ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended August 31, 2001.

RESULTS OF OPERATIONS

Quarter Ended May 25, 2002 Compared with the Quarter Ended May 26, 2001

Sales

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

                                         Quarter Ended                               Nine Months Ended
                                --------------------------------              --------------------------------
                                May 25, 2002      May 26, 2001    Var. %       May 25, 2002      May 26, 2001   Var. %
                                --------------    --------------  ------       --------------    -------------  ------
 Consumer Business Unit:
    Retail Stores                 $   22,336        $   27,745     (19)         $   96,769        $  124,908     (23)
    Catalog/e-Commerce                11,016            15,183     (27)             50,830            75,116     (32)
    Other CBU                            822               106     675               3,047             7,198     (58)
                                  ----------        ----------                  ----------        ----------
                                      34,174            43,034     (21)            150,646           207,222     (27)
                                  ----------        ----------                  ----------        ----------
Organizations Business
Unit:
    Organizational Sales Group        26,865            34,512     (22)             73,627            97,767     (25)
    International                     10,052            10,489     (4)              34,484            40,161     (14)
                                  ----------        ----------                  ----------        ----------
                                      36,917            45,001     (18)            108,111           137,928     (22)
                                  ----------        ----------                  ----------        ----------
                                  $   71,091        $   88,035     (19)         $  258,757        $  345,150     (25)
                                  ==========        ==========                  ==========        ==========

        The Company’s overall operating performance continues to be adversely affected by declining sales compared to the prior year. The Company believes that slow economic growth in the United States led to reduced training and supply expenditures, as corporate clients sought to reduce operating expenses. As a result, the Company experienced significant declines in sales compared to the prior year for both products and training services. Product sales, which primarily consist of planners, binders, and handheld electronic planning devices, decreased $12.0 million, or 22 percent, compared to the prior year. The decrease in product sales is primarily due to decreased retail store sales and catalog/e-Commerce sales. Retail store sales continue to be adversely affected by declining average sales dollars per transaction combined with a decrease in consumer traffic. Average sales dollars per transaction decreased primarily due to a 59 percent decline in sales of higher-dollar handheld electronic planning devices and related accessories. Planner and binder sales through the Company’s various channels also decreased slightly in total sales dollars, but increased as a percent of total sales compared to the prior year. As a result of these sales trends, comparable store retail sales decreased by 26 percent compared to the same quarter of the prior year. The sales performance from 15 additional stores partially offset the decline in comparable store sales resulting in a 19 percent overall decrease in retail store sales compared to the prior year. As of May 25, 2002, the Company was operating 174 domestic retail stores compared to 159 stores at May 26, 2001. Catalog/e-Commerce sales declined due to reduced call volume in the Company’s catalog call center operations and reduced sales activity through the Company’s Internet web site at www.franklincovey.com. The Company attributes this decline to the combination of significantly reduced response rates from its catalog mailings, an overall decrease in handheld electronic product sales, and the reluctance of companies to reimburse employees for planners and other productivity tools due to budgetary and spending constraints.

        Training and service sales decreased $5.0 million, or 15 percent compared to the prior year. The Company offers a variety of training seminars and consulting services including productivity, leadership, and sales performance training. Domestic training seminars and consulting services are delivered through the Company’s Organizational Sales Group (“OSG”). With the impact of a weak domestic economy on corporate spending, training sales during the quarter decreased due to reduced attendance for both on-site and public leadership and productivity programs. Public program sales continued their downward trend from late fiscal 2001 and also decreased compared to the prior year. These decreases were partially offset by sales performance training seminars, which increased significantly compared to the prior year. Due to continued economic factors that adversely affect corporate budgeting and spending, future bookings of training seminars continues to remain slower than expected, and the Company expects this trend to impact the remainder of fiscal 2002. International product and training sales decreased slightly compared to the prior year primarily due to unfavorable sales performance in Mexico, Canada, continental Europe, and licensee operations. These declines were partially offset by increased sales from Japan, Brazil, the United Kingdom, and Australia. The Company attributes a portion of the decrease in international sales to similar economic factors that have had an adverse affect on domestic product and training sales.

