NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held
January 12, 2001
Franklin Covey
You are cordially invited to attend the Annual Meeting of Shareholders of
Franklin Covey Co. (the "Company"), which will be held on Friday, January 12,
2001 at 11:00 a.m., at the Hyrum W. Smith Auditorium, 2200 West Parkway
Boulevard, Salt Lake City, Utah 84119-2331 (the "Annual Meeting"), for the
following purposes:
(I) To elect four directors of the Company, each to serve a term of three
years expiring at the annual meeting of shareholders of the Company to be
held following the end of fiscal year 2003 and until their respective
successors shall be duly elected and shall qualify;
(II) To consider and vote upon a proposal to ratify the approved performance
award for the chief executive officer of the Company to qualify such
compensation under Section 162(m) of the Internal Revenue Code of 1986;
(III) To consider and vote upon a proposal to ratify the amendment of the
Company's Employee Stock Purchase Plan to extend the term of the plan to
August 31, 2004 and to increase the maximum number of the Company's
Common Stock subject to the plan by 1,000,000 shares;
(IV) To consider and vote upon a proposal to ratify the appointment of Arthur
Andersen LLP as independent auditor of the Company for the fiscal year
ending August 31, 2001; and
(V) To transact such other business as may properly come before the Annual
Meeting or at any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on November 17,
2000, as the record date for the determination of shareholders entitled to
receive notice of and to vote at the Annual Meeting and at any adjournment or
postponement thereof.
All shareholders are urged to attend the meeting.
By Order of the Board of Directors
Robert A. Whitman
Chairman of the Board
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November 30, 2000
IMPORTANT
Whether or not you expect to attend the Annual Meeting in person, to assure
that your shares will be represented, please promptly complete, date, sign and
return the enclosed proxy without delay in the enclosed envelope, which requires
no additional postage if mailed in the United States. Your proxy will not be
used it you are present at the Annual Meeting and desire to vote your shares
personally.
2
FRANKLIN COVEY CO.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
---------------------
PROXY STATEMENT
---------------------
Annual Meeting of Shareholders
January 12, 2001
SOLICITATION OF PROXIES
This Proxy Statement is being furnished to the shareholders of Franklin
Covey Co., a Utah corporation (the "Company"), in connection with the
solicitation by the Board of Directors of the Company of proxies from holders of
outstanding shares of the Company's Common Stock, $0.05 par value per share (the
"Common Stock") and outstanding shares of the Company's Series A Preferred
Stock, no par value (the Series A Preferred Stock) for use at the Annual Meeting
of Shareholders of the Company to be held on Friday, January 12, 2001, and at
any adjournment or postponement thereof (the "Annual Meeting"). This Proxy
Statement, the Notice of Annual Meeting of Shareholders and the accompanying
form of proxy are first being mailed to shareholders of the Company on or about
November 30, 2000.
The Company will bear all costs and expenses relating to the solicitation
of proxies, including the costs of preparing, printing and mailing to
shareholders this Proxy Statement and accompanying materials. In addition to the
solicitation of proxies by use of the mails, the directors, officers and
employees of the Company, without receiving additional compensation therefor,
may solicit proxies personally or by telephone or telegram. Arrangements will be
made with brokerage firms and other custodians, nominees and fiduciaries for the
forwarding of solicitation materials to the beneficial owners of the shares of
Common Stock held by such persons, and the Company will reimburse such brokerage
firms, custodians, nominees and fiduciaries for reasonable out-of-pocket
expenses incurred by them in connection therewith.
VOTING
The Board of Directors has fixed the close of business on November 17,
2000, as the record date for determination of shareholders entitled to notice of
and to vote at the Annual Meeting (the "Record Date"). As of the Record Date,
there were issued and outstanding 20,650,824 shares of Common Stock and 811,094
shares of Series A Preferred Stock. The holders of record of the shares of
Common Stock on the Record Date entitled to be voted at the Annual Meeting are
entitled to cast one vote per share on each matter submitted to a vote at the
Annual Meeting. The holders of record of Series A Preferred Stock on the Record
Date are entitled to cast that number of votes equal to the number of shares of
Common Stock each share of Series A Preferred Stock could be converted into,
approximately 7.14 votes per share of Series A Preferred Stock or an aggregate
of approximately 5,793,529 votes for all of the Series A Preferred Stock. The
shares of Common Stock and Series A Preferred Stock vote together as a single
class.
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PROXIES
Shares of Common Stock and Series A Preferred Stock which are entitled to
be voted at the Annual Meeting and which are represented by properly executed
proxies will be voted in accordance with the instructions indicated on such
proxies. If no instructions are indicated, such shares will be voted FOR the
election of each of the four director nominees, FOR the ratification of the
proposed executive performance award, FOR the ratification of the amendment of
the Employee Stock Purchase Plan to extend the term of the plan and to increase
the maximum number of shares in the plan by 1,000,000, FOR the ratification of
the appointment of Arthur Andersen LLP as the independent auditor of the Company
for the fiscal year ending August 31, 2001, and in the discretion of the proxy
holder as to any other matters which may properly come before the Annual
Meeting. A shareholder who has executed and returned a proxy may revoke it at
any time prior to its exercise at the Annual Meeting by executing and returning
a proxy bearing a later date, by filing with the Secretary of the Company, at
the address set forth above, a written notice of revocation bearing a later date
than the proxy being revoked, or by voting the Common Stock covered thereby in
person at the Annual Meeting.
VOTE REQUIRED
A majority of the votes entitled to be cast at the Annual Meeting is
required for a quorum at the Annual Meeting. Abstentions and broker non-votes
are counted for purposes of determining the presence or absence of a quorum for
the transaction of business. In the election of the directors, the three
nominees receiving the highest number of votes will be elected. Accordingly,
abstentions and broker non-votes will not affect the outcome of the election.
The ratification of the proposed executive performance award, the ratification
of the amended Employee Stock Purchase Plan, the ratification of the appointment
of Arthur Andersen as independent auditor for the Company, and the approval of
other matters which may properly come before the meeting generally requires that
the number of votes cast in favor of the proposal exceed the number of votes
cast in opposition. Abstentions and broker non-votes will not affect the outcome
of any such matter. Holders of shares of Common Stock are entitled to one vote
at the Annual Meeting for each share of Common Stock held of record at the
Record Date.
ELECTION OF DIRECTORS
At the Annual Meeting, three directors of the Company are to be elected to
serve three-year terms expiring at the annual meeting of shareholders to be held
following the end of fiscal year 2003 and until their successors shall be duly
elected and qualified. If any of the nominees should be unavailable to serve,
which is not now anticipated, the proxies solicited hereby will be voted for
such other persons as shall be designated by the present Board of Directors. The
three nominees receiving the highest number of votes at the Annual Meeting will
be elected.
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
Certain information with respect to the nominees is set forth below.
JOEL C. PETERSON, 53, has been a director of the Company since May 1997.
Mr. Peterson served as a director of Covey Leadership Center ("Covey") from 1993
to 1997 and as Vice Chairman of Covey from 1994 to 1997. Mr. Peterson is also
chairman of Peterson Ventures, Inc., a privately-held equity investment firm and
is chairman of the board of directors for Essex Capital, a real estate
development and management company. Mr. Peterson also serves on the boards of
directors of Road Rescue, Dermody Properties, AccuDocs, JetBlue and Bay Logics,
Inc. Mr. Peterson earned his MBA from Harvard Business School.
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E. KAY STEPP, 55, has been a director of the Company since May 1997. Ms.
