David Covey and Stephan Mardyks have since left FranklinCovey but were with FranklinCovey as NEO’s for the entire 2010 fiscal year and are therefore included in this report. For 11 months of fiscal 2010, Shawn Moon was in the role of General Manager for our Government Services vertical market and was then promoted to the role of Executive Vice President – Domestic and Global Sales and Delivery, and as such, became an Executive Officer for FranklinCovey on July 28, 2010. For the remaining month of fiscal 2010, Shawn Moon continued with the same compensation as in his previous role.

During the first quarter of fiscal 2010, the Compensation Committee approved LTIP awards for 232,576 shares of common stock (the target award) to be awarded to the NEO’s and other leaders, if the Company achieved specified financial results within a specified time period. Subsequent to year-end, the Compensation Committee cancelled this LTIP award for the majority of the potential recipients, since these awards would have been additive to their Total Targeted Compensation, and a proposal for a new LTIP award is being discussed.

In reviewing and determining the CEO’s compensation, the Compensation Committee met in an executive session to consider the same inputs for the CEO’s compensation as used for the other NEOs.

Elements of Executive Compensation

Our Executive Compensation Plan incorporates five main elements:

1.	Base Salary

 

2.	Short-Term Incentive Plan (STIP)

 

3.	Long-term Incentive Plan (LTIP) – Performance-Based Equity Grants

 

4.	Certain other benefits

 

5.	Severance benefits

 

6.	Change in Control severance benefits

 

Each element of our executive compensation program addresses different purposes, as described below:

1. Base Salary

Base salaries for NEOs were determined by considering the relative importance of the position, the competitive marketplace, and the individual’s experience, performance and contribution.  Base salaries were targeted between the 50th and 75th percentiles for fiscal 2010.  Base salaries are reviewed annually, and may or may not be adjusted to reflect changing market levels.  During the first quarter of fiscal 2010, the Compensation Committee increased Sean Covey’s base salary from $250,000 to $275,000, commensurate with his expanding role and to align with market

 

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competitive levels.  Base compensation was also reviewed for Mr. Whitman, Mr. Young and the other NEOs; the Compensation Committee determined that their base salaries were competitive with the market and no changes were made for fiscal 2010.

2. Short-Term Incentive Plan (STIP)

The annual short-term incentive plan reinforces our pay for performance philosophy and rewards the achievement of specific business and financial goals achieved during the fiscal year.

For Mr. Whitman and Mr. Young, whose primary focus is overall corporate performance, the fiscal 2010 STIP program was designed to reward financial performance (Operating Income) and the achievement of individual objectives aligned with our Wildly Important Goals (WIGs).  Their STIP payout was weighted so that 70% of the incentive was based on corporate financial goals, while 30% of the incentive was based on the achievement of individual goals.  The 70/30 split was focused on achieving significant performance improvement tied to our strategic and operational objectives. The largest portion of the incentive (70%) was aligned with achieving financial results (Operating Income), which the Compensation Committee believes is the best driver of shareholder value.

For the majority of fiscal 2010, Sean Covey continued to have primary responsibility for the development of all our products and programs. As such, his STIP was weighted so that approximately 70% of the incentive was based on product development, market research, book publishing, financial results of the Education Practice, and meeting overall SG&A and Adjusted EBITDA targets each quarter. Approximately 30% of his incentive was tied to achieving overall corporate operating results (Operating Income), thus maintaining focus on our strategy while driving completion of products and programs in support of the strategy.

For fiscal 2010, 80% of the STIP for David Covey and Stephan Mardyks was focused on achieving Adjusted EBITDA results domestically and internationally, and 20% was focused on growing the Speed of Trust and Execution Practices. For Jennifer Colosimo, 75% of the STIP was focused on achieving Adjusted EBITDA results domestically and internationally and 25% was focused on growing the Speed of Trust and Execution Practices. Shawn Moon’s STIP was 100% focused on achieving Adjusted EBITDA results for the Government Services vertical market, the Education Practice, and Sales Performance Practice, and revenue growth for our Platform Sales Initiative.

STIP Payout Opportunities: Whitman, Young, and Sean Covey

 

The annual STIP payout opportunities for fiscal 2010, as a percentage of base salary for Robert Whitman, Stephen Young, and Sean Covey are shown below.  The target earnings opportunity was established to position total cash compensation of these NEOs between the 50th and 75th percentiles of the market when performance is at targeted levels.

 

The Compensation Committee established the payout scale illustrated below with the intent of the plan paying out at target five to six times every ten years and paying out at the 120% of financial performance target  one to two times every ten years.  Payouts at 120% of the financial performance target under the plan would result in total cash compensation at or above the market 75th percentile.

 

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Annual STIP Payouts at Various Performance Levels as a Percentage of Base Salary: Whitman, Young, and Sean Covey

 

Name	Minimum Payout for Financial Performance Less than 80% of Target	Threshold Payout for Financial Performance at 80% of Target (1)	Payout for Financial Performance at 100% of Target	Payout for Financial Performance at 120% of Target
Robert A. Whitman CEO	0	1%	100%	200%
Stephen D. Young CFO	0	1%	70%	140%
M. Sean Covey	0	1%	55%	110%

  (1)      Financial Performance is defined as Adjusted EBITDA less certain pre-determined charges for Mr. Whitman, Mr. Young, and Sean Covey.

For Mr. Whitman, Mr. Young, and Mr. Sean Covey, the maximum STIP payout could only be achieved based on the achievement of our annual financial goals.  In the event of performance greater than target, the maximum payout percent would be applied to both financial and individual portions of the STIP.

STIP Payout Opportunities: David Covey, Stephan Mardyks, Shawn Moon, and Jennifer Colosimo

 

STIPs for David Covey, Stephan Mardyks, Shawn Moon, and Jennifer Colosimo rewarded performance in their sales leadership roles, and for growing specific program areas in support of our overall business strategy. As noted, for David Covey and Stephan Mardyks, 80% of the STIP payment was based on achieving domestic and international Adjusted EBITDA results and 20% was based on revenue growth for the Speed of Trust and Execution Practices. For Jennifer Colosimo, 75% of the STIP payment was based on achieving domestic and international Adjusted EBITDA results and 25% was based on revenue growth for the Speed of Trust and Execution Practices.

 

For Shawn Moon, who as previously mentioned was paid for his role as General Manager of the Government Services vertical market and, of the Sales Performance Practice, and Sales Leader for the Education Practice and Platform Sales Initiative, STIP payment was based on Adjusted EBITDA results for Government Services, Education Practice, Sales Performance Practice, and revenue results for the Platform Sales Initiative. Adjusted EBITDA is defined as net income or loss from operations excluding the impact of interest expense, income tax benefit, amortization, depreciation, and other non-recurring items.

 

David Covey, Stephan Mardyks, Shawn Moon, and Jennifer Colosimo received a percentage of Adjusted EBITDA from their respective business unit’s performance.  Once the unit Adjusted EBITDA exceeded the Adjusted EBITDA achieved in the prior year, the respective manager received an accelerated percentage of Adjusted EBITDA during the remainder of the fiscal year.  The target earnings opportunity was established to position total cash compensation for David Covey, Stephan Mardyks, Shawn Moon, and Jennifer Colosimo between the 50th and 75th percentiles of the market assuming performance at targeted levels.  Commissions for Adjusted EBITDA results greater than budget continued to be paid at the same accelerated percentage.

 

The Compensation Committee established the payout scale illustrated below with the intent of the plan paying out at target five to six times every ten years and paying out at the 110% of financial performance target one to two times every ten years.  Payouts at 110% of the financial performance target under the plan would result in total cash compensation at or above the market 75th percentile.

 

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Annual STIP Payouts at Various Performance Levels as a Percentage of Base Salary:

 

David M.R. Covey, Stephan Mardyks, Shawn Moon, Jennifer Colosimo

 

	Minimum Payout for no Financial Performance1	Payout for Financial Performance equal to FY10 Revenues2	Payout for Financial Performance at 100% of Target	Payout for Financial Performance at 110% of Target
Name
David M.R. Covey	0%	51%	100%	136%
Stephan Mardyks	0%	51%	100%	136%
Shawn Moon	0%	0%	108%	143%
Jennifer Colosimo	0%	59%	100%	207%

(1)	Financial Performance is defined as domestic and international sales Adjusted EBITDA with the exception of Shawn Moon whose financial performance is defined as Adjusted EBITDA for Government Services, Education Practice, Sales Performance & Platform Sales.

(2)	Payouts for performance up to and equal to prior year Adjusted EBITDA is a straight line calculation after achieving certain thresholds based on actual Adjusted EBITDA and may range from 0 to approximately 59% of base salary.

 

 

For fiscal 2010 David Covey and Stephan Mardyks were individually eligible for quarterly bonuses based on the number of consecutive quarters in which domestic and international Adjusted EBITDA targets were achieved.  As shown in the chart below, these bonuses could range from $8,000 to $15,000 per quarter to a target payout of $38,000 per year during fiscal 2010, or an amount approximately equal to 15% of base salary.  If the Adjusted EBITDA target was missed during a quarter, the payout was zero and the target quarterly bonus would be reset to begin at $8,000 the next time the quarterly Adjusted EBITDA target is achieved.

 

Quarterly Adjusted EBITDA Budget Achievement

 

First quarter of achieving Adjusted EBITDA budget	$8,000
Second successive quarter of making budget	$9,000
Third successive quarter of making budget	$10,000
Fourth successive quarter of making budget	$11,000
Fifth successive quarter of making budget	$12,000
Sixth successive quarter of making budget	$13,000
Seventh successive quarter of making budget	$14,000
Eighth and subsequent successive quarters of making budget	$15,000

 

For fiscal 2010, Shawn Moon was eligible for quarterly bonuses based on the number of consecutive quarters in which Government Services, Education Practice, and Sales Performance Practice Adjusted EBITDA targets were at least 3% over last year’s Adjusted EBITDA results. As shown in the chart below, these bonuses could range from $7,000 to $10,000 per quarter to a target payout of $34,000 per year during fiscal 2010, or an amount approximately equal to 15% of base salary.  If the Adjusted EBITDA target was missed during a quarter, the payout was zero and the target quarterly bonus would be reset to begin at $3,000 the next time the quarterly Adjusted EBITDA target was achieved.

 

 

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Quarterly Revenue Budget Achievement

 

First quarter of achieving revenue budget	$7,000
Second successive quarter of making budget	$8,000
Third successive quarter of making budget	$9,000
Fourth and subsequent successive quarters of making budget	$10,000

Performance Measures

Financial Performance Measures

2010 Short-Term Incentive Payouts were based on corporate financial performance and individual objectives.  The table below presents the corporate financial measures for the NEOs:

 

Name	Financial Measure	Fiscal 2010 Target	Fiscal 2010 Quarterly Targets
Robert A. Whitman Chief Executive Officer	Adjusted Operating Income for Franklin Covey Co., (1)	$5.5 million	n/a
Stephen D. Young Chief Financial Officer	Adjusted Operating Income for Franklin Covey Co.	$5.5 million	n/a
David Covey Co-Chief Operating Officer, Global Operations	Adjusted EBITDA for FranklinCovey Domestic & International Sales	$33.4 million	Q1 $7.1 million Q2 $7.2 million Q3 $8.6 million Q4 $10.5 million
Stephan Mardyks Co-Chief Operating Officer, Global Operations	Adjusted EBITDA for FranklinCovey Domestic & International Sales	$33.4 million	Q1 $7.1 million Q2 $7.2 million Q3 $8.6 million Q4 $10.5 million
Shawn Moon Executive Vice President Domestic and Global Sales and Delivery	Adjusted EBITDA for Government Services, Education Practice, Sales Performance Practice, & Platform Sales	$7.6 million	Q1 $1.0 million Q2 $0.8 million Q3 $2.0 million Q4 $3.8 million
Jennifer Colosimo Executive Vice President Chief Operations Officer	Adjusted EBITDA for FranklinCovey Domestic & International Sales	$33.4 million	n/a
M. Sean Covey Executive Vice President Global Solutions and Partnerships	Adjusted Operating Income for Franklin Covey Co.	$15.0 million	n/a

 

(1)	Adjusted Operating Income is equal to Adjusted EBITDA less $9.5 million of certain pre-determined charges.

 

 

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To establish target Adjusted Operating Income and Adjusted EBITDA performance ranges for fiscal 2010, the Compensation Committee and the Executive Team reviewed historical performance data, general economic and market trends, industry-specific trends and results, new sales associate hiring and ramp-up plans, known client purchasing trends, new and updated product offerings that will be available during the year, and other variables related to organizational performance.

 

Individual Performance Objectives

 

Individual objectives for the NEOs were determined by the CEO for his direct reports and by the Board for the CEO.  Because these goals were strategic in nature, and disclosing specifics could cause potential competitive harm, they are not disclosed.  In general, targets were set for goals related to overall revenue growth, specific product revenue growth, sales proficiency, product development, customer relations, balance sheet management, and winning culture.  Named Executive Officers generally averaged three to four major goals per year – the majority of which underpin or are otherwise related to achieving the annual plan.  Achievement of key strategic, customer loyalty, and/or cultural goals required significant effort, and teamwork. Goals established for each NEO were stretch goals t ied to achieving our annual plan in support of the long-term strategy. Each goal was typically linked to one of our Wildly Important Goals that are cascaded throughout FranklinCovey; progress toward each of these goals was reported weekly. Because of the focus on individual/team accountability for reaching these goals, there was an expected 70% or greater probability that the goals would be achieved.

 

Achievement of individual performance objectives accounted for up to 30% of the target STIP amount for Mr. Whitman and Mr. Young. Individual objectives were weighted based on difficulty and on the stretch required to achieve the goal, with most goals weighted between 10% and 35% of the individual portion of the STIP. The following table provides an example of an NEO with 4 individual performance objectives, and shows the STIP amount tied to achieving the payout for the individual portion of the STIP. In addition, the Compensation Committee retains discretion to award STIP payouts for individual performance in excess of 100% when it feels that an executive has exceeded its expectations in contributing to FranklinCovey’s success.  In 2010, the Compensation Committee awarded Mr. Whitman 110% of his possible STIP payout for in dividual performance based upon his contributions. David Covey, Stephan Mardyks, and Jennifer Colosimo all achieved 132% of the individual component of their STIP since the growth of the Speed of Trust and Execution Practices substantially exceeded their goal for fiscal 2010.

Payout Calculations Tied to Individual Performance Objectives –

Example Based on 4 Individual Performance Objectives

Number of Individual Performance Objectives Achieved	Weighting of Each Performance Objective	Percentage of STIP Payout for Individual Performance (30% portion)
1	35%	35%
2	35%	70%
3	20%	90%
4	10%	100%

 

 

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Fiscal 2010 Actual Performance and Short-Term Incentive Plan (STIP) Payouts

 

For fiscal 2010, actual payouts relative to targets were as follows:

 

Name	Year	Target Annual STIP ($)	Financial Performance Component as a Percentage of Total STIP (%)	Individual Performance Component as a Percentage of Total STIP (%)	Total STIP Payout ($)
Robert A. Whitman CEO	2010	500,000	84% of financial target	110% of 30% of target	459,000
Stephen D. Young CFO	2010	175,000	84% of financial target	100% of 30% of target	155,400
David Covey	2010	213,000	74% of financial target	132% of 20% target	183,540
Stephan Mardyks	2010	213,000	74% of financial target	132% of 20% target	183,540
M. Sean Covey	2010	150,000	91% of financial target	68% of 70% target	112,286
Shawn Moon	2010	194,000	367% of financial target	-	711,433
Jennifer Colosimo	2010	70,000	88% of financial target	132% of 25% target	69,448

The Compensation Committee established the STIP payout targets for 2010 such that FranklinCovey would need to significantly improve its applicable financial metrics in order for the Name Executive Officers to receive bonus payouts based upon the financial metrics applicable to them.  In addition, the percentage of the payouts was not directly tied to the percentage of the target financial performance achieved.  For example, the financial metrics that were tied to Mr. Whitman’s and Mr. Young’s bonus payouts exceeded 84%, but, based upon the payout ratios established by the Compensation Committee at the beginning of 2010, Mr. Whitman and Mr. Young were only entitled to receive 84% of the payout for financial performance.

STIP Plan Changes for Fiscal 2011

The following changes were made to the STIP for fiscal 2011:

·

For fiscal 2011, the Executive Team will share and work on the same financial goals and the same individual performance targets.  The target STIP amount as a percentage of base salary will be different for each executive. We believe this complete alignment of pay and individual performance targets will serve to further strengthen the alignment of all our NEO’s toward our critical objectives for fiscal 2011.

