Michael Mazya, CFA 1-917-463-9533 mazya@wharton.upenn.edu 1 | P a g e

Summary Franklin Covey (NYSE:FC) – Short Idea

Business Description:Franklin Covey is a global provider of training and consulting services in the fields of: leadership, productivity, sales performance, customer loyalty, and education. The company is best known for the “The 7 Habits of Highly Effective People” brand.

Situation Summary: Franklin Covey is currently undergoing a transformation into a SaaS business through sales of a subscription to its “All Access Pass” or AAP. The company promises that AAP is going to increase revenues and margins materially, the market agrees and has re-priced the stock accordingly.

My View: I believe that management has materially overpromised, and is purposefully obscuring poor results. FC is likely to miss their own guidance as well as market expectations. Despite apparent setbacks, FC has doubled down on aggressive guidance for FY 2017.

Timing: “AS TO WHEN THE SUCCESS OF ALL ACCESS PASS IS EXPECTED TO TRANSLATE INTO MEANINGFUL GROWTH FOR THE U.S. DIRECT OFFICES AND FOR THE COMPANY OVERALL, LET'S SAY THAT WE EXPECT THAT THE ANSWER IS ESSENTIALLY NOW. ACTUALLY, WE EXPECT THAT THE COMBINED IMPACT OF SIGNIFICANT ALL ACCESS PASS RENEWALS, AND TOGETHER WITH NEW ALL ACCESS PASS SALES, WE'LL BEGIN TO BE VERY VISIBLE IN THIS OUR THIRD QUARTER, WHICH WILL END MAY 31.” – CEO Robert Whitman, Q2 Conference Call

Market View Variant View How I Got There Market leader

positioned to win business in an

unconsolidated industry

• Highly cyclical industry facing increasingly poor dynamics and secular challenges

• The FC brand is weakening

• Historical & forward looking industry/competitor research and analysis

• Historic market share analysis isolating currently relevant segments and geographies across changing segmental reporting going back 13+ years

Currently converting clients to a new

business model and raising ARPU

• The transition to AAP is not nearly as successful as previously expected or currently described

• Discounting and pulling forward of revenue is likely

• Using publicly available data on gov’t clients, I found historical sales to certain clients as well as the specific terms of their conversion to AAP

Education segment is a growth engine

• An FC related foundation raises serious questions regarding sales numbers

• Discounting and pulling forward of revenue is likely

• Using publicly available data from schools and school districts, I found specific terms and pricing

• Tracing the funding of education contracts, I found undisclosed and questionable connection back to FC

Success of All Access Pass is being obscured

by transitory accounting and business issues

• The legacy business is deteriorating more quickly than AAP is growing.

• Either ARPU is not increasing as much as described or clients are not converting at expected rates.

• Using the data presented since the introduction of AAP, I attempted to reconcile reported revenues and reported operational metrics with management explanations of progress

Low valuation provides a margin of safety

• Numerous issues call into question the current valuation

• Related party transactions • Constant changes in metrics presented along with

limited disclosures on complex reporting • Low quality earnings • High levels of intangible assets

Primary Research: I have conducted extensive primary research to validate my thesis, and have not seen any other party use the data I gathered to evaluate Franklin Covey. Going back over a decade, I found no mention of the lower pricing, changing payment terms, suspicious foundation funding or sufficient explanations for the inadequate reporting and related party transactions in any SEC filing, officially released transcript, sell-side research report, or buy-side write ups (SumZero, VIC, SA.)

I believe this new information calls into question the prevailing investment thesis on FC. I have linked to or sourced every data point uncovered.

Key Risks to My Thesis: The contracts I identified may be highly unrepresentative or taken out of context, Plausible explanations for related foundation spending, FC taken private by management, Acquisition by a large tech firm, AAP is much more successful in raising ARPU and retention than I expect, New hit product

Catalysts: Earnings, Insider selling

Current Capitalization (Millions) Share Price $20.40 FD Shares Out. (mm) 13.83 Market Capitalization 282.0 (+) Net Debt & Min. Int. 34.1 Total Enterprise Value 316.2 BV of Common Equity 90.5 (+) Total Debt & Min. Int. 42.0 = Total Capital 132.5

Short Franklin Covey (NYSE: FC)

EBITDA tomorrow and EBITDA yesterday, but never EBITDA today

‘It must come sometimes to “jam to-day,”’ Alice objected. ‘No, it can’t,’ said the Queen. ‘It’s jam every other day: to-day isn’t any other day, you know.’ ‘I don’t understand you,’ said Alice. ‘It’s dreadfully confusing!’

• Lewis Carrol, Through the Looking-Glass

I am short this stock. I may close my position at any time without notice Views presented are entirely my own and do not represent those of any past, present, or future employer Submitted to SumZero on 05/22/2017 Prepared by Michael Mazya, CFA mazya@wharton.upenn.edu www.michaelmazya.com Cell: 917-463-9533

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Contents Summary .................................................................................................................................................................................................... 1 One Page Financials ................................................................................................................................................................................... 4 Business Overview and the Promise of the All Access Pass (AAP) ............................................................................................................. 5 Industry Analysis and Competitive Position............................................................................................................................................. 10 AAP Contracts Analysis ............................................................................................................................................................................ 18 Leader in Me Contracts and Funding Analysis ......................................................................................................................................... 22 Constantly Changing Metrics And Drivers ............................................................................................................................................... 30 Other Issues ............................................................................................................................................................................................. 34 Deciphering AAP ...................................................................................................................................................................................... 36 Buybacks and other things that give me considerable pause .................................................................................................................. 38 Valuation and Price Target ....................................................................................................................................................................... 40 Appendix .................................................................................................................................................................................................. 41

Summary Financials ............................................................................................................................................................................. 41 Existing Coverage and Write Ups ........................................................................................................................................................ 44 Revenue build ...................................................................................................................................................................................... 45

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One Page Financials

Current Capitalization (Millions ) Franklin Covey Inc FC Michael Mazya, CFAShare Price 20.40 Graph Data Last Trade 20.40 Last Updated: 05/21/2017FD Shares Out. 13.8 MarketCap Common EquTotal Liab Net Liab ADV shares (k) 62.1 mazya@wharton.upenn.eduMarket Capitalization 282.0 MarketCap 282.0 ADV $mm's 1.3 www.michaelmazya.com(+) Net Debt & Min. Int 34.1 TEV 282.0 34.1 52 wk high 22.45Total Enterprise Value 316.2 Total Capital 90.5 42.0 52 week low 13.45 FC Investor Relations PageBV of Common Equity 90.5 Short Ratio 15.2(+) Total Debt & Min. Int. 42.0 Dividend Yield - Formula

= Total Capital 132.5 Exchange NYSE Hard Coded

Next Earnings Release July 5th, 2017 Links to Another Tab

Next Sell-Side Conf. May 25th, 2017Recommendation: ShortPrice Target: $12.0Total Return Objective: (41%)Major Index Cons: Russell 2k

Valuation Multiples based on Current Capitalization2014 A 2015 A 2016 A LTM 2017 E 2018 E 2019 E

TEV/Total Revenue 1.5x 1.5x 1.6x 1.7x 1.7x 1.6x 1.5xTEV/EBITDA 9.5x 10.0x 12.8x 21.1x 249.0x 19.9x 19.2xTEV/EBIT 12.8x 14.8x 21.6x 72.1x - 67.7x 63.1xPE Ratio 19.1x 31.1x 43.8x - - 282.7x 231.8x

Key Financials Actuals LTM Estimates2014 A 2015 A 2016 A LTM 2017 E 2018 E 2019 E

Total Invoiced Revenue 205.2 209.9 207.3 204.1 205.2 209.0 211.6Growth Over Prior Year 2% (1%) (1%) 2% 1%

Total Recognized Revenue 205.2 209.9 200.1 191.6 185.1 202.0 206.4Growth Over Prior Year 2% (5%) (7%) 9% 2%

EBITDA 33.2 31.7 24.7 15.0 1.3 15.9 16.4 Margin % 16.2% 15% 12% 8% 1% 7.9% 8.0%

Consolidated Adjusted EBITDA 34.7 31.7 23.2 16.8 3.2 15.9 16.4 Margin % 17% 15% 12% 9% 2% 7.9% 8.0%

Adjusted EBITDA + Growth in Deferred Revenue 34.7 31.7 30.5 29.4 23.3 22.9 21.6 Margin % 17% 15% 15% 15% 13% 11% 10%

EBIT 24.8 21.4 14.6 4.4 (9.5) 4.7 5.0Margin % 12% 10% 7% 2% (5%) 2.3% 2.4%

Net Income 18.1 11.1 7.0 (0.6) (8.9) 0.9 1.1Margin % 9% 5% 4% (0%) (5%) 0.5% 0.5%

Diluted EPS Excl. Extra Items $1.07 $0.66 $0.47 ($0.09) ($0.66) $0.07 $0.09Growth Over Prior Year (38%) (29%) (119%) 635% (111%) 22%

Consensus Estimates as of 05-02-2017 (CIQ/Factset, omitted wherever <2 sources)3Q 2017 4Q 2017 FY 2017 E FY 2018 E 2019 E

Revenue (Recognized Revenue) 44.3 65.0 191.2 208.8 -Adjusted EBITDA 1.3 13.9 12.3 19.6 -Net Income (1.3) 6.2 (1.9) 2.5 -EPS (0.1) 0.5 (0.1) 0.3 -

Management Guidance 2016A FY 2017 E 2018 E 2019 E

Adjusted EBITDA 10-14Adjusted EBITDA + Growth in deferred 35-38

Other GuidanceAAP Amounts Incoviced 50.0Client Partners (Sales People) 234.0"After Tax Cash Flow" 22.0

Education Segment Adj. EBITDA 8.2Depreciation 3.7 3.9Amortization 3.3 2.9Net Interest and Discount 1.9 2.2SBC, impaired assets, restructuring, ERP implementation, ac 6.1SBC, ERP implementation, contract termiantion, earnout adj 7.0Capex 4.0 5.4Capitalized Curriculum 2.2 8.0

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Business Overview and the Promise of the All Access Pass (AAP) HISTORY Franklin Covey was formed in 1997 when Franklin Quest Co., known for its day planners and organizational system, acquired Stephen Covey’s Covey Leadership Center, best known for “The 7 Habits of Highly Effective People.” Franklin Quest itself had been public since 1992. Franklin Quest was an early pioneer in selling personal computer software, it’s seminars on time management were widely attended, and more than three million people regularly used the Franklin Management system. however by the mid 1990’s, growth had flattened out and the stock was lagging. The purchase of The Covey Leadership Center for $160mm seemed like the panacea they needed the move their business forward. Merging the two firms proved problematic almost immediately. Separate headquarters, unequal pay, and reluctance by either side to accept change saw costs rising faster than revenues in the following years. The company started selling off non-core assets but it was not enough, and CEO Jon Rowberry resigned in 1999. He was replaced by the Chairman Robert Whitman (*Robert Whitman is still CEO) on “presumably an interim basis.”1 Whitman did not have management experience in either business, but he had served on the board of The Covey Leadership Center previously, and as CEO of the Hampstead Group he had seen his company buy $75mm of preferred stock in Franklin Covey via an entity created specifically for that purpose, Knowledge Capital2 (*Continues to own 20% of outstanding stock). He was known as a fixer based on previous work with troubled companies, and he got to work cutting extra staff, selling additional non-core assets, and buying other assets viewed as more in line with Franklin Covey’s Business.3 Franklin Covey was profitable again in 2005, following losses from 1999 – 2004. In 2008, the company split up its consumer products business from the training business. It sold Franklin Covey Products LLC (also known as Franklin Covey Organizational Products, or FCOP) to Private Equity firm Peterson Partners at a valuation of $32mm, and retained 19.5% of the new entity. Franklin Covey was also due ~$3.5 million in January of 2009 for working capital left with the entity and transaction costs. Those receivables were not received and shortly thereafter impaired. “…the financial position of FCOP deteriorated significantly late in fiscal 2009 and the deterioration accelerated subsequent to August 31, 2009.” 4 Since 2009 Franklin Covey has recorded several million dollars of charges due to uncollectable receivables from this entity, which is generally listed in filings as FCOP. The businesses are tightly intertwined however, and FC continues to extend working capital despite the risks. More information about current exposure is listed in the “Other Issues” section of this report. Joel Peterson, from Peterson Partners, with whom Franklin Covey conducted this troubled transaction, currently sits on the board of Franklin Covey.

In 2008, Franklin Covey launched “The Leader in Me” or TLIM, based on the book “The 7 Habits of Highly Effective Teens” within its education business. The book was written by Michael Covey, and based on principles introduced by his father, Stephen R. Covey. Due to the cyclical nature of the training industry, discussed in more depth under industry Analysis, the company struggled during the financial crisis. In 2013, the company acquired NinetyFive 5, doubling its sales performance practice.

AAP Franklin Covey Introduced its All Access Pass, or AAP, in Q1 of 2016. AAP offers clients access to all the material offered by Franklin Covey via a web portal, and they can use it as much as they like online. Clients would be exposed to other products within FC’s catalogue for which they had earlier not considered FC, or had not considered at all. This could in theory expand share of wallet considerably, and limited versions of the pass at a discounted price are designed to encourage roll out among a greater “population” of employees.

1 International Directory of Company Histories, Vol. 37. St. James Press, 2001. 2 http://www.bizjournals.com/dallas/stories/1999/12/27/story8.html 3 International Directory of Company Histories, Vol. 189. St. James Press, 2017. 4 Franklin Covey 2016 10-K

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Instead of having to re-sell clients on a specific program year after year, FC would be able to have a baseline offering with clients, and retention would be automatic. Initial contracts were not automatically renewable, but current ones are. The introduction of this product has been promoted as revolutionary and groundbreaking for the business. Higher growth and higher margins are expected due to three main reasons itemized by the management team in recent calls. I note how these have shifted over time in the “Changing Metrics” section of this report. Most recently, they are:

1) Higher Initial Sales Size 2) Higher Revenue Renewal Rate 3) Add-On Purchases.

Of their ~$200mm in revenue, $175mm was the portion they hoped to convert over to AAP. The higher initial sales size is described as significant:

“FOR THE VAST MAJORITY OF THESE CUSTOMERS, THEIR INITIAL PASS SPEND ALONE ON THE ALL ACCESS PASS WAS SUBSTANTIALLY GREATER THAN THEIR AVERAGE TOTAL ANNUAL SPEND AS A PREVIOUS FRANKLIN COVEY FACILITATOR CUSTOMER. SO RIGHT OUT OF THE BOX, THE AMOUNT THEY SPENT JUST ON THE PASS ITSELF WITHOUT ANY PASS EXPANSIONS OR ADD-ONS WAS SUBSTANTIALLY LARGER AND SUBSTANTIALLY IN A RANGE DEPENDING ON THE SIZE OF THE CUSTOMER COULD BE 3 OR 4 TIMES AS LARGE TO 20% LARGER, BUT IT'S A SIGNIFICANT AMOUNT FOR THE VAST MAJORITY OF CUSTOMERS.” – Q2 2017 Earnings Call

“IN THE FULL FISCAL YEAR 2015, THESE PARTICULAR 139 CLIENTS SPENT $3.7 MILLION FOR THE WHOLE YEAR, A MEDIAN OF $17,700 PER CLIENT, BASED PRIMARILY ON FACILITATOR MATERIALS. THESE SAME CLIENTS WHO ARE NOW ALL ACCESS PASS HOLDERS HAVE ALREADY SPENT $5.2 MILLION THIS YEAR – YEAR-TO-DATE THROUGH THE THIRD QUARTER, A MEDIAN SPEND OF $25,250; AND MOST OF THEM JUST BECAME PASS HOLDERS RELATIVELY RECENTLY.” – Q3 2016 Earnings Call

Higher revenue renewal rate means on the order of 90%.

“WE ALSO EXPECT 90% OR MORE OF THE SIGNIFICANTLY INCREASED AMOUNTS OF ALL ACCESS PASS REVENUE UP FOR RENEWAL IN THE THIRD AND FOURTH QUARTERS WILL ALSO RENEW.” – Q2 2017 Earning Call “WE ARE VERY ENCOURAGED THAT MORE THAN 90% OF THE ALL ACCESS PASS AMOUNTS UP FOR RENEWAL THROUGH THE FIRST AND SECOND QUARTERS RENEWED ON TIME OR EARLIER.” – Q2 2017 Earnings Call

Add on purchases refers to additional services and materials purchased by customers of AAP that are connected to the pass. I am referring it to as attach rate in the model. Sales of AAP “add-ons” have increased the total amount of AAP related sales by a bit over 20% to date. SEGMENTS Franklin Covey reports data on the following segments, as defined in the 10K. They switched segment reporting as of Q1 2016, before the announcement of AAP but likely in preparation for it. I added the percentage of revenues for reference.

Segment #1: Direct Offices – 52% of FY 2016 Revenue This segment consists of geographic sales offices that serve the United States and Canada; international sales offices located in Japan, the United Kingdom, and Australia; and public programs group. This division will include new sales offices in China that were opened on September 1, 2016 after previously having been licensed. Segment #2: Strategic Markets – 15% of FY 2016 Revenue This segment includes government services office, the Sales Performance practice, the Customer Loyalty practice, and a new “Global 50” group, which is specifically focused on sales to large, multi-national organizations. Segment #3: Education practice – 20% of FY 2016 Revenue This segment is comprised of domestic and international Education practice operations, which are centered on sales to educational institutions such as elementary schools, high schools, and colleges and universities.

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Segment #4: International Licensees – 9% of FY 2016 Revenue This segment is primarily comprised of our international licensees’ royalty revenues. Corporate & Other – 4% of FY 2016 Revenue This segment’s sales are mainly comprised of leasing, books and audio product sales, and shipping and handling revenues.

DEFERRED REVENUES One of the challenges associated with the transition to AAP has been the accounting relating to deferred revenue. Franklin Covey is collecting cash up front, but the revenue is only recognized over the life of the contract. They were initially recognizing 60% of revenue up front, but as of 08/31/2017, 100% was being deferred over the life of the contract, generally a year. Revenues from AAP add-ons are recognized immediately. The company also generates deferred revenue from its education business, “The Leader In Me”, and customer deposits round out this line item. The increase in deferred revenue associated with the transition to AAP has been depressing current year revenues and EBITDA, and this is frequently cited this as a source of confusion which is scaring away investors. Deferred revenues associated with AAP are expected to have a very high embedded EBITDA margin, 80% - 90%. To bring attention to this sum, the company introduced a new metric on top of the adjusted EBITDA and consolidated adjusted EBITDA they had been using – consolidated adjusted EBITDA plus growth in deferred revenues less certain costs. Those costs are effectively prepaid commission to the sales team, at 15%.

“GROSS MARGIN ASSOCIATED WITH THAT DEFERRED REVENUE IS VERY HIGH, ALMOST – WITH THESE INTELLECTUAL PROPERTIES CLOSE TO 95%. AND THAT WILL THEN SERVE AS – WE'LL HAVE A BANK OF DEFERRED REVENUE EMBEDDED IN WHICH IS NEARLY $5 MILLION BUT ALSO GROSS MARGIN, MOST OF WHICH IS EBITDA CONTRIBUTION TO MOVE INTO NEXT YEAR.” – Q4 2016 Earnings Call

Q2 2017 Earnings slides. EBITDA contribution from deferred revenues is expected to be 85%.