Stepp served as a director of Covey from 1992 to 1997. Ms. Stepp is the former
president and chief operating officer of Portland General Electric, an electric
utility, and former chairman of the board of Gardenburger, Inc. (NASDAQ). Ms.
Stepp is also currently a director of StanCorp Financial Group (NYSE), Planar
Systems, Inc. (NASDAQ), and is a founding director of the Bank of the Northwest.
She is a former director of the Federal Reserve Bank of San Francisco. She
received her Bachelor of Arts degree from Stanford University and a Master in
Arts in Management from the University of Portland and attended the Stanford
Executive Program.
STEVEN C. WHEELWRIGHT, 57, has been a director of the Company since January
1999. Dr. Wheelwright is currently on a 3 year leave of absence from the Board
of Directors residing in England as a mission president for the Church of Jesus
Christ of Latter-Day Saints. Prior to serving the mission, Dr. Wheelwright was
the Edsel Bryant Ford Professor of Business Administration at Harvard Business
School. He also served as Senior Associate Dean responsible for faculty hiring
and planning. Dr. Wheelwright has also taught at Stanford University's Graduate
School of Business and has authored several texts presenting concepts and tools
proven effective in product and process development.
ROBERT A. WHITMAN, 47, has been a director of the Company since May 1997
and has served as Chairman of the Board of Directors since June 1999 and Chief
Executive Officer of the Company since July 1999. Mr. Whitman served as a
director of Covey from 1994 to 1997. Prior to joining the Company, Mr. Whitman
served as president and co-chief executive officer of the Hampstead Group
L.L.C., a privately-held equity investment firm based in Dallas, Texas, from
1992 to 2000. Mr. Whitman received his Bachelor of Arts degree in Finance from
the University of Utah and his MBA from Harvard Business School.
DIRECTORS WHOSE TERMS OF OFFICE CONTINUE
In addition to the directors to be elected at the Annual Meeting, the
directors named below will continue to serve their respective terms of office as
indicated. Stephen M. R. Covey, Robert H. Daines, E. J. "Jake" Garn and Donald
J. McNamara are currently serving terms which expire at the annual meeting of
the Company's shareholders to be held following the end of fiscal year 2001.
Stephen R. Covey, Dennis G. Heiner, Brian A. Krisak and Hyrum W. Smith are
currently serving terms which expire at the annual meeting of the Company's
shareholders to be held following the end of fiscal year 2002. Brief statements
setting forth certain biographical information concerning each continuing
director appear below.
STEPHEN M. R. COVEY, 38, has been Executive Vice President of the Company
since May 1997 responsible for Organizational Solutions. From 1994 to 1997, Mr.
Covey served as President and Chief Executive Officer of Covey. Mr. Covey joined
Covey in 1989, serving in various capacities prior to his appointment as
President and Chief Executive Officer, including Vice President of Client
Services Group, Vice President of Corporate Development, and Managing
Consultant. Mr. Covey earned an MBA from Harvard Business School and has
professional work experience in different industries, including real estate
development with Trammell Crow Company in Dallas, Texas. Mr. Covey is the son of
Stephen R. Covey, Vice-Chairman of the Board of Directors. Mr. Covey's term as a
director expires in 2001.
ROBERT H. DAINES, 66, has been a director of the Company since April 1990.
Dr. Daines is the Driggs Professor of Strategic Management at Brigham Young
University, where he has been employed since 1959. Dr. Daines also currently
serves on the board of directors for Volvo Commercial Credit Corporation and
Alta Technology. Dr. Daines received his MBA from Stanford and his DBA from
Indiana University. Mr. Daines's term as a director expires in 2001.
E. J. "JAKE" GARN, 68, was elected to serve as a director of the Company in
January 1993. Mr. Garn is managing director of Summit Ventures, LLC with offices
in Salt Lake City and Washington, DC. From December 1974 to January 1993, Mr.
Garn was a United States Senator from the State of Utah. During his term in the
Senate, Mr. Garn served six years as Chairman of the Senate Banking, Housing and
Urban Affairs Committee and served on the Appropriations, Energy and Natural
Resources, and Senate Rules Committees. Prior to his election to the Senate, Mr.
Garn served as Mayor of Salt Lake City, Utah, from January 1972 to December
1974. Mr. Garn also currently serves as a director of Morgan Stanley Dean Witter
Advisors (NYSE), NuSkin Asia Pacific Corporation (NYSE) and BMW Bank, NA
(NASDAQ), and is a member of the Board of Trustees of Intermountain Health Care.
Mr. Garn's term as a director expires in 2001.
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DONALD J. MCNAMARA, 47, was appointed to serve as a director of the Company
in June 1999. Mr. McNamara is the founder of the Hampstead Group, L.L.C., a
privately-held equity investment firm based in Dallas, Texas, and has served as
its Chairman since its inception in 1989. He currently serves as Chairman of the
Board of Directors of FelCor Lodging Trust (NYSE). Mr. McNamara also currently
serves as a director of Legend Airlines, a director of Omega Healthcare
Investors, Inc. (NYSE), a trustee of Saint Mark's School, a trustee of the
Virginia Tech Foundation, and a member of the Urban Land Institute. He received
his undergraduate degree from Virginia Tech and his MBA in 1978 from Harvard
University. Mr. McNamara's term as a director expires in 2001.
HYRUM W. SMITH, 57, a co-founder of the Company, has served as a director
of the Company since December 1983 and has served as Vice Chairman of the Board
of Directors since June 1999. Mr. Smith served as Chairman of the Board of
Directors from December 1986 to June 1999. Mr. Smith served as the Chief
Executive Officer of the Company from February 1997 to March 1998, a position he
also held from April 1991 to September 1996. He was Senior Vice President of the
Company from December 1984 to April 1991. Mr. Smith is author of The Ten Natural
Laws of Time and Life Management and What Matters Most. He is also a director of
SkyWest, Inc. (NASDAQ), Greater Salt Lake Area Red Cross, and on the Advisory
Board for the University of Utah School of Business. Mr. Smith's term as a
director expires in 2002.
STEPHEN R. COVEY, 68, has been Vice Chairman of the Board of the Company
since June 1999. Dr. Covey Served as Co-Chairman of the Board of Directors from
May 1997 to June 1999. Dr. Covey founded Covey Leadership Center and served as
its Chief Executive Officer and Chairman of the Board from 1980 to 1997. Dr.
Covey received his MBA degree from Harvard Business School and his doctorate
from Brigham Young University, where he was a professor of organizational
behavior and business management from 1957 to 1983, except for periods in which
he was on leave from teaching, and served as Assistant to the President and
Director of University Relations. Dr. Covey is the author of several acclaimed
books, including The 7 Habits of Highly Effective People, Principle-Centered
Leadership, The 7 Habits of Highly Effective Families, and the co-author of
First Things First. His newest books, The Nature of Leadership, co-authored with
Roger Merrill and DeWitt Jones, and Living the 7 Habits: Stories of Courage and
Inspiration were introduced in 1999. He is also a director of Points of Light
foundation and a fellow of the Center for Organizational and Technological
Advancement at Virginia Tech. Dr. Covey is the father of Stephen M. R. Covey, a
director and Executive Vice President of the Company. Dr. Covey's term as a
director expires in 2002.
DENNIS G. HEINER, 57, was appointed as a director of the Company in
January 1997. Mr. Heiner has served as president and chief executive officer of
Werner Co., a leading manufacturer of climbing products and aluminum extrusions,
since 1999. Prior to joining Werner, he was employed by Black & Decker
Corporation from 1985 to 1999 where he served as Executive Vice President and
President of the Security Hardware Group, a world leader in residential door
hardware. Mr. Heiner's term as a director expires in 2002.