 

·

The mix between financial objectives and individual performance will be adjusted in fiscal 2011 to bring all NEO’s to the existing 70% financial and 30% individual performance targets in place during fiscal 2010 for Mr. Whitman, Mr. Young, and Mr. Sean Covey. For fiscal 2011, all NEO’s will share the same financial and individual performance targets.

 

·	The maximum payout for any executive will be 200% of target.  This maintains the emphasis on paying for performance and drives each named Executive Officer to achieve stretch goals that enhance shareholder value.

 

 

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3. Long-Term Incentive Plan (LTIP) – Performance-Based Equity Grants

In fiscal 2005, the Compensation Committee adopted a new long-term incentive strategy solely using performance-based shares.  The LTIP was established as a performance incentive for certain members of management, including the NEOs, and other key employees to provide incentive to achieve the specific financial objectives included in our long-term financial plan. The number of shares that eventually vest and are issued to LTIP participants is variable and based entirely upon the achievement of specified performance objectives during a defined performance period.

The Compensation Committee approved a LTIP award in fiscal 2010 which included the following:

·	Target Number of Shares originally expected to Vest at August 31, 2012 – 232,576 shares

·	Remaining Vesting Dates – August 31, 2012, March 2, 2013, and August 31, 2013

·	Grant Date Fair Value of Common Stock - $5.28 per share

The fiscal 2010 LTIP has a four-year performance period with three potential vesting dates if certain financial measures are achieved during the performance period.

The Compensation Committee determined to cancel this LTIP for the majority of the potential recipients, since the amount of these awards would have been additive to their Total Targeted Compensation and a proposal for a new equity incentive plan is now being discussed. With this decision, 50,190 shares were cancelled.

New Equity Incentive Plan for Fiscal 2011

The Compensation Committee has begun initial discussions regarding a new equity incentive plan for the NEO’s and other senior leaders of the Company. An outside consultant has been engaged, and has provided initial analysis and design parameters for this new equity incentive plan. Discussions regarding this equity incentive plan will continue in the next Organization and Compensation Committee Meeting to be held in January 2011.

Stock Ownership Guidelines.  Philosophically, we believe that ownership of our Common Stock is important to further increase the alignment of interests of executives and outside with those of our shareholders.  Through the LTIP and issuance of Restricted Share Awards (RSAs), executives have the opportunity to increase stock ownership. As a general guideline, and consistent with industry best practices, beginning in fiscal 2009 outside directors were encouraged to maintain stock ownership equal to at least 3 times their annual retainer or a value of $90,000. Executives were encouraged to maintain stock ownership where the market value of shares held is equivalent to at least two times base salary.

 

The Compensation Committee annually reviews executives’ and directors’ progress toward meeting these guidelines.  Based on our closing share price on August 31, 2010, multiplied by the number of shares including common shares and vested and unvested RSAs held by each director and executive:

 

·	All directors meet the foregoing guidelines.

 

·	Three of the six Executive Officers already meet the foregoing guidelines; with the other three Executive Officers expected to meet the guideline within a three- to five-year time frame.

 

4. Certain Other Benefits

 

Other Benefits and Perquisites. We maintain a number of other broad-based employee benefit plans in which, consistent with our values, Executive Officers participate on the same terms as other employees who meet the eligibility requirements, subject to any legal limitations on amounts that may be contributed to or benefits payable under the plans.  These benefits include:

 

 

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·	Our High Deductible Health Plans and Health Savings Accounts administered pursuant to Section 125 of the Internal Revenue Code of 1986, as amended (“the Code”), and Section 223.

 

·	Our 401(k) plan, in which we match 100% of the first 1% contributed and 50% of the next 4% contributed for a net 3% match on a 5% contribution.  Contributions to the 401(k) plan from highly compensated employees are currently limited to a maximum of 7% of compensation, subject to statutory limits.

 

·	Our Employee Stock Purchase Plan implemented and administered pursuant to Section 423 of the Code.

 

In addition to the benefits available to all full-time associates, we provide the following benefits to the Named Executive Officers as specified below:

 

·	Term Life Insurance.  FranklinCovey provides a portable 20-year term life policy for the CEO and CFO.  The coverage amount is 2.5 times each executive’s target cash compensation (base salary + target annual incentive).

 

·

Supplemental Disability Insurance. We provide Mr. Whitman with long-term disability insurance which, combined with our current group policy, provides, in aggregate, monthly long-term disability benefits equal to 75 percent of his fiscal 2010 target cash compensation. Executives and other highly compensated associates may purchase voluntary supplemental disability insurance at their own expense.

 

We believe that these benefits are critical to retaining key executive talent and are required as part of a competitive executive compensation and benefits package.

 

Perquisites: Consistent with the spirit of partnership at FranklinCovey, there are no other executive perquisites.

 

 

5. Severance Benefits

 

We do not have an employment agreement with any of our NEOs, including Robert A. Whitman, the Chief Executive Officer and Chairman of the Board.

 

Severance Policy

 

Based on market data, we have implemented a severance policy to establish, in advance, the appropriate treatment for terminating executives and to ensure market competitiveness. Named Executive Officers who are terminated involuntarily without cause, receive an equivalent of one week’s salary for every $10,000 of their annual TTC (Total Targeted Compensation). This is the same formula that is used when calculating severance for all FranklinCovey employees. Additionally, we pay COBRA medical and dental insurance premiums for the term of the severance.  Consistent with FranklinCovey’s severance payment policy, all severance payments are made as a lump sum. We do not gross-up severance payments to compensate for taxes withheld. At Mr. Whitman’s request, his target severance was set at the same level as those who r eport to him.

 

 In return for receiving severance pay, employees agree to specific confidentiality, non-solicitation, and non-disparagement terms.

 

 

6. Change in Control Severance Benefits

 

Change-in-Control Severance Agreements

 

We have established change-in-control severance agreements for all NEOs. The change-in-control policy is designed to retain our executives in the event a change-in-control transaction is proposed. In such situations, the change-in-control benefit may alleviate some of the financial and career concerns normally associated with a change-in-control and assure executives of fair treatment.

Based on market assessment, the Compensation Committee determined the following change-in-control severance benefits to be appropriate for a company of our size and revenues. Specifically, in the event an Executive Officer’s or key employee’s employment is terminated, without good reason, and as the result of a change-in-control, as

 

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defined in the policy, the Executive Officer is entitled to receive a lump sum cash payment equal to one times his or her current annual target compensation (base salary + STIP). At Mr. Whitman’s request, his change-in-control severance agreement was set at the same level as those executives who report to him. Executive Officers are also entitled to reimbursement for the payment of premiums to secure continuation coverage pursuant to Section 4980B of the Code (or any successor provision thereto) under our medical, dental and other group health plans, and are entitled to have immediately vested, as of his or her employment termination date, all awards granted which at the time are not yet vested according to their terms. Long-term incentive plan awards vest in accordance with the terms and provisions of the plan and award documents. We do not gross-up change-in-control payments to compensate for taxes withheld.

These change-in-control severance agreements are separate from the standard severance policy. NEOs may not receive payment under both the severance policy and the change-in-control severance agreements. Payments made under the change-in-control severance policy are reduced by an amount equal to the aggregate amount of any other cash payments paid under any other severance policy, agreement, program, arrangement, or requirement of statutory or common law.

Section 162(m) Implications for Executive Compensation

 

Section 162(m) of the Code imposes a $1.0 million limit on the amount that a public company may deduct for compensation paid to the company’s principal executive officer or any of the company’s three other most highly compensated executive officers, other than the company’s chief financial officer, who are employed as of the end of the year. This limitation does not apply to compensation that meets the requirements under Section 162(m) for “qualifying performance-based” compensation (i.e., compensation paid only if the individual’s performance meets pre-established objective goals based on performance criteria approved by shareholders).

To maintain flexibility in compensating Executive Officers in a manner designed to promote varying corporate goals, the Compensation Committee reserves the right to recommend and award compensation that is not deductible under Section 162(m). Our STIP payments in fiscal 2010 were not considered qualified performance-based compensation under Section 162(m).

Fiscal 2010 Equity Awards for CEO and CFO

 

During fiscal 2010 the Compensation Committee awarded the CEO and CFO options to purchase 250,000 shares and 175,000 shares of our common stock, respectively. These stock options have a contractual life of 10 years and are divided into four equal tranches with exercise prices of $9.00 per share, $10.00 per share, $12.00 per share, and $14.00 per share. The options vest upon resolution of the management common stock loan program, subject to Board of Director approval of the resolution, which was determined to be a market vesting condition based upon our share price. During fiscal 2011, the Compensation Committee intends to award Mr. Whitman an additional 250,000 stock options with similar vesting terms to those awarded during fiscal 2010.

COMPENSATION TABLES

 

 Summary Compensation Table

 

The salary, bonus, other compensation, long-term compensation and share-based awards for Robert A. Whitman, our Chairman and Chief Executive Officer, and the other Executive Officers listed below (collectively, the Named Executive Officers) as of August 31, 2010, the most recent fiscal year end, are shown on the following Summary Compensation Table.  For a complete understanding of the data on the table, please refer to the narrative disclosures that follow.

 

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2010 Summary Compensation Table

A	B	C	D	E	F	G	H	I	J
Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)
Robert A. Whitman Chairman and Chief Executive Officer	2010 2009 2008	500,000 500,000 500,000	- 241,500 645,134	600,000 - -	289,773 - -	459,000 150,000 295,000	- - -	398,396 49,380 56,750	2,247,169 940,880 1,496,884
Stephen D. Young Chief Financial Officer	2010 2009 2008	250,000 250,000 250,000	- 70,000 177,913	150,000 - -	202,841 - -	155,400 52,500 103,250	- - -	13,371 7,462 15,072	771,612 379,962 546,235
David M.R. Covey Co-Chief Operating Officer for Global Operations	2010 2009	281,442 250,000	- 25,300	- -	- -	183,540 98,474	- -	467,267 7,277	932,249 381,051
Stephan Mardyks Co-Chief Operating Officer for Global Operations	2010 2009	281,442 250,000	- 25,300	- -	- -	183,540 124,734	- -	459,846 14,210	924,828 414,244
M. Sean Covey Executive Vice President Global Solutions and Partnerships	2010 2009	270,000 250,000	- 70,000	68,000 -	- -	112,285 72,614	- -	845,480 164,048	1,295,765 556,662
Shawn Moon Executive Vice President Domestic and Global Sales and Delivery	2010	250,000	-	10,000	-	711,433	-	18,478	989,911
Jennifer Colosimo Executive Vice President Chief Operations Officer	2010	200,000	-	30,000	-	69,447	-	7,066	306,513

Salary (Column C)

 

The amounts reported in column C represent base salaries paid to each NEO in fiscal 2010.

Bonus (Column D)

 

The amounts in Column D represent bonuses paid in lieu of LTIP awards made in fiscal 2006 and fiscal 2007 which were canceled as of August 31, 2009 with no shares vesting to participants, and in lieu of LTIP awards that were not made in fiscal 2008 or fiscal 2009, resulting in target total compensation at less than the 50th percentile for the NEOs.

Stock Awards (Column E)

 

Amounts in this Column represent the grant date fair value of unvested (restricted) shares issued under the terms of our LTIP program. During fiscal 2010, the Compensation Committee approved the fiscal 2010 LTIP award, which includes the following key terms a) target number of shares expected to vest at August 31, 2012 – 232,576 shares; b) vesting dates – August 31, 2012, March 2, 2013, and August 31, 2013; and c) grant date fair value of common stock – $5.28 per share.  The fiscal 2010 LTIP has a four-year performance period, but has three vesting dates if certain financial measures are achieved during the performance period.  As previously noted, by mutual agreement, the employment of David Covey and Stephan Mardyks was terminated with the Company effective August 31, 2010, and any rights to past or future performance share awards were forfeited concurrently. For further information regarding the LTIP awards, refer to Note 13, Share-Based Compensation Plans, to our consolidated financial statement for the three years in the period ended August 31, 2010, included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2010.

Option Awards (Column F)

 

Amounts in this column represent the grant date fair value of stock options awarded to the CEO and CFO during fiscal 2010.  During fiscal 2010, the Compensation Committee awarded the CEO and CFO options to purchase 250,000 shares and 175,000 shares of our common stock, respectively.  These stock options have a contractual life of 10 years and are divided into four equal tranches with exercise prices of $9.00 per share, $10.00 per share, $12.00

 

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per share, and $14.00 per share.  The options vest upon resolution of the management common stock loan program, subject to Board of Director approval of the resolution, which was determined to be a market vesting condition based upon our share price.  Accordingly, the fair value of these stock options was determined using a Monte Carlo simulation with an embedded Black-Scholes valuation model.  For further information regarding these stock options, refer to Note 13, Share-Based Compensation Plans, to our consolidated financial statement for the three years in the period ended August 31, 2010, included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2010.

Non-Equity Incentive Plan Compensation (Column G)

 

The amounts reported in column G represent the amounts paid to each Named Executive Officer under the STIP, which is discussed previously in the section entitled “Compensation Discussion and Analysis – Elements of Executive Compensation.” Payouts are based on completing objectives established quarterly or annually and meeting quarterly and annual financial targets. Incentive amounts were approved by the Compensation Committee and were paid following each of the fiscal quarters and at the conclusion of the fiscal year.  Payments made to David Covey, Stephan Mardyks, Shawn Moon, and Jennifer Colosimo were made monthly. The amounts for David Covey and Stephan Mardyks include $8,000 each in quarterly bonuses for meeting quarterly Adjusted EBITDA targets. The amount for Shawn Moon includes $22,000 in quarterly bonus es for meeting quarterly Adjusted EBITDA targets.

Change in Pension Value and Nonqualified Deferred Compensation Earnings (Column H)

 

We do not maintain any pension plans.

The Nonqualified Deferred Compensation (NQDC) plan was frozen to new contributions as of January 1, 2005. Effective August 15, 2005, NQDC balances invested in our stock will be distributable to participants only in the form of shares of our stock.  None of the NEOs participate in the NQDC plan.

All Other Compensation (Column I)

 

The amounts reported in column I represent the aggregate dollar amount for each NEO for other personal benefits, tax reimbursements, Company contributions to 401(k) accounts, royalty payments, and insurance premiums.  The 2010 All Other Compensation Table presents the detail of the amounts included in column I for fiscal 2010.

Total Compensation (Column J)

 

The amounts reported in column J reflect the sum of Columns C through I for each NEO, including all amounts paid and deferred.

All Other Compensation Table

 

The All Other Compensation Table provides numerical information that is incorporated into Column I, All Other Compensation, on the 2010 Summary Compensation Table. For a complete understanding of the data on the table, please refer to the narrative disclosures that follow.

 

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Fiscal 2010 All Other Compensation Table

A	B	C	D	E	F	G	H	I	J
Name	Year	Contributions to DC Plans ($)	Executive Life Insurance Premiums ($)	Executive Disability Premiums ($)	Gross Up ($)	President’s Club ($)	Other ($)	Severance ($)	Total ($)
Robert A. Whitman CEO	2010	6,975	7,310	34,878	349,233				398,396
Stephen D. Young CFO	2010	11,101	2,270						13,371
David M.R. Covey	2010	7,421						459,846	467,267
Stephan Mardyks	2010	-						459,846	459,846
M. Sean Covey	2010	12,705			707,523		125,252		845,480
Shawn Moon	2010	14,117				4,361			18,478
Jennifer Colosimo	2010	7,066							7,066

 

Company Contribution to Defined Contribution Plans (Column C)

 

We match dollar for dollar the first 1% contributed to the 401(k) plan, and 50 cents on the dollar of the next 4% contributed.  Our match for executives is the same match received by all associates who participate in the 401(k) plan.

 

Executive Life Insurance Premiums (Column D)

 

The Compensation Committee evaluated the market competitiveness of the executive benefit package to determine the most critical and essential benefits necessary to retain executives. Based on information on benefits prevalence from Mercer, the Compensation Committee determined to include executive life insurance for specific NEOs.  For the CEO and CFO, we maintain an executive life insurance policy with a face value of approximately 2.5 times their target annual cash compensation.  The amounts in Column D show the annual premiums paid for each 20-year term executive life insurance policy.

 

Executive Disability Premiums (Column E)

 

We provide Mr. Whitman with long-term disability insurance which, combined with our current group policy, provides, in aggregate, monthly long-term disability benefits equal to 75 percent of his fiscal 2010 target cash compensation. The amount in Column E shows the premiums paid for Mr. Whitman’s supplemental long-term disability coverage.