BULLISH INVESTORS & OPTIMISTIC GUIDANCE

“THE COMPANY APPEARS WELL POSITIONED IN THE TRAINING INDUSTRY AS IT COMMANDS A STRONG GLOBAL BRAND NAME, PRODUCT DIFFERENTIATION, AND IS BACKED BY ACCELERATING MULTIYEAR GROWTH EFFORTS AND MARGIN EXPANSION.”- Stonegate Capital Markets Research – March 2017 “IN CHOOSING A STOCK TICKER FC, THE COMPANY SHOULD HAVE ADDED ANOTHER F ON FC(F) GIVEN THE BUSINESS HAS QUITE ATTRACTIVE FREE CASH FLOW DYNAMICS” – Value Investors Club, Zach721, October 2016 “NEXT POINT, THE PROGRESS OF ALL ACCESS PASS CONTINUES TO BE STRONG AND IS EXPECTED TO BE EVEN STRONGER, AS THE COMPOUNDED IMPACT OF HAVING NEW ALL ACCESS PASS SALES PLUS SIGNIFICANT RENEWAL SALES FROM THE PRIOR QUARTERS BEGINS TO KICK IN IN THE COMING QUARTERS.” – Q1 2017 Earnings Call “FOR FULL FISCAL 2017, WE EXPECT TOTAL ALL ACCESS PASS AND PASS-RELATED AMOUNTS INVOICED TO BE IN THE RANGE OF $50 MILLION, MAYBE EVEN SLIGHTLY ABOVE $50 MILLION, COMPARED TO $23.2 MILLION FOR THE FULL FISCAL YEAR 2016. SO, WE HAD HOPED THAT WE MIGHT BE ABLE TO DOUBLE THIS YEAR. WE'RE BELIEVING THAT IT IS LIKELY THAT WE WILL BE ABLE TO DO THAT.” – Q2 2017 Earnings Call

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HISTORICAL STOCK PERFORMANCE All below charts are from FactSet, and are total return. I have selected these particular ranges to give a sense of the different time periods discussed in the history above. Franklin Quest in the period leading up to the acquisition of the Covey Leadership Center

Challenges post acquisition and restructuring

Return to profitability up to crisis and sale of FCOP

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Financial crisis to present day

Post-acquisition to present day

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Industry Analysis and Competitive Position

“ACCORDING TO THE TRAINING MAGAZINE 2016 TRAINING INDUSTRY SURVEY, THE TOTAL SIZE OF THE U.S. TRAINING INDUSTRY IS ESTIMATED TO BE $70.7 BILLION, WHICH IS ESSENTIALLY FLAT COMPARED WITH THE PRIOR YEAR. ONE OF OUR COMPETITIVE ADVANTAGES IN THIS HIGHLY FRAGMENTED INDUSTRY STEMS FROM OUR FULLY INTEGRATED PRINCIPLE-CENTERED TRAINING OFFERINGS, MEASUREMENT METHODOLOGIES, AND IMPLEMENTATION TOOLS TO HELP ORGANIZATIONS AND INDIVIDUALS MEASURABLY IMPROVE THEIR EFFECTIVENESS. - 2016 10-K

Despite the difficulties that Franklin Covey has faced in the past, it been highly successful in the corporate coaching business, consolidating market share for well over a decade. I gathered industry data from IBISWorld, Training Magazine, and the Census Bureau / Bureau of Labor statistics starting from 2002 on for a frame of reference.5 6 7 IBIS data was in inflation adjusted 2016 dollars which I corrected using a bls.gov adjustment factor.

The data reflects the highly cyclical nature of the industry, and the fact that it has never come close to recovering from the 2008 – 2009 crisis. Pre and post dot com bubble data showed similar trends. Lags between economic downturns and cutting of training spend vary by industry but are generally about six to nine months.8 As new data gets added, these lags seem to be decreasing. 9 Franklin Covey has shifted its business mix over time, so I attempted to match the historical segments which are captured by my industry data.

5 IBISWorld Industry Reports - Business Coaching - NAICS 611430 6 US Census Bureau - Revenue of professional trainings (NAICS 61143) 7 Recent Training Magazine Industry reports available online, historical from miscellaneous sources 8 https://eric.ed.gov/?id=ED504404 9 https://eric.ed.gov/?id=ED501686

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Industry Size Industry Size - US OnlyIBISWorld Analysis 4,424.7 5,015.3 5,781.5 6,445.2 7,177.3 8,198.9 8,596.1 8,079.5 8,359.1 8,645.4 8,975.7 9,227.9 9,757.3 10,362.6 10,513.7US Census Bureau Analysis 6,385.0 6,545.0 6,923.0 6,850.0 7,505.0 7,646.0 7,927.0 8,140.0Training Magazine 15,100.0 13,800.0 13,300.0 13,500.0 15,800.0 16,300.0 15,400.0 7,000.0 6,900.0 9,100.0 7,400.0 5,700.0 6,100.0 8,000.0 7,500.0Industry Size 9,762.4 9,407.7 9,540.8 9,972.6 11,488.6 12,249.5 11,998.1 7,154.8 7,268.0 8,222.8 7,741.9 7,477.6 7,834.4 8,763.2 8,717.9Growth (%) (4%) 1% 5% 15% 7% (2%) (40%) 2% 13% (6%) (3%) 5% 12% (1%)

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Industry Data

Industry Size Growth (%)

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In comparing it to the industry data and isolating relevant segments, I made some educated guesses given fewer disclosures in early years, and the data is not corrected for fiscal years vs. the industry data being in calendar years. I have also chosen to exclude the 2016 change in deferred revenue balance, but the model can account for it if you wish to see the results.

Looking at the last line in the data above, the narrowing focus to the US institutional/corporate training business really stands out. Putting it all together, a surprising and impressive chart appears.

I am not sure it is clear to all just how well they have done over the past decade, especially given the volatility of the stock. I have seen comments describing the coming quarters/years as finally FC’s time to shine after past troubles. A more accurate narrative would be that they have narrowed themselves to a business where they have been doing extraordinarily well. FC faces significant challenges going forward that makes this kind of performance implausible going forward.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Historical SegmentsClassification System 2001-2009Organizational Solutions Business Unit -Organizational Solutions Grou 110,675 82,095 74,306 61,047 76,114 71,108 81,447 91,287 83,193International 45,518 41,279 40,688 48,318 54,074 56,701 57,674 59,100 43,369Total OSBU 156,193 123,374 114,994 109,365 130,188 127,809 139,121 150,387 126,562

Classification System 2010 - 2015Sales by Channel:U.S./Canada direct 68,707 85,397 86,698 96,899 99,128 101,959International direct 26,110 27,464 28,773 29,558 28,588 27,217International licensees 9,198 12,590 14,301 15,452 17,065 17,100National account practices 19,447 22,780 27,367 37,042 48,645 51,354Self-funded marketing 8,075 9,013 8,368 5,866 5,938 5,547Other 5,337 3,560 4,949 6,107 5,801 6,764

Classification System 2016Sales by Segment:Direct offices 115,085 113,087 103,613Strategic markets 31,841 37,039 29,778Education practice 30,883 33,128 40,361International licensees 17,065 17,100 17,629Corporate and other 10,291 9,587 8,674Total Sales 439,781 332,998 307,160 275,434 283,542 278,623 284,125 260,092 130,118 136,874 160,804 170,456 190,924 205,165 209,941 200,055

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Franklin Covey DataMost comparable data

US Training / Non Consumer 110,675.0 82,095.0 74,306.0 61,047.0 76,114.0 71,108.0 81,447.0 91,287.0 83,193.0 88,154.0 108,177.0 114,065.0 133,941.0 177,809.0 183,254.0 173,752.0(-) Canada Adjustment 6,157.0 7,080.0 8,574.0 9,866.0 8,780.0 6,640.0 4357(-) Japan 16,652.0 14,446.0 14,997.0(-) UK Adjustment 6,899.0 8,997.0 7,716.0(-) Australia 4,623.0 3,774.0 3,404.0Education/Non-US Adjustment factor - Aprox.(+) Change in deferred revenue balanceFranklin Covey US Training Bus. 110.7 82.1 74.3 61.0 76.1 71.1 81.4 91.3 83.2 82.0 101.1 105.5 124.1 140.9 149.4 143.3Growth (%) (26%) (9%) (18%) 25% (7%) 15% 12% (9%) (1%) 23% 4% 18% 14% 6% (4%)

% of total FC Business 25% 25% 24% 22% 27% 26% 29% 35% 64% 60% 63% 62% 65% 69% 71% 72%

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INDUSTRY DYNAMICS ARE DETERIORATING Training magazine Training magazine, which I found thanks to the regular mention in the 10-Ks, has been a great resource to better understand the dynamics shaping the business. Their annual surveys on industry size and trends are conducted carefully and professionally, and the commentary does a good job of capturing the zeitgeist in this narrow corner of the business universe. I did not assign much weight to the forward-looking commentary. The last few reports are made available online. 10 11 12 13 The headline number of industry size has been reported in every Franklin Covey 10-K since 2009, but the two numbers that follow in the report which are never mentioned in the 10-K are more telling, showing what portion of this money goes to vendors like FC.

14 Going back to 2002, the trend for outside share can be seen below

What the data they themselves reference shows is that the total addressable market is 1/7th of what they mention. Even more crucially, as per the grey line above, the GFC led to a fundamental shift in how institutions split their training budget between internal costs and outside vendors like FC. Their TAM got cut by more than half and has stabilized at the significantly lower level. Management is well aware of the data. Pre-2007 they cite data from SIMBA research which captures this external share more directly. Some research notes this point, but much does not. In certain cases, a sell-side analyst covering the stock seems to be

10 https://trainingmag.com/sites/default/files//2013_Training_Industry_Report.pdf 11 https://trainingmag.com/sites/default/files/magazines/2014_11/2014-Industry-Report.pdf 12 http://cdn.coverstand.com/20617/278428/5a501562469c31a776570286dc694b50fcbe3364.7.pdf 13 https://trainingmag.com/sites/default/files/images/Training_Industry_Report_2016.pdf 14 Same as above

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Training Magazine Annual Industry Report Data

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Outside vendor share

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aware of the data, but their successor reverts to using the larger headline number. I did not find any reason to believe that this structural break is going to reverse in coming years. NEW COMPETITORS Franklin Covey is now switching to digital delivery, and the potential for stronger margins and better renewal rates is real. However, the competition in this new world is significantly more threatening as well. In their industry, Franklin Covey has been number one in market share and growing. They have acknowledged the leverage this provides them. In the digital world, they face not only goliaths, but many up and coming Davids as well. With the All Access Pass, FC opens itself up to competition from different types of competitors, and many with varying business models.

15 The All Access Pass has far fewer courses, costs the same or more, and most importantly, requires cash up front. Management and bullish investors have frequently cited how the deferring of revenue is giving short shrift to FC for the cash coming in because they invoice an entire year up front and take in the cash.

“NUMBER ONE, WHILE MANY OF THE SUBSCRIPTIONS OFFERINGS BILL AND COLLECT MONTHLY. THE ALL ACCESS PASS IS BILLED AND COLLECTED UPFRONT AHEAD OF THE TIME WHEN WE ACTUALLY RECOGNIZED MOST OF THE REVENUE. SO IT DOESN'T AFFECT OUR CASH FLOW AND IN FACT IT IMPROVES THE CASH FLOW AS A PERCENTAGE OF REPORTED REVENUE.” – Q1 2017 Earnings Call

From the perspective of a client however, this is extraordinarily onerous. Training professionals at companies have been forced to tighten their belts time and time again as companies try to cut costs or allocate budget to compliance training [which Franklin Covey does not offer directly, though they do touch on ethics issues.] Based on conversations I have had with HR and Training professionals, they are frequently walking a tight rope between implementing what they view as the best possible training regime and the limited budget they have been granted. This is especially true in the smaller companies which make up the majority of FC’s client base. If they succeed in winning a large share of wallet, they are also then effectively asking these companies to spend a large share of their budget up front which puts the individuals responsible for training in a precarious position should needs change. Competing services offer monthly memberships, billed and collected monthly, free trial periods, free intro classes and other incentives. Dozens of new competitors have been established over the past several years, and new ones continue to be founded. Franklin Covey meanwhile has been adamant that the shift to FC is not going to be detrimental to cash flow. This may be true from a technical perspective given how they are transitioning customers now, but it does not acknowledge the realities of the challenges they face going forward. If we see a pay as you go option or other flexibility on payments terms from Franklin Covey with regards to AAP, I would view it very negatively.

15 Companies are not perfect comps, but chosen by me for illustrative purposes

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“Big Tech” companies, especially big tech companies that have been more successful on the consumer side than the business side, want to own the kind of relationships Franklin Covey has historically had. They are willing to spend significant amounts of money to get there, and are then willing to continue spending money to show they are serious about the space. Before itself being acquired by Microsoft, LinkedIn bought Lynda.com, and this year they produced their first annual workplace training report. 16

At FC, this kind of spending would be viewed very differently.

Q – “OKAY, PERFECT. THEN MAYBE JUST ONE MORE IF I COULD. WITH RESPECT TO, I GUESS, INVESTMENTS IN ALL ACCESS PASS MAY, PARTICULARLY INTERNATIONALLY, I GUESS, TO USE A CLICHÉ, WHAT INNING WOULD YOU SAY WE'RE IN THERE?” A – “IN TERMS OF THE INVESTMENT SIDE, I THINK WE'RE KIND OF AT THE END OF THE BIGGEST PART OF THE INVESTMENT CYCLE ON THAT.” … “BUT WE FEEL LIKE WE'RE AT THE – CLOSE TO THE END OF THAT SPENDING PART AND GETTING READY TO START TO BEGIN TO HARVEST.” - CEO Robert Whitman responding to an analyst question on the 2Q 2017 Earnings Call

At an EV of ~320mm, FC may seem like an easy purchase for a big tech firm, but I think this is unlikely in the short term. The structure and flow of much of their content is a poor match for the online first implementation of most the content presented by competitors, and would be difficult to integrate without spending a lot of money re-doing it. The value would have to come primarily from the “7 habits” brand, and the younger Silicon Valley set may not find it quite as compelling for reasons I describe below. None the less, I would view an acquisition by a large tech firm as one of the primary risks to this short.

THE BRAND APPEARS TO BE WEAKENING

Stephen Covey (Senior)

Stephen Covey, an icon in the business world, died in 2012. It is not clear that his role can ever be fully replaced. His frequent media and academic appearances were a powerful sales pitch for the company that bears his name, and the “7 habits” brand is core to their business. He was also still very relevant and contributing in big ways right up until the end. The core of their fast-growing education business was elucidated and brought to mainstream attention by an article that Stephen Covey wrote in 2010. He published it digitally first in the then still maturing Huffington Post. His death was linked to complications from a bicycling injury he sustained in the hills outside of Provo, Utah, at age 79.

16 https://learning.linkedin.com/content/dam/me/learning/en-us/pdfs/lil-workplace-learning-report.pdf

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Franklin Planner

The demise and eventual sale of the paper planner business was more painful than it may have seemed at first, as the seasonal nature of ordering planners likely helped keep the FC name present in customers’ minds.

17 Google trends has data on this term going back to 2004, but that doesn’t begin to capture the full decline. When they partnered with LG for Franklin Quest branding on a business oriented cell phone, a writer covering the collaboration first felt obligated to explain who they were, and then generously described the brand as “insanely retro”. This was almost ten years ago in 2008. 18

“WHAT DO AN OLD-SCHOOL PAPER DAY PLANNER AND A PHONE WITH A 3-INCH OLED HAVE IN COMMON? IF YOU ANSWERED "ABSOLUTELY NOTHING," YOU'D BE CORRECT “ - Chris Ziegler, Engadget

Trends Data Broader Google Trends data is not encouraging either. The result for “The 7 habits of highly effective people” is quite resilient at first glance, but if you exclude the term “pdf” it gets much worse. None of their other brands have ever come close to 7 habits.

I don’t want to extrapolate too far from this given the limitations of Trends data, the point I want to make here is that their competitive position is, at best, not improving.

17 Google Trends Data, 18 https://www.engadget.com/2008/12/07/lg-goes-insanely-retro-with-franklin-planner-branding-on-su100-p/

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In the context of AAP, this calls into question their ability to keep growing market share as they have been. In recent quarters when even adding back deferred revenue seemed to provide underwhelming results Part of the slow-down has been attributed to a longer sales cycle resulting from more approvals from upper management to get a deal signed.

“THEY'RE BUYING AN IP PASS. THERE'S A LEGAL COMPONENT THERE. SO, THERE ARE MORE PEOPLE THAT ARE INVOLVED IN THE DECISION OR AT LEAST INVOLVED IN PROCURING IT ON THE CLIENT SIDE. IT HAS BEEN THE CASE IN THE PAST.” – Q2 2017 Earning Call

In an industry as cyclical as theirs, Franklin Covey has placed itself into a precarious position. If they don’t get customers to shift to AAP and raise ticket sizes they will have failed at their strategy. If they do succeed, they put themselves at risk of having their entire contract re-negotiated down or just cut the next time the economy hiccups given their weak position. Skipping ahead somewhat, the latter concern is probably optimistic, as I don’t believe Franklin Covey is having the success they describe in term of getting more value from clients via AAP.

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AAP Contracts Analysis FC has a significant amount of government contracts for their core training business, and the education business fundamentally targets publicly funded schools given the structure of education in the US. Government data on outside contractors in made public by law, but it is scattered across many sources. Federal is somewhat easier than states, but both are available. For education contracts, availability of data varies by state, country, school district, and even by school. AAP I downloaded every government contractor transaction for as long as they are still releasing data. In this case, I could only find data with specifics going back to 2008. Aggregated data with less information goes back to around 2000, but I did not find that helpful without all the supporting information on price, timing, and sales cycle. The contracts themselves were less also clear in that period. USASpending.gov offers this data at an aggregate level via their website19, but this omits most of the important things and is delayed. Fortunately, full data can be pulled via their API 20 or by downloading their data dumps via very large CSV files21. The larger CSVs will often crash excel, so be careful on phones or lighter weight laptops. Of the hundreds of thousands of entries, I then pulled out only Franklin Covey related spending to find relevant users. Most, but by no means all, of this spending will fall under NAICS code 61143 and sub-codes thereof. The relevant spending will be Franklin Covey Client Sales, as distinct from their planner and book business which I viewed as distinct and more relevant for FCOP. Some of the data will fall under subcontracts, which will not always show up automatically depending on where the data is sourced. An example looks like this, I have brought forward the relevant parts.

I could slice and dice it different ways, but the goal was to find regular customers that had recently switched to AAP, and had pricing data/ contracts that were publicly available in full.

19 https://www.usaspending.gov/transparency/Pages/default.aspx 20 https://www.usaspending.gov/DownloadCenter/API/Pages/api.aspx 21 https://www.usaspending.gov/DownloadCenter/Pages/DataDownload.aspx

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The data above is a pivot table of FC spending by the government through early April when I pulled the data. I found regular buyers of products that were being clearly substituted for AAP. I was also able to find the applicable pricing on many of the contracts on www.gsa.gov. You can search for Franklin Covey at the top to get schedules which itemize prices22. The most recent pricing list is often available. Pricing on the non-AAP portion of the business is very impressive.