BRIAN A. KRISAK, 49, was appointed to the Board of Directors in June 1999.
Mr. Krisak is a principal of the Hampstead Group L.L.C., a privately-held equity
investment firm based in Dallas, Texas. Mr. Krisak joined The Hampstead Group in
January 1999. Prior to joining Hampstead, Mr. Krisak served as vice president
and general manager of PICO, Inc., a satellite and wireless communications firm
in the transportation industry, from 1997 to 1999 and owned and operated Krisak
Consulting from 1993 to 1997. He also has served as chief executive officer of
the Columbia-Free State Health System, president of Nicholas Coffee and sr. vice
president of Elkin's Coffee. He received his degree in Government and Law from
Lafayette College in 1973 and his MBA in 1978 from Harvard University. Mr.
Krisak's term as a director expires in 2002.
6
COMMITTEES, MEETINGS AND REPORTS
The Board of Directors has standing Executive, Audit, Nominating and
Compensation Committees. The Executive Committee presently consists of Messrs.
Joel Peterson, Chairperson and Robert Whitman. The members of the Audit
Committee are Messrs. Jake Garn, Chairperson, Robert Daines and Joel Peterson.
The Nominating Committee consists of Messrs. Stephen R. Covey and Hyrum Smith.
The Compensation Committee consists of Ms. Kay Stepp, Chairperson, and Messrs.
Dennis Heiner, Brian Krisak, Robert Daines and Steven Wheelwright, a member of
the committee who is on a three-year leave of absence from the Board.
The Executive Committee met four times during the 2000 fiscal year. Its
functions are to oversee: the day-to-day operations of the Company, employment
rights and compensation of designated key employees and to make recommendations
with respect thereto to the Compensation Committee and the Board of Directors;
and to establish the agenda for the Board of Directors meetings.
The Audit Committee met six times during the 2000 fiscal year. Its
functions are: (i) to review and approve the selection of, and all services
performed by, the Company's independent auditors; (ii) to review the Company's
internal controls and audit functions; and (iii) to review and report to the
Board of Directors with respect to the scope of internal and external audit
procedures, accounting practices and internal accounting, and financial and risk
controls of the Company.
The Nominating Committee met once during the 2000 fiscal year. The
Nominating Committee has exclusive authority to nominate individuals for
election to the following offices: President, Chief Executive Officer, Chief
Financial Officer and individuals to be nominated by the Board of Directors to
serve on the Board of Directors or committees of the Board.
The Compensation Committee met four times during the 2000 fiscal year. Its
functions are: (i) to review, and make recommendations to the Board of Directors
regarding the salaries, bonuses and other compensation of the Company's Chairman
of the Board and executive officers; and (ii) to review and administer any stock
option, stock purchase plan, stock award plan and employee benefit plan or
arrangement established by the Board of Directors for the benefit of the
executive officers and employees of the Company.
During the 2000 fiscal year, there were six meetings held by the Board of
Directors of the Company. All directors attended more than 75 percent of the
board meetings. No director attended fewer than 75 percent of the total number
of meetings of the committees on which he or she served.
DIRECTOR COMPENSATION
Messrs. Robert A. Whitman, Brian A. Krisak, Donald J. McNamara, Stephen M.
R. Covey and Stephen R. Covey do not currently receive compensation for Board or
committee meetings. Remaining directors are paid as follows: an annual retainer
of $16,000, with the exception of the committee chairpersons who are paid an
annual retainer of $18,000; $2,000 for attending each Board meeting; $1,333 for
participating in each telephone Board meeting; $1,000 for attending each
committee meeting, with the exception of the committee chairperson who is paid
$1,100; and $667 for participating in committee meetings held by telephone, with
the exception of the committee chairperson who receives $773. Directors are
reimbursed by the Company for their out-of-pocket travel and related expenses
incurred in attending all Board and committee meetings.
7
EXECUTIVE OFFICERS
In addition to Messrs. Whitman and Stephen M. R. Covey, certain information
is furnished with respect to the following executive officers of the Company:
VAL JOHN CHRISTENSEN, 46, has been Secretary and General Counsel of the
Company since January 1990 and an Executive Vice President since March 1996. Mr.
Christensen served as a director of the Company from July 1991 to June 1997.
From January 1990 to March 1996, Mr. Christensen served as a Senior Vice
President of the Company. From March 1987 to November 1989, Mr. Christensen was
engaged in the private practice of law with the law firm of LeBoeuf, Lamb, Lieby
& MacRae, specializing in general business and business litigation matters. From
1983 until he joined the Company, Mr. Christensen acted as outside counsel to
the Company.
JOHN R. HARDING, 41, has been Executive Vice President - Marketing and
Solutions for the Company since October 1999. He joined the company in February
1994, through the acquisition of Shipley Associates where he served as Chief
Executive Officer. He served as Vice President of the Company from 1994 to 1999
with responsibilities for the consultant delivery of training programs,
strategy, and innovation. Mr. Harding earned a Masters of Management from
Northwestern University. He is also a certified facilitator of The 7 Habits of
Highly Effective People and a Certified Public Accountant (CPA).
DON J. JOHNSON, 52, has been Executive Vice President - Manufacturing /
Distribution and Call Center of the Company since May 1996 responsible for the
manufacturing, printing, packaging and distribution of the Company's product
line. From 1986 to 1996, Mr. Johnson was employed by Valleylab, a division of
Pfizer, Inc., a medical device manufacturing and distributing company in
Boulder, Colorado, as Director of both Domestic and International Manufacturing
and Distribution. Mr. Johnson has more than 29 years of manufacturing and
distribution management experience in both the U.S. and international markets.
DARL MCBRIDE, 41, recently joined the Company as the President of
www.franklincoveyplanner.com, the online services group of the Company and
Executive Vice President of Business Development. Mr. McBride served previously
as the CEO of PointServe, Inc., an online service fulfillment company and was
the founder and CEO of SolutionBank, Inc., a web services integration company.
Additionally, he held various executive management positions at Novell, Inc.,
for eight years. Mr. McBride has held executive positions in the technology
industry for nearly twenty years, during which time he has established domestic
and international industry partnerships with such companies as Softbank, Sony,
Canon, Microsoft, IBM, Compaq and HP. Mr. McBride was listed as one of the top
twenty executives to watch, CRN 1996, and holds a Bachelor of Arts from Brigham
Young University and a Master of Arts from Illinois University.
MIKELL RIGG MCGUIRE, 35, has been Executive Vice President of the
International Division since February 1999. Ms. Rigg McGuire joined the Company
in 1990 in International Sales. She has held various positions within the
Company including Vice President of Sales in Canada, General Manager of the
Canadian office and Area Vice President of the Americas.
SCOTT NIELSEN, 42, has been Executive Vice President and Interim Chief
Financial Officer of the Company since January 2000. He joined the Company in
1994 and has held various finance positions including Vice President of Finance
and Controller with duties including mergers, acquisitions, divestitures, and
performance analysis. Prior to joining the Company, Mr. Nielsen was a senior
audit manager for Price Waterhouse. Mr. Nielsen is a Certified Public Accountant
(CPA).
MARVA SADLER, 43, has been Executive Vice President of Business Plan
Implementation, responsible for implementation of major corporate operational
improvement initiatives, since joining the Company in March of 2000. She also
serves as CFO/COO of the CSG Division. Prior to joining the company, Ms. Sadler
was with Achieve Global from 1996-2000 as Executive Vice President of
Operations, and CFO/CEO at Baron Woolen Mills from 1993-1996, and spent several
years in management consulting with Marakon Associates, and Bain & Co.
