenders to make Loans hereunder and the
obligation and power of the LC Issuer to issue Facility LCs shall automatically
terminate and the Obligations shall immediately become due and payable without
any election or action on the part of the Managing Agent, the LC Issuer or any
Lender and the Borrower will be and become thereby unconditionally obligated,
without any further notice, act or demand, to pay to the Agent an amount in
immediately available funds, which funds shall be held in the Facility LC
Collateral Account, equal to the difference of (x) the amount of LC Obligations
at such time, less (y) the amount on deposit in the Facility LC Collateral
Account at such time which is free and clear of all rights and claims of third
parties and has not been applied against the Obligations (such difference, the
"Collateral Shortfall Amount"). If any other Default occurs, the Required
Lenders (or the Managing Agent with the consent of the Required Lenders) may (a)
terminate or suspend the obligations of the Lenders to make Loans hereunder and
the obligation and power of the LC Issuer to issue Facility LCs, or declare the
Obligations to be due and payable, or both, whereupon the Obligations shall
become immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which the Borrower hereby expressly waives, and (b)
upon notice to the Borrower and in addition to the continuing right to demand
payment of all amounts payable under this Agreement, make demand on the Borrower
to pay, and the Borrower will, forthwith upon such demand and without any
further notice or act, pay to the Agent the Collateral Shortfall Amount, which
funds shall be deposited in the Facility LC Collateral Account..
(ii) If at any time while any Default is continuing, the Agent
determines that the Collateral Shortfall Amount at such time is greater than
zero, the Agent may make demand on the Borrower to pay, and the Borrower will,
forthwith upon such demand and without any further notice or act, pay to the
Agent the Collateral Shortfall Amount, which funds shall be deposited in the
Facility LC Collateral Account.
(iii) The Agent may at any time or from time to time after funds are
deposited in the Facility LC Collateral Account, apply such funds to the payment
92
<PAGE>
of the Obligations and any other amounts as shall from time to time have become
due and payable by the Borrower to the Lenders or the LC Issuer under the Loan
Documents.
(iv) At any time while any Default is continuing, neither the Borrower
nor any Person claiming on behalf of or through the Borrower shall have any
right to withdraw any of the funds held in the Facility LC Collateral Account.
After all of the Obligations have been indefeasibly paid in full and the
Aggregate Commitment has been terminated, any funds remaining in the Facility LC
Collateral Account shall be returned by the Agent to the Borrower or paid to
whomever may be legally entitled thereto at such time.
(v) If, within 30 days after acceleration of the maturity of the
Obligations or termination of the obligations of the Lenders to make Loans and
the obligation and power of the LC Issuer to issue Facility LCs hereunder as a
result of any Default (other than any Default as described in Section 7.6 or 7.7
with respect to the Borrower) and before any judgment or decree for the payment
of the Obligations due shall have been obtained or entered, the Required Lenders
(in their sole discretion) shall so direct, the Managing Agent shall, by notice
to the Borrower, rescind and annul such acceleration and/or termination.
8.2. AMENDMENTS. Subject to the provisions of this Article VIII, the
Required Lenders (or the Managing Agent with the consent in writing of the
Required Lenders) and the Borrower may enter into agreements supplemental hereto
for the purpose of adding or modifying any provisions to the Loan Documents or
changing in any manner the rights of the Lenders or the Borrower hereunder or
waiving any Default hereunder; PROVIDED, HOWEVER, that no such supplemental
agreement shall, without the consent of all of the Lenders:
(i) Extend the final maturity of any Loan, or extend the expiry date of
any Facility LC to a date after the Facility Termination Date or postpone any
regularly scheduled payment of principal of any Loan or forgive all or any
portion of the principal amount thereof or any Reimbursement Obligation related
thereto, or reduce the rate or extend the time of payment of interest or fees
thereon or Reimbursement Obligations related thereto.
(ii) Reduce the percentage specified in the definition of Required
Lenders.
(iii) Extend the Facility Termination Date or reduce the amount or
extend the payment date for, the mandatory payments required under Section 2.2,
or increase the amount of the Aggregate Commitment, the Commitment of any Lender
hereunder or the commitment to issue Facility LCs, or permit the Borrower to
assign its rights under this Agreement.
(iv) Amend this Section 8.2.
No amendment of any provision of this Agreement relating to the Managing Agent
shall be effective without the written consent of the Managing Agent, and no
amendment of any provision relating to the LC Issuer shall be effective without
the written consent of the LC Issuer. The Managing Agent may waive payment of
the fee required under Section 12.3.2 without obtaining the consent of any other
party to this Agreement.
8.3. PRESERVATION OF RIGHTS. No delay or omission of the Lenders, the
LC Issuer or the Managing Agent to exercise any right under the Loan Documents
93
<PAGE>
shall impair such right or be construed to be a waiver of any Default or an
acquiescence therein, and the making of a Credit Extension notwithstanding the
existence of a Default or the inability of the Borrower to satisfy the
conditions precedent to such Credit Extension shall not constitute any waiver or
acquiescence. Any single or partial exercise of any such right shall not
preclude other or further exercise thereof or the exercise of any other right,
and no waiver, amendment or other variation of the terms, conditions or
provisions of the Loan Documents whatsoever shall be valid unless in writing
signed by the Lenders required pursuant to Section 8.2, and then only to the
extent in such writing specifically set forth. All remedies contained in the
Loan Documents or by law afforded shall be cumulative and all shall be available
to the Managing Agent, the LC Issuer and the Lenders until the Obligations have
been paid in full.
ARTICLE IX
GENERAL PROVISIONS
------------------
9.1. SURVIVAL OF REPRESENTATIONS. All representations and warranties of
the Borrower contained in this Agreement shall survive the making of the Credit
Extensions herein contemplated.
9.2. GOVERNMENTAL REGULATION. Anything contained in this Agreemen to
the contrary notwithstanding, neither the LC Issuer nor any Lender shall be
obligated to extend credit to the Borrower in violation of any limitation or
prohibition provided by any applicable statute or regulation.
9.3. HEADINGS. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any of
the provisions of the Loan Documents.
9.4. ENTIRE AGREEMENT. The Loan Documents embody the entire agreement
and understanding among the Borrower, the Managing Agent, the LC Issuer and the
Lenders and supersede all prior agreements and understandings among the
Borrower, the Managing Agent, the LC Issuer and the Lenders relating to the
subject matter thereof other than any fee letter described in Section 10.13.
9.5. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The respective
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other (except to the extent to which the
Managing Agent is authorized to act as such). The failure of any Lender to
perform any of its obligations hereunder shall not relieve any other Lender from
any of its obligations hereunder. This Agreement shall not be construed so as to
confer any right or benefit upon any Person other than the parties to this
Agreement and their respective successors and assigns, provided, however, that
the parties hereto expressly agree that the Arranger shall enjoy the benefits of
the provisions of Sections 9.6, 9.10 and 10.11 to the extent specifically set
forth therein and shall have the right to enforce such provisions on its own
behalf and in its own name to the same extent as if it were a party to this
Agreement.
9.6. EXPENSES; INDEMNIFICATION. (i) The Borrower shall reimburse the
Managing Agent and the Arranger for any costs, internal charges and
out-of-pocket expenses (including attorneys' fees and time charges of attorneys
for the Managing Agent, which attorneys may be employees of the Managing Agent)
paid or incurred by the Managing Agent or the Arranger in connection with the
preparation, negotiation, execution, delivery, syndication, review, amendment,
modification, and administration of the Loan Documents. The Borrower also agrees
to reimburse the Managing Agent, the Arranger, the LC Issuer and the Lenders for
any costs, internal charges and out-of-pocket expenses (including attorneys'
94
<PAGE>
fees and time charges of attorneys for the Managing Agent, the Arranger, the LC
Issuer and the Lenders, which attorneys may be employees of the Managing Agent,
the Arranger, the LC Issuer or the Lenders) paid or incurred by the Managing
Agent, the Arranger, the LC Issuer or any Lender in connection with the
collection and enforcement of the Loan Documents. Expenses being reimbursed by
the Borrower under this Section include, without limitation, costs and expenses
incurred in connection with the Reports described in the following sentence. The
Borrower acknowledges that from time to time Bank One may prepare and may
distribute to the Lenders (but shall have no obligation or duty to prepare or to
distribute to the Lenders) certain audit reports (the "Reports") pertaining to
the Borrower's assets for internal use by Bank One from information furnished to
it by or on behalf of the Borrower, after Bank One has exercised its rights of
inspection pursuant to this Agreement.
(ii) The Borrower hereby further agrees to indemnify the Managing
Agent, the Arranger, the LC Issuer, each Lender, their respective affiliates,
and each of their directors, officers and employees against all losses, claims,
damages, penalties, judgments, liabilities and expenses (including, without
limitation, all expenses of litigation or preparation therefor whether or not
the Managing Agent, the Arranger, the LC Issuer or any Lender is a party
thereto) which any of them may pay or incur arising out of or relating to this
Agreement, the other Loan Documents, the transactions contemplated hereby or the
direct or indirect application or proposed application of the proceeds of any
Credit Extension hereunder except to the extent that they are determined in a
final non-appealable judgment by a court of competent jurisdiction to have
resulted from the gross negligence or willful misconduct of the party seeking
indemnification. The obligations of the Borrower under this Section 9.6 shall
survive the termination of this Agreement.