22 https://search.gsa.gov/search?utf8=%3F&affiliate=gsa.gov&query=franklin+covey&commit=

Quarters (All)maj_agency_cat (All)

Sum of dollarsobligated Column LabelsRow Labels 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Grand Total1100: EXECUTIVE OFFICE OF THE PRESIDENT $1,460.0 ($786.4) ($1,120.6) (447.0)1330: NATIONAL OCEANIC AND ATMOSPHERIC ADMINISTRATION ($265.0) (265.0)1605: OFFICE OF THE ASSISTANT SECRETARY FOR ADMIN AND MANAGEMENT $0.0 0.097AK: DEFENSE INFORMATION SYSTEMS AGENCY (DISA) $129.0 129.07527: INDIAN HEALTH SERVICE $111.1 $353.1 $308.1 772.397ZS: U.S. SPECIAL OPERATIONS COMMAND (USSOCOM) $3,113.2 3,113.29748: DEFENSE HUMAN RESOURCES ACTIVITY $3,462.1 3,462.18800: NATIONAL ARCHIVES AND RECORDS ADMINISTRATION $4,894.4 4,894.41435: BUREAU OF OCEAN ENERGY MANAGEMENT $5,230.0 5,230.0959P: PRETRIAL SERVICES AGENCY $5,490.5 5,490.59506: FEDERAL ELECTION COMMISSION $5,670.7 5,670.72046: OFFICE OF THE COMPTROLLER OF THE CURRENCY $6,375.0 6,375.07524: FOOD AND DRUG ADMINISTRATION $7,000.0 7,000.07022: FEDERAL EMERGENCY MANAGEMENT AGENCY $7,015.2 7,015.29594: COURT SERVICES AND OFFENDER SUPERVISION AGENCY $7,197.8 7,197.81205: USDA, OFFICE OF THE CHIEF FINANCIAL OFFICER $7,377.8 7,377.82044: UNITED STATES MINT $7,777.8 ($328.6) 7,449.24705: OFFICE OF THE ADMINISTRATOR(ACMD) $7,528.4 7,528.49568: BROADCASTING BOARD OF GOVERNORS $7,875.0 7,875.01204: OFFICE OF INSPECTOR GENERAL $9,500.0 9,500.01438: OFFICE OF SURFACE MINING, RECLAMATION AND ENFORCEMENT $9,688.8 9,688.81524: DRUG ENFORCEMENT ADMINISTRATION $5,559.7 $5,043.3 10,603.07529: NATIONAL INSTITUTES OF HEALTH $3,891.0 $7,604.8 ($23.9) 11,471.97001: OFFICE OF PROCUREMENT OPERATIONS $14,192.6 14,192.61443: NATIONAL PARK SERVICE $3,629.4 $3,629.4 $5,500.0 $5,500.0 18,258.87523: CENTERS FOR DISEASE CONTROL AND PREVENTION $21,425.4 21,425.42036: BUREAU OF THE FISCAL SERVICE $10,996.6 ($10,996.6) $21,859.5 21,859.512C3: NATURAL RESOURCES CONSERVATION SERVICE $22,350.9 22,350.997DH: DEFENSE HEALTH AGENCY (DHA) $24,900.0 24,900.04740: PUBLIC BUILDINGS SERVICE $6,677.9 $18,229.4 24,907.31540: FEDERAL PRISON SYSTEM / BUREAU OF PRISONS $24,948.9 24,948.91549: FEDERAL BUREAU OF INVESTIGATION $14,450.0 $13,734.5 28,184.52026: FINANCIAL CRIME ENFORCEMENT NETWORK $28,471.3 28,471.39508: NATIONAL TRANSPORTATION SAFETY BOARD $18,059.6 $26,578.1 ($15,931.3) 28,706.49761: DEFENSE THREAT REDUCTION AGENCY (DTRA) $29,075.4 ($0.1) 29,075.31450: BUREAU OF INDIAN AFFAIRS $9,512.4 $4,416.3 $15,622.2 29,550.91501: OFFICES, BOARDS AND DIVISIONS $10,808.8 $19,664.8 30,473.66800: ENVIRONMENTAL PROTECTION AGENCY $14,849.7 $8,807.9 $3,387.6 $3,891.5 30,936.62001: DEPARTMENTAL OFFICES $31,039.5 31,039.597AT: DEFENSE SECURITY COOPERATION AGENCY $24,668.4 $16,030.4 40,698.91550: OFFICE OF JUSTICE PROGRAMS $29,445.6 $19,998.8 49,444.41434: GEOLOGICAL SURVEY $26,249.3 $19,014.7 $5,575.8 50,839.77015: FEDERAL LAW ENFORCEMENT TRAINING CENTER $28,880.9 $22,238.9 51,119.912D2: FARM SERVICE AGENCY $8,624.0 ($2,611.0) $49,463.8 ($2,465.9) 53,010.94900: NATIONAL SCIENCE FOUNDATION $12,219.4 $6,644.9 $22,376.6 $14,004.7 55,245.68900: ENERGY, DEPARTMENT OF $5,150.0 $5,350.0 $6,336.6 $363.4 $97,450.2 ($44,997.8) $0.0 69,652.41406: DEPARTMENTAL OFFICES $70,738.6 70,738.67014: U.S. CUSTOMS AND BORDER PROTECTION $29,299.0 $9,718.5 $4,922.1 $8,960.0 $9,672.0 $19,185.8 81,757.47012: U.S. IMMIGRATION AND CUSTOMS ENFORCEMENT $37,308.1 $45,797.9 83,106.03100: NUCLEAR REGULATORY COMMISSION $44,354.1 $57,738.1 ($13,855.1) $14,505.6 ($1,333.4) 101,409.32400: OFFICE OF PERSONNEL MANAGEMENT $3,200.4 ($190.0) $36,478.6 $65,908.2 105,397.27008: U.S. COAST GUARD $26,243.4 $6,608.5 $3,611.4 $9,020.2 $3,602.4 $21,647.1 $26,614.9 $8,765.5 106,113.41540: FEDERAL PRISON SYSTEM $9,979.1 $28,150.0 $69,774.2 $22,300.0 130,203.212C2: FOREST SERVICE $88,576.8 $47,027.7 $7,708.1 $3,700.0 147,012.597AS: DEFENSE LOGISTICS AGENCY ($21,789.0) $103,047.8 $51,586.0 $15,168.0 $14,934.0 162,946.89100: EDUCATION, DEPARTMENT OF $265.0 $64,805.0 $124,978.8 190,048.84735: FEDERAL ACQUISITION SERVICE $191,789.9 191,789.912K3: ANIMAL AND PLANT HEALTH INSPECTION SERVICE ($309.4) $4,666.8 $5,582.1 $142,412.4 ($48,713.8) $47,169.9 $64,190.0 214,998.11422: BUREAU OF LAND MANAGEMENT $5,070.3 $150,598.0 $47,343.2 $21,993.3 $826.1 225,830.91560: ATF ACQUISITION AND PROPERTY MGMT DIV $174,691.3 $55,437.6 $8,461.0 238,589.897F2: DEPT OF DEFENSE EDUCATION ACTIVITY (DODEA) $240,578.4 240,578.44732: FEDERAL ACQUISITION SERVICE $39,419.1 $76,471.8 $94,145.5 $29,449.3 $4,983.3 244,469.02800: SOCIAL SECURITY ADMINISTRATION $21,300.5 $100,682.2 $124,862.9 246,845.67003: U.S. CITIZENSHIP AND IMMIGRATION SERVICES $2,978.5 ($349.0) ($483.5) $88,310.4 $70,934.3 $92,400.0 ($355.3) 253,435.51406: OFFICE OF POLICY, MANAGEMENT, AND BUDGET $211,809.0 ($1,875.2) ($10,565.2) $4,670.3 $89,654.0 293,692.82050: INTERNAL REVENUE SERVICE $4,317.5 $41,421.9 $72,433.8 $39,784.0 $97,093.3 $19,437.3 $40,172.3 $55,083.3 369,743.58600: HOUSING AND URBAN DEVELOPMENT, DEPARTMENT OF $58,887.9 $315,802.9 374,690.81406: OFFICE OF POLICY, BUDGET AND ADMINISTRATION $326,835.0 $69,686.5 396,521.597AZ: DEFENSE COMMISSARY AGENCY (DECA) $177,909.8 $66,400.0 $4,350.0 $113,836.5 $138,523.3 $55,000.0 556,019.51448: U.S. FISH AND WILDLIFE SERVICE $3,760.0 $16,911.3 $53,795.0 $68,160.0 $57,663.1 $187,985.9 $75,169.5 $67,363.2 $6,303.1 $85,399.7 $19,000.0 641,510.97200: AGENCY FOR INTERNATIONAL DEVELOPMENT $75,317.0 $90,778.0 $54,840.5 $174,891.2 $17,410.6 $240,487.9 $27,370.6 681,095.81900: STATE, DEPARTMENT OF $310.8 $99,340.3 $64,156.0 $30,120.8 $78,618.3 $104,785.6 $35,720.0 $119,994.7 $139,648.8 $12,183.3 684,878.65700: DEPT OF THE AIR FORCE $47,098.9 $136,095.1 $301,528.0 $132,845.3 $138,175.5 $4,114.1 $198,839.5 $90,014.5 1,048,710.912F2: FOOD AND NUTRITION SERVICE $21,389.3 $12,815.0 $8,052.5 ($265.1) $931,487.6 $85,000.0 1,058,479.297BZ: DEFENSE FINANCE AND ACCOUNTING SERVICE (DFAS) $51,795.7 $1,536,071.5 ($83,891.5) $141,749.2 ($456,394.6) 1,189,330.38000: NATIONAL AERONAUTICS AND SPACE ADMINISTRATION $13,493.3 $56,106.9 $254,944.2 $96,208.4 $257,461.5 $42,672.2 $95,439.5 $142,825.2 $260,778.6 $56,026.2 1,275,956.14730: FEDERAL ACQUISITION SERVICE $249,022.7 $686,559.5 $425,727.9 $212,144.4 1,573,454.53600: VETERANS AFFAIRS, DEPARTMENT OF $177,789.2 $276,296.0 $141,758.5 $175,729.5 $307,323.4 $353,922.3 $395,269.9 $364,117.5 ($36,775.2) $185,946.5 $7,477.0 2,348,854.72100: DEPT OF THE ARMY $612,312.3 $887,396.1 $501,854.8 $429,744.2 $342,125.1 $577,564.0 $273,828.9 $253,252.7 $557,089.9 4,435,167.91700: DEPT OF THE NAVY $25,726.2 $1,339,438.5 $516,513.0 $901,371.8 $639,926.3 $300,120.8 $259,129.4 $464,279.3 $677,966.6 $620,419.7 $46,337.6 5,791,229.2Grand Total 485,635 3,429,889 4,184,904 3,717,691 2,492,637 2,256,009 1,433,918 3,056,861 2,326,163 3,095,477 181,848 26,661,031

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GSA also lists other resources to explore government contracts, the most important of which was FedBizOps23

In practice, you can generally find a specific contract just as well by just typing the data from the original USASpending.gov data into google, but FBO allowed more precision. From here I could find the exact data around AAP terms for different size clients, and the actual contracts they signed. I had earlier identified government customers who had converted to AAP and how much they were spending, but I was -and am – concerned around just how representative these clients were in terms of switching speed, objectives, willingness to spend, and numerous other factors. For these reasons, despite a great deal of effort and energy spent working on it, I eventually wrote off most of the pure statistical data gleamed from this massive data set. Instead, the contracts helped spell out the nuances of the product and sales terms much better. They further served as an independent check on the data we have been given by management as to what has been happening.

Some contracts appeared to be in line with expectations – management had shown pricing from $150 – $250 per seat

23 https://www.fbo.gov/

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Other contracts seemed to imply either dramatic discounting or built in optionality for future years which could be pulled.

Other contracts contained language implying that “add-on” spending was going to be incredibly hard to come by, or that they were discounting indirectly.

One interesting quirk is the presence of sole source contracts. That is, someone wanted specifically an FC training, and had to file a form explaining why they did not want any other product. There was no lack of competition of course. With decreasing brand awareness, I wonder how these will trend over time.

I have not seen any other market participant using this data to look at FC or any data remotely similar. The contracts above are just a portion of what was uncovered. More contracts and more data is being added constantly. The take-aways from this analysis are straight-forward: the terms of clients converting to AAP are often not nearly as clear as generally described, and Franklin Covey is likely discounting directly or discounting indirectly by selling a larger amount of services now to show the growth in “deferred revenue” while impairing future periods. If they are in fact taking in cash now but short-changing the future, this should hypothetically manifest itself in confusing deferred revenue numbers that seem out of line with the business. Based on my efforts to decipher the numbers presented to investors on AAP, I believe this may already be happening. Lastly, these contracts cast additional doubt as to how much add-on revenue we could reasonably hope to see going forward.

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Leader in Me Contracts and Funding Analysis My primary research process here was similar, but the data was more widely distributed between states, counties, cities, districts etc. After reading through countless PTA meeting minutes and school board acquisition meetings, I was able to isolate spending on “The Leader In Me” or TLIM, and in some cases I was able to find the specific documents relating to purchases.

Again, pricing was not always exactly as described by the management.

MICHAEL COVEY - AND THEN WE ALSO HAVE A MEMBERSHIP PACKAGE WHICH IS A RENEWAL SUBSCRIPTION SERVICE, BASICALLY IT WORKS JUST LIKE ALL ACCESS PASS, IT'S KIND OF ALL ACCESS PASS EQUIVALENT FOR EDUCATION. AND THAT'S ABOUT $8,000 A YEAR, AND... ROBERT WHITMAN – PER SCHOOL MICHAEL COVEY - YEAH, PER SCHOOL. AND SO OUR GOAL THERE IS – LAST YEAR WE HAD 94% RENEWAL ON THAT, AND SO WE JUST THINK ABOUT IT IN TERMS OF, BOY, BRING ON 800 NEW SCHOOLS, GET 95% OF THEM TO RENEW THEIR SUBSCRIPTION FOR LEADER IN ME, AND IT'S A REALLY GOOD BUSINESS MODEL. – Q1 2017 Earnings Call

24

25 In other cases, the pricing was fine, but the contract terms were surprising. I was under the impression that they collected the cash up front here just as they did with AAP, though this was never explicitly stated. Emphasis in red is mine.

26 As I found more contracts, I was able to find pricing that appeared to be significantly lower than expected. In other cases, Franklin Covey is only billing in the future, a stark departure from what has been implied about their deferred revenue.

24 Cedar Falls, Iowa School District 25 Cartmell Elementary, Kentucky 26 Browning Springs Middle School, Kentucky

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POTENTIAL DISCOUNTING, VERY INDIRECTLY, AND VERY STRANGELY

<Q - TREVOR ROMEO>: SURE. OKAY. SO, SECOND QUESTION, I GUESS WOULD BE, WOULD ANY OF THE PROPOSED CUTS TO THE FEDERAL GOVERNMENT BUDGET POSSIBLY IMPACT THE GRANTS OR FUNDING FOR THE EDUCATION BUSINESS? <A - ROBERT A. WHITMAN>: SHAWN, DO YOU WANT TO SPEAK? <A - SHAWN D. MOON>: I DON'T THINK SO, BECAUSE MOST OF THE FUNDS THAT ARE FUNDING THE LEADER IN ME SCHOOLS ARE NOT COMING FROM FEDERAL GRANTS. WE HAD ONE OF THOSE IN THE PAST RIGHT TO THE TOP GRANT THAT FINISHED ITS COURSE A YEAR AGO, AND MOST OF OUR FUNDING IS FROM LOCAL SCHOOL BUCKETS OR DISTRICT FUNDING OR SOMETIMES COMMUNITY SUPPORT. SO I DON'T THINK WE DON'T ANTICIPATE IT HAVING ANY IMPACT. – Q2 Earnings Call

Having looked at Houghton Mifflin Harcourt closely in the past, I knew that educations was an extraordinarily tough business, and 8k per school for just the software without all the required add-ons was a very high number given the lack of history in the classroom. Reading the minutes of a PTA meeting in the Bethlehem, PA school district looking for pricing data, I found the below.

DR. ROY BEGAN TO LEAD THE DISCUSSION BY TALKING ABOUT THE CORE COMPONENTS OF THE ROADMAP FOR THE LEADER IN ME PROGRAM. THE LEADER IN ME (LIM) MODEL IS ESSENTIALLY ABOUT COMMUNICATING TO STUDENTS ABOUT THEIR WORTH AND POTENTIAL SO CLEARLY THAT THEY BEGIN TO SEE IT THEMSELVES AND ARE INSPIRED BY THEIR EDUCATORS. LEADERSHIP IS TAUGHT DIRECTLY TO STUDENTS AND IS ALSO WOVEN INTO THEIR LESSONS. LIM EMPOWERS THE EDUCATORS AND THE STUDENTS TO HAVE A VOICE AND BEGIN TO BUILD TRUST AND A SENSE OF WHAT THEY ARE RESPONSIBLE TO FOR OTHERS AND THE IMPACT THEY MAKE ON THE WHOLE SCHOOL. WITH LIM, STUDENTS SET THEIR OWN GOALS AND HAVE TO SHARE THEIR PROGRESS WITH OTHERS. THEY LEARN THE “7 HABITS OF HIGHLY EFFECTIVE PEOPLE” WHICH WAS DEVELOPED BY STEPHEN COVEY AND IS USED AS THE FRAMEWORK FOR LIM. MR. SMITH CLOSED WITH SAYING THAT EVERY CHILD HAS LIMITLESS WORTH AND POTENTIAL AND WE JUST KEEP TELLING THEM THAT UNTIL THEY BELIEVE IT! 27

They sound like salespeople, but that’s not unbelievable, perhaps they were going to earn a commission.

“DR. ROY SAID THAT THE LEADER IN ME HAS BEEN MADE POSSIBLE THROUGH GENEROUS DONATIONS BY COMMUNITY MEMBERS AND THE FUNDRAISING EFFORTS OF A NEW NOT---FOR---PROFIT, LEHIGH VALLEY LEADER FOUNDATION (LVLF). THIS GROUP, THE LVLF, HAS NEGOTIATED A DISCOUNT WITH FRANKLIN COVEY SO THAT THE COST WILL BE $2 PER CHILD, PER YEAR.”28

This raised some very big questions. Starting with the district, and then with Mr. Smith and Dr. Roy. Looking up the school district, I found that it was the sixth largest in the country. Not small potatoes.

And Dr. Roy who I thought to be a salesman of some kind is actually the superintendent of that district. With that information, going back and re-reading the whole meeting is even more odd.

27 https://www.beth.k12.pa.us/ParentsStudents/PACmeetings/151029_PAC_Minutes.pdf?-session=BASDStaffMember:42F9409E0540c36688rqo1747598 28 Ibid.

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29 I did not find too much on Mr. Smith aside from him being chairperson and I moved onto the two foundations mentioned. Having worked with foundations for many years, I had a good sense of where to begin digging, and almost immediately I began to encounter information that was highly concerning. The more recent document mentioned the Lehigh Valley Leader Foundation. This was actually organized as a donor advised fund, a kind of charitable entity where a donor theoretically has less control over how their funds are disbursed, but is spared the administrative burden to a large degree and can be significantly more anonymous. The second foundation mentioned was the I Am a Leader Foundation. Their website was easy to find, and it was instantly clear that they were deeply intertwined with Franklin Covey the corporation.

“LEADER.ORG OFFERS GRANTS TO PUBLIC SCHOOLS THAT HAVE A STRONG INTEREST AND COMMITMENT TOWARD LONG-TERM IMPLEMENTATION OF THE LEADER IN ME—A WHOLE-SCHOOL TRANSFORMATION PROCESS BASED ON STEPHEN R. COVEY’S THE 7 HABITS OF HIGHLY EFFECTIVE PEOPLE.” 30 “THE MAJORITY OF OUR GRANTS ARE SPONSORED BY THE PANDA CHARITABLE FOUNDATION, WHOSE MISSION REQUIRES THAT GRANT APPLICANTS MEET THE FOUR PREREQUISITES LISTED BELOW. IN ADDITION, THE SCHOOL MUST BE ABLE TO MEET THEIR ANNUAL FINANCIAL COMMITMENT – PAYING THE LEADER IN ME ANNUAL MEMBERSHIP FEE ($7,500 PER YEAR) FOR THE FULL, 5-YEAR TERM OF THE GRANT AGREEMENT.” 31

This is a charity whose only mission is to subsidize FC’s TLIM program, and even then, schools are expected to pay the membership fee which is effectively list price. It was also large enough to be required by law to file a document called a 990. A kind of tax return for charities which requires them to list their sources and uses of funds, along with significant disclosures on operating data. From the 990, we see that:

1) It is located not far from the headquarters of Franklin Covey. 2) The head of the foundation started it immediately after quitting Franklin Covey where he had been for 25 years. 3) It has been responsible for millions of dollars of education sales paid indirectly to Franklin Covey (they pay the schools,

the schools pay Franklin Covey, the money has to be spent on TLIM) And last but not least,

4) Franklin Covey has contributed directly to the Foundation in cash. An excerpt from the form is on the next page, along with a link to a site where you can pull it up for yourself. These are incredibly important data points about their education business given that the foundation has been spending millions of dollars on TLIM! Again, double digit percentages of the education segment’s revenue have been coming from an entity which appears to be deeply intertwined with Franklin Covey itself.