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DOUGLAS SMITH, 46, has been Executive Vice President of Technology
Solutions and e-Commerce since October, 1999. Mr. Smith joined the Company in
November 1998 as Vice President of the Electronics Solutions Division. Prior to
joining the Company, Mr. Smith was employed at Sequent Computers for 12 years in
various marketing and business development roles.
MICHAEL O. WILLIS, 45, is joined the Company this year as Executive Vice
President of Global Sales and Alliances. Mr. Willis is responsible for corporate
business development and partnering programs worldwide. Mr. Willis brings more
than 25 years of experience to the Company having held executive management
positions with several Fortune 100 corporations and having developed significant
expertise in strategic planning, marketing and sales management, change and
operations management and information technology. Prior to joining the Company,
Mr. Willis spent five and half years with IBM Global Service. Mr. Willis holds a
MBA in Management Science and is currently completing his Doctorate in Business
Administration.
D. GORDON WILSON, 48, has been an Executive Vice President of the Company
since March 1996 responsible for retail store operation and direct product
sales. Mr. Wilson served as a Senior Vice President of the Company responsible
for the Retail Stores Division and the Marketing Division since January 1995 and
September 1995, respectively. From 1989 to 1994, he was Group Vice President and
General Merchandise Manager of the Home Division and Apparel Division of Fred
Meyer, Inc. Mr. Wilson held various buying and merchandising positions at Fred
Meyer, Inc. from 1983 to 1989.
EXECUTIVE COMPENSATION
The compensation of Robert A. Whitman, the Company's Chief Executive
Officer and the four other most highly paid executive officers during the fiscal
year ended August 31, 2000 is shown on the following pages in three tables and
discussed in a report from the Compensation Committee of the Board of Directors.
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SUMMARY COMPENSATION TABLE
Long Term Compensation
-------------------------
Annual Compensation Awards
-------------------------------------- -------------------------
Restricted
Fiscal Other Annual Stock Options/ All Other
Name and Position Year Salary Bonus Compensation(1) Awards(2) SARs(#)(3) Compensation(4)
- ---------------------------- --------- ------------- ------------- --------------- ------------ ----------- ----------------
Robert A. Whitman 2000 $ 336,539 $ 375,000 $ 22,990 $ -- -- $ --
Chairman and Chief 1999 -- -- 14,000 -- -- --
Executive Officer 1998 -- -- 18,000 -- -- --
Val John Christensen 2000 320,708 150,000 -- -- -- 8,808
Executive Vice President 1999 163,323 90,000 -- -- 90,300 4,771
and Secretary 1998 156,667 71,820 -- -- -- 2,891
Stephen M. R. Covey 2000 225,885 188,000 -- -- -- 6,399
Executive Vice President 1999 181,731 90,000 -- -- 25,000 4,800
1998 195,769 216,375 -- -- -- 4,754
Don J. Johnson 2000 174,423 130,000 -- -- -- 5,916
Executive Vice President 1999 156,821 121,170 -- -- 30,000 4,431
1998 156,250 71,820 -- -- 49,000 3,790
John R. Harding 2000 168,654 125,000 -- -- -- 7,597
Executive Vice President 1999 136,218 37,584 -- -- 55,000 4,038
1998 137,740 18,726 -- -- -- 8,812
- ----------------------
(1) Includes compensation paid to Mr. Whitman as a member of the Board of
Directors for fiscal year 1999 and 1998 and a travel allowance for fiscal year
2000.
(2) Restricted stock awards vest in full four years from the date of grant. No
vesting occurs prior to four years from grant. Holders of restricted shares are
entitled to vote the shares. The number of shares granted to each of the persons
named in the foregoing table and the value of restricted shareholdings at the
end of the fiscal year is as follows:
Number Value at
Name Of Shares August 31, 2000
------------------------------------------ ---------------- ----------------
Val John Christensen..................... 4,000 $26,500
Don J. Johnson........................... 1,000 6,250
Val John Christensen..................... 1,000 6,250
(3) Amounts shown reflect options granted to the named executive officers
pursuant to the Franklin Covey 1992 Stock Incentive Plan (the "Incentive Plan").
As of August 31, 2000, the Company had not granted any stock appreciation
rights.
(4) Amounts shown reflect contributions made by the Company for the benefit of
the named executive officers under the Franklin Covey 401(k) Profit Sharing
Plan.
10
OPTION/SAR GRANTS IN LAST FISCAL YEAR
During the fiscal year ended August 31, 2000, the Company did not grant any
stock options or stock appreciation rights to the persons named in the preceding
Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR OPTION/SAR
VALUES
The following table sets forth the number of shares of Common Stock
acquired during the fiscal year ended August 31, 2000, upon the exercise of
stock options, the value realized upon such exercise, the number of unexercised
stock options held on August 31, 2000, and the aggregate value of such options
held by the persons named in the Summary Compensation Table. This table reflects
options to acquire shares of Common Stock granted to the named individuals by
the Company and by certain affiliates of the Company. As of August 31, 2000, the
Company had not granted any stock appreciation rights to any of the executive
officers named below.
Number of Unexercised Value of Unexercised
Number of Options at August 31, In-the-Money Options at
Shares Value 2000 August 31, 2000(2)
Acquired on Realized on -------------------------- -----------------------------
Name Exercise Exercise(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------ ----------- ------------- ----------- -------------- -------------- -------------
Robert A. Whitman............ -- $ -- -- -- $ -- $ --
Val John Christensen......... -- -- 27,825 71,475 34,605 --
Stephen M. R. Covey.......... -- -- 6,250 18,750 -- --
Don J. Johnson............... -- -- 15,000 5,000 -- --
John R. Harding.............. -- -- 51,834 39,166 -- --
- ----------------------
(1) Reflects the difference between the exercise price of the options exercised
and the market value of the Common Stock on the date of such exercise, as
reported by the New York Stock Exchange.
(2) Reflects the difference between the exercise price of the unexercised
options and the market value of the Common Stock on August 31, 2000. The
last sale price of the Common Stock on August 31, 2000, as reported by the
New York Stock Exchange, was $6.625 per share.
EMPLOYMENT AGREEMENTS
The Company does not have an employment agreement with any of its named
executive officers, other than Robert A. Whitman, the President, Chief Executive
Officer and Chairman of the Board.
In an effort to develop a compensation agreement that would create a strong
link in both pay for performance and shareholder value creation, the Board and
Mr. Whitman have directly linked Mr. Whitman's annual performance award and
long-term compensation to measures that create value and increase the price of
the Company's Common Stock. The performance award's unusual structure differs
from normal executive compensation programs in that the annual performance pay
is tied to very aggressive growth goals and the long-term compensation is
awarded only after most shareholders have benefited from a substantial increase
in share price. For example, for fiscal year 2001, Mr. Whitman would receive no
performance pay until an approximate 36% increase in EBITDA is achieved and
would not receive a full reward unless an 84% increase in EBITDA is achieved.
Though subsequent years' performance requirements may not necessarily be that
aggressive, the hurdle tied to value creation is expected to be high. The
Company's outside compensation consultants advised the Board that long-term
11
compensations is typically bench-marked by company size and is usually granted
at current market price. However, to emphasize pay for performance, the options
granted to Mr. Whitman have an unusually conservative vesting schedule and grant
price, consistent with Mr. Whitman's desire that value be created for existing
shareholders before he receives long-term compensation rewards. The award
provides for no vesting for seven years (and only then if currently employed) of
any of the options unless the market price of the Company's stock price reaches
certain levels which would increase shareholders value by approximately 300% to
700% over that time period. The grant price of $14.00 is also well above the
current market price. The Board and Mr. Whitman have designed this compensation
package with the intent that existing shareholders would benefit prior to Mr.
