Sales

         The following table sets forth selected sales data of the Company's operating segments (in thousands):

                                             Quarter Ended
                                ---------------------------------------
                                   November 24,         November 25,
                                       2001                 2000           Variance %
                                 -----------------    -----------------    ----------
 Consumer Business Unit:
    Retail Stores                  $    28,639          $    39,631            (28)
    Catalog/e-Commerce                  19,444               31,586            (38)
    Other CBU                            1,392                3,705            (62)

Organizations Business Unit:
    Organizational Sales Group          21,987               35,232            (38)
    International                       12,878               15,462            (17)
                                   -----------          -----------
                                   $    84,340          $   125,616            (33)
                                   ===========          ===========

        In general, the Company’s sales were adversely affected by events described above regarding the United States economy, which was worsened by the September 11 terrorist attacks. In addition, the Company believes that reduced training budgets, as corporate clients strive to reduce operating expenses, and reluctance of personnel to travel, were significant contributors to the overall decrease in sales, for both on-site and public training programs. Product sales, which primarily consist of planners, binders, and handheld electronic planning devices, decreased $29.1 million, or 33 percent, compared to the prior year. The decrease in product sales is primarily due to decreased retail store and catalog/e-Commerce sales. Retail store sales declined primarily due to reduced traffic in the stores, which resulted in fewer transactions coupled with lower average sales per order due to a sharp decline in sales of handheld electronic planning devices and related accessories. Total handheld electronic device sales, the majority of which are made through the Company’s retail stores, decreased by more than $10.0 million, or 54 percent, compared to the prior year. Planner and binder sales also decreased compared to the prior year. As a result of these declines, comparable store sales decreased during the quarter by 35 percent compared to the prior year. The sales performance from 23 additional stores partially offset the decline in comparable store sales resulting in a 28 percent overall decrease compared to the prior year. As of November 24, 2001, the Company was operating 172 retail stores compared to 149 stores at November 25, 2000. Catalog/e-Commerce sales declined due to reduced call volume in the Company’s catalog operations and reduced sales activity through the Company’s Internet web site at www.franklincovey.com. Sales from the Company’s historically strong fall catalog mailing, which was mailed just days prior to September 11 and the subsequent anthrax scares associated with the mail, declined more than 40 percent compared to the same quarter last year. Other CBU sales decreased due to reduced demand for the Company’s products through wholesale channels and from the sale/discontinuance of certain small entities. The Company offers a variety of training seminars and consulting services including time management, leadership, and sales performance training. Domestic training seminars and consulting services are delivered through the Company’s Organizational Sales Group (“OSG”). Training sales decreased primarily due to canceled and postponed programs and reduced attendance, for both on-site and public leadership and time management programs. Public program sales continued their downward trend from late fiscal 2001 and decreased compared to the prior year. Due to economic factors, future bookings of training seminars remain slow, and the Company expects this trend to impact the second quarter and the remainder of fiscal 2002. International product and training sales decreased compared to the prior year primarily due to decreased sales in Japan, Canada, and Mexico. These decreases were partially offset by slight sales increases from Europe and licensee operations.

Gross Margin

        Gross margin consists of net sales less the cost of goods sold or services provided. The Company’s overall gross margin decreased to 56.3 percent of sales for the quarter, compared to 60.1 percent in the prior year. The decline in gross margin was primarily due to increased manufacturing costs, which adversely affected product cost of sales, and the impact of fixed delivery costs for seminars, which reduced training and service gross margins. Gross margin on product sales decreased to 53.3 percent compared to 56.4 percent in the prior year. Due to decreased sales volume, especially in the latter half of fiscal 2001, production volume for planners and related forms was reduced, which resulted in higher per-unit costs due to the loss of certain volume efficiencies. Partially offsetting these factors was an overall decrease in the sales volume of lower-margin handheld electronic devices. Training and service gross margin decreased to 63.1 percent compared to 68.4 percent in the prior year. Seminar costs, as a percentage of revenue, increased due to lower attendance at seminar events during the quarter and the cancellation and postponement of seminars due to travel restrictions resulting from the September 11 terrorist attacks. Certain components of training program costs are fixed, such as site fees, equipment rentals, and presenter costs. With a decline in average participants per training seminar, the fixed costs for the seminar resulted in lower gross margins for the seminar event. In addition, some costs incurred for canceled seminars were not entirely refundable.