Gross Margin

         Gross margin consists of net sales less the cost of goods sold or services provided. The Company’s overall gross margin increased to 55.3 percent of sales, compared to 54.5 percent in the prior year. The improvement in overall gross margin was primarily due to an increase in training and service sales as a percentage of total sales, since training and service sales generally have higher gross margins than the majority of the Company’s product sales. Gross margin on product sales declined slightly to 47.3 percent compared to 47.5 percent in the prior year. The Company’s training and service gross margin improved to 67.3 percent compared to 66.0 percent in the prior year. The improvement in training and service gross margin was primarily due to focused efforts to reduce seminar delivery costs and improve margins on training seminars. The Company believes that its efforts to improve training margins will continue to have a favorable impact upon operations during the remainder of fiscal 2002 and in future periods. The training and services gross margin was also favorably affected by increased sales revenue from sales performance training, which has gross margins that are slightly higher than the majority of the Company’s other training programs.

Operating Expenses

        Selling, general, and administrative (“SG&A”) expenses decreased $6.0 million, but due to decreased sales, increased as a percent of sales to 70.0 percent, compared to 63.3 percent of sales in the prior year. The decrease in SG&A expenses was primarily due to initiatives designed to reduce operating expenses in light of recent sales trends. These cost reduction initiatives resulted in significantly decreased associate, advertising, travel, and computer and office supply expenses compared to the prior year. Partially offsetting these cost reduction initiatives were severance costs and the costs necessary to operate additional retail stores. As a result of headcount reduction efforts, the Company incurred and expensed $0.7 million of severance and related costs during the quarter. As previously mentioned, the Company is operating 15 additional stores compared to the prior year and has realized increased operating costs associated with those new stores. The Company has implemented and continues to pursue various cost reduction initiatives and believes that its efforts will continue to reduce recurring operational SG&A costs throughout the remainder of fiscal 2002 and in future periods.

        The Company is the creditor for a loan program that provided certain management personnel with the opportunity to purchase shares of the Company’s common stock. These loans are full recourse to the participants and are recorded as a reduction to shareholders’ equity in the accompanying consolidated condensed balance sheets. The Company utilizes a systematic methodology for determining the level of reserves that are appropriate for the management common stock loan program. The primary factor considered by the Company’s methodology is the current market value of common stock held by the participants. Other factors considered by the methodology include: the liquid net worth and earnings capacity of the participants; the inherent difficulties and risks of pursuing collection actions against key employees; the probability of sufficient collateral value based upon the proximity to the due date of the loans; and other business, economic, and participant factors which may have an impact on the Company’s ability to collect the loans. Based upon this methodology, the Company recorded a $0.2 million charge to operations during the quarter ended May 25, 2002 to increase the loan loss reserve. As of May 25, 2002, the Company had an aggregate loan loss reserve totaling $19.8 million, which reduces notes and interest receivable from related parties in the accompanying consolidated condensed balance sheets. In addition, the Company discontinued recording interest receivable and corresponding interest income on the loans during the quarter ended May 25, 2002. However, the loan participants remain liable for interest accrued over the full term of their loans, which is due when the loans mature in March 2005. At May 25, 2002, the participants’ loans plus accrued interest exceeded the value of the common stock held by the participants by $26.3 million. Should the value of the common stock alone continue to be insufficient to cover the loans outstanding during the loan term, the Company’s loan loss reserve methodology provides a basis to be fully reserved prior to the March 2005 loan maturity date. The establishment of reserves for potential loan losses requires significant estimates and judgment by the Company’s management and these estimates and projections are subject to change as a result of various economic factors, most of which are not within the control of the Company. Based on the methodology in place as well as other factors, charges to the Company’s operating results in order to increase the reserve for management stock loan losses could fluctuate significantly in future periods. Additionally, the inability of some or all participants to repay their loans would have a significant adverse effect upon the financial position and future cash flows of the Company.

        Depreciation expense increased by $0.8 million compared to the prior year, primarily due to the acquisition of computer software and hardware, and the addition of leasehold improvements in new and remodeled retail stores. Amortization expense decreased by $2.0 million, primarily due to the adoption of SFAS No. 142, which prohibits goodwill amortization and requires the Company to adopt a fair value approach, with periodic assessments for impairment, to value goodwill and indefinite-lived intangible assets. As a result of adopting the provisions of SFAS No. 142, the Company wrote off all recorded goodwill associated with its consumer business unit and organizations business unit plus a portion of the Covey trade name intangible asset, which has an indefinite life, from its balance sheet as of September 1, 2001. Refer to Note 4 to the accompanying consolidated condensed financial statements for further information regarding the impact of adopting 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 $1.3 million during the quarter ended May 25, 2002, compared to $0.6 million for the comparable quarter of the prior year. The increase is primarily due to improved sales performance and profitability at Franklin Covey Coaching, LLC for AMS programs.