Whitman receiving meaningful compensation.
On September 1, 2000, the Company entered into an employment agreement with
Robert A. Whitman, as President and Chief Executive Officer of the Company. In
addition, the Company agreed to use its best efforts to continue Mr. Whitman in
his position as chairman of the board of directors. The agreement has an initial
term expiring August 31, 2007, and provides for an annual base salary, paid
retroactively to December 31, 1999, of $500,000, to be reviewed annually by the
Compensation Committee. The base salary may be increased, but not decreased,
during the term of the agreement. The Employment Agreement provides for an
annual bonus, to be paid based on the attainment of performance objectives
determined by the Compensation Committee. The bonus can range from 0 percent to
150 percent of the base salary. A substantial portion of Mr. Whitman's annual
performance bonus will be based upon the Company meeting EBITDA targets
established by the Compensation Committee. The remaining portion of Mr.
Whitman's annual bonus will be determined based on reaching other targets
established by the Compensation Committee on an annual basis which may include
such things as: meeting target dates for development of specific projects,
meeting sales goals for individual products or business areas, increasing
revenues and/or market penetration associated with products or groups of
products, successful development and introduction of new products, attracting
and retaining key employees, implementing business strategies, identifying and
negotiating business transactions, and other items that may be established by
the Compensation Committee from time to time.
Mr. Whitman was also granted an option to acquire 1,602,000 shares of
common stock, with an exercise price of $14.00 per share. This option will not
be exercisable until August 31, 2007. However, acceleration of that exercise
date for all or a portion of those options may occur if the average closing
sales price of the Company's Common Stock achieves certain levels prior to that
date based on a schedule determined by the average closing price of the
Company's common stock for the preceding 90 consecutive trading days. This
schedule ranges from $20.00 per share at which point half of the options will be
exercisable to $50.00 per share at which point all of the options will be
exercisable. If not exercised, the options expire August 31, 2010. If Mr.
Whitman elects to exercise all or a portion of the option, the Company has
agreed to lend the exercise price, plus the aggregate amount of federal, state,
and local income taxes incurred by Mr. Whitman as a result of such exercise, to
Mr. Whitman, to facilitate the exercise. Any such loan will become due and
payable at the time the shares of common stock purchased with the loan proceeds
are sold or otherwise disposed of by Mr. Whitman or, in the event there is no
such sale or disposition, five years after the date the loan was made. The loan
will bear interest and be subject to the same terms and conditions as loans to
key employees under the Company's Management Stock Purchase Loan program. Mr.
Whitman will also be entitled to participate in all Company sponsored employee
benefit plans and will be reimbursed for all expenses incurred on behalf of the
Company.
In the event that the Company elects to terminate the agreement for any
reason other than for "cause" as specified in the agreement, it will owe to Mr.
Whitman an amount equal to two and a half times the then current base salary,
compensation for his unused vacation days, a pro rata portion of the bonus that
would have been earned by Mr. Whitman for the year in which the termination
occurred, an amount equal to two and a half times the average annual incentive
compensation paid to Mr. Whitman for the three fiscal years immediately
preceding the fiscal year in which his employment is terminated, and any
12
payments due to Mr. Whitman under the Company's other employment benefit plans.
In addition, Mr. Whitman would be entitled to continued medical, dental, and
other health benefits on payment of any amounts typically charged by the Company
to similar situated employees. To the extent that any stock options held by Mr.
Whitman are currently exercisable as of the date of termination, they will
continue to be exercisable for a period of five years following his date of
termination or, if sooner, August 31, 2010.
In the event there is a change in control of the Company as defined in the
Agreement that is not approved by the current board of directors or successor
directors nominated by at least a two-thirds majority of existing directors,
and, during the 24 month period following the date of the change in control, Mr.
Whitman's employment is terminated for any reason other than cause, or by Mr.
Whitman for good reason, as defined in the agreement, the Company will pay all
termination amounts set forth above to Mr. Whitman and, in addition, all of the
options held by Mr. Whitman will immediately vest and become exercisable. If the
change of control has been approved by the incumbent board, 801,000 shares of
any non-vested options shall become immediately vested. In the event that it is
determined that any of the payments to Mr. Whitman on termination or change in
control are subject to an excise tax under Section 4999 of the Internal Revenue
Code of 1986, as amended, Mr. Whitman shall be entitled to receive an additional
payment so that, after payment of all taxes, including the exercise tax, Mr.
Whitman would retain an additional amount equal to the exercise tax. During the
term of the agreement and for a period of three years thereafter, Mr. Whitman
has agreed not to engage in any competitive activity with the Company. In
addition, Mr. Whitman agrees not to attempt to solicit or hire key employees of
the Company for a period of two years after termination of the agreement.
COMPENSATION COMMITTEE REPORT
The report was prepared by the Compensation Committee of the Board of
Directors (the "Committee"), which is composed of independent directors who are
not employees of the Company or its subsidiaries. The Committee has
responsibility for all compensation matters for the Company's Chairman and the
Company's President and Chief Executive Officer (the "Key Executives"). It also
has the responsibility of administering the Incentive Plan. The Key Executives
determine the amount of cash compensation for executive officers other than the
Key Executives. The Committee determines the amount of cash compensation under
the Incentive Plan for all executive officers, including the Key Executives. The
current members of the Committee are Kay Stepp, who serves as Chairperson,
Robert Daines, Dennis Heiner, Brian Krisak and Steven Wheelwright. The Committee
met four times during fiscal year 2000.
Executive Compensation Philosophy. In 1997 and then revised in 2000, an
executive compensation strategy and structure was created with assistance from
the Board's consultants, Schuster-Zingheim and Associates. The executive
compensation program enables the Company to attract, motivate and retain senior
management by providing a competitive total compensation opportunity. Variable
performance-based cash incentive awards are an important element of the
Company's cash compensation philosophy. The Committee believes the executive
compensation program strikes an appropriate balance between short- and long-term
performance objectives.
The overall executive compensation objective is pay for performance. The
strategy is based on the following principles: (1) compensation is aligned with
achieving the Company's strategic business plan and is directly related to
performance and value added; (2) compensation promotes shared destiny and
teamwork; (3) compensation attracts and retains qualified executives; (4) the
greater the amount of direct influence on organizational performance, the
greater the portion of pay at risk; (5) stock ownership plans, such as executive
stock loan programs or stock option issuance, aligns executive and shareholder
interests in building Company value and will be used as an incentive to
executives for increasing Company value.
13
Key Executive Compensation. Key Executive Compensation consists of annual
salaries and additional compensation in the form of cash performance-based
bonuses, stock ownership plans, stock options and restricted stock awards as the
Committee in its discretion awards to the Key Executives. The annual salaries of
the Key Executives are set at amounts that are deemed competitive for executives
with comparable ability and experience, taking into account existing salaries
with respect to executives in companies comparable in size and complexity to the
Company. Performance-based bonuses were awarded to the Key Executives in 2000
reflecting the Company's overall performance.
Chairman, President and Chief Executive Officer's Compensation. Mr.
Whitman's compensation for fiscal year 2000 was determined pursuant to the
principles described above. The Committee concluded that the annual performance
bonus for 2000 paid to Mr. Whitman fairly and adequately compensates him based
on the overall performance of the Company.