9.7. NUMBERS OF DOCUMENTS. All statements, notices, closing documents,
and requests hereunder shall be furnished to the Managing Agent with sufficient
counterparts so that the Managing Agent may furnish one to each of the Lenders.
9.8. ACCOUNTING. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement Accounting
Principles.
9.9. SEVERABILITY OF PROVISIONS. Any provision in any Loan Document
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.
9.10. NONLIABILITY OF LENDERS. The relationship between the Borrower on
the one hand and the Lenders, the LC Issuer and the Managing Agent on the other
hand shall be solely that of borrower and lender. Neither the Managing Agent,
the Arranger, the LC Issuer nor any Lender shall have any fiduciary
responsibilities to the Borrower. Neither the Managing Agent, the Arranger, the
LC Issuer nor any Lender undertakes any responsibility to the Borrower to review
or inform the Borrower of any matter in connection with any phase of the
Borrower's business or operations. The Borrower agrees that neither the Managing
Agent, the Arranger, the LC Issuer nor any Lender shall have liability to the
Borrower (whether sounding in tort, contract or otherwise) for losses suffered
by the Borrower in connection with, arising out of, or in any way related to,
the transactions contemplated and the relationship established by the Loan
Documents, or any act, omission or event occurring in connection therewith,
unless it is determined in a final non-appealable judgment by a court of
95
<PAGE>
competent jurisdiction that such losses resulted from the gross negligence or
willful misconduct of the party from which recovery is sought. Neither the
Managing Agent, the Arranger, the LC Issuer nor any Lender shall have any
liability with respect to, and the Borrower hereby waives, releases and agrees
not to sue for, any special, indirect or consequential damages suffered by the
Borrower in connection with, arising out of, or in any way related to the Loan
Documents or the transactions contemplated thereby.
9.11. CONFIDENTIALITY. Each Lender agrees to hold any confidential
information which it may receive from the Borrower pursuant to this Agreement in
confidence, except for disclosure (i) to its Affiliates and to other Lenders and
their respective Affiliates, (ii) to legal counsel, accountants, and other
professional advisors to such Lender or to a Transferee, (iii) to regulatory
officials, (iv) to any Person as requested pursuant to or as required by law,
regulation, or legal process, (v) to any Person in connection with any legal
proceeding to which such Lender is a party, (vi) to such Lender's direct or
indirect contractual counterparties in swap agreements or to legal counsel,
accountants and other professional advisors to such counterparties, (vii) to
rating agencies if requested or required by such agencies in connection with a
rating relating to the Advances hereunder and (viii) permitted by Section 12.4.
9.12. NONRELIANCE. Each Lender hereby represents that it is not relying
on or looking to any margin stock (as defined in Regulation U of the Board of
Governors of the Federal Reserve System) for the repayment of the Credit
Extensions provided for herein.
9.13. DISCLOSURE. The Borrower and each Lender hereby (i) acknowledge
and agree that Bank One and/or its Affiliates from time to time may hold
investments in, make other loans to or have other relationships with the
Borrower and its Affiliates, and (ii) waive any liability of Bank One or such
Affiliate of Bank One to the Borrower or any Lender, respectively, arising out
of or resulting from such investments, loans or relationships other than
liabilities arising out of the gross negligence or willful misconduct of Bank
One or its Affiliates.
ARTICLE X
THE AGENT
---------
10.1. APPOINTMENT; NATURE OF RELATIONSHIP. Bank One, NA is hereby
appointed by each of the Lenders as its contractual representative (herein
referred to as the "Managing Agent") hereunder and under each other Loan
Document, and each of the Lenders irrevocably authorizes the Managing Agent to
act as the contractual representative of such Lender with the rights and duties
expressly set forth herein and in the other Loan Documents. The Managing Agent
agrees to act as such contractual representative upon the express conditions
contained in this Article X. Notwithstanding the use of the defined term
"Managing Agent," it is expressly understood and agreed that the Managing Agent
shall not have any fiduciary responsibilities to any Lender by reason of this
Agreement or any other Loan Document and that the Managing Agent is merely
acting as the contractual representative of the Lenders with only those duties
as are expressly set forth in this Agreement and the other Loan Documents. In
its capacity as the Lenders' contractual representative, the Managing Agent (i)
does not hereby assume any fiduciary duties to any of the Lenders, (ii) is a
"representative" of the Lenders within the meaning of Section 9-105 of the
Uniform Commercial Code and (iii) is acting as an independent contractor, the
rights and duties of which are limited to those expressly set forth in this
Agreement and the other Loan Documents. Each of the Lenders hereby agrees to
96
<PAGE>
assert no claim against the Managing Agent on any agency theory or any other
theory of liability for breach of fiduciary duty, all of which claims each
Lender hereby waives.
10.2. POWERS. The Managing Agent shall have and may exercise such
powers under the Loan Documents as are specifically delegated to the Managing
Agent by the terms of each thereof, together with such powers as are reasonably
incidental thereto. The Managing Agent shall have no implied duties to the
Lenders, or any obligation to the Lenders to take any action thereunder except
any action specifically provided by the Loan Documents to be taken by the
Managing Agent.
10.3. GENERAL IMMUNITY. Neither the Managing Agent nor any of its
directors, officers, agents or employees shall be liable to the Borrower, the
Lenders or any Lender for any action taken or omitted to be taken by it or them
hereunder or under any other Loan Document or in connection herewith or
therewith except to the extent such action or inaction is determined in a final
non-appealable judgment by a court of competent jurisdiction to have arisen from
the gross negligence or willful misconduct of such Person.
10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. Neither the Managing
Agent nor any of its directors, officers, agents or employees shall be
responsible for or have any duty to ascertain, inquire into, or verify (a) any
statement, warranty or representation made in connection with any Loan Document
or any borrowing hereunder; (b) the performance or observance of any of the
covenants or agreements of any obligor under any Loan Document, including,
without limitation, any agreement by an obligor to furnish information directly
to each Lender; (c) the satisfaction of any condition specified in Article IV,
except receipt of items required to be delivered solely to the Managing Agent;
(d) the existence or possible existence of any Default or Unmatured Default; (e)
the validity, enforceability, effectiveness, sufficiency or genuineness of any
Loan Document or any other instrument or writing furnished in connection
therewith; (f) the value, sufficiency, creation, perfection or priority of any
Lien in any collateral security; or (g) the financial condition of the Borrower
or any guarantor of any of the Obligations or of any of the Borrower's or any
such guarantor's respective Subsidiaries. The Managing Agent shall have no duty
to disclose to the Lenders information that is not required to be furnished by
the Borrower to the Managing Agent at such time, but is voluntarily furnished by
the Borrower to the Managing Agent (either in its capacity as Managing Agent or
in its individual capacity).
10.5. ACTION ON INSTRUCTIONS OF LENDERS. The Managing Agent shall in
all cases be fully protected in acting, or in refraining from acting, hereunder
and under any other Loan Document in accordance with written instructions signed
by the Required Lenders, and such instructions and any action taken or failure
to act pursuant thereto shall be binding on all of the Lenders. The Lenders
hereby acknowledge that the Managing Agent shall be under no duty to take any
discretionary action permitted to be taken by it pursuant to the provisions of
this Agreement or any other Loan Document unless it shall be requested in
writing to do so by the Required Lenders. The Managing Agent shall be fully
justified in failing or refusing to take any action hereunder and under any
other Loan Document unless it shall first be indemnified to its satisfaction by
the Lenders pro rata against any and all liability, cost and expense that it may
incur by reason of taking or continuing to take any such action.
10.6. EMPLOYMENT OF MANAGING AGENTS AND COUNSEL. The Managing Agent may
execute any of its duties as Managing Agent hereunder and under any other Loan
Document by or through employees, agents, and attorneys-in-fact and shall not be
answerable to the Lenders, except as to money or securities received by it or
its authorized agents, for the default or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care. The Managing Agent shall
be entitled to advice of counsel concerning the contractual arrangement between
97
<PAGE>
the Managing Agent and the Lenders and all matters pertaining to the Managing
Agent's duties hereunder and under any other Loan Document.
10.7. RELIANCE ON DOCUMENTS; COUNSEL. The Managing Agent shall be
entitled to rely upon any Note, notice, consent, certificate, affidavit, letter,
telegram, statement, paper or document believed by it to be genuine and correct
and to have been signed or sent by the proper person or persons, and, in respect
to legal matters, upon the opinion of counsel selected by the Managing Agent,
which counsel may be employees of the Managing Agent.