Operating Expenses

        Selling, general, and administrative (“SG&A”) expenses increased $0.5 million, to 67.0 percent of sales, compared to 44.6 percent in the prior year. The increase in SG&A expenses was primarily due to increased retail store operations, costs associated with the implementation of the Electronic Data Systems (“EDS”) outsourcing contract, increased advertising and promotion costs, increased consulting costs, and severance costs resulting from headcount reduction efforts. These increases were slightly offset by decreased associate costs and reduced travel and entertainment expenses. As previously mentioned, the Company is operating 23 additional stores compared to the prior year and has realized increased operating costs, including pre-opening costs for new stores opened during the quarter. During fiscal 2001, the Company entered into a long-term outsourcing agreement with EDS to provide warehousing, distribution, information systems, and call center operations. In addition to base charges for services provided, the Company has incurred transition costs necessary to operate under the terms of the agreement. The Company believes that over the life of the contract, significant cost savings will be realized in these outsourced areas. In an effort to improve sales performance, the Company increased spending for advertising and promotional materials, especially for catalogs and related mailing materials. During the quarter, the Company continued its spending to develop and market new products and training courses and engaged consultants to assist in the development of these items. Additionally, the Company has implemented numerous initiatives to reduce operating expenses, including headcount reductions in various areas of the Company. As a result of these efforts, the Company incurred and expensed severance costs during the first quarter of fiscal 2002. The Company believes that its cost reduction initiatives will significantly reduce SG&A costs throughout the remainder of fiscal 2002 and in future periods.

        During fiscal 2000, the Company implemented an incentive-based compensation program that included a loan program from external lenders to certain management personnel for the purpose of purchasing shares of the Company’s common stock. As part of the credit agreement obtained in fiscal 2001, the Company acquired the notes receivable from the loan participants and recorded them as a component of shareholders’ equity. As a result, the Company is now the direct lender on these full-recourse notes from the participants of the loan program. The Company regularly evaluates the creditworthiness of loan participants and their ability to repay the loans. The Company’s systematic methodology used in this evaluation considers factors such as the current stock value, the participant’s available net worth, historical losses on loans, general economic and business factors, and other factors. Based upon the Company’s methodology, which considered operating results of the Company’s first fiscal quarter, anticipated sales trends, and current general economic factors expected to affect the Company’s operations during the remainder of fiscal 2002, the Company recorded an additional $10.0 million loan loss reserve during the quarter ended November 24, 2001. As of November 24, 2001, the Company had an aggregate loan loss reserve totaling $11.0 million, which reduces notes and interest receivable from related parties in the Company’s consolidated condensed balance sheet. Although all participants have full-recourse loans from the Company, the inability of some or all participants to repay their loans would have a significant adverse effect upon the operating results, financial position, and liquidity of the Company.

         Depreciation expense increased by $2.2 million compared to the prior year, primarily due to the addition of leasehold improvements in new and remodeled retail stores, the purchase of computer hardware and software, and investments in additional manufacturing equipment. Amortization expense decreased by $1.9 million, primarily due to the adoption of SFAS No. 142, which requires goodwill amortization to cease and a fair value approach to goodwill and other intangibles. The Company is in the process of valuing its goodwill and other intangibles and may be required to record a material charge in fiscal 2002 as a result of adopting the provisions of SFAS No. 142.

Equity in Earnings of Unconsolidated Subsidiary

        Effective September 1, 2000, the Company entered into a joint venture agreement with American Marketing Systems (“AMS”) to form Franklin Covey Coaching, LLC. Each partner owns 50 percent of the joint venture and participates equally in its management. The Company accounts for its investment in Franklin Covey Coaching, LLC using the equity method of accounting and reports its share of the joint venture’s net income as equity in earnings of an unconsolidated subsidiary. The Company’s share of the joint venture’s earnings totaled $0.9 million during the first quarter of fiscal 2002, compared to $0.9 million for the comparable quarter of the prior year.

        Under terms of the joint venture agreement, the coaching programs contributed by the Company are required to achieve minimum earnings thresholds over the next four years, or the joint venture agreement is subject to termination at the option of AMS. For fiscal 2002, the Company’s coaching programs are required to achieve $3.2 million in earnings before interest, taxes, depreciation, and amortization. As of November 24, 2001, the Company’s coaching program earnings applicable to the threshold were $0.3 million. The Company has evaluated its investment in Franklin Covey Coaching, LLC by considering probable future cash flows based upon earnings trends and the likelihood of a contract revision or termination by AMS. As a result of this evaluation, the Company recorded an impairment charge of $1.9 million during the first quarter of fiscal 2002. As future information regarding the Company’s investment in Franklin Covey Coaching, LLC becomes available, further impairment charges may be recorded by the Company. As of November 24, 2001, the Company’s net investment in Franklin Covey Coaching, LLC totaled $15.6 million.