Executive Stock Ownership Program. The Company believes it is essential for
all executive officers to have a vested interest in the Company, thereby
aligning the long-term interest of executives with those of stockholders. Each
executive officer is required (encouraged?) to accumulate and maintain ownership
in the Company equal to 25 percent of their annual income, including
performance-based bonuses. In this connection, the Company has facilitated
personal loans to the executives through lending institutions to buy the stock
on the open market. The stock acts as collateral for the full-recourse loans
with the Company providing a guarantee to the lending institutions for the
loans.
Incentive Stock Option Program. The Company believes it is essential for
all executive officers to receive Incentive Stock Options ("ISOs") under the
Incentive Plan, thereby aligning the long-term interests of executives with
those of stockholders. The Company adopted the Incentive Plan in 1992, charging
the Committee with responsibility for its administration. These ISOs generally
vest over a four-year period and expire ten (10) years from the date of grant.
If an executive officer's employment terminates prior to applicable vesting
dates, the officer generally forfeits all ISOs that have not yet vested. The
Committee believes that the grant of these ISOs to executive officers is highly
desirable because it motivates these officers to continue their employment with
the Company and creates strong incentives to maximize the growth and
profitability of the Company.
As of August 31, 2000, executive officers held incentive stock options to
purchase an aggregate of 381,300 shares of Common Stock granted under the
direction of the Committee pursuant to the Incentive Plan since its inception in
1992. Of those options, 103,159 are currently exercisable.
Other Compensation Plans. The Company has a number of other broad-based
employee benefit plans in which executive officers participate on the same terms
as other employees meeting the eligibility requirements, subject to any legal
limitations on amounts that may be contributed to or benefits payable under the
plans. These include (I) the Company's cafeteria plan administered pursuant to
Section 125 of the Internal Revenue Code of 1986, as amended (the "Code"); (ii)
the Company's 401(k) Plan, pursuant to which the company makes matching
contributions; and (iii) the Company's Employee Stock Purchase Plan implemented
and administered pursuant to Section 423 of the Code.
Respectfully submitted,
E. Kay Stepp
Robert H. Daines
Dennis G. Heiner
Brian A. Krisak
Steven C. Wheelwright
14
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total shareholder
return, calculated on a dividend reinvested basis, for the five fiscal years
ended August 31, 2000, for the Common Stock, the S&P 600 SmallCap Index in which
the Company is included and the S&P Miscellaneous Industry Index, the index to
which the Company believes it would be assigned if it were included in the S&P
500. The Company has been advised that the S&P Miscellaneous Industry Index
includes ten corporations, many of which, like the Company, are of a diversified
nature.
INDEXED RETURNS
-----------------------------------------------------
Years Ending
- --------------------------------------------------------------------------------------
Aug95 Aug96 Aug97 Aug98 Aug-99 Aug-00
- --------------------------------------------------------------------------------------
FRANKLIN COVEY CO 100.00 78.92 107.57 81.08 33.51 28.65
S&P SMALLCAP 600 INDEX 100.00 113.29 151.93 124.13 156.75 200.94
CONSMER(JWRLY,NVL,GFT)-SMALL 100.00 93.22 125.67 100.91 63.88 39.82
15
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth information as of November 1, 2000, with
respect to the beneficial ownership of shares of Common Stock and Series A
Preferred Stock by each person known by the Company to be the beneficial owner
of more than 5 percent of Common Stock or Series A Preferred Stock, by each
director, by each executive officer named in the Summary Compensation Table 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.
The percentages set forth below have been computed without taking into account
treasury shares held by the Company and are based on 20,643,182 shares of Common
Stock and 811,094 shares of the Series A Preferred Stock outstanding as of
November 1, 2000. In cases where shareholders own both Common Stock and Series A
Preferred Stock, the number of shares shown assumes the conversion of the Series
A Preferred Stock into the Common Stock and the issued and outstanding Common
Stock is increased by an equal amount for that shareholder. The shares of Series
A Preferred Stock are shown on an "as converted basis" with approximately 7.14
shares of Common Stock issueable on conversion of each share of Series A
Preferred Stock.
16
Beneficial Ownership as of
November 1, 2000
----------------------------
Number of Percentage
Shares of Class
-------------- ------------
Common Stock and Common Stock Equivalents:
Knowledge Capital Investment Company (1)(2).............. 6,506,073 24.9%
2200 Ross Avenue, Suite 42-W
Dallas, Texas 75201
Stephen R. Covey(3)...................................... 1,927,384 9.3
C/o Franklin Covey Co.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
Dimensional Fund Advisors, Inc........................... 1,524,700 7.4
1299 Ocean Avenue
Santa Monica, California 90401
Dennis R. Webb(3)(4)..................................... 1,275,712 6.2
c/o Franklin Covey Co.
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
Yacktman Asset Management (1)............................ 1,209,102 5.8
303 West Madison
Chicago, Illinois 60606
Hyrum W. Smith(3)(4)..................................... 568,859 2.8
Stephen M. R. Covey...................................... 365,436 1.8
Val John Christensen(3).................................. 254,401 1.2
John R. Harding(3)....................................... 206,942 1.0
Joel C. Peterson......................................... 144,487 *
Don J. Johnson(3)........................................ 54,495 *
Steven C. Wheelwright.................................... 30,000 *
Robert H. Daines(6)...................................... 20,507 *
E. J. "Jake" Garn........................................ 4,000 *
Kay E. Stepp............................................. 3,000 *
Dennis G. Heiner......................................... -- *
Robert A. Whitman(2)..................................... -- *
Brian A. Krisak(2)....................................... -- *
Donald J. McNamara(2).................................... -- *
All directors and executive officers
As a group (22 persons)(1)(2)(4)(5)................... 9,074,613 34.4%
- ----------------------
* Less than 1%.
17
(1) The Series A Preferred Stock is convertible into Common Stock at a rate of
approximately 7.14 shares of Common Stock for each share of Series A
Preferred Stock. The number of shares shown for Knowledge Capital
Investment Company and Yacktman Asset Management include 768,750 and 10,102
shares of the Series A Preferred Stock, respectively, shown on an as
converted basis as 5,491,071 and 72,157 shares of Common Stock
respectively. The holdings of Knowledge Capital Investment Company and
Yacktman Asset Management represent 94.8 percent and 1.2 percent of the
issued and outstanding Series A Preferred Stock, respectively.
(2) Messrs. Whitman, Krisak and McNamara, each of whom is a director of the
Company and, in the case of Mr. Whitman, an executive officer of the
Company, are principals of the private investment firm that sponsors
Knowledge Capital and therefore may be deemed the beneficial owner of the
Common Stock and the Series A Preferred Stock and the shares of Common
Stock into which the Series A Preferred Stock may be converted. Each of
Messrs. Whitman, Krisak and McNamara disclaim beneficial ownership of the
Common Stock and the Series A Preferred Stock and of the Common Stock into
which the Series A Preferred Stock may be converted.
(3) The share amounts indicated for Hyrum W. Smith are owned of record by Hyrum
W. Smith as trustee of The Hyrum W. Smith Trust with respect to 329,700
shares; those indicated for Dennis R. Webb, by Dennis R. Webb as trustee of
The Lighthouse Foundation with respect to 82,500 shares; and those
indicated for Stephen R. Covey by Stephen R. Covey as Trustee of The
Gathering For Zion Foundation with respect to 505,000 shares; and for
SRSMC, LLC with respect to 40,000 shares; and for SANSTEP Properties, LLC
with respect to 1,382,384 shares. Messrs. Smith and Webb are the respective
trustees of those trusts and foundations, having sole power to vote and
dispose of all shares held by the respective trusts and foundations, and
may be deemed to have beneficial ownership of such shares. Mr. Covey, as a
trustee of the Gathering for Zion Foundation and as co-manager of SRSMC,
LLC and SANSTEP, LLC, has shared voting and dispositive control over the
shares held by those entities and may be deemed to have beneficial
ownership of such shares.