10.8. MANAGING AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders
agree to reimburse and indemnify the Managing Agent ratably in proportion to
their respective Commitments (or, if the Commitments have been terminated, in
proportion to their Commitments immediately prior to such termination) (i) for
any amounts not reimbursed by the Borrower for which the Managing Agent is
entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any
other expenses incurred by the Managing Agent on behalf of the Lenders, in
connection with the preparation, execution, delivery, administration and
enforcement of the Loan Documents (including, without limitation, for any
expenses incurred by the Managing Agent in connection with any dispute between
the Managing Agent and any Lender or between two or more of the Lenders) and
(iii) for any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind and nature
whatsoever which may be imposed on, incurred by or asserted against the Managing
Agent in any way relating to or arising out of the Loan Documents or any other
document delivered in connection therewith or the transactions contemplated
thereby (including, without limitation, for any such amounts incurred by or
asserted against the Managing Agent in connection with any dispute between the
Managing Agent and any Lender or between two or more of the Lenders), or the
enforcement of any of the terms of the Loan Documents or of any such other
documents, provided that (i) no Lender shall be liable for any of the foregoing
to the extent any of the foregoing is found in a final non-appealable judgment
by a court of competent jurisdiction to have resulted from the gross negligence
or willful misconduct of the Managing Agent and (ii) any indemnification
required pursuant to Section 3.5(vii) shall, notwithstanding the provisions of
this Section 10.8, be paid by the relevant Lender in accordance with the
provisions thereof. The obligations of the Lenders under this Section 10.8 shall
survive payment of the Obligations and termination of this Agreement.
10.9. NOTICE OF DEFAULT. The Managing Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Managing Agent has received written notice from a Lender or
the Borrower referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event that
the Managing Agent receives such a notice, the Managing Agent shall give prompt
notice thereof to the Lenders.
10.10. RIGHTS AS A LENDER. In the event the Managing Agent is a Lender,
the Managing Agent shall have the same rights and powers hereunder and under any
other Loan Document with respect to its Commitment and its Loans as any Lender
and may exercise the same as though it were not the Managing Agent, and the term
"Lender" or "Lenders" shall, at any time when the Managing Agent is a Lender,
unless the context otherwise indicates, include the Managing Agent in its
individual capacity. The Managing Agent and its Affiliates may accept deposits
from, lend money to, and generally engage in any kind of trust, debt, equity or
other transaction, in addition to those contemplated by this Agreement or any
98
<PAGE>
other Loan Document, with the Borrower or any of its Subsidiaries in which the
Borrower or such Subsidiary is not restricted hereby from engaging with any
other Person.
10.11. LENDER CREDIT DECISION. Each Lender acknowledges that it has,
independently and without reliance upon the Managing Agent, the Arranger or any
other Lender and based on the financial statements prepared by the Borrower and
such other documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement and the other Loan
Documents. Each Lender also acknowledges that it will, independently and without
reliance upon the Managing Agent, the Arranger or any other Lender and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement and the other Loan Documents.
10.12. SUCCESSOR MANAGING AGENT. The Managing Agent may resign at any
time by giving written notice thereof to the Lenders and the Borrower, such
resignation to be effective upon the appointment of a successor Managing Agent
or, if no successor Managing Agent has been appointed, forty-five days after the
retiring Managing Agent gives notice of its intention to resign. The Managing
Agent may be removed at any time with or without cause by written notice
received by the Managing Agent from the Required Lenders, such removal to be
effective on the date specified by the Required Lenders. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint, on
behalf of the Borrower and the Lenders, a successor Managing Agent. If no
successor Managing Agent shall have been so appointed by the Required Lenders
within thirty days after the resigning Managing Agent's giving notice of its
intention to resign, then the resigning Managing Agent may appoint, on behalf of
the Borrower and the Lenders, a successor Managing Agent. Notwithstanding the
previous sentence, the Managing Agent may at any time without the consent of the
Borrower or any Lender, appoint any of its Affiliates which is a commercial bank
as a successor Managing Agent hereunder. If the Managing Agent has resigned or
been removed and no successor Managing Agent has been appointed, the Lenders may
perform all the duties of the Managing Agent hereunder and the Borrower shall
make all payments in respect of the Obligations to the applicable Lender and for
all other purposes shall deal directly with the Lenders. No successor Managing
Agent shall be deemed to be appointed hereunder until such successor Managing
Agent has accepted the appointment. Any such successor Managing Agent shall be a
commercial bank having capital and retained earnings of at least $100,000,000.
Upon the acceptance of any appointment as Managing Agent hereunder by a
successor Managing Agent, such successor Managing Agent shall thereupon succeed
to and become vested with all the rights, powers, privileges and duties of the
resigning or removed Managing Agent. Upon the effectiveness of the resignation
or removal of the Managing Agent, the resigning or removed Managing Agent shall
be discharged from its duties and obligations hereunder and under the Loan
Documents. After the effectiveness of the resignation or removal of an Managing
Agent, the provisions of this Article X shall continue in effect for the benefit
of such Managing Agent in respect of any actions taken or omitted to be taken by
it while it was acting as the Managing Agent hereunder and under the other Loan
Documents. In the event that there is a successor to the Managing Agent by
merger, or the Managing Agent assigns its duties and obligations to an Affiliate
pursuant to this Section 10.12, then the term "Corporate Base Rate" as used in
this Agreement shall mean the prime rate, base rate or other analogous rate of
the new Managing Agent.
10.13. MANAGING AGENT'S FEE. The Borrower agrees to pay to the Managing
Agent, for its own account, such fees as may be agreed to in writing by the
Borrower and the Managing Agent from time to time.
99
<PAGE>
10.14. DELEGATION TO AFFILIATES. The Borrower and the Lenders agree
that the Managing Agent may delegate any of its duties under this Agreement to
any of its Affiliates. Any such Affiliate (and such Affiliate's directors,
officers, agents and employees) which performs duties in connection with this
Agreement shall be entitled to the same benefits of the indemnification, waiver
and other protective provisions to which the Managing Agent is entitled under
Articles IX and X.
10.15. MANAGING AGENT, CO-AGENTS, DOCUMENTATION AGENT, SYNDICATION
AGENT, ETC. Neither any of the Lenders identified in this Agreement as the
"Managing Agent" or a "Co-Agent" nor the Documentation Agent or the Syndication
Agent shall have any right, power, obligation, liability, responsibility or duty
under this Agreement other than those applicable to all Lenders as such. Without
limiting the foregoing, none of such Lenders shall have or be deemed to have a
fiduciary relationship with any Lender. Each Lender hereby makes the same
acknowledgments with respect to such Lenders as it makes with respect to the
Managing Agent in Section 10.11.
ARTICLE XI
SETOFF; RATABLE PAYMENTS
------------------------
11.1. SETOFF. In addition to, and without limitation of, any rights of
the Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default occurs, any and all deposits (including all account
balances, whether provisional or final and whether or not collected or
available) and any other Indebtedness at any time held or owing by any Lender or
any Affiliate of any Lender to or for the credit or account of the Borrower may
be offset and applied toward the payment of the Obligations owing to such
Lender, whether or not the Obligations, or any part thereof, shall then be due.
11.2. RATABLE PAYMENTS. If any Lender, whether by setoff or otherwise,
has payment made to it upon its Outstanding Credit Extensions (other than
payments received pursuant to Section 3.1, 3.2, 3.4 or 3.5) in a greater
proportion than that received by any other Lender, such Lender agrees, promptly
upon demand, to purchase a portion of the Aggregate Outstanding Credit Exposure
held by the other Lenders so that after such purchase each Lender will hold its
Pro Rata Share of the Aggregate Outstanding Credit Exposure. If any Lender,
whether in connection with setoff or amounts which might be subject to setoff or
otherwise, receives collateral or other protection for its Obligations or such
amounts which may be subject to setoff, such Lender agrees, promptly upon
demand, to take such action necessary such that all Lenders share in the
benefits of such collateral ratably in proportion to their respective Pro Rata
Shares of the Aggregate Outstanding Credit Exposure. In case any such payment is
disturbed by legal process, or otherwise, appropriate further adjustments shall
be made.
ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
-------------------------------------------------
12.1. SUCCESSORS AND ASSIGNS. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (i) the
Borrower shall not have the right to assign its rights or obligations under the
100
<PAGE>
Loan Documents and (ii) any assignment by any Lender must be made in compliance
with Section 12.3. The parties to this Agreement acknowledge that clause (ii) of
this Section 12.1 relates only to absolute assignments and does not prohibit
assignments creating security interests, including, without limitation, any
pledge or assignment by any Lender of all or any portion of its rights under
this Agreement and any Note to a Federal Reserve Bank; provided, however, that
no such pledge or assignment creating a security interest shall release the
transferor Lender from its obligations hereunder unless and until the parties
thereto have complied with the provisions of Section 12.3. The Managing Agent
may treat the Person which made any Loan or which holds any Note as the owner
thereof for all purposes hereof unless and until such Person complies with
Section 12.3; provided, however, that the Managing Agent may in its discretion
(but shall not be required to) follow instructions from the Person which made
any Loan or which holds any Note to direct payments relating to such Loan or
Note to another Person. Any assignee of the rights to any Loan or any Note
agrees by acceptance of such assignment to be bound by all the terms and
provisions of the Loan Documents. Any request, authority or consent of any
Person, who at the time of making such request or giving such authority or
consent is the owner of the rights to any Loan (whether or not a Note has been
issued in evidence thereof), shall be conclusive and binding on any subsequent
holder or assignee of the rights to such Loan.