 

Gross up (Column F)

 

For Mr. Whitman, the amount in Column F refers to taxes paid by the Company relating to reimbursements of business travel treated under IRS rules as taxable compensation to Mr. Whitman. For Mr. Sean Covey, the amount in Column F refers to a bonus covering taxes resulting from the forgiveness of Sean Covey’s management stock loan.

 

President’s Club (Column G)

 

For Mr. Shawn Moon, the amount in Column G refers to travel and travel-related awards received during fiscal 2010 for performance during fiscal 2009.

 

Other (Column H)

 

For Mr. Sean Covey, the amount in Column H refers to royalties of $125,252 paid during fiscal 2010.

 

Severance (I)

 

For Mr. David Covey and Mr. Stephan Mardyks, the amounts in Column I refer to the severance amount that each received as their employment with FranklinCovey ended.

 

Total (Column J)

 

The amounts reported in Column J reflect the sum of columns C through I for each NEO. These numbers are reflected in Column I (All Other Compensation) of the fiscal 2008 Summary Compensation Table, as presented above.

 

 

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Grants of Plan-Based Awards Table

 

The following table summarizes annual Short-Term and Long-Term Incentive Plan awards made to each of the NEOs in fiscal 2010. For a complete understanding of the data on the table, please refer to the narrative disclosures that follow.

 

Fiscal 2010 Grants of Plan-Based Awards

 

A	B	C	D	E	F	G	H	I	J	K	L
		Estimated future payouts under non-equity incentive plan awards			Estimated future payouts under equity incentive plan awards			All other stock awards: Number of shares of stock or units  (#)	All other option awards: Number of securities underlying options  (#)	Exercise or base price of option awards ($/share)	Grant date fair value of stock and option awards ($)
Name	Grant Date	Threshold  ($)	Target  ($)	Max ($)	Threshold (#)	Target (#)	Max (#)
Robert A. Whitman CEO Short-Term Incentive Plan(1) Long-Term Incentive Plan(2) Stock Options(3)	1/28/2010 1/28/2010 1/28/2010 1/28/2010 1/28/2010	-	500,000	1,000,000	20,454	113,636	227,272	-	62,500 62,500 62,500 62,500	9.00 10.00 12.00 14.00	600,000 80,619 76,593 69,399 63,162
Stephen D. Young CFO Short-Term Incentive Plan(1) Long-Term Incentive Plan(2) Stock Options(3)	1/28/2010 1/28/2010 1/28/2010 1/28/2010 1/28/2010	-	175,000	350,000	5,114	28,409	56,818	-	43,750 43,750 43,750 43,750	9.00 10.00 12.00 14.00	150,000 56,433 53,615 48,579 44,213
David M.R. Covey(5) Short-Term Incentive Plan(4) Long-Term Incentive Plan(4)	1/28/2010	-	213,000	-	1,364	7,576	15,152	-	-	-	40,000
Stephan Mardyks(5) Short-Term Incentive Plan(4) Long-Term Incentive Plan(4)	1/28/2010	-	213,000	-	1,364	7,576	15,152	-	-	-	40,000
M. Sean Covey(5) Short-Term Incentive Plan(1) Long-Term Incentive Plan(2)	1/28/2010	-	150,000	-	2,318	12,879	25,758	-	-	-	68,000
Shawn Moon(5) Short-Term Incentive Plan(1) Long-Term Incentive Plan(2)	1/28/2010	-	194,000	-	341	1,894	3,788	-	-	-	10,000
Jennifer Colosimo(5) Short-Term Incentive Plan(1) Long-Term Incentive Plan(2)	1/28/2010	-	70,000	-	1,023	5,682	11,364	-	-	-	30,000

 

(1)  Represents estimated payouts for annual incentives under the terms of our STIP for each of the listed NEOs.  The STIP is an annual cash incentive opportunity and therefore awards are earned in the year that they are approved (granted).  The target amounts represent the potential payout if both Company and individual performance are at targeted levels.  The maximum amounts represent the amounts that may be earned if Company and individual performance substantially exceed targeted levels.  Refer to the Summary Compensation Table for actual payout amounts for fiscal 2010 under the STIP.  Refer to the Compensation Discussion and Analysis for further information regarding the STIP awards.

(2)  Represents possible future payouts of Common Stock underlying performance shares awarded in fiscal 2010 under terms of our LTIP.  These awards will vest upon the achievement of performance measures based on cumulative Adjusted EBITDA and division Adjusted EBITDA if applicable, over a four-year vesting period.  The threshold, target, and maximum awards are equal to 50%, 100%, and 150%, respectively, of the number of performance shares awarded.  If the minimum financial goals are not met by the end of the four-year vesting period, no awards will be paid out under the terms of the fiscal 2010 LTIP award.  Refer to the Compensation Discussion and Analysis for further information regarding the LTIP awards.

(3)  Represents stock options awarded to the CEO and CFO during fiscal 2010 under the Amended and Restated 1992 Franklin Covey Co. Incentive Stock Plan.  These options vest upon resolution of the management common stock loan program, subject to Board of Director approval of the resolution, which

 

 

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was determined to be a market vesting condition based upon our share price.  Accordingly, the fair value of these stock options was determined using a Monte Carlo simulation with an embedded Black-Scholes valuation model.  For further information regarding these stock options, refer to Note 13, Share-Based Compensation Plans, to our consolidated financial statement for the three years in the period ended August 31, 2010, included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2010.

 

(4)  David Covey and Stephan Mardyks, by mutual agreement, terminated their employment with the Company effective August 31, 2010.  Mr. Covey and Mr. Mardyks received STIP payments as shown in the Summary Compensation Table, but all performance share awards granted under terms of the 2010 LTIP award were forfeited and they will not be eligible to receive these shares.

(5) For fiscal 2010, all or a some of the STIP for David Covey, Stephan Mardyks, Sean Covey, Shawn Moon, and Jennifer Colosimo was tied to Adjusted EBITDA targets and/or revenue growth of specific initiatives. There was no maximum as to what they could earn for exceeding the targets that had been set. For further information about these plans, please refer to the STIP discussion previously presented.

Outstanding Equity Awards at Fiscal Year-End

The following equity awards granted to our named executive officers were outstanding as of August 31, 2010.

A	B	C	D	E	F		G	H	I	J
	Option Awards						Stock Awards
Name	Number of securities underlying unexercised options - Exercisable (#)	Number of securities underlying unexercised options Unexercisable (#)	Equity Incentive plan awards: Number of securities underlying unexercised unearned options (#)	Option exercise price ($)	Option expiration date		Number of shares or unit of stock that have not vested (#)	Market value of shares or units of stock that have not vested ($)	Equity Incentive Plan Awards:  Number of unearned shares, units or other rights that have not vested (#)	Equity Incentive Plan Awards: Market or payout value of unearned shares, units or other rights that have not vested ($)(1)
Robert A. Whitman CEO LTIP Awards(2) Stock Options(2)		62,500 62,500 62,500 62,500		9.00 10.00 12.00 14.00	1/28/2020 1/28/2020 1/28/2020 1/28/2020				113,636	693,180
Stephen D. Young CFO LTIP Awards(2) Stock Options(2)	35,000	43,750 43,750 43,750 43,750		8.00 9.00 10.00 12.00 14.00	1/16/2011 1/28/2020 1/28/2020 1/28/2020 1/28/2020				28,409	173,295
David M.R. Covey LTIP Awards(3)									-	-
Stephan Mardyks LTIP Awards(3)									-	-
M. Sean Covey LTIP Awards(2)									12,879	78,562
Shawn Moon LTIP Awards(2)									1,894	11,553
Jennifer Colosimo LTIP Awards(2)									5,682	34,660

 

(1)  Represents the target number of unvested performance shares issued under the LTIP program multiplied by the closing price of our Common Stock on August 31, 2010 of $6.10 per share.  At August 31, 2010, we believe that the target number of shares represents the best estimate of the number of shares that will vest to participants.  However, the ultimate value of the LTIP awards will depend on the number of shares actually issued and the share price of our Common Stock on the vesting date.

 

 

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(2)  Grants were made under the terms of the Amended and Restated 1992 Franklin Covey Co. Incentive Stock Plan.  Refer to the discussion under Grants of Plan-Based Awards Table for the vesting terms of stock options granted to Mr. Whitman and Mr. Young during fiscal 2010.

 

(3)  David Covey and Stephan Mardyks, by mutual agreement, terminated their employment with the Company effective August 31, 2010.  All performance share awards granted under terms of the 2010 LTIP award were forfeited and they will not be eligible to receive these shares in any future period.

 

Change-in-Control Severance Benefits

Subsequent to the end of fiscal 2009, change-in-control severance agreements were established for each NEO.  Under the terms of the Change-in-Control Severance Agreement, each executive officer would receive one times his or her current annual total targeted cash compensation paid out in a lump sum, plus reimbursement of premiums to secure benefit continuation coverage during the severance period.

Estimated Change-in-Control Severance Amounts as of August 31, 2010

A	B	C	D	E	F	G
		Target Total Severance Payment	Base Salary	Target Annual STIP	Target  Annual Cash Compensation	Target COBRA Premiums for 12 months
Name	Year	($)	($)	($)	($)	($)
Robert A. Whitman CEO	2010	1,008,288	500,000	500,000	1,000,000	8,288
Stephen D. Young CFO	2010	435,120	250,000	175,000	425,000	10,120
M. Sean Covey	2010	435,120	275,000	150,000	425,000	10,120
Shawn Moon	2010	454,120	250,000	194,000	444,000	10,120
Jennifer Colosimo	2010	282,758	200,000	70,000	270,000	12,758

Target Total Change-in-Control Severance Payment (Column C)

The target total severance payment in Column C equals the target annual cash compensation (Column F) plus target COBRA premiums for the severance period (Column G).

Severance Benefits

Under our severance policy, NEOs who terminate involuntarily without cause, receive an equivalent of one week’s salary for every $10,000 of their annual total targeted compensation. This is the same formula that is used when calculating severance for all FranklinCovey employees. This amount is paid out in a lump sum payment. Additionally, we pay COBRA medical and dental premiums for the term of the severance. In return for the receipt of severance payment, the NEO agrees to abide by specific non-compete, non-solicitation, and confidentiality requirements.

David Covey and Stephan Mardyks, by mutual agreement, terminated their employment with the Company effective August 31, 2010.  Mr. Covey and Mr. Mardyks were each paid severance totaling $459,846 plus COBRA premiums, which was calculated according to the formula described above.

 

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Estimated Severance Amounts as of August 31, 2010

A	B	C	D	E	F	G
		Target Total Severance Payment	Base Salary	Target Annual STIP	Target Annual Cash Compensation	Target COBRA Premiums for 12 months
Name	Year	($)	($)	($)	($)	($)
Robert A. Whitman CEO	2010	1,939,015	500,000	500,000	1,923,077	15,938
Stephen D. Young CFO	2010	359,810	250,000	175,000	351,442	8,368
M. Sean Covey	2010	359,810	275,000	150,000	351,442	8,368
Shawn Moon	2010	392,988	250,000	194,000	384,230	8,758
Jennifer Colosimo	2010	146,816	200,000	70,000	140,192	6,624

 

Target Total Severance Payment (Column C)

 

The target total severance payment in Column C equals the target annual cash compensation (Column F) plus target COBRA premiums for the severance period (Column G). The target annual cash compensation (Column F) is calculated by taking an equivalent of one week’s salary for every $10,000 of annual total targeted compensation.  The annual salary is equal to the annual total targeted compensation and is calculated by adding the base salary (Column D) and the target annual STIP (Column E). 

 

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PRINCIPAL HOLDERS OF VOTING SECURITIES

The following table sets forth information as of October 31, 2010, with respect to the beneficial ownership of shares of Common Stock by each person known by us to be the beneficial owner of more than five percent of Common Stock, by each director, by the Named Executive Officers at August 31, 2010, and by all directors and officers as a group.  Unless noted otherwise, each person named has sole voting and investment power with respect to the shares indicated.  In computing the number of shares of Common Stock beneficially owned by a person or entity and the percentage ownership of that person or entity, we deemed outstanding shares of Common Stock subject to options or warrants held by that person or entity that are currently exercisable or exercisable within 60 days of October 31, 2010.  We did not deem the se shares outstanding, however, for the purpose of computing the percentage ownership of any other person or entity.  The percentages set forth below have been computed without taking into account treasury shares held by us and are based on 17,037,070 shares of Common Stock outstanding as of October 31, 2010.  At the date of this report, there are no shares of Series A or B Preferred Stock outstanding.

 

BENEFICIAL OWNERSHIP

As of October 31, 2010		Number of Common Shares		Percentage of Class
Donald J. McNamara(1)(2)(3)(6) c/o Franklin Covey Co. 2200 West Parkway Blvd. Salt Lake City, UT 84119-2331		7,269,535		31.7	%
Knowledge Capital Investment Group(1)(2) 3232 McKinney Ave. Dallas, TX 75204		6,928,404		30.2	%
Dimensional Fund Advisors, Inc.(4) 1299 Ocean Avenue Santa Monica, CA  90401		1,228,909		7.2	%
Stephen R. Covey(3)(6) c/o Franklin Covey Co. 2200 West Parkway Blvd. Salt Lake City, UT 84119-2331		1,034,281		6.1	%
John H. Lewis(7) Osmium Partners, LLC 388 Market Street, Suite 920 San Francisco, CA  94111		1,033,558		6.1	%
William Blair & Co., LLC(4) 222 West Adams St. Chicago, IL  60606-5312		969,244		5.7	%
Robert A. Whitman		479,882		2.8	%
M. Sean Covey		239,062		1.4	%
Joel C. Peterson(6)		227,946		1.3	%
Dennis G. Heiner(6)		133,654		*	%
Stephen D. Young(5)		104,312		*	%
E. Kay Stepp(6)		58,806		*	%
E.J. “Jake” Garn(6)		45,354		*	%
Clayton M. Christensen(6)		41,779		*	%
Robert H. Daines(6)		33,313		*	%
David M.R. Covey		21,900		*	%
Stephan Mardyks		19,513		*	%
Jennifer Colosimo		1,112		*	%
All directors and executive officers as a group(5)(6)(8)(13 persons)		9,749,203		42.4	%

(1)

The Common Stock shares indicated for Knowledge Capital include 5,913,402 warrants.  The warrants are exercisable into a share of Common Stock at $8.00 per share.

(2)

Mr. McNamara, who is a director of the Company, is a principal of The Hampstead Group, the private investment firm that sponsors Knowledge Capital, and therefore may be deemed the beneficial owner of the Common Stock and the warrants of Common Stock held by Knowledge Capital.  Mr. McNamara disclaims beneficial ownership of the Common Stock and warrants of Common Stock held by Knowledge Capital.

(3)

The share amounts include those held for Stephen R. Covey by SANSTEP Properties, L.C. with respect to 1,022,148 shares; and those indicated by Donald J. McNamara by the Donald J. and Joan P. McNamara Foundation with respect to 23,000 shares.  Mr. McNamara is the trustee of his foundation, having sole voting and dispositive control of all shares held by the foundation, and may be deemed to have beneficial ownership of such shares.  Mr. Covey, as co-manager of SANSTEP Properties, L.C., has shared voting and dispositive control over the shares held by those entities and may therefore be deemed to have beneficial ownership of such shares.

(4)

Information for Dimensional Fund Advisors and William Blair & Co. is provided as of September 30, 2010, the filing of their last 13F Reports.

(5)

The share amount indicated includes 35,000 shares subject to currently exercisable stock options held by Stephen D. Young.  Mr. Young was the only officer who held exercisable stock options at October 31, 2010.

 

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(6)

The share amounts indicated include unvested stock awards currently not vested held by the following persons in the following amounts: Clayton M. Christensen, 12,133 shares; Stephen R. Covey, 12,133 shares; Robert H. Daines, 12,133 shares; E.J. “Jake” Garn, 12,133 shares; Dennis G. Heiner, 12,133 shares; Donald J. McNamara, 12,133 shares; Joel C. Peterson, 12,133 shares; E. Kay Stepp, 12,133 shares; and all directors as a group, 97,064 shares.

(7)

John H. Lewis serves as the controlling member of Osmium Partners, LLC, which serves as the general partner of Osmium Capital, LP; Osmium Capital II, LP; and Osmium Spartan, LP (collectively, the Funds); and which manages other accounts on a discretionary basis.  Mr. Lewis and Osmium Partners, LLC may be deemed to share with the Funds and discretionary accounts voting and dispositive power with respect to such shares, except for the 200,039 shares that are directly owned by Mr. Lewis.  Each of Mr. Lewis, Osmium Partners, LLC, and the Funds disclaim beneficial ownership with respect to any shares other than the shares owned directly by such person or entity.  The information regarding the number of shares beneficially owned or deemed to be beneficially owned by Mr. Lewis, Osmium Partners, LLC, and the Funds was taken from a Schedule 13G filed by those entities and Mr. Lewis with the Sec urities and Exchange Commission, dated December 31, 2009.