29 http://www.lehighvalleylive.com/breaking-news/index.ssf/2013/11/lehigh_valley_schools_business.html 30 http://leader.org/educators/ 31 http://leader.org/educators/

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The head of the foundation was able to get a very large and very complex foundation running immediately after quitting FC according to his LinkedIn profile. This seems suspect at best, and as the head of a foundation he should be independent. The website for the leader in me, www.leaderinme.org, was up and running by September 8th, 2008.32

I Am A Leader Foundation Reporting Year: 2012

Reporting Year: 2013

Reporting Year: 2014

Paid Out to Schools for TLIM purchases ~1.4 million ~4.7 million 4.25 million

#1 Source of funding Panda Charitable Foundation: 3.25 million

Panda Charitable Foundation: 3.9 million

Panda Charitable Foundation: 4.25 million

#2 Source of Funding Franklin Covey: 148k Franklin Covey: 241k Franklin Covey: 564k 33

I found this so surprising that my first thought was that I was the only one who missed an important memo of some kind. We are again, talking about a double digit percentage of revenues in a segment that is viewed as a growth engine. To that effect, I started looking for any mention of such an arrangement anywhere. 32 http://web.archive.org/web/20080908190503/http://theleaderinme.org:80/ 33 https://www.citizenaudit.org/organization/454625508/I%20AM%20A%20LEADER%20FOUNDATION/

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There is brief mention on the earnings call from Q3 2010:

WE JUST SET UP A PARTNERSHIP WITH THE CENTER FOR THE ADVANCEMENT OF JEWISH EDUCATION, AND THERE ARE 800 JEWISH STATE SCHOOLS IN THE UNITED STATES. AND THEIR GOAL IS TO TAKE IT TO HALF-THE-DAY SCHOOLS. AND SO WE'RE STARTING A PILOT PROGRAM IN FLORIDA, SOUTH FLORIDA, WITH 13 SCHOOLS. THEY'RE FUNDING ALL OF THIS THROUGH DONATIONS AND FOUNDATION GRANTS AND SO FORTH. AND SO WE'RE SURPRISED TO FIND THAT THERE'S ALL KINDS OF MONEY OUT THERE, IF YOU KNOW HOW TO TAP INTO IT. AND WE'RE HELPING OUR SCHOOLS DO THAT. WE'RE ALSO DEALING A LOT WITH CHAMBERS OF COMMERCE

This is relevant, but in no way satisfactory. Reviewing the call from Q3 of 2012:

JOSEPH DAVID JANSSEN BARRINGTON RESEARCH ASSOCIATES, INC., RESEARCH DIVISION THAT GAP FUNDING THAT YOU’RE KIND OF TALKING ABOUT, ARE YOU HELPING THE SCHOOLS FIND THAT FUNDING? OR IS THAT JUST THE SCHOOL GOES OUT TO ITS ALUMNI AND FINDS ANGEL INVESTORS, FOR LACK OF A BETTER WORD, TO HELP FILL THAT GAP? OR ARE YOU FACILITATING THAT? MICHAEL SEAN MERRILL COVEY EXECUTIVE VICE PRESIDENT OF GLOBAL SOLUTIONS & PARTNERSHIPS, EDUCATION PRACTICE LEADER AND EXECUTIVE OFFICER WE HELP FACILITATE A LOT OF IT. A LOT OF IT’S ON OUR WEBSITE. IF YOU GO TO OUR WEB, IT WILL GIVE SCHOOLS A WHOLE BUNCH OF IDEAS ON DIFFERENT WAYS THEY CAN GO RAISE FUNDS. OUR MOST SUCCESSFUL SOURCE HAS BEEN CHAMBERS OF COMMERCE, AND WE HAVE ORGANIZED EVENTS ALL OVER THE COUNTRY, ALL THE TIME, WHERE WE GET SCHOOLS AND THE CHAMBERS TOGETHER. IT’S VERY HARD FOR A CHAMBER TO TURN DOWN A NEEDY SCHOOL IN THEIR BACKYARD. AND WE FIND THAT THERE’S SO MUCH MONEY LOOKING FOR A GOOD CAUSE, AND YOU’VE JUST GOT TO HAVE GOOD RESULTS AND PROVE IT. SO WE GET PRINCIPALS IN FRONT OF THESE CHAMBERS, AND WE HAVE GREAT SUCCESS WITH IT

As of the writing of this report, the above data is actually on the website of the foundation, but it’s something. Moving forward, on the earnings call from Q3 2013

MANY OF THE SCHOOLS FIND THEIR OWN FUNDING TO PAY FOR THE LEADER IN ME PROCESS, BUT WE’RE ALSO FINDING LOTS OF OTHER MONEY POURING IN TO HELP PAY THE BILL FOR THESE SCHOOLS, INCLUDING MONEY FROM FOUNDATIONS, CHAMBERS OF COMMERCE, LARGE ORGANIZATIONS IN THE COMMUNITY, HIGHER EDUCATION INSTITUTIONS AND FEDERAL GRANTS. AS WELL, WE HAVE NOW LICENSED THE LEADER IN ME PROCESS TO THREE DIFFERENT ENTITIES IN THREE DIFFERENT COUNTRIES AND ANTICIPATE MANY MORE SUCH PARTNERSHIPS BEING FORMED.

A brief note In the Q1 2014 10Q OUR ACCOUNTS RECEIVABLE COLLECTIONS WERE ADVERSELY IMPACTED BY A $3.0 MILLION INCREASE IN RECEIVABLES FROM A CHARITABLE FOUNDATION THAT FUNDS THE LEADER IN ME PROGRAMS IN ELEMENTARY SCHOOLS,

And finally, a passing reference in Q3 2016 where this was glazed over artfully

UNKNOWN ANALYST OKAY. SO WAIT, A COUPLE OF FOLLOW-UPS. THE FIRST IS JUST ARE THERE ANY OTHER MAJOR CONTRACTS, LIKE THE GOVERNMENT CONTRACT THAT YOU SEE AS BEING ANY RISK OF NONRENEWAL THE NEXT FEW YEARS. ROBERT A. WHITMAN CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT IN THE -- WE DON'T HAVE ANY IN THE GOVERNMENT. THE ONLY PLACE WHERE WE HAVE ANY LARGE CONTRACTS IS IN EDUCATION, AND THAT, FOR THIS YEAR, IS DOWN -- THERE ARE SOME CHARITABLE FOUNDATIONS WHO FUND SOME NUMBER OF SCHOOLS EACH YEAR, IN TOTAL AROUND $4 MILLION. BUT OTHERWISE, WE DON'T HAVE ANY LARGE CONTRACTS. PLUS, A LARGE CONTRACT, THE LARGEST WOULD BE LIKE $1 MILLION IN A YEAR, THE NORMAL -- THE LARGEST CONTRACT OUTSIDE THIS EDUCATIONAL FOUNDATION. [INDISCERNIBLE] UNKNOWN ANALYST OKAY. BUT NOTHING THAT WOULD MATERIALLY IMPACT YOUR REVENUE GROWTH LIKE THIS ONE OR YOUR EBITDA FOR THAT MATTER?

The quote above is key. This is the exact money he is talking about, it’s the right amount, and the CEO casually touches on it before the focus shifts back the regular business of the day. Boyd Craig sits on the executive board of the Panda Restaurant Group which sponsors the Panda Charitable Trust. I don’t see why any revenues being paid to the company as an indirect result of that position would continue should he leave that role.

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One final strange connection tying back into the first donor advised fund based in the Lehigh Valley comes from the 990 of the United Way of the Greater Lehigh Valley. They have been paying Franklin Covey – the corporation, same EIN – out of their grant funds for the past several years. This isn’t necessarily wrong, but it’s odd. 2011 – 34,591 2012 – 34,653 2013 – 30,356 2014 – 66,861

34 Leader.org connects us to www.theleaderinme.org, which is an extension of Franklin Covey fairly directly, with instructions on astroturfing for TLIM and other tips on raising money.

Two big things to take note of here at this non-profit’s website

1) They provide a count of the schools using TLI on the bottom. That’s not provided in management operating metrics on a regular basis, but is certainly a KPI

2) This excerpt from the FAQ

34 https://www.citizenaudit.org/organization/232657933/united-way-of-the-greater-lehigh-valley/

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The key lines from the above are further excerpted, and the highlighting is mine.

I don’t personally have much to add to those two sentences, aside from saying that this is not how we were led to believe this business worked. Even if the dollars involved were lass material, and they are material, this calls into question the credibility of management. If this is not a big deal, and there could certainly be plausible explanations here, it should have been clearly disclosed and explained. This is a management team which has in the past built out excel spreadsheets, included them on the earnings call decks, and spent over an hour walking them effectively column by column. Worst of all, this is not the only issue where things seem amiss.

REVIEWS FOR THE LEADER IN ME

TREVOR ROMEO, WILLIAM BLAIR WHAT'S THE RECEPTION FROM CLIENTS BEEN LIKE? WHAT KIND OF FEEDBACK HAVE YOU HEARD FROM THEM? SEAN COVEY GREAT. I THINK. SO I'D SAY THAT THERE SEEMS TO BE VERY, VERY HIGH LEVELS OF SATISFACTION -Q1 Earning Call

I am hesitant to go too far into reviews and feedback, as every education product has very vocal critics, and so there are no shortage here. Complaints range from it being expensive, to cult-like, to ineffective. A handful of examples are listed below.

https://www.cultofpedagogy.com/problems-with-leader-in-me/ https://redmondcity.blogspot.com/2013/01/five-lakeview-el-parents-complain-about.html https://flaglerlive.com/72427/leader-in-me-indoctrination-sanford/ https://www.dnainfo.com/chicago/20130624/near-west-side/corporate-based-7-habits-teaching-approach-cps-brings-mixed-reaction https://leaderinmeconcerns.wordpress.com/about/ http://flaglerparentonline.com/index.php/2015/02/24/lim/

I found the indoctrination concerns interesting, since the founder of Panda Express, Andrew Cherng, has a history of being passionate about strict self-improvement programs 35 which some describe as cult-like; including Landmark and Life Academy. I also note complaints that the grants from the I Am a Leader foundation came with requirements to help sell the program to other schools. Lastly, complaints about the Leader in Me not being scientific enough should not be entirely dismissed. There is no firm grounding in data for the program, and this is probably a bigger problem in the classroom than it is in the boardroom. Franklin Covey itself hired Johns Hopkins University to conduct a study on the program, and the result was underwhelming to say the least36. They were not able to find any improvement whatsoever in scores, despite what seems like a fairly generous statistical analysis, but did then go on to say:

AN EXAMINATION OF THE FINDINGS FOR THIS DATA RESULTED IN THE CONCLUSION THAT TLIM SCHOOLS DID NOT SIGNIFICANTLY DIFFER IN FIFTH-GRADE ACADEMIC ACHIEVEMENT FROM NTLIM SCHOOLS. HOWEVER, SCHOOLS THAT HAD ACHIEVED TLIM LIGHTHOUSE STATUS DID STATISTICALLY DIFFER IN FIFTH-GRADE ACADEMIC ACHIEVEMENT FROM NTLIM SCHOOLS. FURTHER, THE RESULTS OF THE DATA ANALYSIS INDICATED NO SIGNIFICANT DIFFERENCE IN DISCIPLINARY PLACEMENTS BETWEEN TLIM AND NTLIM SCHOOLS. THIS FINDING MEANS THAT, FOR THE PARTICULAR SET OF DATA USED TO COMPARE THE VARIABLES, THE USE OF TLIM DID NOT POSITIVELY AFFECT ACADEMIC ACHIEVEMENT OR DISCIPLINARY REMOVALS.

In Other words, the very best schools of one group are better than the average school of another group, and if we shift focus to focus on a different factor from the primary one we are selling, there is still nothing there. The Franklin Covey summary of the same report is more positive unsurprisingly, though wildly off topic with regards to what they set out to study.

WITHOUT QUESTION, THE STRONGEST CONSENSUS WAS THAT TLIM POSITIVELY IMPROVED SCHOOL CLIMATE. FOR THE TEACHERS AND PRINCIPALS, THE MAIN CONTRIBUTORS TO CLIMATE CHANGES WERE IMPROVED STUDENT BEHAVIOR AND THE ESTABLISHMENT OF A CULTURE, GUIDED BY THE 7 HABITS SUPPORTING RESPECT AND ACCEPTANCE OF OTHERS. AN INDIRECT EFFECT WAS GIVING THE SCHOOL A PRIDEFUL IDENTITY AND UNIQUE SENSE OF PURPOSE. 37

Again, I have not seen any other market participant using this data or any remotely similar data to analyze FC. I have not seen any questions regarding the round trip of money from Franklin Covey, to the Foundation, to schools, and then back to FC. The foundation connections are sloppily disclosed and inappropriate at best, and more likely scandalous. This is a hard company in terms of figuring out the books, additional issues are discussed in greater detail in the next sections, and we must then trust that management is being clear and forthright. The contracts shown above are a small set of what was uncovered, but there many more anomalies. No matter how clearly these questions get addressed, a reasonable investor has to be left wondering what else is not mentioned.

35 https://www.bloomberg.com/news/articles/2010-11-18/general-tso-meet-steven-covey 36 http://www.ncpeapublications.org/attachments/category/116/ELRDR%20Spring%20FINAL_2015.pdf 37 http://www.theleaderinme.org/uploads/Documents/results/Johns_Hopkins_Cases.pdf

CONSTANTLY CHANGING METRICS AND DRIVERS Going back through historical reports, there is always a new operational metric, always a new business driver, and the old ones are quickly dropped. This makes it tremendously difficult to get a good sense of what is going on with the financials of the business. Depending on which new metric we focus on, growth is always right around the corner. GENERAL BUSINESS METRICS For example, data on sales by practice was reported regularly until Q1 of 2016, the last quarter before AAP was the main topic of discussion. It was no longer reported starting Q2 of 2016. Other metrics more temporary, some examples can be seen in the chart I have compiled below. 2015 2016 2017

Metric Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Sales by practice Delivery consultant under-utilization in Japan Education coaching under-utilization Pipeline of booked days and awarded revenue Marketing Events US/Canada Direct Offices without Government Services U.S./Canada Regions Total Gross Pipelines Revenue Renewal Rate Gross Licensee Revenue (to calculate margin on int’l business)

Education Revenue ex-large deals Some of this data is hinted at in response to analyst questions, or mentioned in the Qs, but it is not comparable due to being specific to some segment or region only. The thing that stands out the most is how when AAP is introduced, all the previous reporting stops. This could theoretically be justified, but in this case I do not feel that it is for two reasons. First, these metrics are extremely important and perhaps even more important once AAP is launched to understand how it is affecting the business. The second is that we see the same game being played with AAP. AAP DATA Given the importance of AAP to the business, nobody would be surprised to see clear goals set and consistent KPIs reported on. So the complete absence of these things is both incredibly frustrating, and somewhat ridiculous. Similar to the chart above, this attempts to capture the same inconsistency in reporting. The same disclaimer on partial answers applies here as well. 2016 2017

Metric Q1 Q2 Q3 Q4 Q1 Q2 AAP Net Promoter Score AAP Attach Rate IP Revenue Reported Breakdown of subscription related deferred revenue Breakdown of customer deposits in deferred revenue Education Division invoiced amounts Total Company invoiced amounts Average revenue increase per CP U.S. Direct Offices Selected Financial Information AAP Pass Holders with Split The presentation of the data on their most important initiative is opportunistic and seems designed to be difficult to follow. UNDERSTANDING THE DEFERRAL

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Deferred revenue is clearly much more important in the presence of AAP, but it was not new as the education business has been generating it for quite some time already. FC breaks out deferred revenue on the balance sheet for the first time in Q4 2016, but it continues to be a puzzle because we don’t have enough data to fully parse what is going into it. Due to the presence of AAP deferred revenue, TLIM deferred revenue, and regular customer deposits, the number still fluctuates in a way that is always fully explained after the fact, but generally surprising when it is reported.

Some more data comes out in Q4 2016, but that only explains why the data has been odd and is difficult to forecast.

We get the rest of the context in Q1 of 2017,

To understand what is happening with the AAP deferral, we need to know what is happening with the education deferral (size, seasonality, trends), and then what else is being included that is not subscription related. Each of the above pieces of data should be presented regularly and clearly. Instead, the data is inconsistent and when something is shown, it is never shown all at once, meaning some elements are stale. I believe it is likely that the poor reporting standards are helping obscure the true operating results of AAP. SEGMENTS DON’T RECONCILE CLEANLY OVER REPORTING REGIMES

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The official reporting segments have changed twice within the past decade. In and of itself this would be fine, given the changing business, but here again, it seems like they were designed purposely to make it impossible to reconcile them across time perfectly to track results and understand how certain stories have played out over time.

WHAT EXACTLY IS THE ATTACH RATE? In Q2 of 2016 management introduced us to APP and made clear that it would add value to the business in part because they would continue to sell their core business lines to clients on top of AAP. AAP was supposed to be incremental.

ALL ACCESS PASS ALSO LEVERAGES OUR SIGNIFICANT INVESTMENT IN PRACTICES AND IN BUILDING INTEGRATED SOLUTIONS WITH PREMIUM SERVICES. … ON TOP OF THE PLATFORM OF INTELLECTUAL PROPERTY SALE, WHERE THEY ADD ANOTHER THIRD OF THEIR REVENUE COMES FROM PREMIUM SERVICES, WE HAVE BUILT A STRONG CAPABILITY AROUND THESE SERVICES FOR EXECUTION, SALES PERFORMANCE, CUSTOMER LOYALTY, ET CETERA, AND WE BELIEVE THAT THIS ALL ACCESS PASS AT THE CENTER OF THE CIRCLE, WE CAN ADD PIECES AROUND THE CIRCLES, WHERE IT WILL BE A NATURAL WAY TO GO BIGGER AND BROADER INSIDE COMPANIES. – Q2 2016 Earnings Call

One quarter later it became bluntly apparent that it was not incremental, and was in fact cannibalizing the core business.

YEAH, LET ME SAY THIS. WE ACTUALLY WANT CANNIBALIZATION TO HAPPEN IN THE SENSE THAT BECAUSE OF THE LIFETIME VALUE, THE INITIAL SALE AND THE RECURRING REVENUE FROM AN ALL ACCESS PASS SALE WE THINK IS MUCH BETTER. – Q3 2016 Earnings Call

The drag on the business got worse in Q4 from cannibalization, though because FC had stopped reporting on the specifics via their old numbers, we are forced to go by rough commentary or inferring from the data. However starting in Q4, we begin to get data on “AAP Services and Materials” or the attach rate for AAP. Instead of AAP being incremental, the old business is incremental to AAP. This change in description allows FC to show strong numbers for AAP and cover up the legacy business which is being destroyed very quickly.

Q3 2016 AAP Reporting Data Q4 2016 Reporting Data FC began including data from their “old” business as part of their “new” business, to make it look like it is doing better than it is. The total share of “AAP” business made up by this attach rate. To date, more than 20% of AAP revenue is actually represented by this attach rate, and the numbers vary dramatically in FC’s own reporting from period to period.

The emphasis via red lines is mine, note the dramatic change in amount of AAP services and materials reported in Q1 of 2017 vs the amount that was then reported for that same period during Q2 of 2017. The attach rate is potentially being gamed to make sure they hit their “AAP” numbers, and we need to haircut the renewal rate on this portion of the business when evaluating future prospects.