        The joint venture agreement requires the Company’s coaching programs to achieve specified earnings thresholds beginning in fiscal 2002 (the joint venture agreement did not contain an earnings threshold requirement in fiscal 2001) or the joint venture agreement may be terminated at the option of AMS. As a result of worse than expected performance during the first nine months of fiscal 2002, combined with unfavorable performance expectations through the remainder of fiscal 2002, AMS informed the Company that it is exercising its option to terminate the joint venture agreement as of August 31, 2002. As a result of this decision, the Company has recognized impairment charges to its investment in Franklin Covey Coaching, LLC totaling $16.3 million during fiscal 2002. The remaining investment balance in the accompanying condensed consolidated balance sheet at May 25, 2002 represents the net realizable value of expected remaining cash disbursements and tangible assets expected to be returned upon termination of the joint venture agreement. As further information becomes available, including coaching program financial results and partnership dissolution valuations, additional impairment or recovery adjustments to the Company’s investment in Franklin Covey Coaching, LLC may be required. As of May 25, 2002, the Company’s remaining net investment in Franklin Covey Coaching, LLC totaled $0.8 million.

Interest Income and Expense

        Interest income and expense was primarily influenced by cash received from the sale of Premier, which occurred on December 21, 2001. The Company used a portion of the proceeds from the sale of Premier to repay and terminate its existing term note and line of credit agreement. As a result of this transaction, the Company’s interest income increased $0.1 million and interest expense decreased by $1.7 million compared to the prior year. Interest income was also adversely affected by reduced interest rates on excess cash balances compared to the prior year. Due to decreased debt balances and increased cash balances resulting from the sale of Premier, the Company expects interest income to be higher and interest expense to be less than reported in prior comparable periods during the remainder of fiscal 2002.

Income Taxes

        Income tax benefit attributable to losses from continuing operations was recorded based upon third quarter losses which partially offset the gain generated in the second quarter from the sale of Premier and other related factors including the effect of non-deductible items.

Preferred Stock Dividends

        Preferred stock dividends increased over the prior year due to the issuance of additional shares of preferred stock during the first and second quarters of fiscal 2002 as payment for accrued dividends. The Company paid preferred dividends totaling $2.2 million with cash during the Company’s third fiscal quarter and accrued preferred dividends at May 25, 2002 were subsequently paid in cash during the Company’s fourth fiscal quarter. The Company was allowed, at its option, to 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 quarterly in cash.

Nine Months Ended May 25, 2002 Compared to the Nine Months Ended May 26, 2001

Sales

        During the nine months ended May 25, 2002, the Company’s sales were adversely affected by the unfavorable performance of the United States economy, which was worsened by the events of September 11, 2001. Additionally, the Company believes that reduced training and supply budgets at its corporate clients, in an effort to reduce overall operating expenses, and reluctance of personnel to travel, were significant contributors to the overall decrease in sales, for both products and training programs. Product sales, which primarily consist of planners, binders, and handheld electronic planning devices, decreased $66.4 million, or 27 percent, compared to the prior year. The decrease in product sales is primarily due to decreased retail store, catalog/e-Commerce, and wholesale sales. Retail store sales continue to be adversely affected by a decline in average sales dollars per transaction coupled with reduced traffic in the stores. Average sales dollars per transaction decreased primarily due to a 59 percent decline in sales of handheld electronic planning devices and related accessories, which have sales prices greater than the majority of the Company’s other products. Planner and binder sales also decreased 14 percent and 13 percent, respectively, compared to the prior year. As a result of these declines, comparable store sales decreased by 30 percent compared to the prior year. The sales performance from 15 additional stores partially offset the decline in comparable store sales resulting in a 23 percent overall decrease compared to the prior year. Catalog/e-Commerce sales declined due to reduced call volume in the Company’s catalog call center 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 significantly compared to the prior year. Subsequent holiday mailings also produced disappointing results and overall catalog sales have declined sharply from the prior year. The Company attributes this decline to the combination of significantly reduced response rates from its catalog mailings, an overall decrease in handheld electronic product sales, and the continued reluctance of companies to reimburse employees for planners and other productivity tools due to budgetary constraints. Other consumer business unit product sales decreased due to reduced demand for the Company’s products through wholesale channels and from the sale or discontinuance of certain other small non-core entities.