12.2. PARTICIPATIONS.
12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in the
ordinary course of its business and in accordance with applicable law,
at any time sell to one or more banks or other entities
("Participants") participating interests in any Outstanding Credit
Exposure of such Lender, any Note held by such Lender, any Commitment
of such Lender or any other interest of such Lender under the Loan
Documents. In the event of any such sale by a Lender of participating
interests to a Participant, such Lender's obligations under the Loan
Documents shall remain unchanged, such Lender shall remain solely
responsible to the other parties hereto for the performance of such
obligations, such Lender shall remain the owner of its Outstanding
Credit Exposure and the holder of any Note issued to it in evidence
thereof for all purposes under the Loan Documents, all amounts payable
by the Borrower under this Agreement shall be determined as if such
Lender had not sold such participating interests, and the Borrower and
the Managing Agent shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under
the Loan Documents.
12.2.2. VOTING RIGHTS. Each Lender shall retain the sole right
to approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Loan Documents other
than any amendment, modification or waiver with respect to any Credit
Extension or Commitment in which such Participant has an interest which
forgives principal, interest, fees or any Reimbursement Obligation or
reduces the interest rate or fees payable with respect to any such
Credit Extension or Commitment, extends the Facility Termination Date,
postpones any date fixed for any regularly-scheduled payment of
principal of or interest on, any Loan in which such Participant has an
interest, or any regularly-scheduled payment of fees on any such Credit
Extension or Commitment, releases any guarantor of any such Credit
Extension or releases any collateral held in the Facility LC Collateral
Account (except in accordance with the terms hereof) or all or
substantially all of the collateral, if any, securing any such Credit
Extension.
12.2.3. BENEFIT OF SETOFF. The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in
Section 11.1 in respect of its participating interest in amounts owing
under the Loan Documents to the same extent as if the amount of its
101
<PAGE>
participating interest were owing directly to it as a Lender under the
Loan Documents, provided that each Lender shall retain the right of
setoff provided in Section 11.1 with respect to the amount of
participating interests sold to each Participant. The Lenders agree to
share with each Participant, and each Participant, by exercising the
right of setoff provided in Section 11.1, agrees to share with each
Lender, any amount received pursuant to the exercise of its right of
setoff, such amounts to be shared in accordance with Section 11.2 as
if each Participant were a Lender.
12.3. ASSIGNMENTS.
12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in the ordinary
course of its business and in accordance with applicable law, at any
time assign to one or more banks or other entities ("Purchasers") all
or any part of its rights and obligations under the Loan Documents.
Such assignment shall be substantially in the form of Exhibit C or in
such other form as may be agreed to by the parties thereto. The consent
of the Borrower, the Managing Agent and the LC Issuer shall be required
prior to an assignment becoming effective with respect to a Purchaser
which is not a Lender or an Affiliate thereof; provided, however, that
if a Default has occurred and is continuing, the consent of the
Borrower shall not be required. Such consent shall not be unreasonably
withheld or delayed. Each such assignment with respect to a Purchaser
which is not a Lender or an Affiliate thereof shall (unless each of the
Borrower and the Managing Agent otherwise consents) be in an amount not
less than the lesser of (i) $5,000,000.00 or (ii) the remaining amount
of the assigning Lender's Commitment (calculated as at the date of such
assignment) or outstanding Loans (if the applicable Commitment has been
terminated).
12.3.2. EFFECT, EFFECTIVE DATE. Upon (i) delivery to the
Managing Agent of an assignment, together with any consents required by
Section 12.3.1, and (ii) payment of a $4,000 fee to the Managing Agent
for processing such assignment (unless such fee is waived by the
Managing Agent), such assignment shall become effective on the
effective date specified in such assignment. The assignment shall
contain a representation by the Purchaser to the effect that none of
the consideration used to make the purchase of the Commitment and
Outstanding Credit Exposure under the applicable assignment agreement
constitutes "plan assets" as defined under ERISA and that the rights
and interests of the Purchaser in and under the Loan Documents will not
be "plan assets" under ERISA. On and after the effective date of such
assignment, such Purchaser shall for all purposes be a Lender party to
this Agreement and any other Loan Document executed by or on behalf of
the Lenders and shall have all the rights and obligations of a Lender
under the Loan Documents, to the same extent as if it were an original
party hereto, and no further consent or action by the Borrower, the
Lenders or the Managing Agent shall be required to release the
transferor Lender with respect to the percentage of the Aggregate
Commitment and Outstanding Credit Exposure assigned to such Purchaser.
Upon the consummation of any assignment to a Purchaser pursuant to this
Section 12.3.2, the transferor Lender, the Managing Agent and the
Borrower shall, if the transferor Lender or the Purchaser desires that
its Loans be evidenced by Notes, make appropriate arrangements so that
new Notes or, as appropriate, replacement Notes are issued to such
transferor Lender and new Notes or, as appropriate, replacement Notes,
are issued to such Purchaser, in each case in principal amounts
reflecting their respective Commitments, as adjusted pursuant to such
assignment.
102
<PAGE>
12.4. DISSEMINATION OF INFORMATION. The Borrower authorizes each Lender
to disclose to any Participant or Purchaser or any other Person acquiring an
interest in the Loan Documents by operation of law (each a "Transferee") and any
prospective Transferee any and all information in such Lender's possession
concerning the creditworthiness of the Borrower and its Subsidiaries, including
without limitation any information contained in any Reports; provided that each
Transferee and prospective Transferee agrees to be bound by Section 9.11 of this
Agreement.
12.5. TAX TREATMENT. If any interest in any Loan Document is
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the transferor
Lender shall cause such Transferee, concurrently with the effectiveness of such
transfer, to comply with the provisions of Section 3.5(iv).
ARTICLE XIII
NOTICES
-------
13.1. NOTICES. Except as otherwise permitted by Section 2.14 with
respect to borrowing notices, all notices, requests and other communications to
any party hereunder shall be in writing (including electronic transmission,
facsimile transmission or similar writing) and shall be given to such party: (x)
in the case of the Borrower or the Managing Agent or either of the Co-Agents, at
its address or facsimile number set forth on the signature pages hereof, (y) in
the case of any Lender, at its address or facsimile number set forth in its
administrative questionnaire or (z) in the case of any party, at such other
address or facsimile number as such party may hereafter specify for the purpose
by notice to the Managing Agent and the Borrower in accordance with the
provisions of this Section 13.1. Each such notice, request or other
communication shall be effective (i) if given by facsimile transmission, when
transmitted to the facsimile number specified in this Section and confirmation
of receipt is received, (ii) if given by mail, 72 hours after such communication
is deposited in the mails with first class postage prepaid, addressed as
aforesaid, or (iii) if given by any other means, when delivered (or, in the case
of electronic transmission, received) at the address specified in this Section;
provided that notices to the Managing Agent under Article II shall not be
effective until received.
13.2. CHANGE OF ADDRESS. The Borrower, the Managing Agent, either of
the Co-Agents and any Lender may each change the address for service of notice
upon it by a notice in writing to the other parties hereto.
ARTICLE XIV
COUNTERPARTS
------------
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Agreement by signing any such counterpart. This
Agreement shall be effective when it has been executed by the Borrower, the
Managing Agent, the LC Issuer and the Lenders and each party has notified the
Managing Agent by facsimile transmission or telephone that it has taken such
action.
103
<PAGE>
ARTICLE XV
CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL
------------------------------------------------------------
15.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
15.2. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS
TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE
COURT SITTING IN NEW YORK, NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES
THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR
HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN
SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL
LIMIT THE RIGHT OF THE MANAGING AGENT, THE LC ISSUER OR ANY LENDER TO BRING
PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY
JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE MANAGING AGENT, THE LC ISSUER OR
ANY LENDER OR ANY AFFILIATE OF THE MANAGING AGENT, THE LC ISSUER OR ANY LENDER
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED
TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN NEW
YORK, NEW YORK.
15.3. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT, THE LC ISSUER AND
EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR
OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN
DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
104
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders, the LC Issuer and the
Managing Agent and the Co-Agents have executed this Agreement as of the date
first above written.
FRANKLIN COVEY CO.