(4) Some of the share amounts indicated as beneficially owned are subject to
options granted to other directors, officers and key employees of the
Company by the following persons in the following amounts: Hyrum W. Smith,
49,350 shares, and Dennis R. Webb, 19,500 shares.
(5) The share amounts indicated include shares subject to options currently
exercisable held by the following persons in the following amounts: Val
John Christensen, 27,825 shares; Don J. Johnson, 5,000 shares; John R.
Harding, 51,834 shares; and all executive officers and directors as a
group, 112,159 shares.
(6) The share amounts indicated for Robert H. Daines include 5,000 shares owned
by Tahoe Investments, L.L.C., a Utah limited liability company, of which
Mr. Daines is a member.
18
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than 10 percent of the Common Stock, to file with the
Securities and Exchange Commission (the "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 the Common Stock are required
by Commission regulations to furnish the Company with copies of all such reports
they file. Based upon a review of the copies of such forms received by the
Company and information furnished by the persons named below, the Company
believes that all reports were filed on a timely basis. Except for: A Form 4 for
E. J. ("Jake") Garn, a director, reported the purchase of 4,000 shares was due
on June 10, 2000, but not filed until June 20, 2000; A Form 3 for John R.
Harding, an executive officer, was timely filed on October 21, 1999, but did not
list all options held at the time he became an insider. An amendment to the Form
3 to report all securities held was filed on December 14, 1999; A Form 3 for
Darl McBride, an executive officer, was due on July 10, 2000, but was not filed
until July 13, 2000; A Form 5 for Mikel Rigg-Mcguire to report 25,000 options
granted to her on February 17, 1999 and 10,000 options granted to her on
December 11, 1998 which should have been reported no later than November 14,
1999, but were not reported until a Form 4 was filed on June 12, 2000; A Form 3
for Marva Sadler, an executive officer, was due on March 3, 2000, but was not
filed until June 13, 2000; A Form 3 for Douglas Smith was timely filed on
October 21, 1999, but did not list all shares held at the time he became an
insider until an amendment to the Form 3 to report all securities was filed on
November 17, 1999; A Form 4 for D. Gordon Wilson that reported the sale of 357
shares was due on December 10, 1999, but was not filed until February 18, 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the merger between the Company and Covey Leadership
Center, Stephen R. Covey, who is vice-chairman of the Board of Directors,
entered into a Speaker Services Agreement with the Company pursuant to which Dr.
Covey receives 20 percent of the proceeds from personal speaking engagements,
which resulted in a payment of $3.3 million to Dr. Covey for the fiscal year
ending August 31, 2000. Also in connection with this transaction, the Company
entered in a 12-year lease agreement expiring in 2009 on two office buildings
located in Provo, Utah where the operations of Covey formerly conducted by Covey
continued to be located. The buildings are leased from entities in which Stephen
R. Covey and Stephen M. R. Covey, executive officers and/or directors of the
Company have a 35 percent and 11 percent interest, respectively. Lease rentals
paid in fiscal 2000 were $2,062,428. The Company believes the terms of the
leases, including the lease rentals, are at least as favorable as could be
obtained from unrelated third parties.
Robert A. Whitman, the Company's Chairman and Chief Executive Officer, and
Messrs. Donald J. McNamara and Brian A. Krisak, directors of the Company, are
principals of the Hampstead Group, L.L.C., a Texas limited liability company,
the private investment firm that sponsors Knowledge Capital Investment Company,
the holder of 95 percent of the Company's outstanding Series A Preferred Stock,
and of Hampstead Interests, LP, a Texas limited partnership. On June 2, 1999,
the Company and Hampstead Interests, LP entered into a Monitoring Agreement
which provides for payment of a monitoring fee of $100,000 per quarter to
Hampstead Interests, LP for assisting the Company in strategic planning,
including acquisitions, divestitures, new development and financing matters. The
agreement continues so long as Knowledge Capital Investment Group owns more than
50 percent of the 750,000 shares of Series A Preferred Stock (or Common Stock
equivalents) originally purchased. The Company has paid $400,000 to Hampstead
Interests, LP since the beginning of the fiscal year ended August 31, 2000,
pursuant to the Monitoring Agreement.
19
During the fiscal year ended August 31, 2000, the Company sold 121,250
shares of its common stock to a former CEO of the Company for $0.9 million. In
consideration for the common stock, the Company received a non-recourse
promissory note, due September 2003, bearing interest at 10.0 percent.
Additionally, all of the former CEO's stock options were canceled and the
issuance of common stock is being accounted for as a variable security, due to
its stock option characteristics. The note receivable from the sale of this
stock has been recorded as a reduction to shareholders' equity in the
accompanying fiscal 2000 consolidated balance sheet.
During fiscal 2000, the Company actively sought to reacquire outstanding
options to purchase the Company's common stock (Note 12). Included in the total
number of option shares reacquired, the Company purchased 150,000 option shares
from a Vice-Chairman of the Board of Directors for $0.4 million. In addition,
358,000 option shares were purchased from two officers and one former officer of
the Company for a total of $0.8 million. These options were reacquired using the
same valuation methodology as other stock options purchased by the Company.
Premier Agendas ("Premier"), a subsidiary of the Company, had trade
accounts payable to various companies which are partially owned by certain
former owners of Premier totaling $2.1 million and $3.3 million at August 31,
2000 and 1999, respectively. In addition, Premier had notes payable to key
employees and former key employees totaling $1.4 million and $1.5 million as of
August 31, 2000 and 1999, respectively (Note 6). The notes payable were used for
working capital, are due upon demand, and have interest rates which approximate
prevailing market rates.
During fiscal years 2000 and 1998, the Company purchased 9,000 shares and
500,000 shares of its common stock for $0.1 million and $12.0 million in cash,
respectively, from a Vice-Chairman of the Board of Directors. All shares were
purchased at the existing fair market value on the dates of the transactions.
In January 1999, the Company issued 1,450 shares of its common stock to
each member of the Board of Directors for $17.25 per share. The purchase price
was to be paid in the form of secured promissory notes that were payable in
three annual installments. During fiscal 2000, the promissory notes were
canceled and the Company retained the shares of stock.
During the fiscal year ended August 31, 1999, the Company purchased 130,000
shares of its common stock for $2.3 million in cash, from an officer of the
Company. The shares were purchased at the existing fair market value on the date
of the transaction.
During the fiscal years ended August 31, 1999 and 1998, the Company
purchased 92,000 and 100,000 shares of its common stock for $1.2 million and
$2.5 million in cash, respectively, from a former officer and director of the
Company. The shares were purchased at the existing fair market value on the
dates of the transactions.
The Company purchased 194,000 shares of its common stock from a director of
the Company for $3.7 million in cash during the fiscal year ended August 31,
1998. Also during fiscal 1998, the Company purchased 57,094 shares of its common
stock from a former officer of the Company for $1.1 million. The shares were
purchased at the existing fair market value on the dates of the transactions.
During fiscal 1998, the Company sold one of its consulting units to a group
of former employees for $1.6 million. The amount is payable to the Company in
six annual installments from September 1998 through 2003. The Company also
granted certain employees the option to purchase another consulting unit of the
Company for $1.2 million payable to the Company in equal annual installments
over a ten-year period commencing January 2001. Such option becomes exerciseable
upon the achievement of certain financial thresholds. As of August 31, 2000, the
consulting unit had not yet reached planned financial thresholds and the Company
does not expect that the option will be exercised.