        The Company offers a variety of training seminars and consulting services including productivity, leadership, and sales performance training. Training and services sales related to these areas decreased by $20.0 million, or 19 percent compared to the prior year. With the continuing effects of a weak economy in the United States and the impact of September 11, 2001 events, training sales decreased due to canceled programs that occurred primarily during the Company’s first fiscal quarter combined with reduced attendance, for both on-site and public leadership and productivity programs. Public program sales also continued their downward trend from late fiscal 2001 and decreased overall compared to the prior year. These declines were partially offset by increased sales performance training, which increased significantly compared to the prior year. Due to economic factors that continue to adversely affect corporate budgeting and spending, future bookings of training seminars remains slower than expected, and the Company expects this trend to impact the remainder of fiscal 2002. International product and training sales decreased compared to the prior year primarily due to decreased sales in Canada, Mexico, continental Europe, Japan, and Australia. These decreases were partially offset by a slight sales increase in the United Kingdom and Brazil. International licensee royalties were flat compared to the prior year. In addition, unfavorable exchange rates adversely affected reported international sales by $1.1 million compared to the prior year. The Company attributes a portion of the decrease in international sales to similar economic factors that have had an adverse affect on domestic product and training sales.

Gross Margin

        The Company’s overall gross margin for the nine months ended May 25, 2002, decreased to 55.5 percent of sales, compared to 57.0 percent in the prior year. The decline in gross margin during fiscal 2002 was due to a number of factors, including increased deep discounting on handheld electronic products, changes in the product mix, increased manufacturing costs, and backorders on certain planner products, which adversely affected product cost of sales. The impact of fixed delivery costs for public seminars, reduced sales of high-margin training kits and accessories, the sale of new low-margin customized training products, and participant cancellations at the Company’s annual symposium event reduced training and service gross margins during the nine months ended May 25, 2002. However, cost reduction initiatives designed to reduce product and training costs had a favorable effect upon gross margin performance during the third quarter, which has improved the Company’s gross margin performance for fiscal 2002. Gross margin for product sales decreased to 51.0 percent compared to 52.7 percent in the prior year. Due to reduced demand for handheld electronic products, additional discounting was required to slow the declining sales trend of these products, especially during the seasonally heavy shopping season in November and December of 2001. The Company has also experienced a shift in its product mix toward lower-margin binders and planners. Additionally, smaller production runs for planners and related forms resulted in higher per-unit costs due to the loss of printing volume efficiencies. Finally, the Company experienced a shortage of certain planner products during the second quarter due to production problems at a third-party supplier. The shipping of those backordered products required more expensive overnight carriers in order to maintain high customer service standards. These increased shipping costs could not entirely be passed on to consumers.

        Training and service gross margin decreased to 65.1 percent compared to 67.2 percent in the prior year primarily as a result of reduced attendance at training seminars and the introduction of new training products with lower margins. Seminar costs, as a percentage of revenue, increased primarily due to reduced revenue resulting from overall lower attendance at public seminar events held during the year and the cancellation and postponement of numerous seminars due to travel restrictions resulting from the September 11 terrorist attacks, which primarily affected the first quarter. Certain components of public training program costs are fixed, such as site fees, equipment rentals, and presenter costs. With a decline in the average number of participants per public training seminar, the fixed costs related to the presentation of seminars resulted in lower gross margins for these events. In addition, some costs incurred for canceled seminars were not entirely refundable. Reduced seminar attendance also resulted in decreased sales of higher-margin training kits and related accessories. Additionally, due to travel restrictions and safety concerns following the events of September 11, many customers declined to attend the Company’s annual symposium conference, which resulted in a reduced gross margin for that event. The Company also provided a new customized training product during fiscal 2002 that had significantly lower margins than the majority of other training kits, products, and accessories. As part of its efforts to improve operational results, the Company continues to actively seek to reduce product and seminar costs in order to improve overall gross margins and believes that these initiatives will result in improved margins during future periods.

