Bad Habits at Franklin Covey
from Spring 2000
by David Moon
During one of our regular Sunday afternoons on the sofa with a pile of prospectuses, my wife Sien and I abandoned our normal chitchat about breakout patterns and other investing arcana to debate the relative virtues of paper versus electronic calendars. As a testosterone-filled, SUV-driving, all-American male, I am a gadget guy. I am in charge of the TV remote control. And I understand the superiority of my PalmPilot compared with Sien’s horribly old-fashioned, leather-bound paper calendar.
Sien, typically, brought me back to earth. “If your PalmPilot is so much better than my Franklin Planner,” she asked, “why do you own Franklin stock?”
As it happened, I’d been asking myself the same question. I’d found some solace in the fact that Franklin Covey was aggressively buying back its own stock at $24 a share. But hang on a minute—Franklin Covey actually purchased many of those shares from board members and senior managers. This was my first clue that something might be amiss.
I should have discarded my Franklin Covey stock even before I moved to a PalmPilot, but for a while, the future looked rosy. The company is the result of the 1997 merger of Franklin Quest, purveyor of day planners and other goodies, and Covey Leadership Center, specialists in motivational books, tapes, and seminars. Founder Steven Covey is best known for his series of Seven Habits… books. Two years after the merger, however, the company was still taking restructuring charges and the stock was down steeply.
Fortunately, the two businesses were still cash cows, even if the cows were leaner. The merged company had used excess cash from its operations to repurchase $126 million worth of its stock over the past three years, or 26% of the shares outstanding. So which insiders were doing the selling?
Franklin Quest founder Hyrum Smith, later co-chairman of Franklin Covey, sold 1.25 million shares at $24 during 1997 and 1998. In 1998, director Robert F. Bennett, a U.S. senator from Utah, sold 194,000 shares at $19.08. Franklin’s executive vice president, Val John Christenson, sold 130,000 shares at $17.75 the same year.
But the plot thickens.
In 1999, soon after the stock took its dive, the board voted to issue 750,000 shares of preferred convertible stock, selling them for $75 million to Knowledge Capital Investment Group, a private investment company in Dallas controlled by board member Robert Whitman. Whitman, incidentally, became chairman and interim CEO of Franklin Covey shortly afterward and took the helm officially in January. The shares, which pay a 10% preferred dividend, are convertible into Franklin Covey common stock at $14.
This saddles Franklin Covey with paying an annual dividend of $7.5 million to a company controlled by its CEO. Furthermore, since this is a dividend, the payment is not tax deductible. Franklin Covey could have gotten the $75 million cheaper by borrowing it at an after-tax cost of 4%—if it really needed the money. But did it? The three previous years’ excess cash from operations is what enabled the company to buy back $126 million worth of stock in the first place.
Where was the rest of the board? Protecting their directorships, it seems. In 1997, Franklin Quest directors Smith and Bennett, along with all the shareholders of Covey, signed an agreement requiring that, until August 31, 2000, their shares be voted in favor of any potential directors proposed by the board’s nominating committee.
So far, there’s no word on whether Covey, who is still a director, plans to write Seven Habits of Highly Effective Board Members.
David Moon is president of Moon Capital Management, an investment firm in Knoxville, Tennessee.