THE RENEWAL RATE IS NOT NEW

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One of the main benefits of AAP that has been touted by management and analysts is that AAP should raise renewal rates to 90% or higher. In practice, about 75% of passes are renewing, the 90% is dollar renewal rate, meaning the larger clients are sticking around. Looking at reports going back a few years, this seems like it is what they have always been promising.

“90% RETENTION RATE (A “STICKY” BUSINESS MODEL): WITH A 97% PENETRATION RATE OF THE FORTUNE 100 COMPANIES, 75% PENETRATION RATE OF THE FORTUNE 500 COMPANIES AND A 90% RETENTION RATE (YEARLY RETENTION RATE ON REVENUES), THE COMPANY’S PRODUCT OFFERINGS ARE CLEARLY TIED TO MEASURABLE RESULTS THAT THE CSUITE UNDERSTANDS. WITH STATS LIKE THIS, FC CAN HOLD ITS OWN AGAINST MUCH LARGER CONSULTING COMPANY COMPETITION.” – Barrington Research, April 2015

“WE BELIEVE THAT THE COMPANY’S HIGH PENETRATION RATE AT LARGE COMPANIES (IT HAS SERVED 97 OF THE FORTUNE 100 COMPANIES AND MORE THAN 75% OF THE FORTUNE 500 COMPANIES), AS WELL AS A 90% DOLLAR-RETENTION RATE, DEMONSTRATES THE VALUE CLIENTS REALIZE FROM FRANKLIN COVEY’S TRAINING.” – William Blair Research, March 2014

38

We have always been promised 90%, and so either we were being misled then, or we are being misled now. MINDING THE GAAP The yardsticks that management is using to grade themselves on profitability are complex, oftentimes subjective, and difficult if not impossible to fully reconcile. Instead of EPS, they are focused on Consolidated Adjusted EBITDA plus growth in deferred revenue less certain costs. Because Consolidated adjusted EBITDA itself was not capturing the relevant things they wanted to show. Management does not speak to Free Cash Flow, and catch themselves if they almost say it. Instead they refer to After Tax Cash Flow, or what they refer to as Net Cash Generated. Non-GAAP metrics are being replaced with even less GAAP numbers. Management does not guide to any GAAP number, only the alternative metrics. That should not be too surprising, because over the last 20 years FC has had $8.1 million of total Net Income. Over the last 15, it has had (-$48.6) of Net Income, and $64.5 million over the last 10 years. Those numbers represent average margins of 0.35%, (-0.36%), & 2.82%, respectively. Of course, I should mention that this is on recognized revenues, whereas we are now focused on invoiced revenues. I do not intend to argue that every company should ignore everything but GAAP EPS. There are great businesses in the world where FCF can be material while net income stays depressed. In this context however, the difference between those numbers for FC represents economic value that I believe is melting away. With a balance sheet full of goodwill and intangible assets as well as ongoing acquisitions (most recently 05/18/2017 – terms undisclosed) FC can see these numbers diverge for many years to come. The market views this as a growth story, and that is what is priced into the stock today. In the meantime, the most valuable assets continue to lose relevance, a leverage buyback is ongoing, and the alternative numbers are perpetually in flux. If the narrative were to change, the re-adjustment could be sharp.

38 Q3 2015 Webcast Slides

Other Issues MARGIN PRESSURES Margins going forward are likely to disappoint, as there are large costs to converting clients to AAP or bringing new clients onboard thanks to Franklin Covey’s “Discovery Days”, which involve bringing a team out to a client, or booking time over the phone to check in with clients on how they are doing with AAP. The large number of new clients being brought on vs. converting clients, and the implied churn, means that is painful for longer than expected. This also helps to explain why FC has been unexpectedly struggling with SG&A in recent quarters. The $8m of capitalized curriculum costs expected this year also provide a large headwind to profitability.

INTANGIBLE ASSETS AND GOODWILL Large amounts of intangible assets and goodwill make write-downs a concern, which are ok if they don’t impact cash, but will just make any scenario that requires them to be that much more painful. Over $50m of intangible assets over $20m of goodwill, along with other shaky items present on their balance sheet.

FRANKLIN COVEY ORGANIZATION PRODUCTS (FCOP) See the Business history section for more on FCOP and the amount of money it has already taken from FC. The amounts below are at risk of being written down at any time effectively, and the strange nature of the relationship between FCOP and FC itself is cause for concern.

“AT AUGUST 31, 2016 AND 2015, WE HAD $3.2 MILLION (NET OF $0.8 MILLION DISCOUNT) AND $4.0 MILLION (NET OF $1.0 MILLION DISCOUNT) RECEIVABLE FROM FCOP, WHICH HAVE BEEN CLASSIFIED IN CURRENT ASSETS AND LONG-TERM ASSETS IN OUR CONSOLIDATED BALANCE SHEETS BASED ON EXPECTED PAYMENT DATES. WE ALSO OWED FCOP $0.1 MILLION AND $50,000 AT AUGUST 31, 2016 AND 2015, RESPECTIVELY, FOR ITEMS PURCHASED IN THE ORDINARY COURSE OF BUSINESS. THESE LIABILITIES WERE CLASSIFIED IN ACCOUNTS PAYABLE IN THE ACCOMPANYING CONSOLIDATED BALANCE SHEETS. IF FCOP IS UNABLE TO PAY US FOR THESE RECEIVABLES, OUR LIQUIDITY, FINANCIAL POSITION, AND CASH FLOWS WILL BE ADVERSELY AFFECTED.” - FY 2016 10-K

KNOWLEDGE CAPITAL AND OTHER INSIDERS See the Business history section for more on Knowledge Capital. Between Knowledge Capital, Donald McNamara, Robert Whitman, Joel Peterson, and Michael Covey, insiders own about 30% of shares outstanding. Knowledge Capital currently holds 2.8mm shares of FC or a bit more than 20% of outstanding stock. Donald McNamara holds a 1.5% equity interest in Knowledge Capital directly and Robert Whitman has an approximately 12.6% equity interest in Knowledge Capital directly, based on filings. In May of 2015, Knowledge Capital sold 400k into the open market.

“KNOWLEDGE CAPITAL INVESTMENT GROUP (KNOWLEDGE CAPITAL) HELD A WARRANT TO PURCHASE 5.9 MILLION SHARES OF OUR COMMON STOCK, EXERCISED ITS WARRANT AT VARIOUS DATES ACCORDING TO THE TERMS OF A FISCAL 2011 EXERCISE AGREEMENT, AND RECEIVED A TOTAL OF 2.2 MILLION SHARES OF OUR COMMON STOCK FROM SHARES HELD IN TREASURY. TWO MEMBERS OF OUR BOARD OF DIRECTORS, INCLUDING OUR CEO, HAVE AN EQUITY INTEREST IN KNOWLEDGE CAPITAL.” – 2016 10-K

Historical shares in FC for Knowledge Capital

FAMILY BUSINESS

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Stephen M.R. Covey Stephen M.R. Covey, son of Stephen Covey, was CEO of The Covey Leadership Center prior to its acquisition by Franklin Quest. Per the Bio on the company website:

“A HARVARD MBA, HE JOINED COVEY LEADERSHIP CENTER AS A CLIENT DEVELOPER AND LATER BECAME NATIONAL SALES MANAGER AND THEN PRESIDENT AND CEO”…” GREATLY INCREASED THE VALUE OF THE BRAND AND COMPANY. THE COMPANY WAS VALUED AT ONLY $2.4 MILLION WHEN COVEY WAS NAMED CEO, AND, WITHIN THREE YEARS, HE GREW SHAREHOLDER VALUE TO $160 MILLION IN A MERGER HE ORCHESTRATED WITH FRANKLIN QUEST TO FORM FRANKLINCOVEY.” 39

In 2006 he formed CoveyLink Worldwide, and in 2008 he published The Speed of Trust. Franklin Covey purchased CoveyLink in 2008, and has since paid over 5mm for it. In addition to these payments, Stephen MR Covey is also paid roughly $1.5mm in royalties per year as well as roughly 1mm per year from speaking fees due to the nature of the contract signed upon the acquisition of CoveyLink. Sean Covey In addition to salary and other payments, Sean Covey earns 200k to 300k based on royalties for his books. He has been an employee of Franklin Covey or The Covey Leadership Center continuously since 1994. The Estate of Stephen Covey The Estate of the late Stephen Covey continue to earn between 100k and 200k for royalties. Others Include: Joshua Covey – brother of Sean Covey – $158k John Covey – uncle of Sean Covey - $136k Curtis Bateman – brother in law of Shawn Moon - $220k Curtis Garbett – brother in law of Shawn Moon - $170k Doug Puzey – uncle of Paul Walker - $346k - John Harding- brother in law of Stephen Young - $260k David Covey is no longer employed at Franklin Covey, though as COO he earned ~$1mm

NINETYFIVE FIVE 5 EARN OUT The 2013 purchase of Ninety Five 5 included contingent consideration payments to the former owners up to a maximum of $8.5 million, based on cumulative EBITDA, on top of the $4.2mm paid. $2.2mm was paid in 3Q 2016. There was a liability of $1.9mm on the balance sheet as of the end FY 2016. So far during FY 2017, they have reversed the entire liability saying it was unlikely to be paid. This is despite describing performance as very strong and on track in 2017. Changes in the liability are recorded as a component of SG&A. This means that not only has $1.9mm of adjusted EBITDA this year been the reversal of a liability, but also that they could potentially have to pay $2.2m in 2018 (recognized in 2017) should performance be strong. This creates an interesting conflict between showing good results and not paying out the money. If things play out particularly poorly, this could be thrown in as part of a big bath quarter. PREVIOUS ATTEMPTS AT CONSUMER – GROUPON AND LIVINGSOCIAL Franklin Covey has previously tried rolling out an all you can eat course offering via the internet, and despite significantly lower pricing than they are targeting now, it was highly unsuccessful. This was offered though Groupon and LivingSocial, so the target was the mass consumer as opposed to business, making this a less than perfect comparison. None the less reading the reviews and seeing the pricing they were hoping to achieve on what is very similar material is still quite instructive. Target prices were between $70 and $100, and the overlap in material with AAP is substantial. Several the reviews also raise red flags for having been posted around the time of the AAP launch, despite being years past the expiration date for these deals, as well as for being oddly similar. https://www.groupon.com/deals/gg-online-leadership-courses-from-franklincovey https://www.groupon.com/deals/franklin-covey-3 http://www.winnipegdealsblog.com/2014/09/franklincovey-69-one-year-access-online-leadership-courses-optional-productivity-pack-95.html https://www.livingsocial.com/deals/1569262-access-to-on-demand-professional-growth-library https://www.groupon.com/biz/salt-lake-city/franklin-covey

39 http://www.speedoftrust.com/stephen-m-r-covey-bio

Deciphering AAP A more complete revenue build can be found in the Appendix. The webcast slides presented by FC are the primary source of AAP data. In analyzing FC, I attempted to take the facts management stated in filings, posted on earnings slides, and gave out on calls, and then line them up with the actual reported financials of the business. For many of the reasons already covered, this was surprisingly difficult. Eventually, I believe I did get a sense of what exactly was going on with AAP, but it showed a very different narrative for the business. The key issue was to understand just how many customers were switching over to AAP, the increase in revenue received from those clients and what effect all of this was having on the business as a whole. Given the centrality of the deferred revenue issue, I broke out the analysis into two parts- amounts invoiced to customers, and amounts recognized under GAAP. Given the share of AAP business that was new - i.e. not converted from a current client, and running a wide variety of cases for increase in revenue from existing clients when they converted to AAP, I was eventually to reconcile operating metrics and financial statements, however

• The share of clients (revenues) converting to AAP from the non-AAP business is far lower than it seems • The non-AAP business is deteriorating much faster than the new AAP business is scaling up

In addition, the revenue renewal rates are almost certain to take turn for the worse given the presence of the “supplementary” AAP sales being counted as part of the AAP pie. The high attach rate is a result of first time customers ordering coaching and materials, as well as transactional business that by design does not need to be repeated by expensive FC consultants in the future.

Franklin Covey MRQ ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATEfor the perio 8/31/2013 8/31/2014 8/31/2015 11/28/2015 2/27/2016 5/28/2016 8/31/2016 8/31/2016 11/26/2016 2/28/2017

Overview ($, '000) FY-2013 FY-2014 FY-2015 1Q-2016 2Q-2016 3Q-2016 4Q-2016 FY-2016 1Q-2017 2Q-2017 3Q-2017 4Q-2017 FY-2017 FY-2018 FY-2019 FY-2020 FY-2021

x Direct Offices Segment / AAP Analysis - Amounts InvoicedDirect Offices Invoiced SummaryAAP Subscription Invoices 375.0 3,075.0 5,800.0 12,225.0 21,475.0 4,975.0 7,800.0 9,283.5 15,934.8 37,993.3 49,568.3 58,163 64,466 69,014(+) AAP Add-On Materials 0.0 0.0 225.0 1,500.0 1,725.0 2,075.0 3,450.0 4,106.0 4,060.1 13,691.1 21,149.7 25,822.4 28,658.7 30,248.2Total Amount of AAP Related Revenue Invoiced 375.0 3,075.0 6,025.0 13,725.0 23,200.0 7,050.0 11,250.0 13,389.5 19,994.9 51,684.4 70,718.0 83,985.3 93,124.7 99,262.2(+) Non-AAP Revenues 115,085.0 113,087.0 23,396.0 22,552.0 19,742.0 21,953.0 87,643.0 16,772.0 16,087.0 14,609.1 16,245.2 63,713.3 47,147.8 34,889.4 25,818.2 19,105.4Total Amount INVOICED - Direct Offices 115,085.0 113,087.0 23,771.0 25,627.0 25,767.0 35,678.0 110,843.0 23,822.0 27,337.0 27,998.6 36,240.1 115,397.7 117,865.8 118,874.7 118,942.9 118,367.6

AAP Invoiced YoY Growth 1780.0% 265.9% 122.2% 45.7% 122.8% 36.8% 18.8% 10.9% 6.6%Non-AAP YoY Growth n/a (1.7%) (8.2%) (11.9%) (25.0%) (38.5%) (22.5%) (28.3%) (28.7%) (26.0%) (26.0%) (27.3%) (26.0%) (26.0%) (26.0%) (26.0%)Direct Office Invoed Revenue YoY Growth n/a (1.7%) (6.7%) 0.1% (2.1%) (0.1%) (2.0%) 0.2% 6.7% 8.7% 1.6% 4.1% 2.1% 0.9% 0.1% (0.5%)

AAP Penetration in Direct Offices 1.6% 12.0% 23.4% 38.5% 20.9% 29.6% 41.2% 47.8% 55.2% 44.8% 60.0% 70.7% 78.3% 83.9%

AAP Related Sales InvoicedRevenue that has been converted to AAP 125.0 1,025.0 1,933.3 4,075.0 7,158.3 1,545.8 1,677.5 1,480.7 1,646.5 6,350.5 4,778.5 3,536.1 2,616.7 1,936.4(+) Increase in order size when converting to AAP 25.0 205.0 386.7 815.0 1,431.7 309.2 335.5 296.1 329.3 1,270.1 955.7 707.2 523.3 387.3Converted Client Revenue Contribution 150.0 1,230.0 2,320.0 4,890.0 8,590.0 1,855.0 2,013.0 1,776.8 1,975.8 7,620.6 5,734.2 4,243.3 3,140.0 2,323.6(+) New AAP Sales 225.0 1,845.0 3,480.0 7,335.0 12,885.0 2,782.5 3,019.5 2,576.7 3,567.8 11,946.5 11,539.8 11,786.6 11,887.5 11,894.3(+) AAP Subscription Revenue Renewals invoiced 0.0 0.0 0.0 0.0 0.0 337.5 2,767.5 4,930.0 10,391.3 18,426.3 32,294.3 42,133.0 49,438.5 54,796.1Total AAP Subscription Revenue Invoiced 375.0 3,075.0 5,800.0 12,225.0 21,475.0 4,975.0 7,800.0 9,283.5 15,934.8 37,993.3 49,568.3 58,162.9 64,466.0 69,014.0

(+) AAP New Add on-on Services and Materials 0.0 0.0 225.0 1,500.0 1,725.0 2,075.0 3,450.0 3,937.3 2,935.1 12,397.3 10,881.4 9,960.1 9,292.0 8,754.1(+) Renewal of AAP Add-on Services and Materials 0.0 168.8 1,125.0 1,293.8 10,268.3 15,862.3 19,366.8 21,494.1Total AAP Add-On Materials/Services Revenue Invoiced - - 225.0 1,500.0 1,725.0 2,075.0 3,450.0 4,106.0 4,060.1 13,691.1 21,149.7 25,822.4 28,658.7 30,248.2

All AAP Related Revenues Invoiced 375.0 3,075.0 6,025.0 13,725.0 23,200.0 7,050.0 11,250.0 13,389.5 19,994.9 51,684.4 70,718.0 83,985.3 93,124.7 99,262.2

Reported AAP Subscription Revenues Invoiced 375.0 3,075.0 5,800.0 12,225.0 21,475.0 4,975.0 7,800.0Calculation = Reported? TRUE TRUE TRUE TRUE TRUE TRUE TRUE

Non-AAP RevenueConversions 125.0 1,025.0 1,933.3 4,075.0 7,158.3 1,545.8 1,677.5 1,480.7 1,646.5 6,350.5 4,778.5 3,536.1 2,616.7 1,936.4Up For Renewal 25,351.0 24,579.0 24,373.7 31,625.0 105,928.7 21,850.2 20,874.5 18,261.4 20,306.5 81,292.5 58,934.8 43,611.8 32,272.7 23,881.8

Renewals 22,128.5 21,323.1 18,523.3 20,371.8 82,346.6 15,679.5 15,043.3 14,609.1 16,245.2 61,577.1 47,147.8 34,889.4 25,818.2 19,105.4(+) New Sales 1,267.6 1,229.0 1,218.7 1,581.3 5,296.4 1,092.5 1,043.7 913.1 1,015.3 4,064.6 2,946.7 2,180.6 1,613.6 1,194.1Non-AAP Revenues 115,085.0 113,087.0 23,396.0 22,552.0 19,742.0 21,953.0 87,643.0 16,772.0 16,087.0 14,609.1 16,245.2 63,713.3 47,147.8 34,889.4 25,818.2 19,105.4

Sales Growth AnalysisShare of AAP Revenues from New Clients 60% 60% 60% 60% 60% 60%

AAP New Sales Rate 0.88% 7.21% 13.23% 20.55% 11.71% 11.78% 10% 10%Non-AAP New Sales 5% 5% 5% 5% 5% 5% 5% 5%

Three Key AAP Value Drivers - MgmtIncrease in order size when converting to AAP 20% 20% 20% 20% 20% 20% 20% 20%

Subscription Rev Renewal Rate 90.0% 90.0% 85% 85%Add-Ons Rev Renewal Rate - - 75% 75%AAP Revenue Renewal Rate 90% 90% 85% 84%

Attach rate for new + converted 2.4% 7.0% 8.1% 12.5% 15% 15%Attach rate from renewals 3% 11%Attach Rate as % LTM Invoices (AAP Add-ons & Materials) 7% 8.0% 11.2% 11%

Non-AAP Key DriversAAP Conversion Rate (of Quarterly Revs) 0.5% 4.0% 7.3% 11.4% 6.6% 7.4% 7.5% 7.5%Cumulative dollars convered 125.0 1,150.0 3,083.3 7,158.3 7,158.3 8,704.2 10,381.7

Post Conversion Post Sales Non AAP Renewal/Growth 87% 87% 76% 64% 83% 72% 72% 80% 80%

Michael Mazya 37 | P a g e

DIRECT OFFICES/AAP – RECOGNIZED REVENUES

Franklin Covey MRQ ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATEfor the perio 8/31/2013 8/31/2014 8/31/2015 11/28/2015 2/27/2016 5/28/2016 8/31/2016 8/31/2016 11/26/2016 2/28/2017