By:
/S/ JOHN L. THELER
--------------------------------------
John L. Theler, Chief Financial Officer
:
Address: 2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2099
Attention: John L. Theler,
Chief Financial Officer
Telephone: (801) 817-7052
FAX: (801) 817-8723
BANK ONE, NA,
and as Managing Agent, a Co-Agent and
and a Lender
By: /S/ MARK A. ISLEY
---------------------------------------
Mark A. Isley, First Vice President
Address: 777 South Figueroa Street, 4th Floor
Los Angeles, California 90017-5800
Attention: James P. Moore,
Senior Vice President
Telephone: (213) 683-4966
FAX: (213) 683-4949
ZIONS FIRST NATIONAL BANK,
as LC Issuer, a Co-Agent and a Lender
By: /S/ DAVID MATHIS
---------------------------------------
David Mathis, Vice President
Address: 10 East South Temple, 2nd floor
Salt Lake City, Utah 84133
Attention: David Mathis,
Vice President
Telephone: (801) 524-4822
FAX: (801) 524-2136
105
<PAGE>
EXHIBIT A
FORM OF OPINION
,
---------- ---------
The Managing Agent, the Co-agents, the LC Issuer and the Lenders who are parties
to the Credit Agreement described below.
Gentlemen/Ladies:
We are counsel for FRANKLIN COVEY CO, a Utah corporation (the
"Borrower"), and have represented the Borrower in connection with its execution
and delivery of a Credit Agreement dated as of October 8, 1999 (the "Agreement")
among the Borrower, the Lenders and Co-Agents named therein and Bank One, NA, as
Managing Agent for the Lenders, and Zions First National Bank, as LC Issuer, and
providing for Credit Extensions in an aggregate principal amount not exceeding
$100,000,000.00 at any one time outstanding. All capitalized terms used in this
opinion and not otherwise defined herein shall have the meanings attributed to
them in the Agreement.
We have examined the Borrower's [describe constitutive documents of
Borrower and appropriate evidence of authority to enter into the transaction],
the Loan Documents and such other matters of fact and law which we deem
necessary in order to render this opinion. Based upon the foregoing, it is our
opinion that:
l. Each of the Borrower and its Subsidiaries is a corporation duly and
properly incorporated or organized, as the case may be, validly existing and (to
the extent such concept applies to such entity) in good standing under the laws
of its jurisdiction of incorporation or organization and has all requisite
authority to conduct its business in each jurisdiction in which its business is
conducted.
2. The execution and delivery by the Borrower of the Loan Documents and
the performance by the Borrower of its obligations thereunder have been duly
authorized by proper corporate proceedings on the part of the Borrower and will
not:
(a) require any consent of the Borrower's shareholders or
members (other than any such consent as has already been given and
remains in full force and effect);
(b) violate (i) any law, rule, regulation, order, writ,
judgment, injunction, decree or award binding on the Borrower or any of
its Subsidiaries or (ii) the Borrower's or any Subsidiary's articles or
certificate of incorporation, partnership agreement, certificate of
partnership, articles or certificate of organization, by-laws, or
operating or other management agreement, as the case may be, or (iii)
the provisions of any indenture, instrument or agreement to which the
Borrower or any of its Subsidiaries is a party or is subject, or by
which it, or its Property, is bound, or conflict with or constitute a
default thereunder; or
106
<PAGE>
(c) result in, or require, the creation or imposition of any
Lien in, of or on the Property of the Borrower or a Subsidiary pursuant
to the terms of any indenture, instrument or agreement binding upon the
Borrower or any of its Subsidiaries.
3. The Loan Documents have been duly executed and delivered by the
Borrower and constitute legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their terms except to the
extent the enforcement thereof may be limited by bankruptcy, insolvency or
similar laws affecting the enforcement of creditors' rights generally and
subject also to the availability of equitable remedies if equitable remedies are
sought.
4. There is no litigation, arbitration, governmental investigation,
proceeding or inquiry pending or, to the best of our knowledge after due
inquiry, threatened against the Borrower or any of its Subsidiaries which, if
adversely determined, could reasonably be expected to have a Material Adverse
Effect.
5. No order, consent, adjudication, approval, license, authorization,
or validation of, or filing, recording or registration with, or exemption by, or
other action in respect of any governmental or public body or authority, or any
subdivision thereof, which has not been obtained by the Borrower or any of its
Subsidiaries, is required to be obtained by the Borrower or any of its
Subsidiaries in connection with the execution and delivery of the Loan
Documents, the borrowings under the Agreement, the payment and performance by
the Borrower of the Obligations, or the legality, validity, binding effect or
enforceability of any of the Loan Documents.
This opinion may be relied upon by the Managing Agent, the Co-Agents,
the LC Issuer, the Lenders and their participants, assignees and other
transferees.
Very truly yours,
107
<PAGE>
EXHIBIT B
COMPLIANCE CERTIFICATE
To: The Lenders parties to the
Credit Agreement Described Below
This Compliance Certificate is furnished pursuant to that certain
Credit Agreement dated as of October 8, 1999 (as amended, modified, renewed or
extended from time to time, the "Agreement") among FRANKLIN COVEY CO. (the
"Borrower"), the Lenders party thereto, the Co-Agents, the LC Issuer and Bank
One, NA, as Managing Agent for the Lenders. Unless otherwise defined herein,
capitalized terms used in this Compliance Certificate have the meanings ascribed
thereto in the Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. I am the duly elected of the Borrower;
------------------------
2. I have reviewed the terms of the Agreement and I have made, or have
caused to be made under my supervision, a detailed review of the transactions
and conditions of the Borrower and its Subsidiaries during the accounting period
covered by the attached financial statements;
3. The examinations described in Paragraph 2 did not disclose, and I
have no knowledge of, the existence of any condition or event which constitutes
a Default or Unmatured Default during or at the end of the accounting period
covered by the attached financial statements or as of the date of this
Certificate, except as set forth below; and
4. Schedule I attached hereto sets forth financial data and
computations evidencing the Borrower's compliance with certain covenants of the
Agreement, all of which data and computations are true, complete and correct.
Described below are the exceptions, if any, to Paragraph 3 by listing,
in detail, the nature of the condition or event, the period during which it has
existed and the action which the Borrower has taken, is taking, or proposes to
take with respect to each such condition or event:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
The foregoing certifications, together with the computations set forth
in Schedule I hereto and the financial statements delivered with this
Certificate in support hereof, are made and delivered this day of , .
------- -----
-----------------------------------
108
<PAGE>
SCHEDULE I TO COMPLIANCE CERTIFICATE
Compliance as of _________, ____ with
Provisions of 6.24 of
the Agreement
109
<PAGE>
EXHIBIT C
ASSIGNMENT AGREEMENT
This Assignment Agreement (this "Assignment Agreement") between
(the "Assignor")and (the "Assignee")
- --------------------- -------------------
is dated as of , 19 . The parties hereto agre as follows:
-------------- -----
1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit Agreement
(which, as it may be amended, modified, renewed or extended from time to time is
herein called the "Credit Agreement") described in Item 1 of Schedule 1 attached
hereto ("Schedule 1"). Capitalized terms used herein and not otherwise defined
herein shall have the meanings attributed to them in the Credit Agreement.
2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to
the Assignee, and the Assignee hereby purchases and assumes from the Assignor,
an interest in and to the Assignor's rights and obligations under the Credit
Agreement and the other Loan Documents, such that after giving effect to such
assignment the Assignee shall have purchased pursuant to this Assignment
Agreement the percentage interest specified in Item 3 of Schedule 1 of all
outstanding rights and obligations under the Credit Agreement and the other Loan
Documents relating to the facilities listed in Item 3 of Schedule 1. The
aggregate Commitment (or Outstanding Credit Exposure, if the applicable
Commitment has been terminated) purchased by the Assignee hereunder is set forth
in Item 4 of Schedule 1.
3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the
"Effective Date") shall be the later of the date specified in Item 5 of Schedule
1 or two Business Days (or such shorter period agreed to by the Managing Agent)
after this Assignment Agreement, together with any consents required under the
Credit Agreement, are delivered to the Managing Agent. In no event will the
Effective Date occur if the payments required to be made by the Assignee to the
Assignor on the Effective Date are not made on the proposed Effective Date.
4. PAYMENT OBLIGATIONS. In consideration for the sale and assignment of
Outstanding Credit Exposure hereunder, the Assignee shall pay the Assignor, on
the Effective Date, the amount agreed to by the Assignor and the Assignee. On
and after the Effective Date, the Assignee shall be entitled to receive from the
Managing Agent all payments of principal, interest, Reimbursement Obligations
and fees with respect to the interest assigned hereby. The Assignee will
promptly remit to the Assignor any interest on Loans and fees received from the
Managing Agent which relate to the portion of the Commitment or Outstanding
Credit Exposure assigned to the Assignee hereunder for periods prior to the
Effective Date and not previously paid by the Assignee to the Assignor. In the
event that either party hereto receives any payment to which the other party
hereto is entitled under this Assignment Agreement, then the party receiving
such amount shall promptly remit it to the other party hereto.
5. RECORDATION FEE. The Assignor and Assignee each agree to pay
one-half of the recordation fee required to be paid to the Managing Agent in
connection with this Assignment Agreement unless otherwise specified in Item 6
of Schedule 1.