(8)

Amount excludes shares held by David M.R. Covey and Stephan Mardyks since their service as named executive officers ceased as of August 31, 2010.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10 percent of our common stock, to file with the Securities and Exchange Commission (the SEC or Commission) initial reports of ownership and reports of changes in ownership of the Common Stock and other securities which are derivative of the Common Stock.  Executive officers, directors and holders of more than 10 percent of our Common Stock are required by SEC regulations to furnish us with copies of all such reports they file.  Based upon a review of the copies of such forms received by us and information furnished by the persons named above, we believe that all reports were filed on a timely basis during fiscal 2010.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Review and Approval of Related Party Transactions

We review all relationships and transactions in which the Company and our directors, Named Executive Officers, or their immediate family members are participants, to determine whether such persons have a direct or indirect material interest.  Our legal and accounting departments have responsibility for the development and implementation of processes and controls to obtain information from the directors and Named Executive Officers with respect to related party transactions and for then determining, based upon the facts and circumstances, whether the Company or a related party has a direct or indirect material interest in the transaction.  As required under SEC rules, transactions that are determined to be directly or indirectly material to us or the related party are disclosed in our proxy statement.  In addi tion, a disinterested majority of the full Board of Directors or Compensation Committee reviews and approves any related party transaction that is required to be disclosed.

Related Party Transactions

In fiscal 2009, we acquired the assets of CoveyLink Worldwide, LLC (CoveyLink).  CoveyLink conducts seminars and training courses and provides consulting based upon the book The Speed of Trust by Stephen M.R. Covey, who is the son of the Vice Chairman of the Board of Directors.  The purchase price was $1.0 million in cash plus or minus an adjustment for specified working capital

 

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and the costs necessary to complete the transaction, which resulted in a total initial purchase price of $1.2 million.  The previous owners of CoveyLink, which includes Stephen M.R. Covey, are also entitled to earn annual contingent payments based upon earnings growth over the next five years.  During fiscal 2010, we paid the former owners of CoveyLink $3.3 million in cash for the first earnout payment.  Prior to the acquisition date, CoveyLink had granted a non-exclusive license to us related to The Speed of Trust book and related training courses for which we paid CoveyLink specified royalties.  As part of the CoveyLink acquisition, an amended and restated license of intellectual property was signed that granted us an exclusive, perpetual, w orldwide, transferable, royalty-bearing license to use, reproduce, display, distribute, sell, prepare derivative works of, and perform the licensed material in any format or medium and through any market or distribution channel.  The amount expensed for these royalties due to Stephen M.R. Covey totaled $1.1 million during the fiscal year ended August 31, 2010.  In connection with the CoveyLink acquisition, we also signed a speaking services agreement that pays Stephen M.R. Covey a portion of the speaking revenues received for his presentations.  During fiscal 2010, we expensed $0.8 million for payment from these presentations.

 

Stephen R. Covey, who is currently the Vice-Chairman of the Board of Directors, receives book royalties on books he has authored and has a speaker services agreement with us pursuant to which Dr. Covey receives 80 percent of the net proceeds from personal speaking engagements.  During fiscal 2010, we expensed $1.5 million based upon these agreements.

We pay M. Sean Covey, who is a son of Stephen R. Covey, and who is also an employee of the Company, a percentage of the royalty proceeds received from the sales of certain books authored by him.  During fiscal 2010, we expensed $0.2 million for these royalty payments.

We employ John Covey, a brother of Stephen R. Covey, and paid him compensation totaling $115,096 during fiscal 2010.  During fiscal 2010, we also employed Boyd Craig, who is the son-in-law of Robert H. Daines, a member of our Board of Directors, and paid him compensation totaling $151,905.

Robert A. Whitman, our Chairman of the Board of Directors, President, and CEO beneficially owns a partnership interest in Knowledge Capital.  Donald J. McNamara, a member of our Board of Directors, also beneficially owns a partnership interest in Knowledge Capital.  Knowledge Capital beneficially owns 1,015,002 shares of our Common Stock and holds 5,913,402 warrants to purchase shares of our Common Stock.

Shawn D. Moon was among the 147 participants in our management stock loan program since March 2000, and under that program owed the Company $1,126,595 (75,865 shares) at November 30, 2010.  To settle the loan, he will surrender his loan shares (valued at market) to the Company in partial payment of the loan and we will forgive the remaining loan balance.  To the extent necessary, we also intend to pay Mr. Moon a bonus to cover the related taxes he will incur as a result of this transaction.

Each of these listed transactions was approved according to the procedures cited above.

 

PROPOSAL II

TO APPROVE THE AMENDMENT AND RESTATEMENT OF THE FRANKLIN COVEY CO. 1992 STOCK INCENTIVE PLAN

On November 19, 2010, our Board of Directors adopted, subject to shareholder approval, the Second Amended and Restated 1992 Stock Incentive Plan (the Restated Plan).  The purpose of the

 

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Restated Plan is to promote our long-term success and the creation of incremental stockholder value by encouraging key employees and non-employee directors to focus on critical long-range objectives, encouraging the attraction and retention of key employees and non-employee directors with exceptional qualifications, and linking key employees and non-employee directors directly to stockholder interests through increased stock ownership.

 

The Restated Plan is intended to replace the existing Amended and Restated 1992 Stock Incentive Plan (the Current Plan), which has been amended multiple times, and to merge the Current Plan and the 2004 Non-Employee Directors’ Stock Incentive Plan (the Directors’ Plan) into the Restated Plan.  Under the Restated Plan, the Directors’ Plan will cease to exist and the Restated Plan will govern our stock incentives. By combining the Current Plan and the Directors’ Plan, we will reduce the complexity and administrative costs associated with maintaining two share-based compensation plans and will provide flexibility in awarding shares to employees and non-employee directors.  The Compensation Committee, composed entirely of independent directors, will administer the Restated Plan.

Under the Restated Plan,  non-employee directors will be eligible to receive stock awards and will receive an annual grant (Annual Grant) of a number of restricted shares having an aggregate fair market value of $40,000, rounded up to the nearest whole share.  In addition to the Annual Grant, the Compensation Committee may grant additional awards to non-employee directors at its discretion.  If a non-employee director dies, all options, restricted stock, and stock units granted to such director automatically vest.  If a non-employee director is terminated for cause, all options, restricted stock, and stock units granted to such director automatically terminate and are null and void.

The maximum number of shares of Common Stock that may be issued pursuant to the Current Plan is currently 7,000,000.  The Restated Plan will increase the 7,000,000 share limit to 7,300,000 shares by adding the 300,000 shares previously approved by shareholders for the Directors’ Plan to the existing 7,000,000 shares previously approved by shareholders for the Current Plan to form one pool of 7,300,000 available shares.  We are not requesting the ability to issue any additional shares as a result of this proposal.  Any awards issued under the Directors’ Plan which counted against the 300,000 share limit will continue to count against the combined 7,300,000 share limit unless and to the extent that the awards again become available for re-issuance in accordance with the terms of the Restated Plan (e .g., in the case of forfeiture).

In addition to the changes described above, the Restated Plan includes changes to comply with current tax requirements, to provide more flexibility to the Compensation Committee in granting awards, and several additional changes, including allowing awards to be settled in cash.

If this proposal is approved, we will not grant any more awards under the Directors’ Plan and all outstanding awards issued under the Directors’ Plan will be subject to the terms of the Restated Plan.  New awards granted to directors will be granted from the Restated Plan.  If the shareholders do not approve the Restated Plan at the Annual Meeting, the Restated Plan will be of no effect and the Current Plan and the Directors’ Plan will continue to operate as previously approved.

The following is a summary of the material features of the Restated Plan.  Because it does not contain all of the information that may be important to you, you should read the entire Restated Plan attached hereto as Appendix A carefully before deciding how to vote.

Summary of the Restated Plan

Administration

The Compensation Committee will administer the Restated Plan.  The Compensation Committee is composed entirely of independent directors within the meaning Section 162(m) of the Internal

 

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Revenue Code of 1986, as amended (the Code), and under the NYSE standards.  The Committee will always be comprised of at least two directors but not less than such number of directors as will be required to permit awards granted under the Restated Plan to qualify under Rule 16b-3 of the Exchange Act and Section 162(m) of the Code.  The Board of Directors may, at any time and from time to time, without any further action of the Compensation Committee, exercise the powers and duties of the Compensation Committee under the Restated Plan, unless the exercise of such powers and duties by the Board of Directors would cause the Restated Plan not to comply with the requirements of Rule 16b-3 of the Exchange Act.

 

The Compensation Committee will select the key employees and non-employee directors who are to receive awards under the Restated Plan.  They will further determine the amount, vesting requirements and other conditions of the awards, interpret the Restated Plan, and make all other decisions relating to the operation of the Restated Plan.  The Compensation Committee may adopt such rules or guidelines as it deems appropriate to implement the Restated Plan.  The Compensation Committee’s determinations under the Restated Plan shall be final and binding on all persons.  The Compensation Committee may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any option exercises, share issuances and/or of any resales or other transfers of shares i ssued under the Restated Plan.

Eligible Participants

Awards may be granted only to our key employees.  The Compensation Committee determines which of our employees are deemed to be key employees.  Employees of our subsidiaries can be key employees.  The Restated Plan will also allow us to grant awards to our non-employee directors.  We currently have 9 directors, 5 officers, and approximately 600 employees who will be eligible to participate in the Restated Plan.

Shares Available For Awards

The aggregate number of shares of our Common Stock that may be issued under all stock-based awards made under the Restated Plan will be 7,300,000.  Under the Restated Plan, no person may be granted options or stock appreciation rights for more than 500,000 Common Stock shares in any year.  No person may be awarded performance shares which are intended to represent “qualified performance-based compensation” with the meaning of Section 162(m) of the Code for more than 500,000 Common Stock shares in any year.  The maximum amount payable under the Restated Plan pursuant to all awards denominated in cash to any person in the aggregate in any taxable year will be $5,000,000 in value, whether payable in cash, Common Stock or other property.

The Restated Plan requires appropriate adjustments to the total number of shares of Common Stock available under the Restated Plan, as well as to outstanding awards, to offset the effect of any stock split or dividend of Common Stock, other materially dilutive dividend, consolidation of outstanding shares, recapitalization or similar occurrence.

Types of Awards

The Restated Plan permits us to issue incentive stock options as defined in Section 422 of the Code (ISOs) and nonqualified stock options which are not governed by Section 422 of the Code (Nonqualified Options) to acquire shares of Common Stock (collectively, Options).  The Restated Plan also permits the issuance of stock appreciation rights in connection with Options (SARs), restricted shares of Common Stock, and stock units, including performance shares.  The various types of share-based awards that may be issued are referred to collectively as “Awards.”  The Compensation Committee may, in its discretion, pay in cash the fair market value of the Common Stock that was to be delivered pursuant to an Award instead of delivering the Common Stock.  On

 

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November 30, 2010, the closing price of  our Common Stock, as reported on the New York Stock Exchange, was $8.03 per share.

 

Options.  Subject to the terms of the Restated Plan, we may grant ISOs and Nonqualified Options to key employees and non-employee directors.  The Compensation Committee sets the terms of such Options, except that the exercise price of any Option cannot be less than the fair market value of the underlying shares of Common Stock as of the date of Option grant.  The exercise price of Options is payable upon exercise in the form or forms determined by the Compensation Committee.  The Compensation Committee also determines when each Option vests and becomes exercisable.  The term of an ISO, however, may not be more than ten years from the date of grant.  During the lifetime of the employee receiving the Option (the Optionee), th e Option is not assignable or transferable, however, the Compensation Committee may permit transfers of Nonqualified Options to family members.  The Compensation Committee may allow an Option to be exercised early if the Optionee dies, retires, or becomes disabled or if we undergo a “change in control” as defined in the Restated Plan.  The Compensation Committee may require that a holder’s Options expire if that holder’s employment is terminated.

The Compensation Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Common Shares, promissory notes (provided, however, that the acceptance of such promissory notes does not conflict with Section 402 of the Sarbanes-Oxley Act of 2002), other securities, other Awards or other property, or any combination thereof, having a fair market value on the exercise date equal to the applicable exercise price) in which payment of the exercise price with respect thereto may be made or deemed to have been made.  Alternatively, the Committee may, in its discretion, permit an Option to be exercised using an SAR as described in the Restated Plan.  An Optionee may exercise an Option by requesti ng that the Company deliver to the Optionee a number of Common Shares having an aggregate fair market value (determined as of the date of exercise) equal to the excess, if positive, of the fair market value of the Common Shares underlying the Option being exercised, on the date of exercise, over the exercise price of the Option for such Common Shares (a Net Exercise).  Notwithstanding anything to the contrary herein, the Compensation Committee may, in its discretion, require an Optionee to exercise an Option using the Net Exercise method.  In addition, notwithstanding the method of exercise, the Compensation Committee may, in its discretion, pay to an Optionee in cash the fair market value of the Common Shares that were to be delivered to the Optionee instead of delivering the Common Shares.

Stock Appreciation Rights (SARs).  In connection with the grant of any Option, the Compensation Committee may also grant a SAR related to that Option.  Related SARs entitle the Optionee to surrender to the Company, unexercised, all or any part of the Option which then is exercisable and to receive from the Company an amount equal to the difference between the aggregate exercise price of the Option shares and the fair market value of those shares on the date of exercise.  The Company will pay the amount owing upon exercise of a SAR in shares of Common Stock.  A SAR may be exercised only if the related Option can be exercised.

Restricted Shares.  The Compensation Committee may award to key employees and non-employee directors shares of Common Stock subject to vesting conditions (Restricted Shares).  The Compensation Committee sets vesting conditions, which may be based upon the recipient’s service or performance, our performance, or other criteria and the Restricted Shares vest when those conditions are satisfied.  Restricted Shares may also vest if the recipient dies, retires, or becomes disabled of if we undergo a “change in control” as defined in the Restated Plan.  The holders of Restricted Shares do not have the same voting, dividend and other rights as our other Common Stock holders until the Restricted Shares vest.  To the extent t hat an Award is granted in the form of Restricted Shares, the Award recipient, as a condition to the grant of such Award, may be required to pay the Company in cash an amount equal to the par value of such Restricted Shares.

 

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Stock Units.  The Compensation Committee may grant to participants contractual rights to receive in the future a designated number of shares of Common Stock upon satisfaction of specified vesting conditions (a Stock Unit).  The Compensation Committee selects the vesting conditions for each Stock Unit, which may be based upon the recipient's service or performance, our performance, or other criteria.  Holders of Stock Units have no voting rights and are not entitled to receive cash dividends or dividend equivalents.  Stock Units are settled upon vesting in cash, shares of Common Stock, or a combination thereof, as determined by the Compensation Committee.  Under the Restated Plan, Stock Units may be granted in the form of performance shares as described below.  To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of Award recipients.

Performance Shares.  The Restated Plan permits Stock Units to be granted in the form of performance shares (Performance Shares).  Performance Shares will provide the holder with the right to receive shares of Common Stock upon completion of specified performance periods.  The precise number of shares issued is based upon how well we achieve pre-determined, Compensation Committee-designated target levels of performance during the applicable performance periods.

Performance Shares that are granted to participants who may be “covered employees” under Section 162(m) of the Code and that are intended to be “qualified performance-based compensation” within the meaning of Section 162(m) of the Code, to the extent required by Section 162(m) of the Code, shall be conditioned solely on the achievement of the performance criteria established by the Compensation Committee within the time prescribed by Section 162(m) of the Code, and shall otherwise comply with the requirements of Section 162(m) of the Code.

Performance goals must be based solely on one or more of the following business criteria, applied on a corporate, subsidiary, division, business unit, or line of business basis:  earnings per share, revenues (including net sales growth), return on investment, earnings (including net operating profit after taxes), return on equity, profit margins, cost reductions, inventory levels, delivery performance, safety performance, quality performance, core operating earnings, total shareholder return, cash flow (including operating cash flows, free cash flow, discounted cash flow return on investment, and cash flow in excess of cost of capital), economic value added, stockholder value added, market share, price to earnings ratio, expense ratios, workforce goals, total expenditures, or completion of key projects.  Performance go als may be an absolute measure or a defined change (amount or percentage) in a measure.  The measure of performance may be set by reference to an absolute standard or a comparison to specified companies or groups of companies, or other external measures.  The Compensation Committee may provide that, in determining whether the performance goal has been achieved, the effect of certain events may be excluded.  These events include, but are not limited to, any of the following: restructurings, acquisitions, divestitures, discontinued operations, extraordinary items, unusual or non-recurring charges, an event not directly related to the operations of the Company or within the reasonable control of the Company’s management, or the cumulative effects of tax or accounting changes.  To the extent that Section 162(m) of the Code or applicable tax and/or securities laws change to permit Compensation Committee discretion to alter the governing performance measures without di sclosing to shareholders and obtaining shareholder approval of such changes and without thereby exposing the Company to potentially adverse tax or other legal consequences, the Compensation Committee shall have the sole discretion to make such changes without obtaining shareholder approval.