Overview ($, '000) FY-2013 FY-2014 FY-2015 1Q-2016 2Q-2016 3Q-2016 4Q-2016 FY-2016 1Q-2017 2Q-2017 3Q-2017 4Q-2017 FY-2017 FY-2018 FY-2019 FY-2020 FY-2021

Direct Offices - Recognized Revenue AnalysisDeferral rate for Non-AAP Revenue 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Deferral Rate for AAP Add on Revenue 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Deferral Rate for AAP Subscription Revenue 32% 38% 35% 40% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Amounts RecognizedNon-AAP Revenues Invoiced This Period 23,396.0 22,552.0 19,742.0 21,953.0 87,643.0 16,772.0 16,087.0 14,609.1 16,245.2 63,713.3 47,147.8 34,889.4 25,818.2 19,105.4

AAP - Add on Revenues Invoiced This Period 0.0 0.0 225.0 1,500.0 1,725.0 2,075.0 3,450.0 4,106.0 4,060.1 13,691.1 21,149.7 25,822.4 28,658.7 30,248.2

AAP Subscriptions Invoiced This Period 256.0 1,914.0 3,765.0 7,335.0 13,270.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Of Revenues Invoiced This Period 23,652.00 24,466.0 23,732.0 30,788.0 102,638.0 18,847.0 19,537.0 18,715.1 20,305.3 77,404.4 68,297.6 60,711.8 54,476.9 49,353.6

(+)Reversal of Previously Deferred 0.0 100.0 145.0 710.0 955.0 2,400.0 3,875.0 4,925.0 6,737.1 17,937.1 42,538.7 53,000.9 60,731.5 66,369.1

Direct Offices Total Recognized 23,652.00 24,566.00 23,877.00 31,498.00 103,593.0 21,247.00 23,412.00 23,640.10 27,042.40 95,341.5 110,836.2 113,712.7 115,208.4 115,722.7

Reported Direct Office Recognized Revenue Data 23,661.0 24,567.0 23,892.0 31,493.0 103,613.0 21,247.0 23,412.0

Calculation = Reported? (9.0) (1.0) (15.0) 5.0 (20.0) - -Deferral from Direct Offices - AAP

Deferral Starting Balance 0.0 119.0 1,180.0 3,070.0 0.0 7,250.0 9,825.0 13,750.0 18,108.5 18,108.5 74,155.9 164,939.7 273,750.2 395,873.3

(+) Additions to Deferral 119.0 1,161.0 2,035.0 4,890.0 8,205.0 4,975.0 7,800.0 9,283.5 15,934.8 37,993.3 49,568.3 58,162.9 64,466.0 69,014.0

Deferral from T-1 0.0 1,950.0 2,320.9 4,270.9 11,718.1 14,061.7 15,785.0 17,033.5

Deferral from T-2 0.0 1,243.8 1,950.0 3,193.8 11,037.6 13,554.8 15,411.3 16,762.1

Deferral from T-3 0.0 1,222.5 1,243.8 2,466.3 10,284.7 12,992.4 14,994.5 16,457.0

Deferral from T-4 0.0 508.8 1,222.5 1,731.3 9,498.3 12,392.1 14,540.7 16,116.5

(-) Recognition of past deferred sales 0.0 100.0 145.0 710.0 955.0 2,400.0 3,875.0 4,925.0 6,737.1 17,937.1 42,538.7 53,000.9 60,731.5 66,369.1

Ending Deferral Balance 119.0 1,180.0 3,070.0 7,250.0 7,250.0 9,825.0 13,750.0 18,108.5 27,306.2 74,038.9 166,262.9 276,103.6 398,947.7 531,256.5

Change in Deferred Balance 119.0 1,061.0 1,890.0 4,180.0 7,250 2,575.0 3,925.0 4,358.5 9,197.7 20,056 7,030 5,162 3,735 2,645

Unwind Rate 0.8 12% 23% 13% 33% 39% 36% 37%

Michael Mazya 38 | P a g e

Buybacks and other things that give me considerable pause BUYBACKS Franklin Covey has been buying stock aggressively, implying they have a great deal of confidence in their business. They have borrowed to buy back stock recently, and have indicated a strong willingness to borrow and use all free cash to repurchase shares.

40 Management has stated that the business is cheap in their eyes, and has outlined a rough ballpark of how they view it.

– Targeting 22mm of after tax cash flow, on a then EV of 230mm (share price of ~$16.50), implying a 9.5% cash yield. • 80mm of value for their education business • 100mm of value for their international business • Implies a valuation of 50-60mm for the remainder of their business which represented 150mm of revenue and at least

15mm of adjusted EBITDA, giving them a valuation of 3 - 3.5x on their core business. I am more skeptical of the value, but the amount of buybacks is material especially given the thin volume, small capitalization, and even smaller float (omitting the Knowledge Capital shares)

“WE HAVE GROWN A LOT IN THE PAST, AND EXPECT TO GROW IN THE FUTURE, AND THE IRR WE BELIEVE WE CAN EARN BY REPURCHASING OUR SHARES IS MUCH MORE ATTRACTIVE THAN MOST THINGS WE COULD INVEST IN ELSEWHERE AND MAYBE MORE THAN MOST OF OUR SHAREHOLDERS COULD INVEST IN ELSEWHERE.”

“SO IT CONTINUES TO BE EASY FOR US TO DECIDE USER EXCESS CASH AND THE AVAILABILITY UNDER OUR CREDIT FACILITY TO CONTINUE TO AGGRESSIVELY REPURCHASE SHARES. FOR US, THIS IS AN EASY DECISION.”

• CEO Robert Whitman on Q2 Earnings call Number of times the word aggressive or aggressively was used by management on the Q2 earning call when referring to share repurchases: 4 One thing that makes this less concerning is the high level of salary and options vs amount of stock owned by the CEO and many of the senior managers. Robert Whitman is required to own 5 times his base salary in shares, and seems to make sure not to get too far above that.

TAKEN PRIVATE If management sees value where the market is not, they could potentially buy the company. Before taking control of Franklin Covey back in 1999, Robert Whitman was the CEO of the Hampstead Group, a real estate private equity firm. He worked at Trammel-Crow

40 Uses of Cash, FactSet data

Michael Mazya 39 | P a g e

doing the same thing as well. Interestingly, he has gone back to his roots by currently running a newly formed (2010) real estate private equity firm in addition to his work at Franklin Covey. 41 Board member Donald McNamara, in addition to being the current controlling partner of Knowledge Capital, had advised TPG on real estate private equity, and founded the Hampstead Group where Mr. Whitman worked. In the past he has been described as a close advisor to the Bass family.42 Joel Peterson is also still on the board of the company. I find it interesting that they have never thought to do this in the past however, when the company was worth much less. As previously mentioned, these is also the risk that a big tech company buys FC for the 7 habits brand. Given that the remainder of the brands likely have little value or compete with existing offerings, FC seems particularly expensive for that kind of acquisition. I would start to worry about it at lower valuations again. TAX RATE With a tax rate in the high 30’s or low 40’s, a change in tax regime would be more beneficial for Franklin Covey than most.

41 http://whitmanpeterson.com/team/robert-a-whitman-founding-partner/ 42 http://www.bizjournals.com/dallas/stories/1999/12/27/story8.html

Valuation and Price Target My price target of $12 is based on 12x 2018 Est. EBITDA. Additional valuation data is summarized below.

Valuation Detail

Valuation SummariesMethod Multiple 2018 EBITDA 2018 EPS EV Target Price ReturnDCF $11.32 (45%)EV/EBITDA 10 year average 12.38x 15,869.4 196,441.1 $12.06 (41%)EV/EBITDA 5 year average 11.38x 15,869.4 180,650.3 $10.92 (46%) Current Price 20.4P/E 10 year average 47.78x $0.07 $3.45 (83%) Shares Outstanding 13,825.0

P/E 5 Year average 45.48x $0.07 $3.28 (84%) Market Cap 282,030.0Trailing EV/EBITDA Comps 13.0x 15,869.4 205,508.1 $12.72 (38%) Net Debt 29,673.0

NTM EV/EBITDA Comps 13.1x 15,869.4 208,047.2 $12.90 (37%) EV 311,703.0NTM P/E Comps 25.0x $0.07 $1.80 (91%)

DCFFY-2017 FY-2018 FY-2019 FY-2020 FY-2021

EBIT (9,538.5) 4,669.3 5,009.2 5,215.6 5,323.6Provision for tax 4,632.4 (617.4) (713.8) (746.5) (731.7)NOPAT (4,906.1) 4,051.9 4,295.4 4,469.1 4,591.9

Depreciation 3,894.0 3,916.1 4,006.8 4,071.6 4,118.9Amortization 2,809.5 3,083.1 3,154.6 3,205.7 3,243.2Stock-based comp 4,104.7 4,200.9 4,264.7 4,308.9 4,340.5Amrotization of cap. Curr. Costs 3,883.9 3,962.5 4,014.4 4,050.4 4,076.5

Capex (6,220.0) (6,358.9) (6,450.6) (6,514.6) (6,561.0)Capitalized Curriculum Development Costs (7,995.0) (4,272.1) (4,328.9) (4,367.6) (4,395.0)Change in NWC Needs 21,798.9 4,738.4 4,521.5 3,214.6 2,192.2FCF 17,369.9 13,321.9 13,477.9 12,438.1 11,607.2Terminal Va lue 201,147

0.50 1.50 2.50 3.50 4.50Discount factor 0.95 0.87 0.79 0.72 0.65PV FCF 16,562 11,547 10,620 8,910 138,551

Enterprise va lue 186,190 Discount rate 10.0%

Net debt 29,673 TV growth 4.0%

Equity va lue 156,517 TV EV/EBITDA 12.0x

Shares out 13,825 TV as % of va luation 70.4%

Price per share $11.32

CapIQ HistoricalsFor Year Ending Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 5 Year Avg10 year AverageTEV/LTM Total Revenue 0.48x 0.26x 0.23x 0.34x 0.56x 0.64x 0.69x 0.63x 0.82x 1.22x 1.22x 1.27x 1.58x 1.81x 1.47x 1.34x 1.50x 1.21xTEV/NTM Total Revenues - - - - - - - 0.67x 1.03x 1.11x 1.15x 1.20x 1.44x 1.63x 1.34x 1.28x 1.38x 1.21xTEV/LTM EBITDA 5.21x 104.66x NM 31.64x 7.43x 7.43x 8.10x 6.82x 30.06x 21.06x 10.88x 10.80x 11.06x 13.48x 10.73x 10.88x 11.39x 13.39xTEV/NTM EBITDA - - - - - - - - 9.89x 7.94x 7.81x 7.33x 8.47x 9.16x 8.03x 8.98x 8.39x 8.45xTEV/LTM EBIT 93.91x NM NM NM 20.82x 14.66x 13.65x 11.11x 18.21x 37.85x 19.13x 16.07x 14.15x 18.06x 14.63x 15.50x 15.68x 17.84xTEV/NTM EBIT - - - - - - - 6.31x 15.25x 12.37x 11.98x 10.58x 11.50x 12.45x 11.36x 14.98x 12.17x 11.86xP/LTM EPS NM NM NM NM NM 14.47x 10.14x 26.95x 22.73x NM 175.70x 27.50x 28.57x 24.24x 19.15x 33.53x 26.60x 40.95xP/NTM EPS - - - - - - - 10.38x 19.62x 25.60x 34.95x 24.63x 21.06x 20.47x 20.60x 26.09x 22.57x 22.60xP/LTM Normalized EPS 198.16x NM NM NM 22.92x 19.34x 19.59x 18.49x 34.77x 94.78x 31.58x 28.53x 28.30x 30.91x 26.82x 28.10x 28.53x 34.19xP/BV 0.45x 0.26x 0.21x 0.52x 1.32x 1.68x 1.53x 1.40x 1.20x 1.73x 2.02x 2.11x 2.72x 2.97x 2.33x 2.50x 2.53x 2.05xP/Tangible BV 11.89x 3.46x 1.31x 17.66x 88.94x 45.97x 7.21x 5.98x 25.18x 64.85x 36.37x 11.44x 11.13x 9.58x 5.74x 9.78x 9.54x 18.73xTEV/LTM Unlevered FCF 70.77x 5.15x 5.29x 7.52x 10.07x 62.54x 81.66x 28.59x 76.80x 11.53x 63.54x 18.65x 16.69x 58.18x 30.25x 9.59x 26.67x 39.55xMarket Cap/LTM Levered FCF 8.20x 3.91x 1.98x 3.60x 7.15x 121.98x 195.93x 38.77x 11.05x 10.21x 29.73x 19.01x 17.13x 78.10x 35.27x 9.17x 31.73x 44.44x

Factset Historical ValuationDEC '01 DEC '02 DEC '03 DEC '04 DEC '05 DEC '06 DEC '07 DEC '08 DEC '09 DEC '10 DEC '11 DEC '12 DEC '13 DEC '14 DEC '15 DEC '16 5 Year Avg10 year Average

Valuation (x)

Price/Sales 0.21 0.09 0.13 0.14 0.52 0.45 0.51 0.31 0.68 0.94 0.95 1.42 1.80 1.51 1.21 1.44 1.48x 1.08xPrice/Earnings -- -- -- -- 30.36 6.05 21.27 67.57 -- -- 26.29 25.88 25.90 17.90 27.52 224.63 64.37x 54.62xPrice/Book Value 0.43 0.20 0.39 0.50 1.88 1.30 1.38 1.14 1.34 1.88 1.82 2.41 3.19 2.43 2.16 3.11 2.66x 2.09xPrice/Tangible Book Value 1.31 0.56 4.64 -- -- 6.94 4.92 14.12 53.18 27.97 11.77 8.76 10.77 5.93 5.72 13.75 8.99x 15.69xPrice/Cash Flow 6.05 -- 7.06 2.79 6.67 7.15 6.65 -- 11.21 22.96 8.65 16.33 25.17 16.26 7.62 12.32 15.54x 14.13xPrice/Free Cash Flow -- -- 22.10 3.77 8.42 11.23 10.18 -- 13.83 31.54 10.11 19.83 30.38 19.02 8.30 16.43 18.79x 17.74xEnterprise Value/EBIT -- -- -- -- 17.33 11.92 10.74 84.54 -- 19.49 17.02 9.95 13.52 11.67 11.19 29.86 15.24x 23.11xEnterprise Value/EBITDA -- -- -- 6.27 7.90 6.88 6.93 16.12 22.76 10.16 10.84 7.67 9.43 8.46 7.68 13.67 9.38x 11.37xEnterprise Value/Sales 0.57 0.26 0.26 0.31 0.65 0.56 0.68 0.81 1.06 0.95 1.24 1.16 1.42 1.60 1.32 1.29 1.36x 1.15x

Comps as specified in DEF 14aCompany Name

TEV/Total Revenues LTM - Latest

TEV/EBITDA LTM - Latest

TEV/EBIT LTM - Latest

P/TangBV LTM - Latest

NTM TEV/Forward

Total Revenue (Capital IQ)

NTM TEV/Forward

EBITDA (Capital IQ)

NTM Forward P/E (Capital

IQ)

The Hackett Group, Inc. (NasdaqGS:HCKT) 1.6x 10.7x 11.7x 18.7x 1.41x 8.68x 14.42x

Callidus Software Inc. (NasdaqGM:CALD) 5.1x NM NM 8.8x 4.35x 32.50x 58.43x

Resources Connection, Inc. (NasdaqGS:RECN 0.7x 8.4x 9.1x 6.1x 0.67x 9.17x 19.24x

Gartner, Inc. (NYSE:IT) 4.2x 26.4x 30.6x NM 2.82x 13.33x 30.71x

Exponent, Inc. (NasdaqGS:EXPO) 4.6x 20.7x 22.9x 5.5x 4.29x 17.13x 32.91x

GP Strategies Corporation (NYSE:GPX) 0.9x 11.7x 13.9x 12.5x 0.87x 10.55x 17.75x

RCM Technologies, Inc. (NasdaqGM:RCMT) 0.4x 11.7x 15.7x 3.1x - - -

The Advisory Board Company (NasdaqGS:AB 3.2x 13.5x 18.0x NM 3.09x 12.35x 26.52x

Huron Consulting Group Inc. (NasdaqGS:HURN 1.8x 10.2x 16.0x NM 1.72x 11.32x 16.37x

Summary Statistics TEV/Total Revenues LTM -

Latest

TEV/EBITDA LTM -

Latest

TEV/EBIT LTM - Latest

P/TangBV LTM -

Latest

NTM TEV/Forwar

d Total Revenue

(Capital IQ)

NTM TEV/Forwar

d EBITDA (Capital IQ)

NTM Forward

P/E (Capital IQ)

High 5.1x 26.4x 30.6x 18.7x 4.35x 32.50x 58.43x

Low 0.4x 8.4x 9.1x 3.1x 0.67x 8.68x 14.42x

Mean 2.5x 14.2x 17.2x 9.1x 2.40x 14.38x 27.04x

Median 1.8x 11.7x 15.8x 7.4x 2.27x 11.84x 22.88x

Appendix Summary Financials Income Statement

Franklin Covey MRQ ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATEfor the period 8/31/2013 8/31/2014 8/31/2015 8/31/2016 11/26/2016 2/28/2017

Overview($, '000) FY-2013 FY-2014 FY-2015 FY-2016 1Q-2017 2Q-2017 3Q-2017 4Q-2017 FY-2017 FY-2018 FY-2019 FY-2020 FY-2021

Income Statement - ModelTotal Invoiced Revenues 190,924 205,165 209,941.0 207,305.0 42,362.0 46,121.0 47,949.9 68,726.3 205,159.2 209,042.6 211,605.7 213,375.8 214,659.1Change in Deferred AAP Revenue Balance 0 0 - 7,250.0 2,575.0 3,925.0 4,358.5 9,197.7 20,056.2 7,029.6 5,162.0 3,734.5 2,644.9Total Recognized Revenue (GAAP) 190,924.0 205,165.0 209,941.0 200,055.0 39,787.0 42,196.0 43,591.4 59,528.6 185,103.0 202,013.0 206,443.7 209,641.3 212,014.2COGS 61,935 66,899 71,852 64,901 14,479.0 14,165.0 13,376.7 19,633.8 61,655 62,684 63,878 64,784 65,505Gross profit 128,989 138,266 138,089 135,154 25,308.0 28,031.0 30,214.7 39,894.8 123,448 139,329 142,566 144,858 146,510

SG&A (adjusted for SBC & Cap Curr Costs) 95,266 97,320 104,237 108,180 27,215 26,128 25,718.9 35,121.9 114,184 119,188 121,802 123,688 125,088Capitalized Curriculum Costs 3,224 7,787 2,166 2,236 666 1,679 2,750 2,900 7,995 4,272 4,329 4,368 4,395EBITDA 30,499 33,159 31,686 24,738 (2,573) 224 1,746 1,873 1,270 15,869 16,435 16,802 17,026Reduction of estimated earnout liability 0.0 1,579.0 (35.0) (1,538.0) 1,013.0 923.0 0.0 0.0 1,936.0 0.0 0.0 0.0 0.0Consolidated Adjusted EBITDA 30,499 34,738 31,651 23,200 (1,560) 1,147 1,746 1,873 3,206 15,869 16,435 16,802 17,026Growth in Deferred Revenue 0 0 0 7,250 2,575 3,925 4,358 9,198 20,056 7,030 5,162 3,735 2,645Adjusted EBITDA and Growth in Deferred Revenue 30,499 34,738 31,651 30,450 1,015 5,072 6,104 11,071 23,262 22,899 21,597 20,536 19,671