6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S
LIABILITY. The Assignor represents and warrants that (i) it is the legal and
beneficial owner of the interest being assigned by it hereunder, (ii) such
110
<PAGE>
interest is free and clear of any adverse claim created by the Assignor and
(iii) the execution and delivery of this Assignment Agreement by the Assignor is
duly authorized. It is understood and agreed that the assignment and assumption
hereunder are made without recourse to the Assignor and that the Assignor makes
no other representation or warranty of any kind to the Assignee. Neither the
Assignor nor any of its officers, directors, employees, agents or attorneys
shall be responsible for (i) the due execution, legality, validity,
enforceability, genuineness, sufficiency or collectability of any Loan Document,
including without limitation, documents granting the Assignor and the other
Lenders a security interest in assets of the Borrower or any guarantor, (ii) any
representation, warranty or statement made in or in connection with any of the
Loan Documents, (iii) the financial condition or creditworthiness of the
Borrower or any guarantor, (iv) the performance of or compliance with any of the
terms or provisions of any of the Loan Documents, (v) inspecting any of the
property, books or records of the Borrower, (vi) the validity, enforceability,
perfection, priority, condition, value or sufficiency of any collateral securing
or purporting to secure the Loans or (vii) any mistake, error of judgment, or
action taken or omitted to be taken in connection with the Loans or the Loan
Documents.
7. REPRESENTATIONS AND UNDERTAKINGS OF THE ASSIGNEE. The Assignee (i)
confirms that it has received a copy of the Credit Agreement, together with
copies of the financial statements requested by the Assignee and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment Agreement, (ii) agrees that
it will, independently and without reliance upon the Managing Agent, the
Assignor or any other Lender and based on such documents and information at it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under the Loan Documents, (iii) appoints and
authorizes the Managing Agent to take such action as agent on its behalf and to
exercise such powers under the Loan Documents as are delegated to the Managing
Agent by the terms thereof, together with such powers as are reasonably
incidental thereto, (iv) confirms that the execution and delivery of this
Assignment Agreement by the Assignee is duly authorized, (v) agrees that it will
perform in accordance with their terms all of the obligations which by the terms
of the Loan Documents are required to be performed by it as a Lender, (vi)
agrees that its payment instructions and notice instructions are as set forth in
the attachment to Schedule 1, (vii) confirms that none of the funds, monies,
assets or other consideration being used to make the purchase and assumption
hereunder are "plan assets" as defined under ERISA and that its rights, benefits
and interests in and under the Loan Documents will not be "plan assets" under
ERISA, (viii) agrees to indemnify and hold the Assignor harmless against all
losses, costs and expenses (including, without limitation, reasonable attorneys'
fees) and liabilities incurred by the Assignor in connection with or arising in
any manner from the Assignee's non-performance of the obligations assumed under
this Assignment Agreement, and (ix) if applicable, attaches the forms prescribed
by the Internal Revenue Service of the United States certifying that the
Assignee is entitled to receive payments under the Loan Documents without
deduction or withholding of any United States federal income taxes.
8. GOVERNING LAW. This Assignment Agreement shall be governed by the
internal law, and not the law of conflicts, of the State of New York.
9. NOTICES. Notices shall be given under this Assignment Agreement in
the manner set forth in the Credit Agreement. For the purpose hereof, the
addresses of the parties hereto (until notice of a change is delivered) shall be
the address set forth in the attachment to Schedule 1.
10. COUNTERPARTS; DELIVERY BY FACSIMILE. This Assignment Agreement may
be executed in counterparts. Transmission by facsimile of an executed
counterpart of this Assignment Agreement shall be deemed to constitute due and
111
<PAGE>
sufficient delivery of such counterpart and such facsimile shall be deemed to be
an original counterpart of this Assignment Agreement.
IN WITNESS WHEREOF, the duly authorized officers of the parties hereto
have executed this Assignment Agreement by executing Schedule 1 hereto as of the
date first above written.
112
<PAGE>
SCHEDULE 1
to Assignment Agreement
1. Description and Date of Credit Agreement: Credit Agreement dated as of
October 8, 1999 by and among FRANKLIN COVEY CO., a Utah corporation, as
Borrower, the Lenders and Co-Agents named therein, the LC Issuer and
BANK ONE, NA, as Managing Agent for the Lenders.
2. Date of Assignment Agreement: , .
--------------- ------
3. Amount (As of Date of Item 2 above):
Revolving Credit Facility
a. Assignee's percentage
of Facility purchased
under the Assignment
Agreement** %
------
b. Amount of
Facility
purchased
under the Assignment
Agreement*** $
------
4. Assignee's Commitment (or Outstanding
Credit Exposure with respect to terminated
Commitments) purchased hereunder: $
------
5. Proposed Effective Date:
--------------
6. Non-standard Recordation Fee
Arrangement N/A***
[Assignor/Assignee
to pay 100% of fee]
[Fee waived by Managing Agent]
Accepted and Agreed:
[NAME OF ASSIGNOR] [NAME OF ASSIGNEE]
By: By:
------------------------------- -------------------------------
Title: Title:
---------------------------- ----------------------------
113
<PAGE>
ACCEPTED AND CONSENTED TO BY ACCEPTED AND CONSENTED TO BY
FRANKLIN COVEY CO. (if required) BANK ONE, NA, as Managing Agent
By: By:
------------------------------- -------------------------------
Title: Title:
---------------------------- ----------------------------
* Insert specific facility names per Credit Agreement
** Percentage taken to 10 decimal places
*** If fee is split 50-50, pick N/A as option
114
<PAGE>
Attachment to SCHEDULE 1 to ASSIGNMENT AGREEMENT
ADMINISTRATIVE INFORMATION SHEET
--------------------------------
Attach Assignor's Administrative Information
Sheet, which must include notice addresses
for the Assignor and the Assignee
(Sample form shown below)
ASSIGNOR INFORMATION
--------------------
CONTACT:
Name: Telephone No.:
----------------------------- ---------------------------
Fax No.: Telex No.:
----------------------------- ------------------------------
Answerback:
------------------------------
PAYMENT INFORMATION:
Name & ABA # of Destination Bank:
------------------------------------------
------------------------------------------
Account Name & Number for Wire Transfer:
----------------------------------------
----------------------------------------
Other Instructions:
------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDRESS FOR NOTICES FOR ASSIGNOR:
------------------------------------------
------------------------------------------
------------------------------------------
ASSIGNEE INFORMATION
--------------------
CREDIT CONTACT:
Name: Telephone No.:
----------------------------- ---------------------------
Fax No.: Telex No.:
----------------------------- ------------------------------
Answerback:
------------------------------
KEY OPERATIONS CONTACT:
Booking Installation: Booking Installation:
-------------- --------------------
Name: Name:
------------------------------ ------------------------------------
Telephone No.: Telephone No.:
--------------------- ----------------------------
Fax No.: Fax No.:
-------------------------- ---------------------------------
Telex No.: Telex No.:
------------------------- --------------------------------
Answerback: Answerback:
------------------------ -------------------------------
115
<PAGE>
PAYMENT INFORMATION:
Name & ABA # of Destination Bank:
------------------------------------------
------------------------------------------
Account Name & Number for Wire Transfer:
------------------------------------------
------------------------------------------
Other Instructions:
------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDRESS FOR NOTICES FOR ASSIGNEE:
------------------------------------------
------------------------------------------
------------------------------------------
116
<PAGE>
BANK ONE INFORMATION
--------------------
Assignee will be called promptly upon receipt of the signed agreement.
INITIAL FUNDING CONTACT: SUBSEQUENT OPERATIONS CONTACT:
Name: Name:
------------------------------- -------------------------------------
Telephone No.: (312) Telephone No.: (312)
--------------------- ---------------------------
Fax No.: (312) Fax No.: (312)
--------------------------- ------------------------
Bank One Telex No.: 190201 (Answerback: FNBC UT)
INITIAL FUNDING STANDARDS:
Libor - Fund 2 days after rates are set.
BANK ONE WIRE INSTRUCTIONS: Bank One, NA, ABA # 071000013
LS2 Incoming Account # 481152860000
Ref:
--------------------------
ADDRESS FOR NOTICES FOR BANK ONE: 1 Bank One Plaza, Chicago, IL 60670
Attn: Agency Compliance Division,
Suite IL1-0353
Fax No. (312) 732-2038 or (312) 732-4339
117
<PAGE>
EXHIBIT D
LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION
To Bank One, NA,
as Managing Agent (the "Managing Agent") under the Credit Agreement
Described Below.
Re: Credit Agreement, dated , (as the same may be
--------------- --------
amended or modified, the "Credit Agreement"), among FRANKLIN COVEY
CO. (the "Borrower"), the Lenders and the Co-Agents named therein,
the LC Issuer and the Managing Agent. Capitalized terms used herein
and not otherwise defined herein shall have the meanings assigned
thereto in the Credit Agreement.