Automatic Grant Program.  The Restated Plan contains an automatic option grant program for our non-employee directors (the Automatic Grant Program).  We will award to each non-employee director on the date of the annual shareholder meeting of each year a number of Restricted Shares having an aggregate fair market value of $40,000, rounded up to the nearest whole share.  If the NYSE is not open on such date, the date of grant will be the next subsequent day on which the NYSE is open.  Restricted Shares granted pursuant to this automatic grant program shall vest one

 

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year from the date of grant.  In addition to this annual grant, the Compensation Committee may grant additional Awards to non-employee directors at any time in its discretion.

 

Accounting for Awards

If an Award entitles the holder thereof to receive or purchase shares, the number of shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of shares available for granting Awards under the Restated Plan.  For purposes of determining the number of shares covered on the date of grant by a SAR that is to be settled in shares, the aggregate number of shares with respect to which the SAR is to be exercised shall be counted against the number of shares available for Awards under the Restated Plan (without regard to the number of actual shares issued upon settlement).  Awards that do not entitle the holder thereof to receive or purchase shares shall not be counted against the aggregate number of shares available for Awards under the Restate d Plan.

Award Adjustments

Subject to further adjustment under the Restated Plan, to the extent an Award under the Restated Plan is settled in cash, expires, or is forfeited or cancelled, Common Stock shares subject to the Award will not be considered to have been issued and will not be applied against the maximum number of Common Stock shares available for future issuance under the Restated Plan. If, however, Options are surrendered upon the exercise of related SARs, then the Common Stock shares underlying such Options shall not be restored to the pool available for future Awards.  Any dividend equivalents distributed under the Restated Plan shall not be applied against the number of Common Stock shares available for future Awards.  Shares surrendered to or withheld by the Company in payment of the exercise price or applicable withholding taxes upon exercise or settlement of an Award shall not be restored to the pool available for future Awards.

Transferability of Awards

Subject to the provisions of the Restated Plan, any Award granted under the Restated Plan will not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily, involuntarily or by operation of law.  However, this shall not preclude a person from designating a beneficiary who will receive any undistributed Awards in the event of the person’s death, nor shall it preclude a transfer by will or by the laws of descent and distribution.

Termination and Amendment

The Board of Directors may, at any time and for any reason, amend or terminate the Restated Plan.  No Award shall be granted under the Restated Plan after (a) the tenth anniversary of the earlier of November 19, 2010, or (b) any earlier date of discontinuation or termination established pursuant to the Restated Plan; provided, however, that no Performance Shares shall be granted under the Restated Plan after the fifth year following the year in which stockholders approved the performance criteria unless and until the performance criteria are re-approved by the stockholders.

Any amendment to the Restated Plan is subject to the approval of our shareholders to the extent required by applicable laws and the rules of any exchange on which the Common Stock is listed.

No Awards shall be made under the Restated Plan after the termination thereof.  The termination of the Restated Plan, or any amendment thereof, shall not affect any Option, SAR, Restricted Share or Stock Unit previously granted under the Restated Plan.

 

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Certain Federal Income Tax Consequences

The following is a brief summary of the certain U.S. federal income tax consequences generally applicable to awards under the Restated Plan.

This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax consequences that may apply with respect to participation in the Restated Plan.  In addition, this summary does not take into account the individual facts and circumstances of any particular recipient that may affect the U.S. federal income tax consequences of participation in the Restated Plan.  Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any recipient.  Each recipient should consult his or her own financial advisor, legal counsel, or accountant regarding the U.S. federal, U.S. state and local, and foreign tax consequences of participation in the Restated Plan.

Scope of this Disclosure

This summary is based on the Code, Treasury Regulations, published Internal Revenue Service (IRS) rulings, published administrative positions of the IRS and U.S. court decisions that are applicable as of the date of this document.  Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive basis.  This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive basis.

Grant of Options and SARs

 

The grant of a stock Option (either an ISO or a Nonqualified Option) or SAR is not expected to result in any taxable income for the recipient or any deduction for us at the time of grant.

 

Exercise of Incentive Stock Options

 

No taxable income is realized by the Optionee upon the exercise of an ISO.  If stock is issued to the Optionee pursuant to the exercise of an ISO, and if no disqualifying disposition of such shares is made by such award holder within two years after the date of grant or within one year after the transfer of such shares to such award holder, then (1) upon the sale of such shares, any amount realized in excess of the option price will be taxed to such Optionee as a long-term capital gain and any loss sustained will be a long-term capital loss, and (2) we will not be entitled to a deduction for federal income tax purposes.

 

If the stock acquired upon the exercise of an ISO is disposed of prior to the expiration of either holding period described above, generally (1) the Optionee will realize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of such shares at exercise (or, if less, the amount realized on the disposition of such shares) over the option price paid for such shares, and (2) we will be entitled to deduct such amount for federal income tax purposes if the amount represents an ordinary and necessary business expense.  Any further gain (or loss) realized by the Optionee will be taxed as short-term or long-term capital gain (or loss), as the case may be, and will not result in any deduction by us.

 

Exercise of Non-Qualified Stock Options and SARs

 

Upon exercising a Nonqualified Option, the Optionee must recognize ordinary income equal to the excess of the fair market value of the shares of our Common Stock acquired on the date of

 

 

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exercise over the exercise price, and we generally will be entitled at that time to an income tax deduction for the same amount.  Upon exercising a SAR, the amount of any cash received and the fair market value on the exercise date of any shares of our Common Stock received are taxable to the recipient as ordinary income and generally are deductible by us.

 

The tax consequence upon a disposition of shares acquired through the exercise of a Nonqualified Option or SAR will depend on how long the shares have been held.  Generally, there will be no tax consequence to us in connection with the disposition of shares acquired under a Nonqualified Option or SAR.

Restricted Stock

 

Recipients of grants of Restricted Stock generally will be required to include as taxable ordinary income the fair market value of the Restricted Stock at the time it is no longer subject to a substantial risk of forfeiture.  However, an award holder who makes an 83(b) election within 30 days of the date of grant of the Restricted Stock will incur taxable ordinary income on the date of grant equal to the fair market value of such shares of Restricted Stock (determined without regard to forfeiture restrictions).  With respect to the sale of shares after the forfeiture restrictions have expired, the holding period to determine whether the Award recipient has long-term or short-term capital gain or loss generally begins when the restrictions expire, and the tax basis for such shares will generally be based on the fair mar ket value of the shares on that date.  However, if the award holder made an 83(b) election as described above, the holding period commences on the date of such election, and the tax basis will be equal to the fair market value of the shares on the date of the election (determined without regard to the forfeiture restrictions on the shares).  Dividends, if any, that are paid or accrued while the Restricted Stock is subject to a substantial risk of forfeiture will also be taxed as ordinary income.  We will be entitled to an income tax deduction equal to amounts the award holder includes in ordinary income at the time of such income inclusion.

 

Stock Units and Performance Awards

 

Recipients of grants of Stock Units (including Performance Awards) (collectively, Deferred Awards) will not incur any federal income tax liability at the time the Awards are granted.  Award holders will recognize ordinary income equal to (a) the amount of cash received under the terms of the award or, as applicable, (b) the fair market value of the shares received (determined as of the date of receipt) under the terms of the award.  Cash or shares to be received pursuant to a Deferred Award generally become payable when applicable forfeiture restrictions lapse; provided, however, that, if the terms of the award so provide, payment may be delayed until a later date to the extent permitted under applicable tax laws.  We will be entitled to an income tax deduction for any amounts included by the Award holder as ordinary income.  For Awards that are payable in shares, participant’s tax basis is equal to the fair market value of the shares at the time the shares become payable.  Upon the sale of the shares, appreciation (or depreciation) after the shares are paid is treated as either short-term or long-term capital gain (or loss) depending on how long the shares have been held.

 

Special Rules for Executive Officers and Directors Subject to Section 16 of the Exchange Act

 

Special rules may apply to individuals subject to Section 16 of the Exchange Act. In particular, shares received through exercise or payout of a Nonqualified Option, an ISO (for purposes of the AMT only), a SAR or a Restricted Stock unit, and any shares of Restricted Stock that vest, may be treated as restricted property for purposes of Section 83 of the Internal Revenue Code if the recipient has had a non-exempt acquisition of shares of FranklinCovey stock within the six months prior to the exercise, payout or vesting. Accordingly, the amount of any ordinary income recognized and the amount of our income tax deduction will be determined as of the end of that period (unless a special election is made by the recipient pursuant to Section 83(b) of the Internal Revenue Code to recognize income as of the date the shares are received).< /div>

 

 

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Delivery of Shares for Tax Obligation

 

Under the Restated Plan, participants receiving or exercising Awards, may deliver shares of our Common Stock (either shares received upon the receipt or exercise of the Award or shares previously owned by the participant) to us to satisfy federal, state or local tax obligations.

 

Section 409A of the Internal Revenue Code

 

The Restated Plan contains provisions intended to prevent adverse tax consequences under Section 409A of the Internal Revenue Code to holders of Awards granted under the Restated Plan.

Section 162(m) Limitation

Notwithstanding the above rules, under Code Section 162(m), we cannot deduct any compensation in excess of $1,000,000 paid during any taxable year to our Chief Executive Officer or to any of our other three top executive officers whose annual compensation is required to be reported to shareholders under the Exchange Act, other than the Chief Financial Officer.  This limit is referred to as the “Section 162 Limitation.”  The Section 162(m) Limitation does not apply, however, to certain “performance-based compensation” under plans that satisfy certain shareholder approval requirements.

New Plan Benefits

Except with respect to the Automatic Grant Program, Awards under the Restated Plan are made at the discretion of our Compensation Committee.  It is not possible to determine the benefits or amounts that will be received by eligible participants under the Restated Plan after the date of this Proxy Statement.

Franklin Covey Co. Second Amended and Restated 1992 Stock Incentive Plan.(1)

		Dollar Value ($)				Number of Units
Robert A. Whitman Chief Executive Officer			-				-
Stephen D. Young Chief Financial Officer			-				-
Jennifer Colosimo Executive Vice President and Chief Operations Officer			-				-
M. Sean Covey Executive Vice President of Global Solutions and Partnerships			-				-
Shawn D. Moon Executive Vice President of Global Sales and Delivery			-				-
Executive Group			-				-
Non-Executive Director Group(2)		$	320,000				61,064
Non-Executive Officer Employee Group			-				-

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(1)      With the exception of the annual grant to non-employee directors, we are unable to determine either the number of or dollar value of Awards to be granted in the future.

(2)      The annual grant to each of the eight non-employee directors is a number of restricted shares having an aggregate fair market value of $40,000, rounded up to the nearest whole share.

 

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The rounding may result in the total dollar value exceeding $320,000.  The number of units is calculated by taking the dollar value and dividing by the stock price on January 29, 2010, the date of our last Annual Meeting.

 

The following table sets forth, with respect to our Named Executive Officers (as defined under the “Compensation and Analysis” Section) and the other indicated persons and groups, the aggregate number of shares of Common Stock underlying stock Options that have been granted under our Current Plan from the effective date of the Current Plan through November 30, 2010.  We cannot determine any future grants of stock Options or the future aggregate number of shares of Common Stock underlying such future stock Options.

Name and Position	Number of Units
Robert A. Whitman Chief Executive Officer	250,000
Stephen D. Young Chief Financial Officer	210,000
Jennifer Colosimo Executive Vice President and Chief Operations Officer	-
M. Sean Covey Executive Vice President of Global Solutions and Partnerships	9,500
Shawn D. Moon Executive Vice President of Global Sales and Delivery	-
All current executive officers as a group	469,500
All current directors who are not executive officers as a group	-
Each nominee for election as a director	-
Each associate of any such directors, executive officers or nominees	-
Each other person who received or is to receive 5 percent of such options, warrants or rights	-
All employees, including all current officers who are not executive officers, as a group	-

Valuation of our Common Stock

On November 30, 2010, the closing price of our Common Stock, as reported on the New York Stock Exchange, was $8.03 per share.

Recommendation of the Board of Directors; Vote Required for Approval

The Board recommends that shareholders of the Company vote for approval of the Restated Plan.  Approval of the Restated Plan requires that a quorum be present at the Annual Meeting and that the number of votes cast in favor of the Restated Plan exceed the number of votes cast in opposition to the Restated Plan, provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal.  If the Restated Plan is not approved by our shareholders, the Current Plan will continue in effect as amended, and the Directors’ Plan will continue in effect.

Certain Interests of Directors and Executive Officers

In considering the recommendation of the Board of Directors with respect to the Restated Plan, shareholders should be aware that members of the Board of Directors and executive officers have certain interests which may present them with conflicts of interest in connection with such proposal.  Specifically, current directors who are employees of the Company and executive officers are key employees eligible to participate in the Restated Plan.  Additionally, the non-employee directors are eligible to participate in the Restated Plan.  The Board of Directors recognizes that adoption of the Restated Plan may benefit individual directors and executive

 

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officers of the Company and their successors, but it believes that approval of the Restated Plan will strengthen our ability to continue to attract, motivate and retain qualified employees, officers and directors and advance the interests of the Company and its shareholders by encouraging key employees and non-employee directors to make significant contributions to our long-term success.  The Board of Directors believes that the Restated Plan is in the best interests of the Company and its shareholders, and therefore unanimously recommends a vote FOR the proposal to approve the Restated Plan.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF APPROVING THE AMENDMENT AND RESTATEMENT OF THE FRANKLIN COVEY CO. 1992 STOCK INCENTIVE PLAN

Equity Compensation Plans Previously Approved by Shareholders

 

[a]

[b]

[c]

Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants, and rights

Weighted-average exercise price of outstanding options, warrants, and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column [a])

(in thousands)

(in thousands)

Equity compensation plans approved by security holders(1)(2)(4)

949

$

10.99

2,122

(3)

(1)

Excludes 97,064 shares of unvested (restricted) stock awards that are subject to forfeiture.

(2)

Amount includes 217,424 performance share awards that are expected to be awarded under the terms of a Board of Director approved long-term incentive plan (LTIP).  The number of shares eventually awarded to LTIP participants is variable and based upon the achievement of specified financial performance goals related to cumulative operating income.  The weighted average exercise price of outstanding options, warrants, and rights does not take the LTIP awards into account.

(3)

Amount is based upon the number of LTIP shares expected to be awarded at August 31, 2010 and may change in future periods based upon the achievement of specified goals and revisions to estimates.

(4)

At August 31, 2010, we had approximately 720,000 shares authorized for purchase by participants in our Employee Stock Purchase Plan.

PROPOSAL III

TO APPROVE THE RATIFICATION OF THE INDEPENDENT REGISTERED

PUBLIC ACCOUNTANTS

The Audit Committee has selected the independent registered accounting firm KPMG LLP (KPMG) to review our financial statements for the fiscal quarter ending November 27, 2010, and is seeking ratification of that choice by our shareholders.  During fiscal 2010, the Audit Committee adopted a policy of placing our audit services out to bid every five years and intends to complete the bid process in early 2011.  The Audit Committee is responsible for the selection and ongoing oversight

 

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of the auditors and has the authority to replace KPMG as the auditors for the 2011 fiscal year, if it deems it appropriate to do so.  Any such change subsequent to the Annual Meeting will not be submitted to the shareholders for ratification.  The Board of Directors anticipates that one or more representatives of KPMG will be present at the Annual Meeting and will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

 

Principal Accountant Fees

The following table shows the fees paid or accrued by us for audit and other services provided by KPMG for the fiscal years ended August 31, 2010 and 2009:

		Fiscal 2010				Fiscal 2009
Audit Fees(1)		$	782,000			$	1,071,000
Audit-Related Fees(2)			7,000				-
Tax Fees(3)			35,000				71,000
All Other Fees			-				-
		$	824,000			$	1,142,000

(1)

Audit fees represent fees and expenses for professional services provided in connection with the audit of our consolidated financial statements and the effectiveness of internal controls over financial reporting found in the Annual Report on Form 10-K and reviews of our financial statements contained in Quarterly Reports on Form 10-Q, procedures related to registration statements, and accounting consultations on actual transactions.