Operating Expenses

        Selling, general, and administrative (“SG&A”) expenses decreased $4.6 million, but due to decreasing sales, increased to 63.7 percent of sales, compared to 49.1 percent of sales in the first nine months of the prior fiscal year. The decrease in SG&A expenses was primarily due to third quarter cost reductions resulting from initiatives designed to reduce operating expenses in light of recent sales trends. These cost reduction initiatives resulted in significantly decreased associate, advertising, travel, and computer and office supply expenses compared to the prior year. The decrease in SG&A expenses was partially offset by severance costs resulting from headcount reduction efforts, increased consulting and product development costs, increased retail store operations, costs associated with the implementation of the Electronic Data Systems (“EDS”) outsourcing contract, and expenses incurred to upgrade the Company’s Oracle based information systems. 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 $3.6 million of severance and related costs during the nine months ended May 25, 2002. In addition, the Company expensed approximately $3.3 million of development costs during fiscal 2002 that were related to certain projects. As previously mentioned, the Company is operating 15 additional stores compared to the prior year and has realized increased operating costs associated with these new stores. 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. However, the majority of these transition costs have been incurred and the Company believes that over the life of the contract, significant cost savings will be realized in these outsourced areas. The Company is currently in the process of upgrading its Oracle information system applications and has expensed certain external consulting costs related to the software installation that do not qualify for capitalization. The Company believes that its continuing efforts to reduce recurring operational SG&A costs will produce favorable results throughout the remainder of fiscal 2002 and in future periods.

        During the quarter ended February 23, 2002, the Company recognized an impaired asset charge totaling $4.5 million. The impaired asset charge was comprised of a note receivable from the sale of a subsidiary, obsolete computer software costs, and software development costs for a line of custom planner products. A $2.3 million note receivable from the sale of a subsidiary became impaired during the quarter ended February 23, 2002 due to the purchaser declaring bankruptcy during the quarter. The note was guaranteed by the parent company of the purchaser; however, the parent company became insolvent during the quarter and the chances of recovering any substantial payment on the note appears to be remote. Certain customer database management software, which was developed and installed by an external company, became obsolete when the Company selected a new database software provider, which rendered the existing application obsolete. The cost of the obsolete software written off totaled $1.4 million. The Company also expensed $0.8 million of external development costs for software designed to sell new planner products. Although the software was functional and performed as planned, sales of the corresponding product were significantly less than expected.

        Depreciation expense increased by $6.1 million compared to the prior year, primarily due to the purchases of additional computer software and hardware, the addition of leasehold improvements in new and remodeled retail stores, and the acceleration of depreciation on certain computer software that is scheduled to be replaced during fiscal 2002. Amortization expense decreased by $5.9 million, primarily due to the adoption of SFAS No. 142, which prohibits goodwill amortization and requires the Company to adopt a fair value approach to goodwill and indefinite-lived intangible assets. As a result of adopting the provisions of SFAS No. 142, the Company wrote off all recorded goodwill associated with its consumer business unit and organizations business unit plus a portion of the Covey trade name intangible, which has an indefinite life, from its balance sheet as of September 1, 2001 and recorded the charge as a cumulative effect of an accounting change in the accompanying consolidated condensed statement of operations for the nine months ended May 25, 2002.

Equity in Earnings of Unconsolidated Subsidiary

        During the nine months ended May 25, 2002, the Company recognized $3.2 million of equity in the earnings of Franklin Covey Coaching, LLC, an unconsolidated subsidiary, compared to $2.0 million in the prior year. The increase is due to improving sales performance and profitability at Franklin Covey Coaching, LLC on AMS programs. However, due to the unfavorable performance of the Company’s coaching programs, AMS has informed the Company that the joint venture agreement will be terminated at August 31, 2002. As a result of uncertainties surrounding the joint venture agreement, the Company recognized an aggregate impairment charge of $16.3 million during the nine months ended May 25, 2002, with respect to its investment in Franklin Covey Coaching, LLC. Refer to the discussion contained in “Equity in Earnings of Unconsolidated Subsidiary” for the quarter ended May 25, 2002 compared to the quarter ended May 26, 2001 for further information regarding the Company’s investment in Franklin Covey Coaching, LLC.