Interest Income and Expense

        In general, interest income and expense was affected by Company performance during the first quarter of fiscal 2002, which resulted in higher debt balances and lower cash balances than in the prior year. In addition, interest expense increased due to larger debt balances resulting from the Company’s new line of credit agreement signed during the fourth quarter of fiscal 2001. The new line of credit agreement included the management stock loan participant’s debt, which was previously guaranteed by the Company. As a result, the Company paid interest to the bank on amounts borrowed to acquire the loans. The participants will repay the interest paid by the Company when the loans mature in March 2005. Accordingly, the Company recognized $0.8 million of additional interest income, which was recorded as a receivable from the loan participants. Also included in interest expense was the differential on the interest rate swap agreement, which totaled $0.5 million for the quarter ended November 24, 2001. Due to decreased debt balances, the Company expects interest expense to decrease during the remainder of fiscal 2002.

Income Taxes

         Income tax benefit was recorded at an effective tax rate of 40.0 percent, which was based upon expected taxable income for the remainder of fiscal 2002, the anticipated income tax impact from the sale of Premier, and the effects of non-deductible intangible amortization.

Preferred Stock Dividends

        Preferred stock dividends increased over the prior year due to the issuance of additional shares of preferred stock as payment for accrued dividends. The Company may, at its option, pay accrued dividends with cash or additional shares of preferred stock until July 1, 2002. Subsequent to that date, preferred stock dividends must be paid in cash. Accrued preferred stock dividends at November 24, 2001 were subsequently paid with additional shares of preferred stock.

LIQUIDITY AND CAPITAL RESOURCES

        Historically, the Company’s primary sources of capital have been net cash provided by operating activities, long-term borrowings, line of credit financing, and the issuance of preferred stock. Working capital requirements have also been financed through short-term borrowing and line-of-credit financing.

        Net cash provided by operating activities during the quarter ended November 24, 2001 was $13.5 million compared to $25.4 million for the quarter ended November 25, 2000. The decrease in operating cash flow was primarily due to reduced net income from unfavorable operating results recorded during the quarter ended November 24, 2001. Non-cash adjustments to the Company’s results of operations during the first quarter of fiscal 2002 included an increase to the provision for losses on the management stock loan program of $10.0 million, $9.4 million of depreciation and amortization charges, $5.1 million related to the loss resulting from a change in hedge status of an interest rate swap agreement, and a $1.8 million impairment charge on the Company’s investment in Franklin Covey Coaching, LLC. Consistent with prior years, the primary source of cash from operations was the collection of accounts receivable, primarily from Premier, which records seasonally high sales during the Company’s fourth fiscal quarter. The major uses of cash were the acquisition of inventories for new retail stores and expected sales during the Company’s second quarter, and the payment of accounts payable and accrued liabilities also primarily attributable to the seasonal nature of Premier’s operations. Additionally, due to operating losses recorded during the first quarter of fiscal 2002, the Company recognized income tax benefits that reduced income taxes payable and resulted in income taxes receivable at November 24, 2001. The Company anticipates that income taxes receivable will be offset by the tax liability resulting from the sale of Premier during the second quarter of fiscal 2002.

        Net cash used for investing activities totaled $4.1 million during the first quarter of fiscal 2002 compared to $9.7 million in the prior year. Cash was used to purchase computer hardware and software, leasehold improvements in new stores, and other property and equipment.

        Net cash used for financing activities during the quarter ended November 24, 2001 was $6.5 million compared to $14.4 million in the prior year. During the first quarter of fiscal 2002, the Company utilized $10.9 million of cash to reduce both current and long-term debt balances. Also during the quarter, the Company did not purchase any of its common stock for treasury and paid accrued preferred stock dividends with additional shares of preferred stock.