The Managing Agent is specifically authorized and directed to act upon
the following standing money transfer instructions with respect to the proceeds
of Advances or other extensions of credit from time to time until receipt by the
Managing Agent of a specific written revocation of such instructions by the
Borrower, PROVIDED, HOWEVER, that the Managing Agent may otherwise transfer
funds as hereafter directed in writing by the Borrower in accordance with
Section 13.1 of the Credit Agreement or based on any telephonic notice made in
accordance with Section 2.14 of the Credit Agreement.
Facility Identification Number(s)
-----------------------------------------------
Customer/Account Name
----------------------------------------------------------
Transfer Funds To
--------------------------------------------------------------
--------------------------------------------------------------
For Account No.
-----------------------------------------------------------------
Reference/Attention To
---------------------------------------------------------
Authorized Officer (Customer Representative) Date
------------------------------
- ----------------------------------- ------------------------------------------
(Please Print) Signature
Bank Officer Name Date
-------------------------------
- ----------------------------------- ------------------------------------------
(Please Print) Signature
(Deliver Completed Form to Credit Support Staff For Immediate Processing)
118
<PAGE>
EXHIBIT E
NOTE
[Date]
FRANKLIN COVEY CO., a Utah corporation (the "Borrower"), promises to
pay to the order of ____________________________________ (the "Lender") the
aggregate unpaid principal amount of all Loans made by the Lender to the
Borrower pursuant to Article II of the Agreement (as hereinafter defined), in
immediately available funds at the main office of Bank One, NA in Chicago,
Illinois, as Managing Agent, together with interest on the unpaid principal
amount hereof at the rates and on the dates set forth in the Agreement. The
Borrower shall pay the principal of and accrued and unpaid interest on the Loans
in full on the Facility Termination Date
The Lender shall, and is hereby authorized to, record on the schedule
attached hereto, or to otherwise record in accordance with its usual practice,
the date and amount of each Loan and the date and amount of each principal
payment hereunder.
This Note is one of the Notes issued pursuant to, and is entitled to
the benefits of, the Credit Agreement dated as of October 8, 1999 (which, as it
may be amended or modified and in effect from time to time, is herein called the
"Agreement"), among the Borrower, the lenders party thereto, including the
Lender, the LC Issuer and Bank One, NA, as Managing Agent, and the Co-Agents to
which Agreement reference is hereby made for a statement of the terms and
conditions governing this Note, including the terms and conditions under which
this Note may be prepaid or its maturity date accelerated.
FRANKLIN COVEY, CO., a Utah corporation
By:
---------------------------------------
Print Name:
-------------------------------
Title:
------------------------------------
119
<PAGE>
SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL
TO
NOTE OF FRANKLIN COVEY CO.,
DATED ,
---------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Principal Maturity Principal
Amount of of Interest Amount Unpaid
Date Loan Period Paid Balance
</TABLE>
120
<PAGE>
SCHEDULE 1
SUBSIDIARIES AND OTHER INVESTMENTS
(See Sections 5.8 and 6.14)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Investment Jurisdiction of Owned Amount of Percent
In Organization By Investment Ownership
</TABLE>
121
<PAGE>
SCHEDULE 2
INDEBTEDNESS, LIENS AND CONTINGENT OBLIGATIONS (See Sections
5.14, 6.11, 6.15 AND 6.23)
I. INDEBTEDNESS AND LIENS
<TABLE>
<CAPTION>
Maturity
Indebtedness Indebtedness Property and Amount
Incurred By Owed To Encumbered (If Any) of Indebtedness
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
II. CONTINGENT OBLIGATIONS
122
<PAGE>
SCHEDULE 3
INITIAL COMMITMENT SCHEDULE
I. From October 8 to but not including April 1, 2001:
<TABLE>
<S> <C>
LENDER COMMITMENT
Bank One, NA $60,000,000.00
Zions First National Bank $40,000,000.00
II. From and after April 1, 2001:
LENDER COMMITMENT
Bank One, NA $35,000,000
Zions First National Bank $30,000,000
</TABLE>
123
<PAGE>
CREDIT AGREEMENT
DATED AS OF OCTOBER 8, 1999
AMONG
FRANKLIN COVEY CO.,
as the Borrower
THE LENDERS,
BANK ONE, NA,
as Managing Agent
BANK ONE, NA
and
ZIONS FIRST NATIONAL BANK
as Co-Agents
AND
BANC ONE CAPITAL MARKETS, INC.
AS LEAD ARRANGER AND SOLE BOOK RUNNER
124
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I. DEFINITIONS.........................................................................................58
ARTICLE II. THE CREDITS.........................................................................................68
<S> <C> <C>
2.1. Commitment..........................................................................................68
2.2. Required Payments; Termination......................................................................68
2.3. Ratable Loans.......................................................................................69
2.4. Types of Advances...................................................................................69
2.5. Commitment Fee; Reductions in Aggregate Commitment..................................................69
2.6. Minimum Amount of Each Advance......................................................................69
2.7. Optional Principal Payments.........................................................................69
2.8. Method of Selecting Types and Interest Periods for New Advances.....................................69
2.9. Conversion and Continuation of Outstanding Advances.................................................70
2.10. Changes in Interest Rate, etc.......................................................................70
2.11. Rates Applicable After Default......................................................................70
2.12. Method of Payment...................................................................................71
2.13. Noteless Agreement; Evidence of Indebtedness........................................................71
2.14. Telephonic Notices..................................................................................72
2.15. Interest Payment Dates; Interest and Fee Basis......................................................72
2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions.....................72
2.17. Lending Installations...............................................................................72
2.18. Non-Receipt of Funds by the Managing Agent..........................................................73
2.19. Facility LCs........................................................................................73
2.19.1. Issuance...................................................................................73
2.19.2. Participations.............................................................................73
2.19.3. Notice.....................................................................................73
2.19.4. LC Fees....................................................................................74
2.19.5. Administration; Reimbursement by Lenders...................................................74
2.19.6. Reimbursement by Borrower..................................................................74
2.19.7. Obligations Absolute.......................................................................75
2.19.8. Actions of LC Issuer.......................................................................75
2.19.9. Indemnification............................................................................75
2.19.10. Lenders' Indemnification...................................................................76
2.19.11. Facility LC Collateral Account.............................................................76
2.19.12. Rights as a Lender.........................................................................76
ARTICLE III. YIELD PROTECTION; TAXES.............................................................................77
3.1. Yield Protection....................................................................................77
3.2. Changes in Capital Adequacy Regulations.............................................................77
3.3. Availability of Types of Advances...................................................................78
3.4. Funding Indemnification.............................................................................78
3.5. Taxes...............................................................................................78
3.6. Lender Statements; Survival of Indemnity............................................................80
ARTICLE IV. CONDITIONS PRECEDENT................................................................................80
4.1. Initial Credit Extension............................................................................80
4.2. Each Credit Extension...............................................................................81
ARTICLE V. REPRESENTATIONS AND WARRANTIES......................................................................82
5.1. Existence and Standing..............................................................................82
5.2. Authorization and Validity..........................................................................82
5.3. No Conflict; Government Consent.....................................................................82
5.4. Financial Statements................................................................................83
5.5. Material Adverse Change.............................................................................83
5.6. Taxes...............................................................................................83
5.7. Litigation and Contingent Obligations...............................................................83
5.8. Subsidiaries........................................................................................83
5.9. ERISA...............................................................................................83
5.10. Accuracy of Information.............................................................................83
5.11. Regulation U........................................................................................84
5.12. Material Agreements.................................................................................84
5.13. Compliance With Laws................................................................................84
5.14. Ownership of Properties.............................................................................84
5.15. Plan Assets; Prohibited Transactions................................................................84
5.16. Environmental Matters...............................................................................84
5.17. Investment Company Act..............................................................................84
5.18. Public Utility Holding Company Act..................................................................84
5.19. Year 2000...........................................................................................85
5.20. Subordinated Indebtedness...........................................................................85
5.21. Insurance...........................................................................................85
125
<PAGE>
ARTICLE VI. COVENANTS...........................................................................................85
6.1. Financial Reporting.................................................................................85
6.2. Use of Proceeds.....................................................................................86
6.3. Notice of Default...................................................................................87
6.4. Conduct of Business.................................................................................87
6.5. Taxes...............................................................................................87
6.6. Insurance...........................................................................................87
6.7. Compliance with Laws................................................................................87
6.8. Maintenance of Properties...........................................................................87
6.9. Inspection..........................................................................................87
6.10. Dividends...........................................................................................87
6.11. Indebtedness........................................................................................88
6.12. Merger..............................................................................................88
6.13. Sale of Assets......................................................................................88
6.14. Investments and Acquisitions........................................................................88