Interest Income and Expense

        Interest income and expense were impacted primarily by cash received from the sale of Premier that occurred on December 21, 2001. The Company used a portion of the proceeds from the sale of Premier to repay and terminate the Company’s existing term loan and line of credit agreement. Interest income increased $1.6 million over the prior year primarily as a result of increased cash balances from the sale of Premier, combined with interest income recognized from the participants of the management stock loan program during the first and second quarters of fiscal 2002. Beginning with the third quarter of fiscal 2002, the Company no longer accrues interest on the management stock loan program notes receivable. However, the loan participants are still obligated to repay the interest to the Company when the loans mature in March 2005. Interest expense decreased $2.1 million compared to the prior year primarily due to lower debt balances during the second and third quarters of fiscal 2002. Due to these decreased debt balances, the Company expects interest expense to continue to be less than reported in prior comparable periods, throughout the remainder of fiscal 2002, and in future periods.

Other Income

        During the quarter ended February 23, 2002, the Company sold a building located in Chandler, Arizona, that previously housed the operations of the government products group. The gain on the sale of the building was $0.6 million and was recorded as other income in the accompanying condensed consolidated statement of operations for fiscal 2002.

Income Taxes

        Income tax benefit attributable to losses from continuing operations was recorded based upon expected operating results for the remainder of fiscal 2002 and other related factors such as non-deductible intangible amortization. Income tax expense resulting from the sale of Premier was calculated based upon the expected combined tax liability from the sale in the United States and Canada. The income tax benefit attributed to the cumulative effect of accounting change was primarily affected by the deductibility of expensed goodwill and intangible assets based upon applicable tax regulations.

Gain on Sale of Discontinued Operations

        Effective December 21, 2001, the Company sold Premier Agendas, Inc., a wholly owned subsidiary located in Bellingham, Washington, and Premier School Agendas Ltd., a wholly owned subsidiary organized in Ontario, Canada, (collectively, “Premier”) to School Specialty, Inc., a Wisconsin-based company that specializes in providing products and services to students and schools. Premier provided productivity and leadership solutions to the educational industry, including student and teacher planners. The sale price was $152.5 million in cash plus the retention of Premier’s working capital, which was received in the form of a $4.0 million promissory note from the purchaser, which bears interest at LIBOR plus two percent. The Company received full payment on the promissory note plus accrued interest during June 2002. Additionally, the Company will receive $0.8 million of cash from Premier related to estimated income tax payments and tax benefits from net operating losses. The Company also agreed not to sell student planners containing the Company’s “7 Habits” and “What Matters Most” content directly to schools and school districts in the K through 12 market subsequent to the closing. The Company recognized a pretax gain of $96.5 million ($60.8 million after applicable taxes) on the sale of Premier, which was recorded as a gain on the sale of discontinued operations in the accompanying consolidated condensed statements of operations for fiscal 2002. The actual pretax gain was greater than previously anticipated due to changes in the net assets of Premier, primarily from greater than anticipated cash transfers to the Company prior to closing.

Cumulative Effect of Accounting Change

        Effective September 1, 2001, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require such assets to be tested for impairment and to be written down to fair value, if necessary. In order to assess the value of its goodwill and indefinite-lived intangibles as of September 1, 2001, the Company engaged an independent valuation firm. The valuation process assigned the Company’s assets and liabilities to its operating business units and then determined a fair market value of those assets using a discounted cash flow model that also considered factors such as market capitalization and appraised values of certain assets. Based upon the results of the valuation, the Company wrote off all of the goodwill assigned to the organizations and consumer business units, plus a portion of the Covey trade name intangible asset, which has an indefinite life. The impairment totaled $61.4 million after applicable income tax benefits and was retroactively recorded in the Company’s first fiscal quarter as required by the guidelines of SFAS No. 142. Goodwill and intangible assets assigned to the education business unit, which consisted primarily of Premier, were not required to be written down since the fair value of that business unit’s assets exceeded their book value at the measurement date. Remaining intangible assets, with a net book value of $101.5 million, were primarily generated from the merger with Covey Leadership Center and are assigned to the organizations business unit.

Preferred Stock Dividends

        Preferred stock dividends increased over the prior year due to the issuance of additional shares of preferred stock during the first and second quarters of fiscal 2002 as payment for accrued dividends. The Company paid preferred dividends totaling $2.2 million with cash during the Company’s third fiscal quarter and accrued preferred dividends at May 25, 2002 were subsequently paid in cash during the Company’s fourth fiscal quarter. The Company was allowed, at its option, to pay accrued dividends with cash or additional shares of preferred stock until July 1, 2002. Subsequent to that date, quarterly preferred stock dividends must be paid in cash.

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 and common stock. Working capital requirements have also been financed through short-term borrowing and line-of-credit financing.