        During the fourth quarter of fiscal 2001, the Company entered into a new credit agreement with its lenders. The new credit agreement was comprised of a $69.0 million term loan and a $45.6 million revolving credit facility, both of which expire in May 2004. Combined with an existing $17.0 million line of credit that in expired in December 2001, the Company had lines of credit available for working capital needs totaling $62.6 million, of which $23.6 million was available at November 24, 2001. The line of credit agreements required the Company to maintain certain financial ratios and working capital levels. Due to unfavorable operating results during the first quarter of fiscal 2002, at November 24, 2001, the Company was not in compliance with the terms of its line of credit agreements. The Company did not obtain waivers of non-compliance from its lenders and has classified all amounts outstanding on its credit agreement as current liabilities in the Company’s condensed consolidated balance sheet for November 24, 2001. On December 21, 2001, the Company used $92.3 million of the proceeds from the sale of Premier to pay all amounts outstanding on its existing line of credit agreements. As a result of this prepayment, the existing line of credit agreement was terminated. Following payment and termination of the lines of credit, the Company’s remaining debt balances primarily consist of long-term mortgages on certain of the Company’s buildings and property.

        On November 13, 2001, the Company signed a definitive agreement to sell Premier, a wholly owned subsidiary that provides productivity and learning solutions to the educational industry. The necessary regulatory approvals were obtained and the transaction closed on December 21, 2001. The sales price was $152.5 million in cash plus the retention of approximately $13.0 million of Premier’s working capital as of December 21, 2001, which will be received in the form of cash dividends from Premier and a promissory note from the purchaser, which is due and payable in June 2002. The Company will recognize a gain of approximately $80.0 million from the sale of Premier during its second quarter of fiscal 2002. Under the terms of its existing credit facilities, the Company used approximately $92.3 million of the proceeds to pay off and terminate its term loan and revolving credit line. In connection with this prepayment, the Company was also required to settle an outstanding interest rate swap agreement it had entered into with respect to a portion of these debt facilities.

        On November 26, 2001, the Company filed a tender offer statement with the Securities and Exchange Commission, which was subsequently amended on December 24, 2001, to purchase up to 7,333,333 shares of its common stock at a purchase price of $6.00 per share. The tender offer is subject to conditions set forth in the tender offer statement, and related amendments, and is currently due to expire on January 31, 2002. However, due to decreased sales trends that continued through the Christmas buying season, the Company is considering the possible reduction, delay, or termination of this tender offer. While the Company has taken significant steps to decrease costs in order to address continuing lower revenues and currently has a very strong balance sheet after the benefit of the Premier sale, with essentially no debt and more than $60 million of cash, the Company is considering whether or not it should conserve this cash to provide it with adequate resources to maintain flexibility in uncertain economic conditions.

        Going forward, the Company will continue to incur costs necessary for the development of products and curriculum, initiatives to strengthen sales, electronic commerce channels, strategic acquisitions and joint ventures, retail store growth and renovations, pay preferred stock dividends, and other costs related to growth and operation of the business. Cash provided by the sale of Premier, operations, 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 for the foreseeable future. The Company also continues to pursue additional financing alternatives as it positions itself for future growth opportunities.

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995

        With the exception of historical information (information relating to the Company’s financial condition and results of operations at historical dates or for historical periods), the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere are forward-looking statements that necessarily are based on certain assumptions and are subject to risks and uncertainties. Such uncertainties include, but are not limited to, unanticipated developments in any one or more of the following areas: decreased sales and profitability due to the sale of Premier, decreased sales as a result adverse economic conditions, management of costs in connection with reduced sales, unanticipated costs, delays or outcomes relating to the Company’s restructuring plans, availability of financing sources, failure to collect employee notes receivable, dependence on products or services, the rate and consumer acceptance of new product introductions, competition, the number and nature of customers and their product orders, pricing, pending and threatened litigation, and other risk factors which may be detailed from time to time in the Company’s press releases, reports to shareholders and in filings with the SEC.

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

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

        These forward-looking statements are based on management’s expectations as of the date hereof, and the Company does not undertake any responsibility to update any of these statements in the future. Actual future performance and results will differ and may differ materially from that contained in or suggested by these forward-looking statements as a result of the factors set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the business risks described in the Company’s Annual Report on Form 10-K for the year ended August 31, 2001, and elsewhere in the Company’s filings with the SEC.

                                 Notional Amount in    Notional Amount in
        Contract Description     Foreign Currency         U.S. Dollars
        --------------------   ----------------------  -------------------
        Japanese Yen                 635,000            $      5,430
        Canadian Dollars               7,915                   5,010
        Mexican Pesos                 14,620                   1,535
                                                        ------------
                                                        $     11,975
                                                        ============