(2)

Audit-Related Fees primarily consisted of accounting consultation on proposed transactions.

(3)

Tax Fees consisted primarily of fees and expenses for services related to tax compliance, tax planning, and tax consulting.

The Audit Committee pre-approves all services to be performed by our independent registered public accountants and subsequently reviews the actual fees and expenses paid to KPMG.  All the audit-related and non-audit services provided by KPMG during the fiscal years ended August 31, 2010 and 2009 were pre-approved by the Audit Committee.  All audit work during fiscal 2010 was performed by employees of KPMG.  The Audit Committee has determined that the fees paid to KPMG for non-audit services are compatible with maintaining KPMG’s independence as our independent registered public accountants.

AUDIT COMMITTEE REPORT

The Audit Committee assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, and reporting practices of the Company.  The Audit Committee operates in accordance with a written charter, which was adopted by the Board of Directors.  A copy of that charter is available on our website at www.franklincovey.com.  Each member of the Audit Committee is “independent,” as required by the applicable listing standards of the New York Stock Exchange and the rules of the SEC.

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors.  The Company’s management has primary responsibility for the financial statements and reporting process, including the Company’s internal control over financial reporting.  The independent registered public accounting firm is responsible for performing an integrated audit of the Company’s financial statements and internal control over financial reporting in accordance with the auditing standards of the Public Company Accounting Oversight Board.

 

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In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with management the audited financial statements to be included in the Annual Report on Form 10-K for the fiscal year ended August 31, 2010.  This review included a discussion of the quality and the acceptability of the Company’s financial reporting and system of internal controls, including the clarity of disclosures in the financial statements.  The Audit Committee also reviewed and discussed with the Company’s independent registered public accounting firm the audited financial statements of the Company for the fiscal year ended August 31, 2010, their judgments as to the quality and acceptability of the Company’s financial reporting, and such other matters as are required to be discussed by Statement on Auditing Standards No. 61, as amended and as adopted by the Public Company Accounting Oversight Board.

The Audit Committee obtained from the independent registered public accountants a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors’ independence consistent with Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, discussed with the auditors any relationships that may impact their objectivity and independence, and satisfied itself as to the auditors’ independence.  The Audit Committee meets periodically with the independent registered public accounting firm, with and without management present, to discuss the results of the independent registered public accounting firm’s examinations and evaluations of the Company’s internal control and the overall quality of the Company’s financial reporting.

Based upon the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2010, for filing with the SEC.

Date:  November 10, 2010

E.J. “Jake” Garn, Chairperson

Robert H. Daines

Dennis G. Heiner

E. Kay Stepp

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE PROPOSAL TO RATIFY THE SELECTION OF KPMG AS INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FOR THE COMPANY FOR THE FISCAL QUARTER ENDING NOVEMBER 27, 2010.

OTHER MATTERS

As of the date of this Proxy Statement, the Board of Directors knows of no other matters to be presented for action at the meeting.  However, if any further business should properly come before the meeting, the persons named as proxies in the accompanying form of proxy will vote on such business in accordance with their best judgment.

PROPOSALS OF SHAREHOLDERS

Proposals which shareholders intend to present at the annual meeting of shareholders to be held in calendar year 2012 must be received by us, at our executive offices (2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331) no later than August 17, 2011, provided that this date may be changed in the event that the date of the annual meeting of shareholders to be held in calendar year 2012 is changed by more than 30 days from the date of the annual meeting of

 

 

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shareholders to be held in calendar year 2011.  Such proposals must also comply with the requirements as to form and substance established by the SEC if such proposals are to be included in our proxy statement and form of proxy.

 

Pursuant to rules adopted by the SEC, if a shareholder intends to propose any matter for a vote at our Annual Meeting to be held in calendar year 2012 but fails to notify us of that intention prior to October 31, 2011, then a proxy solicited by the Board of Directors may be voted on that matter in the discretion of the proxy holder, provided that this date may be changed in the event that the date of the annual meeting of shareholders to be held in calendar year 2012 is changed by more than 30 days from the date of the annual meeting of shareholders to be held in calendar year 2011.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly, and current reports, proxy statements and other information with the SEC.  You may read and copy any document we file at the SEC’s public reference room, 100 F Street NE, Washington, D.C. 20549.  You can also request copies of the documents, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC.  Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms.  These SEC filings are also available to the public from the SEC’s web site at http://www.sec.gov.

We will provide without charge to any person from whom a Proxy is solicited by the Board of Directors, upon the written request of such person, a copy of our 2010 Annual Report on Form 10-K, including the financial statements and schedules thereto (as well as exhibits thereto, if specifically requested), required to be filed with the Securities and Exchange Commission.  Written requests for such information should be directed to Franklin Covey Co., Investor Relations Department, 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331, Attn:  Mr. Stephen D. Young.

You should rely only on the information contained in this Proxy Statement.  We have not authorized anyone to provide you with information different from that contained in this Proxy Statement.  The information contained in this Proxy Statement is accurate only as of the date of this Proxy Statement, regardless of the time of delivery of this Proxy Statement.

 

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APPENDIX A

 

FRANKLIN COVEY CO.

 

SECOND AMENDED AND RESTATED

 

1992 STOCK INCENTIVE PLAN

 

 

TABLE OF CONTENTS

 

 

			Page
ARTICLE 1.		INTRODUCTION	55
ARTICLE 2.		ADMINISTRATION	55
	2.1	The Committee	55
	2.2	Committee Responsibilities	55
ARTICLE 3.		LIMITATION ON AWARDS	56
	3.1	Available Common Shares	56
	3.2	Adjustments	56
	3.3	Accounting for Awards	56
	3.4	Source of Common Shares	57
ARTICLE 4.		ELIGIBILITY	57
	4.1	General Rule	57
	4.2	Ten-Percent Stockholders	57
	4.3	Attribution Rules	57
	4.4	Outstanding Stock	57
ARTICLE 5.		OPTIONS	57
	5.1	Stock Option Agreement	57
	5.2	Options Nontransferable	57
	5.3	Number of Shares	58
	5.4	Exercise Price	58
	5.5	Exercisability and Term	58
	5.6	Effect on Change in Control	58
	5.7	Modification, Extension and Renewal of Options	58
ARTICLE 6.		PAYMENT FOR OPTION SHARES	58
ARTICLE 7.		STOCK APPRECIATION RIGHTS	59
	7.1	Grant of SARs	59
	7.2	Manner of Exercise of SARs	59
	7.3	Limited SARs	59
ARTICLE 8.		RESTRICTED SHARES AND STOCK UNITS	59
	8.1	Time, Amount and Form of Awards	59
	8.2	Payment for Awards	60
	8.3	Vesting Conditions	60
	8.4	Form of Settlement of Stock Units	60
	8.5	Time of Settlement of Stock Units	60
	8.6	Death of Recipient	60
	8.7	Performance Shares	61

 

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	8.8	Section 409A Provisions	62
ARTICLE 9.		VOTING RIGHTS AND DIVIDENDS OR DIVIDEND EQUIVALENTS	62
	9.1	Restricted Shares	62
	9.2	Stock Units	62
ATICLE 10.		PROTECTION AGAINST DILUTION	62
	10.1	General	62
	10.2	Reorganizations	63
	10.3	Reservation of Rights	63
ARTICLE 11.		LIMITATION OF RIGHTS	63
	11.1	Employment Rights	63
	11.2	Stockholders’ Rights	63
	11.3	Creditors’ Rights	63
	11.4	Government Regulations	63
ARTICLE 12.		LIMITATION ON PAYMENTS	64
	12.1	Basic Rule	64
	12.2	Reduction of Payments	64
	12.3	Overpayments and Underpayments	64
	12.4	Related Corporations	65
ARTICLE 13.		WITHHOLDING TAXES	65
	13.1	General	65
	13.2	Options	65
ARTICLE 14.		ASSIGNMENT OR TRANSFER OF AWARD	65
ARTICLE 15.		AWARDS TO NON-EMPLOYEE DIRECTORS	65
	15.1	Annual Grant of Restricted Stock	65
	15.2	Effect on Options of Termination of Membership on the Board of Directors	66
	15.3	Effect on Restricted Stock of Termination of Membership on the Board of Directors	66
	15.4	Termination for Cause	66
	15.5	Change in Control	66
	15.6	Remaining Terms	66
ARTICLE 16.		FUTURE OF THE PLAN	66
	16.1	Term of the Plan	66
	16.2	Amendment or Termination	66
	16.3	Effect of Amendment or Termination	67
ARTICLE 17.		GENERAL PROVISIONS	67
	17.1	No Trust or Fund Created	67
	17.2	Consultation With Professional Tax and Investment Advisors	67
	17.3	Foreign Employees and Foreign Law Considerations	67
	17.4	Blackout Periods	67
ARTICLE 18.		DEFINITIONS	67
ARTICLE 19.		EXECUTION	71

 

 

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FRANKLIN COVEY CO.

 

SECOND AMENDED AND RESTATED

 

1992 STOCK INCENTIVE PLAN

 

ARTICLE 1. INTRODUCTION

 

This Plan was originally adopted by the Board on March 30, 1992, and approved by the Company’s stockholders at a special meeting of stockholders on March 30, 1992.  This Plan has subsequently been amended multiple times.  This Plan is now being amended and restated in order to, among other things, combine the Franklin Covey Co. 2004 Non-Employee Directors’ Stock Incentive Plan (the “Old Directors’ Plan”) into this Plan, and rename this Plan as the Franklin Covey Co. Second Amended and Restated 1992 Stock Incentive Plan.  As a result, the Old Directors’ Plan will be terminated, no further awards will be granted pursuant to the Old Directors’ Plan, and all outstanding awards issued pursuant to the Old Directors’ Plan will be subject to the terms of this Plan.

 

The purpose of the Plan is to promote the long-term success of the Company and the creation of incremental stockholder value by:  (a) encouraging Key Employees and Non-Employee Directors to focus on critical long-range objectives; (b) encouraging the attraction and retention of Key Employees and Non-Employee Directors with exceptional qualifications; and (c) linking Key Employees and Non-Employee Directors directly to stockholder interests through increased stock ownership.  The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, stock appreciation rights or Options, which may constitute incentive stock options or nonstatutory stock options.  The Plan shall be governed by, and construed in accordance with, the laws of the State of Utah.

 

ARTICLE 2. ADMINISTRATION

 

2.1 The Committee.

 

The Plan shall be administered by the Committee.  The Committee shall be comprised of at least two directors but not less than such number of directors as shall be required to permit Awards granted under the Plan to qualify under Rule 16b-3 of the Exchange Act, and Section 162(m) of the Code, and each member of the Committee shall each be an outside director within the meaning of Section 162(m) of the Code.  Notwithstanding anything to the contrary contained herein, the Board may, at any time and from time to time, without any further action of the Committee, exercise the powers and duties of the Committee under the Plan, unless the exercise of such powers and duties by the Board would cause the Plan not to comply with the requirements of Rule 16b-3 of the Exchange Act.

 

2.2 Committee Responsibilities.

 

The Committee shall select the Key Employees and Non-Employee Directors who are to receive Awards under the Plan, determine the amount, vesting requirements and other conditions of such Awards, interpret the Plan, and make all other decisions relating to the operation of the Plan.  The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan.  The Committee’s determinations under the Plan shall be final and binding on all persons.  The Committee may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any Option exercises, share issuances and/or of any resales or other transfers of shares issued hereunder, including without limitation:  (i) restrictions under an

 

 

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insider trading policy; (ii) restrictions as to the use of a specified brokerage firm for such resales or other transfers; (iii) restrictions during any period when the Committee determines that the prospectus relating to such Award may not contain all required information; (iv) restrictions under any applicable federal or state securities law; and (iv) restrictions requested by an underwriter engaged in a registered offering of the Company’s securities, not to exceed 200 days following the pricing of securities for sale in such offering.

 

ARTICLE 3. LIMITATION ON AWARDS

 

3.1 Available Common Shares.

 

Subject to adjustment under Article 10 below, the aggregate maximum number of Common Shares issued pursuant to Restricted Shares, Stock Units (including Performance Shares), SARs and Options awarded under the Plan shall not exceed 7,300,000.  Within this overall limitation, the following additional limitations shall apply (subject to adjustment under Article 10 below):

 

a)	The aggregate maximum number of Common Shares issued pursuant to ISOs shall not exceed 7,300,000;

 

b)	No Participant may be awarded Options and SARs for more than 500,000 Common Shares in any one Award Year; and

 

c)	No Participant may be awarded Performance Shares which are intended to represent “qualified performance-based compensation” with the meaning of Section 162(m) of the Code for more than 500,000 Common Shares in any one Award Year.

 

d)

The maximum amount payable pursuant to all Awards denominated in cash to any Participant in the aggregate in any taxable year shall be $5,000,000 in value, whether payable in cash, Common Shares or other property.  This limitation contained in this Section 3.1(d) does not apply to any Award or Awards subject to the limitation contained in Section 3.1(b) or (c). The limitation contained in this Section 3.1(d) shall apply only with respect to any Award or Awards granted under this Plan, and limitations on awards granted under any other stockholder-approved incentive plan maintained by the Company will be governed solely by the terms of such other plan.

 

3.2 Adjustments.

 

To the extent an Award under this Plan is settled in cash, expires, or is forfeited or cancelled, then except as provided below, Common Shares subject to the Award will not be considered to have been issued and will not be applied against the maximum number of Common Shares available for future issuance under the Plan.  If, however, Options are surrendered upon the exercise of related SARs, then the Common Shares underlying such Options shall not be restored to the pool available for future Awards.  Any dividend equivalents distributed under the Plan shall not be applied against the number of Common Shares available for future Awards.  Shares surrendered to or withheld by the Company in payment of the exercise price or applicable withholding taxes upon exercise or settlement of an Award shall not be restored to the pool available for future Awards.  The limitations of this Article 3 shall be subject to adjustment pursuant to Article 10.

 

3.3 Accounting for Awards.

 

For purposes of this Article 3, if an Award entitles the holder thereof to receive or purchase shares, the number of shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of shares available for granting Awards under the Plan.  For purposes of determining the number of shares covered on the date of grant by a SAR that is to be

 

 

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settled in shares, the aggregate number of shares with respect to which the SAR is to be exercised shall be counted against the number of shares available for Awards under the Plan (without regard to the number of actual shares issued upon settlement).  Awards that do not entitle the holder thereof to receive or purchase shares shall not be counted against the aggregate number of shares available for Awards under the Plan.

 

3.4 Source of Common Shares.

 

Any Common Shares issued pursuant to the Plan may be authorized except unissued Common Shares or treasury Common Shares.

 

ARTICLE 4. ELIGIBILITY

 

4.1 General Rule.

 

Only Key Employees (including, without limitation, members of the Board or officers of the Company who are also Key Employees) and Non-Employee Directors shall be eligible for designation as Participants by the Committee.

 

4.2 Ten-Percent Stockholders.

 

A Key Employee who owns more than 10 percent of the total combined voting power of all classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for the grant of an ISO unless (a) the Exercise Price under such ISO is at least 110 percent of the Fair Market Value of a Common Share on the date of grant, and (b) such ISO by its terms is not exercisable after the expiration of five years from the date of grant.

 

4.3 Attribution Rules.

 

For purposes of Section 4.2, in determining stock ownership, a Key Employee shall be deemed to own the stock owned, directly or indirectly, by or for his or her brothers, sisters, spouse, ancestors and lineal descendants.  Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its stockholders, partners or beneficiaries.  Stock with respect to which the Key Employee holds an Option shall not be counted.

 

4.4 Outstanding Stock.

 

For purposes of Section 4.2, “outstanding stock” shall include all stock actually issued and outstanding immediately after the grant of the ISO to the Key Employee.  “Outstanding stock” shall not include treasury shares or shares authorized for issuance under the outstanding options held by the Key Employee or by any other person.

 

ARTICLE 5. OPTIONS

 

5.1 Stock Option Agreement.

 

Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company.  Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement.  The provisions of the various Stock Option Agreements entered into under the Plan need not be identical.  The Committee may designate all or any part of an Option as an ISO.

 

5.2 Options Nontransferable.

 

No Option granted under the Plan shall be transferable by the Optionee other than by will or by the laws of descent and distribution, and no Option may be exercised during the lifetime of the Optionee except by him or her.  No option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.  Notwithstanding the foregoing, the Committee, in its discretion and subject to such additional terms and conditions as it determines, may permit an Optionee to transfer an NSO to any “family member” (as defined in the General

 

 

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Instructions to Form S-8 (or any successor to such Instructions or such Form) under the Securities Act) at any time that such Optionee holds such NSO, provided that such transfers may not be for value (as defined in the General Instructions to Form S-8 (or any successor to such Instructions or such Form) under the Securities Act) and the family member may not make any subsequent transfers other than by will or by the laws of descent and distribution.