        Net cash used for operating activities for the nine months ended May 25, 2002 was $5.0 million compared to $44.2 million of cash provided by operating activities for the nine months ended May 26, 2001. The decrease in operating cash flows was primarily due to operating losses resulting from declining sales levels during fiscal 2002. The Company anticipates that cash flows from operating activities will continue to be adversely affected by declining sales during the remainder of fiscal 2002. Non-cash adjustments to the Company’s results of operations during fiscal 2002 included increases to the provision for losses on the management stock loan program totaling $18.7 million, a $16.3 million impairment charge on the Company’s investment in Franklin Covey Coaching LLC, $29.9 million of depreciation and amortization charges, and a $4.5 million impairment of other assets. Consistent with comparable periods of the prior year, the primary source of cash from operating activities was the collection of accounts receivable, primarily from Premier, which recorded seasonally high sales during the Company’s fourth fiscal quarter. The primary use of cash was the payment of accounts payable and accrued liabilities, also primarily attributable to the seasonal nature of Premier’s operations. Due to the sale of Premier, effective December 21, 2001, the Company anticipates these operating cash flows will be significantly altered in future periods. Additionally, due to losses generated by continuing operations recorded during the first nine months of fiscal 2002, the Company recognized income tax assets that were offset, in part, by the income tax liabilities resulting from the sale of Premier.

        Net cash provided by investing activities totaled $148.0 million during the first nine months of fiscal 2002 compared to $26.1 million of net cash used for investing activities in the prior year. During the quarter ended February 23, 2002, the Company sold Premier, a wholly owned subsidiary that provided productivity and learning solutions to the educational industry. The sale price was $152.5 million in cash plus a $4.0 million promissory note from the purchaser, which bears interest at LIBOR plus two percent. The Company received full payment on the promissory note plus accrued interest during June 2002. Additionally, the Company will receive $0.8 million of cash from Premier related to estimated income tax payments and tax benefits from net operating losses. During the nine months ended May 25, 2002 the Company used $9.7 million of cash to purchase computer software, leasehold improvements in new stores, computer hardware, and other machinery and equipment. The Company reduced its purchases of property and equipment from $23.6 million during the comparable period of the prior year and plans to continue to reduce capital expenditures until sales performance and related cash flows improve. The Company also received $2.3 million of cash proceeds from the sale of a building located in Chandler, Arizona.

        Net cash used for financing activities during the nine months ended May 25, 2002 was $111.6 million compared to $24.1 million in the first nine months of the prior year. The primary use of financing cash during fiscal 2002 was the payment of outstanding term loan and line of credit debt balances. 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 term loan and line of credit agreements. As a result of this prepayment, the term loan and line of credit agreement were terminated. Currently, the Company’s remaining debt balances total $1.8 million and primarily consist of long-term mortgages on certain buildings and property. In addition to repaying its term note and line of credit, the Company was required to settle an outstanding interest rate swap agreement it had entered into as a part of the debt facility for $4.9 million in cash. The Company paid preferred dividends totaling $2.2 million with cash during the Company’s third fiscal quarter. Accrued preferred dividends at May 25, 2002 were subsequently paid in cash during the Company’s fourth fiscal quarter. Preferred dividend payments during the first and second quarters of fiscal 2002 were paid with additional shares of preferred stock. However, under terms of the preferred stock, all dividends subsequent to July 2002 must be paid in cash and are expected to total approximately $2.2 million per quarter in future periods.

        The Company has not engaged in off-balance sheet arrangements, structured any special purpose entities, or participated in any commodity trading activities, which would expose the Company to potential undisclosed liabilities or create adverse consequences to its liquidity. Required contractual payments consist primarily of payments to Electronic Data Systems (“EDS”) for outsourcing services related to information systems, warehousing and distribution, and call center operations; rent expense for retail store space; and mortgage payments on certain buildings and property. These obligations are described in further detail in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2001.

        Going forward, the Company will continue to incur costs necessary to develop products and curriculum, to deploy sales initiatives, to enhance electronic commerce channels, to pay preferred stock dividends, and other costs related to implementing strategies necessary for the 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 may also pursue additional financing alternatives, including new lines of credit if required, in order to position itself for the future.