6.15. Liens...............................................................................................88
6.16. Capital Expenditures................................................................................89
6.17. Year 2000...........................................................................................89
6.18. Affiliates..........................................................................................89
6.19. Amendments to Agreements............................................................................89
6.20. Subordinated Indebtedness...........................................................................89
6.21. Sale of Accounts....................................................................................90
6.22. Sale and Leaseback Transactions and other Off-Balance Sheet Liabilities.............................90
6.23. Contingent Obligations..............................................................................90
6.24. Financial Covenants.................................................................................90
6.24.1. Fixed Charge Coverage Ratio.............................................................90
6.24.2. Leverage Ratio..........................................................................90
6.24.3. Minimum Net Worth.......................................................................90
ARTICLE VII. DEFAULTS............................................................................................90
ARTICLE VIII.ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES......................................................92
8.1. Acceleration; Facility LC Collateral Account........................................................92
8.2. Amendments..........................................................................................93
8.3. Preservation of Rights..............................................................................93
ARTICLE IX. GENERAL PROVISIONS..................................................................................94
9.1. Survival of Representations.........................................................................94
9.2. Governmental Regulation.............................................................................94
9.3. Headings............................................................................................94
9.4. Entire Agreement....................................................................................94
9.5. Several Obligations; Benefits of this Agreement.....................................................94
9.6. Expenses; Indemnification...........................................................................94
9.7. Numbers of Documents................................................................................95
9.8. Accounting..........................................................................................95
9.9. Severability of Provisions..........................................................................95
9.10. Nonliability of Lenders.............................................................................95
9.11. Confidentiality.....................................................................................96
9.12. Nonreliance.........................................................................................96
9.13. Disclosure..........................................................................................96
ARTICLE X. THE AGENT...........................................................................................96
10.1. Appointment; Nature of Relationship.................................................................96
10.2. Powers..............................................................................................97
10.3. General Immunity....................................................................................97
10.4. No Responsibility for Loans, Recitals, etc..........................................................97
10.5. Action on Instructions of Lenders...................................................................97
10.6. Employment of Managing Agents and Counsel...........................................................97
10.7. Reliance on Documents; Counsel......................................................................98
10.8. Managing Agent's Reimbursement and Indemnification..................................................98
10.9. Notice of Default...................................................................................98
10.10. Rights as a Lender..................................................................................98
10.11. Lender Credit Decision..............................................................................99
10.12. Successor Managing Agent............................................................................99
10.13. Managing Agent's Fee................................................................................99
10.14. Delegation to Affiliates...........................................................................100
10.15. Managing Agent, Co-Agents, Documentation Agent, Syndication Agent, etc.............................100
126
<PAGE>
ARTICLE XI. SETOFF; RATABLE PAYMENTS...........................................................................100
11.1. Setoff.............................................................................................100
11.2. Ratable Payments...................................................................................100
ARTICLE XII. BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS..................................................100
12.1. Successors and Assigns.............................................................................100
12.2. Participations.....................................................................................101
12.2.1. Permitted Participants; Effect.........................................................101
12.2.2. Voting Rights..........................................................................101
12.2.3. Benefit of Setoff......................................................................101
12.3. Assignments........................................................................................102
12.3.1. Permitted Assignments..................................................................102
12.3.2. Effect; Effective Date.................................................................102
12.4. Dissemination of Information.......................................................................103
12.5. Tax Treatment......................................................................................103
ARTICLE XIII.NOTICES............................................................................................103
13.1. Notices............................................................................................103
13.2. Change of Address..................................................................................103
ARTICLE XIV. COUNTERPARTS.......................................................................................103
ARTICLE XV. CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL.......................................104
15.1. CHOICE OF LAW......................................................................................104
15.2. CONSENT TO JURISDICTION............................................................................104
15.3. WAIVER OF JURY TRIAL...............................................................................104
EXHIBIT A. FORM OF OPINION....................................................................................106
EXHIBIT B. COMPLIANCE CERTIFICATE.............................................................................108
EXHIBIT C. ASSIGNMENT AGREEMENT...............................................................................110
EXHIBIT D. LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION.....................................................118
EXHIBIT E. NOTE...............................................................................................119
SCHEDULE 1. SUBSIDIARIES AND OTHER INVESTMENTS.................................................................121
SCHEDULE 2. INDEBTEDNESS, LIENS AND CONTINGENT OBLIGATIONS.....................................................122
SCHEDULE 3. INITIAL COMMITMENT SCHEDULE........................................................................123
</TABLE>
127
<PAGE>
EXHIBIT 21
FRANKLIN COVEY CO.
Subsidiaries
Franklin Development Corporation (a Utah corporation)
Franklin Covey Europe, Ltd. (a United Kingdom corporation)
Franklin Covey Canada, Ltd. (an Ontario corporation)
Franklin Excellence, Inc. (a Utah corporation)
Franklin International Asia, Inc. (a Utah corporation)
Franklin Covey Australia, Inc. (a Utah corporation)
Franklin Covey NZ, Inc. (a Utah corporation)
Franklin Covey Mexico, Inc. (a Utah corporation)
Franklin Covey Taiwan, Inc. (a Utah corporation)
Franklin Covey Argentina, Inc. (a Utah corporation)
Franklin Covey Brazil, Inc. (a Utah corporation)
Franklin Covey Spain, Inc. (a Utah corporation)
Franklin Covey Puerto Rico, Inc. (a Puerto Rico corporation)
Franklin Covey SA, Inc. (a Utah corporation)
Franklin Covey ASC, Inc. (a Utah corporation)
Publishers Press, Inc. (a Utah corporation)
Franklin Covey Client Sales, Inc. (a Utah corporation)
Franklin Covey Catalog Sales, Inc. (a Utah corporation)
Franklin Covey Product Sales, Inc. (a Utah corporation)
Franklin Covey Services, L.L.C. (a Utah limited liability company)
Franklin Covey Marketing, Ltd. (a Utah limited partnership)
Franklin Covey Travel, Inc. (a Utah corporation)
Check Advantage Plus, Inc. (a Utah corporation)
Premier Agendas, Inc. (a Washington corporation)
Premier School Agendas, Ltd. (a British Columbia corporation)
Premier Graphics, L.P. (a Washington limited partnership)
128
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included or incorporated by reference in this Form
10-K, into the Company's previously filed Registration Statements on Form S-8,
File Nos. 33-73624 and 33-51314, and Form S-3, File Nos. 33-47894 and 333-89541.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
November 17, 1999
129
<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To Franklin Covey Co.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in Franklin Covey
Co.'s annual report to shareholders incorporated by reference in this Form 10-K,
and have issued our report thereon dated October 8, 1999. Our audits were made
for the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the index on page 57 is the responsibility of the Company's
management and is presented for the purpose of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
- --------------------------------
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
October 8, 1999
130
<PAGE>
EXHIBIT 99.2
SCHEDULE II
FRANKLIN COVEY CO.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Three Years Ended August 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
----------------------
Charged to Charged
Balance at Costs and to Other Balance at
Description Beginning of Period Expenses Accounts Deductions End of Period
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended August 31, 1997:
Allowance for doubtful
accounts $ 889 $ 1,038 $1,322(1) $ (1,318) (3) $ 1,931
Allowance for inventories 5,378 4,254 400(2) (5,557) (4) 4,475
-------- -------- ------ --------- --------
$ 6,267 $ 5,292 $1,722 $ (6,875) $ 6,406
======== ======== ====== ========= ========
Year ended August 31, 1998:
Allowance for doubtful
accounts $ 1,931 $ 3,472 $ (2,563) (3) $ 2,840
Allowance for inventories 4,475 6,522 (5,998) (4) 4,999
-------- -------- --------- --------
$ 6,406 $ 9,994 $ (8,561) $ 7,839
======== ======== ========= ========
Year ended August 31, 1999:
Allowance for doubtful
accounts $ 2,840 $ 4,862 $ (3,628) (3) $ 4,074
Allowances for inventories 4,999 13,460 (8,899) (4) 9,560
-------- -------- --------- --------
$ 7,839 $ 18,322 $(12,527) $ 13,634
======== ======== ========= ========
</TABLE>
(1) Represents the addition of the allowances for doubtful accounts of acquired
companies.
(2) Represents the addition of the allowances for inventories of acquired
companies.
(3) Represents a write-off of accounts deemed uncollectible.
(4) Reduction in the allowance is due to a write-off of obsolete inventories.
131
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000886206
<NAME> FRANKLIN COVEY CO.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1.0
<CASH> 26,781
<SECURITIES> 0
<RECEIVABLES> 96,574
<ALLOWANCES> 4,074
<INVENTORY> 59,780
<CURRENT-ASSETS> 211,646
<PP&E> 220,204
<DEPRECIATION> 92,341
<TOTAL-ASSETS> 623,303
<CURRENT-LIABILITIES> 203,508
<BONDS> 6,543
0
75,000
<COMMON> 1,353
<OTHER-SE> 302,081
<TOTAL-LIABILITY-AND-EQUITY> 623,303
<SALES> 554,923
<TOTAL-REVENUES> 554,923
<CGS> 243,132
<TOTAL-COSTS> 243,132
<OTHER-EXPENSES> 307,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,912
<INCOME-PRETAX> (4,226)
<INCOME-TAX> 4,546
<INCOME-CONTINUING> (8,772)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,772)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