 

5.3 Number of Shares.

 

Each Stock Option Agreement shall specify the number of shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10.  The Stock Option Agreement shall also specify whether the Option is an ISO or an NSO.

 

5.4 Exercise Price.

 

Each Stock Option Agreement shall specify the Exercise Price.  The Exercise Price under an Option shall not be less than 100 percent of the Fair Market Value of a Common Share on the date of grant.  Subject to the preceding two sentences, the Exercise Price under any Option shall be determined by the Committee.  The Exercise Price shall be payable in accordance with Article 6.

 

5.5 Exercisability and Term.

 

Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable.  The Stock Option Agreement shall also specify the term of the Option.  The term of an ISO shall in no event exceed 10 years from the date of grant, and Section 4.2 may require a shorter term.  Subject to the preceding sentence, the Committee shall determine when all or any part of an Option (and any SARs included therein) is to become exercisable and when such Option is to expire.  A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s employment. & #160;NSOs may also be awarded in combination with Restricted Shares or Stock Units, and such an Award may provide that the NSOs will not be exercisable unless the related Restricted Shares or Stock Units are forfeited.

 

5.6 Effect on Change in Control.

 

The Committee, at its sole discretion, may determine, at the time of granting an Option or thereafter, that such Option (and any SARs included therein) shall become fully exercisable as to all Common Shares subject to such Option in the event that a Change in Control occurs with respect to the Company.  If the Committee finds that there is a reasonable possibility that, within the succeeding six months, a Change in Control will occur with respect to the Company, then the Committee may determine that all outstanding Options (and any SARs included therein) shall become fully exercisable as to all Common Shares subject to such Options.

 

5.7 Modification, Extension and Renewal of Options.

 

Within the limitations of the Plan, the Committee may modify, extend or renew outstanding Options or may accept the cancellation of outstanding Options (to the extent not previously exercised) in return for the grant of new Options at the same or a different price.  The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option.

 

ARTICLE 6. PAYMENT FOR OPTION SHARES

 

Except as set forth below in this Article 6, the Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Common Shares,

 

 

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promissory notes (provided, however, that the acceptance of such promissory notes does not conflict with Section 402 of the Sarbanes-Oxley Act of 2002), other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the applicable exercise price) in which payment of the exercise price with respect thereto may be made or deemed to have been made.  Alternatively, the Committee may, in its discretion, permit an Option to be exercised using an SAR as described in Article 7.  An Optionee may exercise an Option by requesting that the Company deliver to the Optionee a number of Common Shares having an aggregate Fair Market Value (determined as of the date of exercise) equal to the excess, if positive, of the Fair Market Value of the Common Shares underlyi ng the Option being exercised, on the date of exercise, over the exercise price of the Option for such Common Shares (a “Net Exercise”).  Notwithstanding anything to the contrary herein, the Committee may, in its discretion, require an Optionee to exercise an Option using the Net Exercise method.  In addition, notwithstanding the method of exercise, the Committee may, in its discretion, pay to an Optionee in cash the fair market value of the Common Shares that were to be delivered to the Optionee instead of delivering the Common Shares.

 

ARTICLE 7. STOCK APPRECIATION RIGHTS

 

7.1 Grant of SARs.

 

Each Option granted under the Plan may, at the discretion of the Committee, include an SAR.  Such SAR shall entitle the Optionee (or any person having the right to exercise the Option after his or her death) to surrender to the Company, unexercised, all or any part of that portion of the Option which then is exercisable and to receive from the Company Common Shares, or, at the discretion of the Committee, cash in lieu of Common Shares.  If an SAR is exercised, the number of Common Shares remaining subject to the related Option shall be reduced accordingly, and vice versa.  The Fair Market Value of Common Shares (or cash) received upon exercise of an SAR shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Common Shares, subject to the surrendered por tion of the Option, exceeds the Exercise Price.  In no event shall any SAR be exercised if such Fair Market Value does not exceed the Exercise Price.  The discretion of the Committee to include an SAR in an ISO may be exercised only at the time of the grant of such ISO.  The discretion of the Committee to include an SAR in an NSO may be exercised at the time of the grant of such NSO or at any subsequent time.

 

7.2 Manner of Exercise of SARs.

 

An SAR may be exercised by written notice to the Company.  An SAR may be exercised to the extent, and only to the extent, that the Option in which it is included is exercisable.  If, on the date when an Option expires, the Exercise Price under such Option is less than the Fair Market Value on such date but any portion of such Option has not been exercised or surrendered, then any SAR included in such Option shall automatically be deemed to be exercised as of such date with respect to such portion.

 

7.3 Limited SARs.

 

An Option granted under the Plan may, at the discretion of the Committee, provide that it will be exercisable as an SAR only in the event of a Change in Control.

 

ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS

 

8.1 Time, Amount and Form of Awards.

 

The Committee may grant Restricted Shares or Stock Units with respect to an Award Year during such Award Year or at any time thereafter.  The amount of each Award of Restricted Shares or Stock Units shall be determined by the Committee.  Awards under the Plan may be granted in the form of Restricted Shares, in the form of Stock Units, or in any combination of both, as the

 

 

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Committee shall determine at its sole discretion at the time of the grant.  Restricted Shares or Stock Units may also be awarded in combination with NSOs, and such an Award may provide that the Restricted Shares or Stock Units will be forfeited in the event that the related NSOs are exercised.

 

8.2 Payment for Awards.

 

To the extent that an Award is granted in the form of Restricted Shares, the Award recipient, as a condition to the grant of such Award, may be required to pay the Company in cash an amount equal to the par value of such Restricted Shares.  To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of Award recipients.

 

8.3 Vesting Conditions.

 

Each Award of Restricted Shares or Stock Units shall become vested, in full or in installments, upon satisfaction of the conditions specified in the Stock Award Agreement.  The Committee shall select the vesting conditions, which may be based upon the Participant’s service, the Participant’s performance, the Company’s performance or such other criteria as the Committee may adopt.  A Stock Award Agreement may also provide for accelerated vesting in the event of the Participant’s death, disability or retirement.  The Committee, in its sole discretion, may determine, at the time of making an Award or thereafter, that such Award shall become fully vested in the event that a Change in Control occurs with respect to the Company.

 

8.4 Form of Settlement of Stock Units.

 

Settlement of vested Stock Units (including Performance Shares) may be made in the form of cash, in the form of Common Shares, or in any combination of both, as the Committee shall determine at or before the time when distribution commences.  The Committee may designate a method of converting Stock Units into cash, including (without limitation) a method based on the Fair Market Value of Common Shares over a series of trading days.  Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 10.

 

8.5 Time of Settlement of Stock Units.

 

Vested Stock Units may be settled in a lump sum or in installments.  The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date.  The Committee shall determine when all or any part of an Award of Stock Units is to be distributed, and it may modify its original determination with respect to the time of distribution at any time before settlement of the Stock Units is completed.  The Committee may also permit Participants to request a deferral of any distribution under this Section 8.5.  In the case of any deferred distribution, the Committee may increase the amount of such distribution by an interest factor, as it deems appropriate.

 

8.6 Death of Recipient.

 

Any Stock Units Award which becomes payable after the recipient’s death shall be delivered or distributed to the recipient’s beneficiary or beneficiaries.  Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company.  A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient’s death.  If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award which becomes payable after the recipient’s death shall be delivered or distributed to the recipient’s estate.  The Committee, at its sole discretion, shall determine the form and time of any distribution (s) to a recipient’s beneficiary or estate.

 

 

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8.7 Performance Shares.

 

(a) Subject to the other terms of this Plan, the Company may grant Performance Shares to selected Participants upon such terms and conditions as the Committee determines, including:  the applicable performance periods and Performance Criteria; maximum, minimum and target settlement values, if applicable; and whether or not the Participant has the right to vote the Performance Shares.  The Committee will determine the extent to which Performance Criteria related to Performance Shares have been achieved within the applicable performance periods and certify such determination in writing to the extent required to comply with section 162(m) of the Code.

 

(b) Performance Shares that are granted to Participants who may be “covered employees” under Section 162(m) of the Code and that are intended to be “qualified performance-based compensation” within the meaning of Section 162(m) of the Code, to the extent required by Section 162(m) of the Code, shall be conditioned solely on the achievement of the Performance Criteria established by the Committee within the time prescribed by Section 162(m) of the Code, and shall otherwise comply with the requirements of Section 162(m) of the Code, as described below:

 

(i) For each Award intended to be “qualified performance-based compensation,” the Committee shall, not later than 90 days after the beginning of each performance period, (i) designate all Participants for such performance period and (ii) using the Performance Criteria, establish the objective performance factors for each Participant for that performance period; provided that, with respect to such performance factors, the outcome is substantially uncertain at the time the Committee actually establishes them.  The Committee shall have sole discretion to determine the applicable performance period, provided that in the case of a performance period less than 12 months, in no event shall a performance factor be cons idered to be pre-established if it is established after 25 percent of the performance period (as scheduled in good faith at the time the performance factors are established) has elapsed;

 

(ii) Following the close of each performance period and prior to payment of any amount to a Participant with respect to an Award intended to be “qualified performance-based compensation,” the Committee shall certify in writing as to the attainment of all factors (including the performance factors for a Participant) upon which any payments to a Participant for that performance period are to be based;

 

(iii) Certified Awards shall be paid no later than two and one-half months following the conclusion of the applicable performance period; provided, however, that the Committee may establish procedures that allow for the payment of Awards on a deferred basis subject to the requirements of Section 409A of the Code.  The Committee may, in its discretion, reduce the amount of a payout achieved and otherwise to be paid in connection with an Award but may not exercise discretion to increase such amount if such Award is intended to be “qualified performance-based compensation”; and

 

(iv) If a Participant dies or becomes permanently and totally disabled before the end of a performance period or after the performance period and before an Award is paid, the Committee may, in its discretion, determine that the Participant shall be paid a pro-rated portion of the Award that the Participant would have received but for his or her death or disability.

 

 

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(c) Except as otherwise provided in this Section 8.7, Performance Shares shall be treated as Stock Units for all other purposes under the Plan unless the context clearly requires otherwise.

 

(d) The Committee may make the vesting of any Award of Performance Shares, and the delivery of Common Shares thereunder, contingent upon shareholder approval of the applicable Performance Criteria and goals to the extent the Committee determines such shareholder approval necessary to comply with Section 162(m) of the Code.

 

8.8 Section 409A Provisions.

 

Notwithstanding anything in the Plan or any Award to the contrary, to the extent that any amount or benefit that constitutes “deferred compensation” to a Participant under Section 409A of the Code and applicable guidance thereunder is otherwise payable or distributable to a Participant under the Plan or any Award solely by reason of the occurrence of a Change in Control or due to the Participant’s disability or “separation from service” (as such term is defined under Section 409A of the Code), such amount or benefit will not be payable or distributable to the Participant by reason of such circumstance unless the Committee determines in good faith that (i) the circumstances giving rise to such Change in Control, disability or separation from service meet the definition of a change in ownership or control, disa bility, or separation from service, as the case may be, in Section 409A(a)(2)(A) of the Code and applicable regulations, or (ii) the payment or distribution of such amount or benefit would be exempt from the application of Section 409A of the Code by reason of the short-term deferral exemption or otherwise.  Any payment or distribution that otherwise would be made to a Participant who is a specified employee as defined in Section 409A(a)(2)(B) of the Code or applicable regulations under Section 409A of the Code (determined in accordance with procedures established by the Company and applied uniformly with respect to all plans maintained by the Company that are subject to Section 409A of the Code) on account of separation from service may not be made before the date which is six months after the date of the specified employee’s separation from service (or if earlier, upon the specified employee’s death) unless the payment or distribution is exempt from the application of Section 409A of the Code by reason of the short term deferral exemption or otherwise.

 

ARTICLE 9. VOTING RIGHTS AND DIVIDENDS OR DIVIDEND EQUIVALENTS

 

9.1 Restricted Shares.

 

The holders of Restricted Shares awarded under the Plan will not have the same voting, dividend and other rights as the Company’s other stockholders until the Restricted Shares vest.

 

9.2 Stock Units.

 

The holders of Stock Units shall have no voting rights and shall have no dividend rights, including, without limitation, no right to dividend equivalents.

 

ARTICLE 10. PROTECTION AGAINST DILUTION

 

10.1 General.

 

In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a stock split, a reverse stock split, split-up, spin-off, combination, repurchase or exchange of Common Shares or other securities of the Company or a similar occurrence, the Committee shall make appropriate adjustments in one or more of:  (a) the number of Options, Restricted Shares and Stock Units available for future Awards under Section 3.1; (b) the

 

 

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 number of Stock Units included in any prior Award which has not yet been settled; (c) the number of Common Shares covered by each outstanding Option; or (d) the Exercise Price under each outstanding Option, in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.

 

10.2 Reorganizations.

 

In the event that the Company is a party to a merger or other reorganization, outstanding Options, Restricted Shares and Stock Units shall be subject to the agreement of merger or reorganization.  Such agreement may provide, without limitation, for the assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting or for settlement in cash.

 

10.3 Reservation of Rights.

 

Except as provided in this Article 10, a Participant shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class.  Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Common Shares subject to an Option.  The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all o r any part of its business or assets.

 

ARTICLE 11. LIMITATION OF RIGHTS

 

11.1 Employment Rights.

 

Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain employed by the Company or a Subsidiary as an employee or retained as a director.  The Company and its Subsidiaries reserve the right to terminate the employment of any employee at any time, with or without cause, subject only to a written employment agreement, if any.

 

11.2 Stockholders’ Rights.

 

A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the issuance of a stock certificate for such Common Shares.  No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Articles 8, 9 and 10.

 

11.3 Creditors’ Rights.

 

A holder of Stock Units shall have no rights other than those of a general creditor of the Company.  Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Award Agreement.

 

11.4 Government Regulations.

 

Any other provision of the Plan notwithstanding, the obligations of the Company with respect to Common Shares to be issued pursuant to the Plan shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required.  The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award until such time as:

 

(a) Any legal requirements or regulations have been met relating to the issuance of such Common Shares or to their registration, qualification or exemption from registration or qualification under the Securities Act, or any applicable state securities laws; and

 

 

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(b) Satisfactory assurances have been received that such Common Shares, when issued, will be duly listed or quoted on the New York Stock Exchange, the NASDAQ Stock Market, or any other securities exchange or quotation system on which Common Shares are then listed or quoted.

 

ARTICLE 12. LIMITATION ON PAYMENTS

 

12.1 Basic Rule.

 

Any provision of the Plan to the contrary notwithstanding, in the event that the independent auditors most recently selected by the Board (the “Auditors”) determine that any payment or transfer by the Company to or for the benefit of a Key Employee or a Non-Employee Director, whether paid or payable (or transferred or transferable) pursuant to the terms of this Plan or otherwise (a “Payment”), would be nondeductible by the Company for federal income tax purposes because of the provisions concerning “excess parachute payments” in Section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount; provided, that the Committee, at the time of making an Award under this Plan or at any time thereafter, may specify in writing that such A ward shall not be so reduced and shall not be subject to this Article 12.  For purposes of this Article 12, the “Reduced Amount” shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code.

 

12.2 Reduction of Payments.

 

If the Auditors determine that any Payment would be nondeductible by the Company because of Section 280G of the Code, then the Company shall promptly give the Key Employee or the Non-Employee Director, an applicable notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Key Employee or the Non-Employee Director, as applicable, may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice.  If no such election is made by the Key Employee or the Non-Employee Director, as applicable, within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Key Employee or the Non-Employee Director, as applicable, promptly of such election.  For purposes of this Article 12, present value shall be determined in accordance with Section 280G(d)(4) of the Code.  All determinations made by the Auditors under this Article 12 shall be binding upon the Company and the Key Employee or the Non-Employee Director, as applicable, and shall be made within 60 days of the date when a payment becomes payable or transferable.  As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Key Employee or the Non-Employee Director, as applicable, such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Key Employee or the Non-Employee Director, as applicable, in the future such amounts as become due to him or her under the Plan.