"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 of 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, realizability of long-lived assets, dependence on certain 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 currency 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 other risks, foreseen or unforeseen.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK OF FINANCIAL INSTRUMENTS

        During the normal course of business, the Company is exposed to interest rate and foreign currency exchange risks. To manage risks associated with interest rates and foreign currencies, the Company makes limited use of derivative financial instruments. Derivatives are financial instruments that derive their value from one or more underlying financial instruments. As a matter of policy, the Company’s derivative instruments are entered into for periods consistent with related underlying exposures and do not constitute positions that are independent of those exposures. In addition, the Company does not enter into derivative contracts for speculative trading purposes, nor is the Company party to any leveraged derivative instrument. The notional amounts of derivatives do not represent actual amounts exchanged by the parties to the instrument and, thus, are not a measure of the exposure to the Company through its use of derivatives. The Company’s exposure is generally limited to gains and losses resulting from fluctuations in the rates of the underlying contract, such as interest and foreign currency exchange rates. Additionally, the Company does not engage in other “off-balance sheet” transaction arrangements that would subject the Company to additional undisclosed market risks, nor does the Company participate in trading activities involving non-exchange traded contracts that could increase Company liabilities and adversely affect the Company’s liquidity position. The Company enters into derivative agreements with highly rated counterparties and the Company does not expect to incur any losses resulting from non-performance by other parties.

Interest Rate Sensitivity

        The Company is exposed primarily to fluctuations in U.S. interest rates as a result of its cash position. At May 25, 2002, the Company’s remaining debt consisted of both fixed and variable rate instruments. However, during the quarter ended February 23, 2002, the Company utilized $92.3 million of the proceeds from the sale of Premier and retired nearly all of its variable rate debt. Had market interest rates averaged one percent higher during the quarter ended May 23, 2002, the Company’s interest expense would not have been significantly increased due to the reduced debt balances held by the Company during the quarter.

        In order to reduce the risk of interest rate fluctuation, the Company may utilize interest rate swap agreements. Generally, under interest rate swaps, the Company agrees with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts calculated by reference to a contracted notional amount.

        In connection with the management loan program completed in fiscal 2001, the Company entered into an interest rate swap agreement. As a result of the new credit agreement obtained in fiscal 2001, the notes receivable from loan participants and the interest rate swap agreement were acquired by the Company and recorded in the Company’s consolidated balance sheet. The interest rate swap agreement allowed the Company to pay a fixed rate and receive a floating rate from the counterparty through the term of agreement, which expired in March 2005. However, due to terms of the Company’s credit agreement, the Company was obligated to use a portion of the proceeds from the sale of Premier to retire all outstanding debt, including the amount related to the management stock loan. As a result of this transaction, the underlying obligation of the interest rate swap agreement was retired and the existing interest rate swap was transformed from a hedge instrument into a speculative instrument, which the Company settled during the second quarter of fiscal 2002 for $4.9 million. The interest rate differential on this interest rate swap agreement totaled $0.6 million of expense prior to its settlement. The Company did not have any interest rate swaps or other similar derivative contracts outstanding at May 25, 2002.

Foreign Exchange Sensitivity

        The Company has international operations and during the normal course of business is exposed to foreign currency exchange risks as a result of transactions that are denominated in currencies other than the United States dollar. During the quarter ended May 25, 2002, the Company utilized foreign currency forward contracts to manage the volatility of certain intercompany financing transactions that are denominated in Japanese Yen, Mexican Pesos, and Australian Dollars. These contracts did not meet specific hedge accounting requirements and corresponding gains and losses have been recorded as a component of current operations, which offset the gains and losses on the underlying transaction, in the accompanying consolidated condensed statements of operations. The notional amounts of the Company’s foreign currency forward contracts were as follows at May 25, 2002 (in thousands):

                                          Notional Amount in        Notional Amount in
           Contract Description            Foreign Currency            U.S. Dollars
        -----------------------------    ----------------------    -----------------------
        Japanese Yen                               560,000              $      4,129
        Mexican Pesos                               13,600                     1,475
        Australian Dollars                           2,650                     1,433
                                                                        ------------
                                                                        $      7,037
                                                                        ============

        The Company recorded a net loss from its use of foreign currency forward contracts totaling $0.1 million and gains totaling $0.4 million for the quarter and nine months ended May 25, 2002, respectively. Foreign currency forward contract gains were $0.2 million and $0.6 million for the quarter and nine months ended May 26, 2001, respectively. These gains and losses were largely offset by gains and losses on the underlying transactions, which were also recorded in the accompanying consolidated condensed statements of operations.