Depreciation 3,008 3,383 4,142 3,677 866 928 1,050.0 1,050.0 3,894.0 3,916.1 4,006.8 4,071.6 4,118.9Amortization 3,191 3,954 3,727 3,263 722 721 703.5 663.0 2,809.5 3,083.1 3,154.6 3,205.7 3,243.2Stock-based comp 2,686 1,057 2,399 3,173 1,214 1,563 1,077.7 250.0 4,104.7 4,200.9 4,264.7 4,308.9 4,340.5EBIT 21,614.0 24,765.0 21,418.0 14,625.0 (5,375.0) (2,988.0) (1,085.5) (90.0) (9,538.5) 4,669.3 5,009.2 5,215.6 5,323.6

EBITA 27,491.0 29,776.0 27,544.0 21,061.0 (3,439.0) (704.0) 695.7 822.9 (2,624.3) 11,953.3 12,428.5 12,730.2 12,907.4

Net interest expense (income) (1,718) (1,810) (1,754) (1,938) (504.0) (514.0) (714.6) (715.9) (2,448.5) (3,125.8) (3,224.7) (3,349.4) (3,494.2)One time items 0 0 (1,889) (776) - (1,500.0) - - (1,500.0) - - - -Other items (498) (1,196) (363) 0 - - - - - - - - -EBT 19,398.0 21,759.0 17,412.0 11,911.0 (5,879.0) (5,002.0) (1,800.1) (805.9) (13,487.0) 1,543.5 1,784.5 1,866.2 1,829.4

Provision for tax (5,079) (3,692) (6,296) (4,895) 1,921.0 1,669.0 720.0 322.4 4,632.4 (617.4) (713.8) (746.5) (731.7)GAAP Net Income 14,319.0 18,067.0 11,116.0 7,016.0 (3,958.0) (3,333.0) (1,080.0) (483.6) (8,854.6) 926.1 1,070.7 1,119.7 1,097.6

NOPAT 16,535 21,073 15,122 9,730 (3,454) (1,319) (365) 232 (4,906) 4,052 4,295 4,469 4,592

Net income attributable to noncontrolling interestsPreferred dividendsGAAP Net Income to Common Shareholders 14,319.0 18,067.0 11,116.0 7,016.0 (3,958.0) (3,333.0) (1,080.0) (483.6) (8,854.6) 926.1 1,070.7 1,119.7 1,097.6

GAAP Basic EPS $0.83 $1.08 $0.66 $0.47 ($0.29) ($0.24) ($0.08) ($0.04) ($0.66) $0.07 $0.09 $0.10 $0.10GAAP Fully Dilluted EPS $0.80 $1.07 $0.66 $0.47 ($0.29) ($0.24) ($0.08) ($0.04) ($0.66) $0.07 $0.09 $0.10 $0.10

Other DriversCapex (2,174.0) (3,470.0) (2,446.0) (3,993.0) (2,040.0) (1,904.0) (894.7) (1,381.3) (6,220.0) (6,358.9) (6,450.6) (6,514.6) (6,561.0)Capitalized Curriculum Development Costs (3,224.0) (7,787.0) (2,166.0) (2,236.0) (666.0) (1,679.0) (2,750.0) (2,900.0) (7,995.0) (4,272.1) (4,328.9) (4,367.6) (4,395.0)Amrotization of cap. Curr. Costs 1,891.0 2,824.0 4,093.0 3,865.0 977 834 992.4 1,080.5 3,883.9 3,962.5 4,014.4 4,050.4 4,076.5

Performance MetricsInvoiced Revenue Growth 7% 2% (1%) (7%) (0%) 3% (0%) (1%) 2% 1% 1% 1%Recognized Revenue Growth 7% 2% (5%) (12%) (7%) (3%) (8%) (7%) 9% 2% 2% 1%GAAP earnings growth 26% (38%) (37%) (601%) 644% 3% (106%) (226%) (110%) 16% 5% (2%)

Gross Margin 68% 67% 66% 68% 64% 66% 69% 67% 67% 69% 69% 69% 69%EBITDA margin 16% 16% 15% 12% (6%) 1% 4% 3% 1% 8% 8% 8% 8%EBIT margin 11% 12% 10% 7% (14%) (7%) (2%) (0%) (5%) 2% 2% 2% 3%EBITA margin 14% 15% 13% 11% (9%) (2%) 2% 1% (1%) 6% 6% 6% 6%GAAP net margin 7% 9% 5% 4% (10%) (8%) (2%) (1%) (5%) 0% 1% 1% 1%

Incremental Gross Profit Margin 65% (4%) 30% 88% 59% (57%) 109% 78% 94% 73% 72% 70%Incremental EBITDA Margin 19% (31%) 70% 127% 91% (20%) 264% 157% 86% 13% 11% 9%

ROIC (Financial Instruments method) 13% 15% 10% 7% 4% 3% 3% (4%) (4%) 3% 4% 4% 5%ROE 15% 16% 9% 7% 2% (1%) (1%) (10%) (10%) 1% 2% 2% 2%ROA 10% 11% 8% 5% 3% 2% 2% (3%) (3%) 2% 2% 2% 2%

Performance DriversSelector on left; 1 = Rec. Revs, 2 = Inv. Revs

1 Depreciation /Recognized Revs 1.6% 1.6% 2.0% 1.8% 2.2% 2.2% 2.4% 1.8% 2.1% 1.9% 1.9% 1.9% 1.9%1 Amortization /Recognized Revs 1.7% 1.9% 1.8% 1.6% 1.8% 1.7% 1.6% 1.1% 1.5% 1.5% 1.5% 1.5% 1.5%2 Stock Based Comp /Invoiced Revs 1.4% 0.5% 1.1% 1.5% 2.9% 3.4% 2.2% 0.4% 2.2% 2.1% 2.1% 2.1% 2.0%2 Capex /Invoiced Revs (1.1%) 1.7% 1.2% 1.9% 4.8% 4.1% 1.9% 2.0% 3.0% 3.0% 3.0% 3.1% 3.1%2 Cap.curric. costs /Invoiced Revs (1.7%) 3.8% 1.0% 1.1% 1.6% 3.6% 5.7% 4.2% 3.9% 2.0% 2.0% 2.0% 2.0%2 Amortization of Cap Cur Costs /Invoiced Revs 1.0% (1.4%) (1.9%) (1.9%) (2.3%) (1.8%) (2.1%) (1.6%) (1.9%) (1.9%) (1.9%) (1.9%) (1.9%)

Tax rate 26.2% 17.0% 36.2% 41.1% 32.7% 33.4% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%

Balance Sheet

Franklin Covey MRQ ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATEfor the period 8/31/2013 8/31/2014 8/31/2015 8/31/2016 11/26/2016 2/28/2017

Overview($, '000) FY-2013 FY-2014 FY-2015 FY-2016 1Q-2017 2Q-2017 3Q-2017 4Q-2017 FY-2017 FY-2018 FY-2019 FY-2020 FY-2021

Balance Sheet - ModelAssetsCash and equivalents 12,291.0 10,483.0 16,234.0 10,456.0 7,876.0 10,686.0 11,775.9 9,988.3 9,988.3 7,500.0 7,500.0 7,500.0 7,500.0

c Accounts receivable 52,684.0 61,490.0 65,182.0 65,960.0 54,717.0 46,504.0 46,292.3 51,619.5 51,619.5 54,107.9 54,803.5 55,368.2 55,859.9c Inventory 4,321.0 6,367.0 3,949.0 5,042.0 5,077.0 4,778.0 4,221.9 4,441.9 4,441.9 4,656.1 4,715.9 4,764.5 4,806.8

Deferred tax asset, current 4,685.0 6,772.0 2,479.0 0.0 2,633.0 310.0 310.0 310.0 310.0 310.0 310.0 310.0 310.0c Other current assets 7,127.0 7,904.0 7,581.0 8,283.0 10,170.0 9,970.0 9,970.0 9,970.0 9,970.0 9,970.0 9,970.0 9,970.0 9,970.0

Total current assets 81,108.0 93,016.0 95,425.0 89,741.0 80,473.0 72,248.0 72,570.2 76,329.7 76,329.7 76,543.9 77,299.4 77,912.7 78,446.7

PP&E, net 17,180.0 17,271.0 15,499.0 16,083.0 17,172.0 18,051.0 17,895.7 18,227.0 18,227.0 20,669.8 23,113.7 25,556.7 27,998.8

Goodwill 16,135.0 19,641.0 19,903.0 19,903.0 19,903.0 19,903.0 19,903.0 19,903.0 19,903.0 19,903.0 19,903.0 19,903.0 19,903.0c Other intangible assets 60,654.0 57,177.0 53,449.0 50,196.0 49,471.0 48,752.0 49,806.1 50,962.6 50,962.6 48,189.1 45,349.0 42,460.5 39,535.8

Equity investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other assets 14,328.0 18,081.0 16,369.0 14,948.0 14,270.0 14,930.0 14,930.0 14,930.0 14,930.0 14,930.0 14,930.0 14,930.0 14,930.0Total assets 189,405.0 205,186.0 200,645.0 190,871.0 181,289.0 173,884.0 175,105.0 180,352.3 180,352.3 180,235.9 180,595.1 180,762.9 180,814.3

Liabilities & Shareholders' Equity

c Accounts payable 9,294.0 12,001.0 8,306.0 10,376.0 7,440.0 7,691.0 7,874.4 8,533.1 8,533.1 8,944.4 9,059.4 9,152.8 9,234.1c Accrued expenses 31,140.0 29,586.0 29,634.0 17,418.0 13,516.0 14,293.0 14,293.0 14,293.0 14,293.0 14,293.0 14,293.0 14,293.0 14,293.0

Client deposits 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Income taxes payable 1,365.0 0.0 221.0 4.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

c Deferred revenue 0.0 0.0 0.0 20,847.0 20,282.0 21,118.0 25,476.5 34,674.2 34,674.2 41,703.8 46,865.8 50,600.3 53,245.2Other current liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Current portion of long-term debt and ST Debt 1,139.0 1,298.0 1,473.0 5,412.0 6,712.0 6,763.0 6,763.0 6,763.0 6,763.0 6,763.0 6,763.0 6,763.0 6,763.0Total current liabilities 42,938.0 42,885.0 39,634.0 54,057.0 47,950.0 49,865.0 54,406.9 64,263.3 64,263.3 71,704.2 76,981.2 80,809.1 83,535.3

Long Term Debt 27,376.0 26,078.0 24,605.0 33,256.0 35,306.0 33,596.0 33,596.0 33,596.0 33,596.0 33,596.0 33,596.0 33,596.0 33,596.0Revolver (for Projection) - - - - 0.0 0.0 0.0 0.0 - 474.1 3,013.5 6,353.7 10,317.0Net deferred tax liability / (asset) 6,479.0 5,575.0 7,098.0 6,670.0 6,328.0 2,081.0 2,081.0 2,081.0 2,081.0 2,081.0 2,081.0 2,081.0 2,081.0

c Other long-term liabilities 6,106.0 3,934.0 3,802.0 3,173.0 1,235.0 1,247.0 1,247.0 1,247.0 1,247.0 1,247.0 1,247.0 1,247.0 1,247.0Total liabilities 82,899.0 78,472.0 75,139.0 97,156.0 90,819.0 86,789.0 91,330.9 101,187.3 101,187.3 109,102.3 116,918.7 124,086.8 130,776.3

c Common equity 106,506.0 126,714.0 125,506.0 93,715.0 90,470.0 87,095.0 83,774.1 79,165.0 79,165.0 71,133.5 63,676.4 56,676.1 50,038.1Total liabilities & shareholders' equity 189,405.0 205,186.0 200,645.0 190,871.0 181,289.0 173,884.0 175,105.0 180,352.3 180,352.3 180,235.9 180,595.1 180,762.9 180,814.3

Check A=L+SE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUEAssets = Assets (as presented vs model) TRUE TRUE TRUE TRUE TRUE TRUEL+SE=L+SE (as presented vs model) TRUE TRUE TRUE TRUE TRUE TRUE

Working CapitalNon Cash current Assets 68,817.0 82,533.0 79,191.0 79,285.0 72,597.0 61,562.0 60,794.3 66,341.4 66,341.4 69,043.9 69,799.4 70,412.7 70,946.7Non-Debt Current Liabs 41,799.0 41,587.0 38,161.0 48,645.0 41,238.0 43,102.0 47,643.9 57,500.3 57,500.3 64,941.2 70,218.2 74,046.1 76,772.3Net Working Capital 27,018.0 40,946.0 41,030.0 30,640.0 31,359.0 18,460.0 13,150.4 8,841.1 8,841.1 4,102.7 (418.8) (3,633.4) (5,825.6)

Change in NWC Needs (13,928.0) (84.0) 10,390.0 (719.0) 12,899.0 5,309.6 4,309.3 21,798.9 4,738.4 4,521.5 3,214.6 2,192.2

Working Capital DriversSelector on left; 1 = Rec. Revs, 2 = Inv. Revs

1 Days Recievables (Recognized Revs) 101.6 110.1 119.6 138.4 109.4 96.9 79.1 115.9 95.5 96.3 95.9 95.71 Days Inventory (Recognized Revs) 9.5 9.0 8.2 11.6 10.7 8.8 6.8 9.4 8.2 8.3 8.3 8.21 Days Payables (Recognized Revs) 18.9 17.7 17.0 20.4 16.4 16.5 13.1 18.6 15.8 15.9 15.9 15.8

Cash Con. Cycle 92.1 101.4 110.8 129.6 103.7 89.3 72.9 106.6 87.9 88.6 88.3 88.2

Debtxx Total Debt and DE 28,515.0 27,376.0 26,078.0 38,668.0 42,018.0 40,359.0 40,359.0 40,359.0 40,359.0 40,359.0 40,359.0 40,359.0 40,359.0

Net Debt 16,224.0 16,893.0 9,844.0 28,212.0 34,142.0 29,673.0 28,583.1 30,370.7 30,370.7 32,859.0 32,859.0 32,859.0 32,859.0

Rough Liquidation Estimate (Ben Graham Def.)Liquidating Value Per Share [(Current Assets - Curr 0.26 1.19 1.62 (0.05) (0.29) (0.90) (1.22) (1.69) (1.69) (2.37) (3.09) (3.78) (4.45)

LTM B/S MetricsAverage SE 97,561.5 113,657.0 126,250.8 101,211.3 92,057.8 90,623.5 88,763.5 85,126.0 85,126.0 75,775.6 68,045.7 60,797.9 53,935.5Average Book Value of Debt 29,938.3 28,446.0 26,576.8 34,954.0 39,027.5 40,259.3 40,351.0 40,773.8 40,773.8 40,359.0 40,359.0 40,359.0 40,359.0Average Invested Capital 127,499.8 142,103.0 152,827.5 136,165.3 131,085.3 130,882.8 129,114.5 125,899.8 125,899.8 116,134.6 108,404.7 101,156.9 94,294.5

Average Total Assets 168,634.5 185,476.5 192,587.5 181,764.5 179,209.5 179,942.8 180,287.2 177,657.6 177,657.6 184,494.9 185,586.6 186,209.4 186,511.7Average Current Liabilities 32,633.0 33,111.3 31,214.3 38,160.5 42,870.3 47,383.5 51,569.7 54,121.3 54,121.3 65,974.4 72,024.5 76,471.0 79,695.3Average Capital Employed 201,267.5 218,587.8 223,801.8 219,925.0 222,079.8 227,326.3 231,857.0 231,778.8 231,778.8 250,469.3 257,611.1 262,680.3 266,207.0

Cash Flow Statement

Franklin Covey MRQ ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATEfor the period 8/31/2013 8/31/2014 8/31/2015 8/31/2016 11/26/2016 2/28/2017

Overview($, '000) FY-2013 FY-2014 FY-2015 FY-2016 1Q-2017 2Q-2017 3Q-2017 4Q-2017 FY-2017 FY-2018 FY-2019 FY-2020 FY-2021

CFS - ModelOperating ActivitiesNet income 14,319.0 18,067.0 11,116.0 7,016.0 (3,958.0) (3,333.0) (1,080.0) (483.6) (8,854.6) 926.1 1,070.7 1,119.7 1,097.6

D&A 6,131.0 7,326.0 7,875.0 6,943.0 1,588.0 1,649.0 1,753.5 1,713.0 6,703.5 6,999.2 7,161.3 7,277.3 7,362.1Stock-based compensation 2,686.0 1,057.0 2,399.0 3,173.0 1,214.0 1,563.0 1,077.7 250.0 4,104.7 4,200.9 4,264.7 4,308.9 4,340.5Amortization of capitalized curriculum costs 1,891.0 2,824.0 4,093.0 3,865.0 977.0 834.0 992.4 1,080.5 3,883.9 3,962.5 4,014.4 4,050.4 4,076.5Deferred Income Taxes (1,739.0) (679.0) 3,665.0 1,854.0 0.0 (4,256.0) 0.0 0.0 (4,256.0) 0.0 0.0 0.0 0.0Increase / (decrease) in net estimated earnout liability 0.0 (1,579.0) 35.0 1,538.0 (1,013.0) (923.0) 0.0 0.0 (1,936.0) 0.0 0.0 0.0 0.0One Time Expenses (17.0) 0.0 1,302.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Income statement adjustments 8,952.0 8,949.0 19,369.0 17,373.0 2,766.0 (1,133.0) 3,823.6 3,043.5 8,500.0 15,162.6 15,440.5 15,636.6 15,779.2

(Increase) / decrease in working capital (10,170.0) (6,970.0) (6,758.0) 8,593.0 1,855.0 10,877.0 5,309.6 4,309.3 22,350.9 4,738.4 4,521.5 3,214.6 2,192.2Increase / (decrease) in net DTL 1,504.0 (1,347.0) 2,548.0 (316.0) (2,630.0) 2,325.0 0.0 0.0 (305.0) 0.0 0.0 0.0 0.0Increase / (decrease) in other liabilities 923.0 (575.0) (85.0) (1.0) (911.0) 922.0 0.0 0.0 11.0 0.0 0.0 0.0 0.0Balance sheet adjustments (7,743.0) (8,892.0) (4,295.0) 8,276.0 (1,686.0) 14,124.0 5,309.6 4,309.3 22,056.9 4,738.4 4,521.5 3,214.6 2,192.2

Cash flow from operating activities 15,528.0 18,124.0 26,190.0 32,665.0 (2,878.0) 9,658.0 8,053.1 6,869.2 21,702.3 20,827.1 21,032.7 19,970.8 19,069.0

Investing ActivitiesPurchases of property and equipment (2,174.0) (3,470.0) (2,446.0) (3,993.0) (2,040.0) (1,904.0) (894.7) (1,381.3) (6,220.0) (6,358.9) (6,450.6) (6,514.6) (6,561.0)Curriculum development costs (3,224.0) (7,787.0) (2,166.0) (2,236.0) (666.0) (1,679.0) (2,750.0) (2,900.0) (7,995.0) (4,272.1) (4,328.9) (4,367.6) (4,395.0)Acquisition of business (4,185.0) (6,167.0) (262.0) 0.0 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.0Payment of contingent business acquisition costs 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.0Cash flow from investing activities (9,583.0) (17,424.0) (4,874.0) (6,229.0) (2,706.0) (3,583.0) (3,644.7) (4,281.3) (14,215.0) (10,631.0) (10,779.5) (10,882.2) (10,956.0)

Financing Activities

Debt issued/Repaid (3,730.0) (1,155.0) (1,302.0) 12,591.0 3,349.0 (1,658.0) 0.0 0.0 1,691.0 0.0 0.0 0.0 0.0Revolver Draw (Paydown) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 474.1 2,539.4 3,340.2 3,963.3Common stock (repurchased) Issued (1,007.0) (3,767.0) (13,738.0) (42,907.0) 136.0 (1,623.0) (3,318.5) (4,375.5) (9,181.1) (13,158.4) (12,792.6) (12,428.9) (12,076.2)Dividends paid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other financing 903.0 2,477.0 137.0 (2,219.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Cash flow from financing activities (3,834.0) (2,445.0) (14,903.0) (32,535.0) 3,485.0 (3,281.0) (3,318.5) (4,375.5) (7,490.1) (12,684.3) (10,253.2) (9,088.7) (8,113.0)