 

12.3 Overpayments and Underpayments.

 

As a result of uncertainty in the application of Section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made (an “Overpayment”) or that additional Payments which will not have been made by the Company could have been made (an “Underpayment”), consistent in each case with the calculation of the Reduced Amount hereunder.  In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against

 

 

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the Company or the Key Employee or the Non-Employee Director, as applicable, which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Key Employee or the Non-Employee Director, as applicable, which he or she shall repay to the Company, together with interest at the applicable federal rate provided in Section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Key Employee or the Non-Employee Director, as applicable, to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under Section 4999 of the Code.  In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid o r transferred by the Company to or for the benefit of the Key Employee or the Non-Employee Director, as applicable, together with interest at the applicable federal rate provided in Section 7872(f)(2) of the Code.

 

12.4 Related Corporations.

 

For purposes of this Article 12, the term “Company” shall include affiliated corporations to the extent determined by the Auditors in accordance with Section 280G(d)(5) of the Code.

 

ARTICLE 13. WITHHOLDING TAXES

 

13.1 General.

 

To the extent required by applicable federal, state, local or foreign law, the recipient of any payment or distribution under the Plan shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of such payment or distribution.  The Company shall not be required to make such payment or distribution until such obligations are satisfied.

 

13.2 Options.

 

An Optionee may exercise Options to satisfy all or part of his or her withholding tax obligations by having the Company withhold a portion of the Common Shares that otherwise would be issued to him or her under such Options.  Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash.  The payment of withholding taxes by surrendering Common Shares to the Company, if permitted by the Committee, shall be subject to such restrictions as the Committee may impose, including any restrictions required by rules of the  Securities and Exchange Commission.

 

ARTICLE 14. ASSIGNMENT OR TRANSFER OF AWARD

 

Subject to Section 5.2, any Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily, involuntarily or by operation of law.  Any act in violation of this Article 14 shall be void.  However, this Article 14 shall not preclude a Participant from designating a beneficiary who will receive any undistributed Awards in the event of the Participant’s death, nor shall it preclude a transfer by will or by the laws of descent and distribution.

 

ARTICLE 15. AWARDS TO NON-EMPLOYEE DIRECTORS

 

15.1 Annual Grant of Restricted Stock.

 

The Company will award to each Non-Employee Director on the date of the Annual Shareholder Meeting of each year a number of Restricted Shares having an aggregate fair market value of $40,000, rounded up to the nearest whole share.  If the New York Stock Exchange is not open on such date, the date of grant will be the next subsequent day on which the New York Stock Exchange is open.  Restricted Shares granted pursuant to this Section 15.1 shall vest one year from the date of grant.  In addition to the annual grant provided for in this Section 15.1, the Committee may grant additional Awards to Non-Employee Directors at any time in its discretion.

 

 

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15.2 Effect on Options of Termination of Membership on the Board of Directors.

 

Subject to Section 15.4 below, an Option awarded to a Non-Employee Director whose term has not yet expired or been forfeited shall become fully vested and immediately exercisable upon the Non-Employee Director’s termination of Board membership on account of death.  Any such Options of a deceased Director may be exercised (a) within five (5) years from such termination of Board membership, or (b) within the original term of the Option, whichever time is less, or such Option shall thereafter automatically terminate.  Options held by a Non-Employee Director whose membership on the Board terminates for reasons other than death, unless subject to the provisions of Section 15.4 of the Plan, shall expire six (6) months from Board termination and are exercisable only to the extent they have vested, as   otherwise provided for pursuant to the terms of this Plan and the applicable Award agreement, prior to expiration.

 

15.3 Effect on Restricted Stock of Termination of Membership on the Board of Directors.

 

Subject to Section 15.4 below, in the event of a Non-Employee Director’s termination of Board membership on account of death (i) all Restricted Stock held by such Non-Employee Director shall immediately vest and cease to be subject to the restrictions of this Plan, and (ii) all Awards of Stock Units shall automatically vest and be issued.  In such event, certificates for the Common Stock related to such Award shall be delivered to such Non-Employee Director’s beneficiary as soon as administratively feasible after such event.

 

15.4 Termination for Cause.

 

Any provision herein to the contrary notwithstanding, all Options, Restricted Stock, and Stock Units granted to a Non-Employee Director shall automatically terminate and be null and void as of the date a Non-Employee Director’s service on the Board of Directors terminates if the directorship is terminated as a result of any act of (a) fraud or intentional misrepresentation, or (b) embezzlement, misappropriation, or conversion of assets or opportunities of the Company or any Subsidiary.

 

15.5 Change in Control.

 

Except as otherwise provided in the applicable Award agreement, vesting and lifting of restrictions of Non-Employee Director Awards will be accelerated in the event of a Change in Control.  Share certificates evidencing Restricted Stock may be held in escrow by the Company pending vesting of such shares and shall bear such legends as the Committee deems appropriate to reflect the restrictions applicable under the Plan and Award agreement.

 

15.6 Remaining Terms.

 

The remaining terms and conditions of Awards granted to Non-Employee Directors shall be substantially the same as the terms in effect for the Key Employees made under the Plan and shall be set forth in an Award agreement.

 

ARTICLE 16. FUTURE OF THE PLAN

 

16.1 Term of the Plan.

 

The Plan, as set forth herein, became effective on March 30, 1992.  The Plan has subsequently been amended.  No Award shall be granted under the Plan after (a) the tenth anniversary of the earlier of November 19, 2010, or (b) any earlier date of discontinuation or termination established pursuant to 16.2 of the Plan; provided, however, that no Performance Shares shall be granted under the Plan after the fifth year following the year in which stockholders approved the Performance Criteria unless and until the Performance Criteria are re-approved by the stockholders.

 

16.2 Amendment or Termination.

 

The Board may, at any time and for any reason, amend or terminate the Plan.  However, any amendment of the Plan shall be subject to the

 

 

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approval of the Company’s stockholders to the extent required by applicable laws, regulations or rules, including the rules of any exchange on which the Company’s common stock is listed.

 

16.3 Effect of Amendment or Termination.

 

No Awards shall be made under the Plan after the termination thereof.  The termination of the Plan, or any amendment thereof, shall not affect any Option SAR, Restricted Share or Stock Unit previously granted under the Plan.

 

ARTICLE 17. GENERAL PROVISIONS

 

17.1 No Trust or Fund Created.

 

Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any affiliate and a Participant or any other person.  To the extent that any person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any affiliate.

 

17.2 Consultation With Professional Tax and Investment Advisors.

 

The holder of any Award granted hereunder acknowledges that the grant, exercise, vesting or any payment with respect to such an Award, and the sale or other taxable disposition of the shares acquired pursuant to the Plan, may have tax consequences pursuant to the Code or under local, state or international tax laws.  Such a holder further acknowledges that such holder is relying solely and exclusively on the holder’s own professional tax and investment advisors with respect to any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives).  Finally, such a holder understands and agrees that any and all tax consequences resulting from the Award and its grant, exercise, vesting or any payment with respect thereto, and the sale or other taxable disposition of the shares acquired pursuant to the Plan, is solely and exclusively the responsibility of such holder without any expectation or understanding that the Company or any of its employees, representatives or Affiliates will pay or reimburse such holder for such taxes or other items.

 

17.3 Foreign Employees and Foreign Law Considerations.

 

The Committee may grant Awards to Participants who are foreign nationals, who are located outside the United States, who are United States citizens or resident aliens on global assignments in foreign nations, who are not compensated from a payroll maintained in the United States, or who are otherwise subject to (or could cause the Company to be subject to) legal or regulatory provisions of countries or jurisdictions outside the United States, on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to foster and promote achievement of the purposes of the Plan, and, in furtherance of such purposes, the Committee may make such modifications, amendments, procedures, or subplans as may be necessary or advisable to comply with such legal or regulatory provisions .

 

17.4 Blackout Periods.

 

Notwithstanding any other provision of this Plan or any Award to the contrary, the Company shall have the authority to establish any “blackout” period that the Company deems necessary or advisable with respect to any or all Awards.

 

ARTICLE 18. DEFINITIONS

 

18.1 “Auditors” shall have the meaning set forth in Section 12.1.

 

18.2 “Award” means any award of an Option (with or without a related SAR), a Restricted Share, or a Stock Unit (including Performance Shares) under the Plan.

 

 

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18.3 “Award Year” means the Company’s fiscal year (September 1—August 31) with respect to which an Award may be granted.

 

18.4 “Board” means the Company’s Board of Directors, as constituted from time to time.

 

18.5 “Change in Control” means the occurrence of any of the following events:

 

(a) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act;

 

(b) A change in the composition of the Board, as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or

 

(c) Any “person” (as such term is used in Section 13(d) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company’s then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the “Base Capital Stock”); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall be di sregarded until such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any securities of the Company.

 

18.6 “Code” means the Internal Revenue Code of 1986, as amended.

 

18.7 “Committee” means the Compensation Committee of the Board, as constituted from time to time.

 

18.8 “Common Share” means one share of the common stock of the Company.

 

18.9 “Company” means Franklin Covey Co., a Utah corporation.

 

18.10 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

18.11 “Exercise Price” means the amount for which one Common Share may be purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement.

 

18.12 “Fair Market Value” means, with respect to any property (including, without limitation, any Common Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee.  Notwithstanding the foregoing, unless otherwise determined by the Committee, Fair Market Value of a Common Share as of a given date shall mean the closing price of a Common Share on the trading day in question, as stated in the New York Stock Exchange composite transactions report or reported by the NASDAQ Stock Market or by such other

 

 

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exchange or quotation system on which the Common Shares are listed or quoted; or if such exchange is not open for trading on such date, on the next date that such exchange is open for trading.

 

18.13 “ISO” means an incentive stock option described in Section 422A(b) of the Code.

 

18.14 “Key Employee” means a key employee of the Company or any Subsidiary, as determined by the Committee and includes key employees of the Company or any Subsidiary who are also directors.

 

18.15 “Net Exercise” shall have the meaning set forth in Article 6.

 

18.16 “Non-Employee Director” means a director of the Company or any Subsidiary who is not also an employee of the Company or any Subsidiary.

 

18.17 “NSO” means an employee stock option not described in Sections 422 through 424 of the Code.

 

18.18 “Old Director’s Plan” shall have the meaning set forth in the Introduction.

 

18.19 “Option” means an ISO or NSO granted under the Plan and entitling the holder to purchase one Common Share.

 

18.20 “Optionee” means an individual who holds an Option.

 

18.21 “Overpayment” shall have the meaning set forth in Section 12.3.

 

18.22 “Participant” means a Key Employee or a Non-Employee Director who has received an Award.

 

18.23 “Payment” shall have the meaning set forth in Section 12.1.

 

18.24 “Performance Criteria” means one or more of the following performance goals, either individually, alternatively or in any combination, applied on a corporate, subsidiary, division, business unit or line of business basis:

 

·	earnings per share;

 

·	revenues, including net sales growth;

 

·	return on investment;

 

·	earnings, including net operating profit after taxes;

 

·	return on equity;

 

·	profit margins;

 

·	cost reductions;

 

·	inventory levels;

 

 

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·	delivery performance;

 

·	safety performance;

 

·	quality performance;

 

·	core operating earnings;

 

·	total stockholder return;

 

·	cash flow, including operating cash flows, free cash flow, discounted cash flow return on investment, and cash flow in excess of cost of capital;

 

·	economic value added;

 

·	stockholder value added;

 

·	market share;

 

·	price to earnings ratio;

 

·	expense ratios;

 

·	workforce goals;

 

·	total expenditures;

 

·	completion of key projects.

 

Each such performance goal may be based (i) solely by reference to absolute results of individual performance or organizational performance at various levels (e.g., the Company’s performance or the performance of a subsidiary, division, business segment or business unit of the Company) or (ii) upon organizational performance relative to the comparable performance of other companies selected by the Committee.  To the extent consistent with Section 162(m), the Committee may also exclude charges related to an event or occurrence which the Committee determines should appropriately be excluded, including (X) restructurings, acquisitions, divestitures, discontinued operations, extraordinary items, and other unusual or non-recurring charges, (Y) an event either not directly related to the operations of the Company or not within t he reasonable control of the Company’s management, or (Z) the cumulative effects of tax or accounting changes in accordance with U.S. generally accepted accounting principles (or other accounting principles which may then be in effect).  To the extent that Section 162(m) of the Code or applicable tax and/or securities laws change to permit Committee discretion to alter the governing performance measures without disclosing to stockholders and obtaining stockholder approval of such changes and without thereby exposing the Company to potentially adverse tax or other legal consequences, the Committee shall have the sole discretion to make such changes without obtaining stockholder approval.

 

18.25 “Performance Shares” means a Stock Unit under which the recipient is entitled to receive a Common Share or other benefits at a subsequent date, subject to the attainment of specified Performance Criteria.

 

 

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18.26 “Plan” means this Franklin Covey Co. Second Amended and Restated 1992 Stock Incentive Plan, as it may be amended from time to time.

 

18.27 “Reduced Amount” shall have the meaning set forth in Section 12.1.

 

18.28 “Restricted Stock” or “Restricted Share” means a Common Share awarded to a Participant under the Plan subject to vesting conditions.

 

18.29 “SAR” means a stock appreciation right granted under the Plan as part of an Option or as a subsequent addition to an Option.

 

18.30 “Securities Act” means the Securities Act of 1933, as amended.

 

18.31 “Stock Award Agreement” means the agreement between the Company and the recipient of a Restricted Share or Stock Unit which contains the terms, conditions and restrictions pertaining to such Restricted Share or Stock Unit.

 

18.32 “Stock Option Agreement” means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option.

 

18.33 “Stock Unit” means a bookkeeping entry representing the equivalent of one Common Share and awarded to a Participant under the Plan.  “Stock Unit” includes a Performance Share.

 

18.34 “Subsidiary” means any corporation, if the Company and/or one or more other Subsidiaries own not less than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation.  A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

 

18.35 “Underpayment”  shall have the meaning set forth in Section 12.3.

 

ARTICLE 19. EXECUTION

 

To record the adoption of the Plan by the Board and approval by the stockholders, the Company has caused its duly authorized officer to sign below.

 

FRANKLIN COVEY CO.

 

 

By: ___________________________________________                                                         

 

 

 

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PROXY

FRANKLIN COVEY CO.

This Proxy is Solicited on Behalf of the Board of Directors

The undersigned hereby appoints Stephen D. Young as proxy, with full power of substitution, to vote, as designated below, all shares of Common Stock of Franklin Covey Co. (the Company), which the undersigned is entitled to vote at the annual meeting of shareholders of the Company (the Annual Meeting) to be held at the Hyrum W. Smith Auditorium, 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331, on January 14, 2011 at 8:30 a.m., local time, or any adjournment(s) thereof.  This proxy is solicited on behalf of the Board of Directors of the Company.  This proxy, when properly executed and returned in a timely manner, will be voted as specified. If no instructions are specified, this proxy will be voted “FOR” all proposals in accordance with the recommendation of the board of directors.

 

 

1.	Election of nine directors of the Company, each to serve until the next Annual Meeting and until their respective successors shall be duly elected and shall qualify.
	Nominees:   Clayton M. Christensen, Stephen R. Covey, Robert H. Daines, E.J. “Jake” Garn, Dennis G. Heiner, Donald J. McNamara, Joel C. Peterson, E. Kay Stepp, and Robert A. Whitman.

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FOR all nominees

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WITHHOLD AUTHORITY all nominees

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FOR all nominees, except WITHHOLD AUTHORITY for the nominee(s ) whose name(s) are circled above

 

2.	Proposal to approve the Second Amended and Restated 1992 Stock Incentive Plan:

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FOR

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AGAINST

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ABSTAIN

 

3.	Proposal to ratify the appointment of KPMG LLP as the Company’s independent registered public accountants for the fiscal quarter ending November 27, 2010.

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FOR

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AGAINST

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ABSTAIN

 

 

4.	To transact such other business as may properly come before the Annual Meeting or any adjournment(s) thereof.

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FOR

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AGAINST

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ABSTAIN

 

 

 

 

 

 

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Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to be held January 14, 2011. The Proxy Statement and our 2010 Annual Report are available at: www.shareholdermaterial.com/FC.

 

 

 

 

 

 

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The Board of Directors unanimously recommends that the share holders vote “FOR” all proposals.  To vote in accordance with the Board of Directors recommendations, sign below. The “FOR” boxes may, but need not, be checked.  To vote against any proposal, or to abstain from voting on any proposal, check the appropriate box above.  PLEASE PRINT YOUR NAME AND SIGN EXACTLY AS YOUR NAME APPEARS IN THE RECORDS OF THE COMPANY. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS AN ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE, OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZE D PERSON.

 

    Dated: ___________________________________

 

 

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Signature of Shareholder(s)

 

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Signature (if held jointly)

 

 

 

 

 

 

 

 

 

 

 

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