Change In Cash 2,111.0 (1,745.0) 6,413.0 (6,099.0) (2,099.0) 2,794.0 1,089.9 (1,787.6) (2.7) (2,488.3) 0.0 0.0 (0.0)

Change in Cash

Increase (decrease) in cash & cash equivalents 2,111.0 (1,745.0) 6,413.0 (6,099.0) (2,099.0) 2,794.0 1,089.9 (1,787.6) (2.7) (2,488.3) 0.0 0.0 0.0

Effect of foreign exchange on cash (831.0) (63.0) (662.0) 321.0 (481.0) 16.0 0.0 0.0 (465.0) 0.0 0.0 0.0 0.0

Cash and cash equivalents at beginning of period 11,011.0 12,291.0 10,483.0 16,234.0 10,456.0 7,876.0 10,686.0 11,775.9 10,456.0 9,988.3 7,500.0 7,500.0 7,500.0Cash and cash equivalents at end of period 12,291.0 10,483.0 16,234.0 10,456.0 7,876.0 10,686.0 11,775.9 9,988.3 9,988.3 7,500.0 7,500.0 7,500.0 7,500.0

Cash and CE at the EOP from BS 12,291.0 10,483.0 16,234.0 10,456.0 7,876.0 10,686.0 11,775.9 9,988.3 9,988.3 7,500.0 7,500.0 7,500.0 7,500.0Check? 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FCF (CFO-Capex) 10,130.0 6,867.0 21,578.0 26,436.0 (5,584.0) 6,075.0 4,408.4 2,587.9 7,487.3 10,196.1 10,253.2 9,088.7 8,113.0FCF (NOPAT+D&A+SBC-Capex-Intangibles-dNWC) 15,184.0 7,106.0 24,787.0 27,869.0 (3,100.0) 12,043.0 5,123.0 3,303.8 17,369.9 13,321.9 13,477.9 12,438.1 11,607.2

Existing Coverage and Write Ups Sell-Side William Blair Barrington Research B.Riley and Co Roth Capital Partners Stonegate Securities Buy-side Posted Online https://seekingalpha.com/article/2823726-franklin-covey-shares-are-undervalued-and-under-the-radar https://seekingalpha.com/article/3274795-franklin-covey-a-play-on-a-divided-workforce https://seekingalpha.com/article/3964129-overlooked-transformation-makes-franklin-covey-compelling-buy https://seekingalpha.com/article/3964599-franklin-covey-good-enough-reason-buy-yet https://sumzero.com/pro/research/ideas/1343 https://sumzero.com/pro/research/ideas/12200 https://valueinvestorsclub.com/idea/FRANKLIN_COVEY_CO/139167 https://valueinvestorsclub.com/idea/FRANKLIN_COVEY_CO/92646

Revenue build I began with the same industry growth rate data as I previously discussed, and used either three, five, or ten year CAGRs for industry size and share of market in a bull, bear, or base case. The multiple of the two data points got me the size of Franklin Covey’s US training business. I used the resulting growth rate to estimate going forward instead of being strict with the actual size of their business given all the other moving pieces involved here. My key assumptions in this portion were that the industry would grow according to the base case (+1.2%), and that FC would suffer through with the bear case (-0.3%) in terms of market share.

SEGMENT DEFINITIONS Direct Offices – This channel includes our three regional sales offices that serve clients in the United States and Canada; our directly owned international offices in Japan, the United Kingdom, and Australia; and our public program operations.

In addition, we expect our newly opened offices in China to increase sales from our direct offices in future periods. Our offerings were previously sold in China through an independent licensee.

Strategic Markets – This division includes our government services office, Sales Performance practice, Customer Loyalty practice, and the new “Global 50” group, which is specifically focused on sales to large, multi-national organizations. Education Practice – Our Education practice division is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed The Leader In Me program designed for students primarily in K-6 elementary schools.

At August 31, 2016 over 3,000 schools around the world were using The Leader in Me curriculum. Sales of subscription services during the previous fiscal year also improved sales during fiscal 2016 as we recognized a portion of the revenue that was deferred in previous periods.

International Licensees – In countries or foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees, which may translate and adapt our offerings to local preferences and customs, if necessary. Corporate and other – Our “corporate and other” sales are mainly comprised of leasing, books and audio product sales, and shipping and handling revenues. SEGMENTS The segments were built up one at a time, and I will cover each below. The result was this.

ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE Historical CAGR2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 3 Yr 5yr 10yr 13yr

Industry Size Industry Size - US OnlyIBISWorld Analysis 4,424.7 5,015.3 5,781.5 6,445.2 7,177.3 8,198.9 8,596.1 8,079.5 8,359.1 8,645.4 8,975.7 9,227.9 9,757.3 10,362.6 10,513.7US Census Bureau Analysis 6,385.0 6,545.0 6,923.0 6,850.0 7,505.0 7,646.0 7,927.0 8,140.0Training Magazine 15,100.0 13,800.0 13,300.0 13,500.0 15,800.0 16,300.0 15,400.0 7,000.0 6,900.0 9,100.0 7,400.0 5,700.0 6,100.0 8,000.0 7,500.0Industry Size 9,762.4 9,407.7 9,540.8 9,972.6 11,488.6 12,249.5 11,998.1 7,154.8 7,268.0 8,222.8 7,741.9 7,477.6 7,834.4 8,763.2 8,717.9 8,820.4 8,924.2 9,029.2 9,135.4 9,242.8 5.2% 1.2% (2.7%) (0.6%)Growth (%) (4%) 1% 5% 15% 7% (2%) (40%) 2% 13% (6%) (3%) 5% 12% (1%) 1.2% 1.2% 1.2% 1.2% 1.2%

Industry Growth Rate Scenario Analysis1 Bull Case (3yr CAGR) 5.2% 5.2% 5.2% 5.2% 5.2%2 Base Case (5yr CAGR) 1.2% 1.2% 1.2% 1.2% 1.2%3 Bear Case (10yr CAGR) (2.7%) (2.7%) (2.7%) (2.7%) (2.7%)2 Base Case (5yr CAGR) 1.2% 1.2% 1.2% 1.2% 1.2%

Share of market 0.79% 0.64% 0.76% 0.62% 0.66% 0.76% 1.16% 1.13% 1.23% 1.36% 1.66% 1.80% 1.70% 1.64% 1.64% 1.63% 1.63% 1.62% 1.62% (0.3%) 6.0% 10.3% 5.8%Growth (%) (18.99%) 19.28% (18.91%) 7.43% 14.43% 52.82% (2.97%) 8.98% 10.83% 21.77% 8.35% (5.18%) (3.60%) (0.3%) (0.3%) (0.3%) (0.3%) (0.3%)

Market Share Growth Rate Scenario Analysis1 Bull Case (10r CAGR) 10.3% 10.3% 10.3% 10.3% 10.3%2 Base Case (5yr CAGR) 6.0% 6.0% 6.0% 6.0% 6.0%3 Bear Case (3yr CAGR) (0.3%) (0.3%) (0.3%) (0.3%) (0.3%)3 Bear Case (3yr CAGR) (0.3%) (0.3%) (0.3%) (0.3%) (0.3%)

Franklin Covey US Training Bu 110.7 82.1 74.3 61.0 76.1 71.1 81.4 91.3 83.2 82.0 101.1 105.5 124.1 140.9 149.4 143.3 144.5 145.7 147.0 148.2 149.5 4.9% 7.2% 7.3% 5.2%Growth (%) (25.8%) (9.5%) (17.8%) 24.7% (6.6%) 14.5% 12.1% (8.9%) (1.4%) 23.3% 4.3% 17.6% 13.5% 6.1% (4.1%) 0.9% 0.9% 0.9% 0.9% 0.9%

This is all pre-deferral

Industry Data - all data mmIbisWorld IBISWorld Insutry Reports - Business Coaching - NAICS 611430Full Data in Folder

IBISWorld Analysis (forecasts - IBIS) in 20 5,899.6 6,538.9 7,346.3 7,917.9 8,544.4 9,489.5 9,583.2 9,037.5 9,195.9 9,226.7 9,379.0 9,503.5 9,895.8 10,488.5 10,513.7 10,996.5 11,376.3 11,552.2 11,683.9 11,745.7

Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 No inflation adjustment needed for forecastsInflation Adjustment Factor (Bls.gov) 0.75 0.767 0.787 0.814 0.84 0.864 0.897 0.894 0.909 0.937 0.957 0.971 0.986 0.988 1 1 1 1 1 1

IBIS Corrected for inflation adjustment 4,424.7 5,015.3 5,781.5 6,445.2 7,177.3 8,198.9 8,596.1 8,079.5 8,359.1 8,645.4 8,975.7 9,227.9 9,757.3 10,362.6 10,513.7 10,996.5 11,376.3 11,552.2 11,683.9 11,745.7

US Census Bureau / StatistaForecast: revenue professional trainings US 2009-2020Revenue of professional trainings (NAICS 61143) in the United States from 2009 to 2020 (in million U.S. dollars)Source:Statista for forecasts, US Census Bureau for Actuals

US Census Bureau Analysis (forecasts - Statista) 6,385 6,545 6,923 6,850 7,505 7,646 7,927 8,140 8,108 8,256 8,373 8,271

- Includes education as per Census Bureau Definitionhttps://www.census.gov/econ/isp/sampler.php?naicscode=611430&naicslevel=6#Training MagazineTraining Magazine Industry Reports (data citied by mgmt in 10-K), * They note total size as opposed to more relevant outsourced number

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Total Training Expenditures 54,200 51,300 51,400 51,100 55,800 58,500 56,200 52,200 52,800 59,700 55,800 55,400 61,800 70,600 70,600 8.4% 3.4% 2.4% 2.5%Spending on outside products/services 15,100 13,800 13,300 13,500 15,800 16,300 15,400 7,000 6,900 9,100 7,400 5,700 6,100 8,000 7,500 9.6% (3.8%) (7.2%) (4.6%)Outside vendor share 28% 27% 26% 26% 28% 28% 27% 13% 13% 15% 13% 10% 10% 11% 11% 1.1% (7.0%) (9.3%) (6.9%)-Includes Edcuation

Michael Mazya 46 | P a g e

EDUCATION For the education segment, I broke up the business into US and non-US schools, as per the data presented on the Q2 2017 earnings call. Per the 2Q 2017 conference call, Edu business is adding to deferred revenue in 3Q and 4Q, and dispersing deferred revenue in 1Q and 2Q, because of the sales seasonality. There is a large impact of deferred revenue from the TLIM subscription business, however I have not modelled those effects.

• They retroactively break out deferred revenue from accrued liabilities starting 2017, and changes from this business make it hard to follow

• Information on the details of this revenue recognition model, deferral details etc. are insufficient to model it, It is possible, but very limited data, and thus many guesses and assumptions.

• Additional data including some of the deferred revenue guesses/extrapolations are at the bottom of the revenue build • Since it has been this way for some time (i.e. the effect is settled), and almost all the growth in deferred revenue has come

from AAP as opposed to Leader in Me, this should not create too much noise • Other components of the retroactively broken out deferred revenue line include customer deposits unrelated to any

subscription business, details have only been shown once in the 3Q2016 Webcast slides

Revenue growth is being split based on the geographic location of the clients

• Non-US Growth is linked to int'l license, but zeroes for 2017 to not penalize the education segment for the China situation • Assumption that revenue split implies proportional margin split later on, which is likely not true • Zeroes for 2017 Non-US Growth as opposed to the minus 20's for Int'l license because there does not seem to be an impact

from China conversion here

Franklin Covey MRQ ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATEfor the perio 8/31/2013 8/31/2014 8/31/2015 8/31/2016 11/26/2016 2/28/2017

Overview ($, '000) FY-2013 FY-2014 FY-2015 FY-2016 1Q-2017 2Q-2017 3Q-2017 4Q-2017 FY-2017 1Q-2018 2Q-2018 3Q-2018 4Q-2018 FY-2018 FY-2019 FY-2020 FY-2021Period 1 1 1 1 0.25 0.25 0.25 0.25 1 0.25 0.25 0.25 0.25 1 1 1 1pricing as of date/release date 11/14/2013 11/14/2014 11/13/2015 11/14/2016 1/5/2017 4/7/2017Fiscal- Calendar FY-2013 FY-2014 FY-2015 FY-2016 FQ1 - CQ4 FQ2 - CQ1 FY-2017 FY-2018 FY-2019 FY-2020 FY-2021

x Growth By SegmentRecognized Revenue GrowthDirect offices (1.7%) (8%) (10%) (5%) (1%) (14%) (8%) 24% 17% 17% 9% 16% 3% 1% 0%Strategic Markets 16.3% (20%) (34%) (20%) 1% 1% (13%) 1% 1% 1% 1% 1% 1% 1% 1%Education practice 7.3% 22% 9% 16% 1% 1% 5% 2% 2% 2% 2% 2% 2% 2% 3%International licensees 10% 0% 3% (27%) (25%) (20%) (20%) (23%) 5% 5% 5% 5% 5% 5% 5% 5%Corporate and other (7%) (10%) (5%) (19%) (5%) (5%) (9%) (5%) (5%) (5%) (5%) (5%) (5%) (5%) (5%)Total Recognized Revenue Growth 2.3% (5%) (12%) (7%) (3%) (8%) (7%) 14% 10% 10% 5% 9% 2% 2% 1%

Total Invoiced Revenue Growth (1%) (7%) (0%) 3% (0%) (1%) 4% 2% 2% 1% 2% 1% 1% 1%

x Revenue by SegmentRecognized Revenue

Direct Office-This Period 102,638.0 18,847.0 19,537.0 18,715.1 20,305.3 77,404.4 16,902.6 17,187.4 16,550.0 17,657.6 68,297.6 60,711.8 54,476.9 49,353.6Direct Offices - Deferral Unwind 955.0 2,400.0 3,875.0 4,925.0 6,737.1 17,937.1 9,498.3 10,284.7 11,037.6 11,718.1 42,538.7 53,000.9 60,731.5 66,369.1

Direct Offices 115,085.0 113,087.0 103,613.0 21,247.0 23,412.0 23,640.1 27,042.4 95,341.5 26,400.9 27,472.1 27,587.5 29,375.7 110,836.2 113,712.7 115,208.4 115,722.7Strategic Markets Sales 31,841.0 37,039.0 29,778.0 4,761.0 6,002.0 6,965.0 8,212.6 25,940.6 4,801.7 6,053.3 7,024.5 8,282.7 26,162.2 26,385.6 26,611.0 26,838.4Education Sales 30,883.0 33,128.0 40,361.0 8,743.0 7,848.0 7,441.2 18,318.2 42,350.4 8,925.1 8,014.2 7,601.5 18,719.4 43,260.3 44,253.5 45,338.1 46,522.2International Licensees Sales 15,452.0 17,065.0 17,100.0 17,629.0 3,431.0 2,937.0 3,577.6 3,628.0 13,573.6 3,602.6 3,083.9 3,756.5 3,809.4 14,252.3 14,964.9 15,713.1 16,498.8Corporate and Other Sales 10,291.0 9,587.0 8,674.0 1,605.0 1,997.0 1,967.5 2,327.5 7,897.0 1,524.8 1,897.2 1,869.1 2,211.1 7,502.1 7,127.0 6,770.6 6,432.1Total 205,165.0 209,941.0 200,055.0 39,787.0 42,196.0 43,591.4 59,528.6 185,103.0 45,255.0 46,520.6 47,839.1 62,398.3 202,013.0 206,443.7 209,641.3 212,014.2

Change in Deferred Balance 7,250.0 2,575.0 3,925.0 4,358.5 9,197.7 20,056.2 (1,377.9) 526.8 968.1 6,912.6 7,029.6 5,162.0 3,734.5 2,644.9AAP Related Deferred Revenue Balance 7,250.0 9,825.0 13,750.0 18,108.5 27,306.2 27,306.2 72,661.0 73,187.9 74,155.9 81,068.5 81,068.5 171,424.9 279,838.1 401,592.6

Total Invoiced Revenues 205,165.0 209,941.0 207,305.0 42,362.0 46,121.0 47,949.9 68,726.3 205,159.2 43,877.1 47,047.5 48,807.2 69,310.9 209,042.6 211,605.7 213,375.8 214,659.1

Franklin Covey MRQ ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATEfor the perio 8/31/2013 8/31/2014 8/31/2015 8/31/2016 11/26/2016 2/28/2017

Overview ($, '000) FY-2013 FY-2014 FY-2015 FY-2016 1Q-2017 2Q-2017 3Q-2017 4Q-2017 FY-2017 1Q-2018 2Q-2018 3Q-2018 4Q-2018 FY-2018 FY-2019 FY-2020 FY-2021

x Education Segment US Revenue 5,222.1 12,887.9 6,203.8 5,501.7 5,151.9 12,521.2 29,378.6 28,457.2 27,442.7 26,342.2Non-US Revenue 2,219.1 5,430.2 2,721.4 2,512.6 2,449.6 6,198.1 13,881.7 15,796.3 17,895.5 20,180.0Total Revenue 30,883.0 33,128.0 40,361.0 8,743.0 7,848.0 7,441.2 18,318.2 42,350.4 8,925.1 8,014.2 7,601.5 18,719.4 43,260.3 44,253.5 45,338.1 46,522.2

per 1Q call - currently 3,000 schoolsUS Share US - 2,100 sc 70.0% 70% 70% 70% 69% 68% 67% 67.9% 64.3% 60.5% 56.6%Non-US Share Non US - 900 30.0% 30% 30% 30% 31% 32% 33% 32.1% 35.7% 39.5% 43.4%Total Total 100% 100% 100% 100% 100% 100% 100% 100.0% 100.0% 100.0% 100.0%

US Growth Rate ( Linked to US Industry Growth Rate) 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%Non-US Growth Rate (Linked to Int'l License Growth Rate) 0.0% 0.0% 5.0% 5.0% 5.0% 5.0%

Michael Mazya 47 | P a g e

INTERNATIONAL LICENSEES Beg. September 1, 2016 (start of FY 2017) - China offices went from licensees to Direct offices,

• International licensees pay ~20% royalty on sales, and China/Singapore are listed as 1.8% of FY2015 sales (3.8 mm) and 2.5% of FY 2016 sales (5.0 mm)

• With EBIT, EBITDA, Net Margins all below 20% in theory this should not change immediate value of that business, but could optically stand out for change in capital intensity

• I am modelling similar sales growth drawdowns as 1Q and 2Q for the rest of the year to reflect China • Management guidance was that China sales are expected to be backloaded because of Chinese New Year, as per the 2Q

2017 Call. I was not able to identify this effect in the China segments of other businesses.

I am modelling an improvement in COGS margin and then assuming 5% revenue growth (FY18 and out) to reflect potential benefit of AAP in this business segment. I am personally more skeptical here, as sales are slowing across the board internationally, and I found management's explanations unconvincing

• AAP international rollout has been delayed into May from March. • Deferred Revenue should not be an issue here

Growth rate is modelled directly from the main table. STRATEGIC MARKETS This is the segment where we have the most primary data on AAP thanks to government disclosures. The growth rate is based on the industry level growth rate for the US, as this business is covered in the industry analysis. The growth rate is modelled directly from the main table. CORPORATE AND OTHER I have modelled it directly from the main table, and have given it a -5% growth rate, though it has been shrinking much faster than that. DIRECT OFFICES – INVOICED REVENUES/RECOGNIZED REVENUES I am modelling 100% of the effect of AAP here, even though at the moment it is only 91% (of the 21.4mm of AAP sales invoiced in FY 2016, 19.4mm (91%) would have been applicable to this segment per the 2016 10K). If there are any large sales in the "Global 50" group, that would be the time to review this assumption. Longer discussion is shown under Deciphering AAP.