Each transaction described above was entered into pursuant to arm's length
negotiations with the party involved and were approved by disinterested
majorities of the board of directors or the Compensation Committee of the Board.
20
PROPOSAL TO ADOPT AN EXECUTIVE PERFORMANCE AWARD FOR
THE CHIEF EXECUTIVE OFFICER OF THE COMPANY
GENERAL
In an effort to develop a compensation agreement that would create a strong
link in both pay for performance and shareholder value creation, the Board and
Mr. Whitman have directly linked Mr. Whitman's annual performance award and
long-term compensation to measures that create value and increase the price of
the Company's Common Stock. The performance award's unusual structure differs
from normal executive compensation programs in that the annual performance pay
is tied to very aggressive growth goals and the long-term compensation is
awarded only after most shareholders have benefited from a substantial increase
in share price. For example, for fiscal year 2001, Mr. Whitman would receive no
performance pay until an approximate 36% increase in EBITDA is achieved and
would not receive a full reward unless an 84% increase in EBITDA is achieved.
Though subsequent years' performance requirements may not necessarily be that
aggressive, the hurdle tied to value creation is expected to be high. The
Company's outside compensation consultants advised the Board that long-term
compensations is typically bench-marked by company size and is usually granted
at current market price. However, to emphasize pay for performance, the options
granted to Mr. Whitman have an unusually conservative vesting schedule and grant
price, consistent with Mr. Whitman's desire that value be created for existing
shareholders before he receives long-term compensation rewards. The award
provides for no vesting for seven years (and only then if currently employed) of
any of the options unless the market price of the Company's stock price reaches
certain levels which would increase shareholders value by approximately 300% to
700% over that time period. The grant price of $14.00 is also well above the
current market price. The Board and Mr. Whitman have designed this compensation
package with the intent that existing shareholders would benefit prior to Mr.
Whitman receiving meaningful compensation.
On July 14, 2000, which became effective September 1, 2000, the Board of
Directors and the Compensation Committee of the Board approved the terms of an
employment agreement (the "Employment Agreement" or "Agreement") containing a
performance award for Robert A. Whitman, the Chairman of the Board, President
and Chief Executive Officer of the Company, subject to approval by the Company's
shareholders in accordance with the provisions of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). Section 162(m) generally
authorizes the deduction of compensation in excess of $1,000,000 per taxable
year payable to a chief executive officer (and certain other officers) only
where such compensation is at least partially based on performance, satisfies
other requirements, and is approved by shareholder vote.
If the performance award is approved by the affirmative vote of the holders
of at least a majority of the shares of Common Stock present and entitled to
vote at the meeting and certain other requirements set forth in Section 162(m)
of the Code are satisfied, the performance awards paid to Mr. Whitman pursuant
to the Employment Agreement will qualify for deduction under Section 162(m) of
the Code. A description of the performance award for Mr. Whitman is set forth
below.
21
ANNUAL INCENTIVE COMPENSATION
Under the terms of his agreement, Mr. Whitman is entitled to annual
incentive compensation ranging from 0 percent to 150 percent of his base salary.
This base salary, retroactively paid to December 31, 1999, is initially fixed at
$500,000 per year, but will be reviewed annually by the Compensation Committee
and may be increased during the term of the agreement. The employment agreement
has an initial term through August 31, 2007, and may be extended beyond this
term by the mutual agreement of the Company and Mr. Whitman.
Mr. Whitman will be eligible to receive the incentive compensation only if
he meets or exceeds performance standards established annually by the
Compensation Committee. Fifty to seventy-five percent of the annual incentive
compensation will be based on reaching or exceeding targets with respect to the
Company's earnings before interest, taxes depreciation and amortization
("EBITDA") for each fiscal year. Thirty percent of the annual incentive
compensation will be based on meeting or exceeding target goals with respect to
other aspects of the business of the Company identified by the Compensation
Committee and may include such things as meeting target dates for development of
specific projects, meeting sales goals for individual products or business
areas, increasing revenues and/or market penetration associated with products or
groups of products, successful development and introduction of new products,
attracting and retaining key employees, implementing business strategies,
identifying and negotiating business transactions, and other items that may be
established by the Compensation Committee from time to time.
OPTION GRANT
The employment agreement also provides for the grant to Mr. Whitman of an
option to purchase 1,602,000 shares of the Company's common stock, with an
exercise price of $14.00 per share. This option becomes exercisable on a
graduated basis, depending on increases in the market price for the Company's
common stock. If the closing sales price for the Company's common stock exceeds
$20.00 for 90 consecutive trading days, the option becomes exercisable with
respect to 801,000 shares of stock. The option becomes exercisable for
additional shares of stock for each subsequent $5.00 increase in the market
price of the stock up to $50.00 at which point the option is exercisable for the
entire 1,602,000 shares. If it has not otherwise become exercisable and if Mr.
Whitman is still employed by the Company, the option will become fully
exercisable on August 31, 2007. The option also becomes exercisable under
certain conditions in the event the Company elects to terminate the employment
agreement or there is a change of control of the Company, all as defined under
the terms of the employment agreement. To the extent unexercised, the option
will expire on August 31, 2010.
In the event that Mr. Whitman elects to exercise the option to acquire
shares of common stock, the Company has agreed to loan the exercise price, plus
the aggregate amount of any federal, state, or local income tax payable as a
result of such exercise, to Mr. Whitman. This loan will bear interest at a rate
substantially similar to the interest on loans by the Company to key employees
under its Management Sock Purchase Loan Program. The principal amount of the
loan (or a pro rata portion thereof) will be payable at the time that Mr.
Whitman's sells or otherwise disposes of shares of common stock purchased with
the loan proceeds. If not previously paid, the loan will be payable in full five
years after the date of the advance by the Company.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHHOLDERS VOTE
IN FAVOR OF THE PROPOSAL TO APPROVE THE PERFORMANCE AWARDS FOR THE CHIEF
EXECUTIVE OFFICER OF THE COMPANY.
22
PROPOSAL TO RATIFY THE AMENDMENT OF THE EMPLOYEE STOCK PURCHASE PLAN
GENERAL
The Franklin Covey Co. Amended and Restated 2000 Employee Stock Purchase
Plan, as amended, (the "Purchase Plan") was adopted by the Board of Directors
(the "Board") in March 1992 and approved by the Company's shareholders in April
1992. The Purchase Plan was amended by the Board on June 29, 1992, in August,
1992 and on March 11, 1996. On May 11, 2000, the Board amended the Purchase Plan
to extend the term of the Purchase Plan and increased the number of shares of
the Company's Common Stock, subject to the Purchase Plan by 1,000,000. This most
recent amendment (the "Amendment") is being submitted to the shareholders for
their approval. The following description of the Purchase Plan contains, among
other information, summaries of certain provisions of the Purchase Plan, a copy
of which will be provided to any employee eligible to participate in the
Purchase Plan upon request. The information set forth in this document with
respect to the Purchase Plan is qualified in its entirety by reference to the
complete text of the Purchase Plan.
The purpose of the Purchase Plan is to provide a method whereby employees
of the Company and its subsidiary corporations will have an opportunity to
acquire a proprietary interest in the Company through the purchase of shares of
Common Stock. The Purchase Plan has been structured to qualify as an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code").
The Purchase Plan is not a qualified retirement plan under Section 401 of
the Code, nor is it subject to any provision of the Employee Retirement Income
Security Act of 1974, as amended.
ADMINISTRATION OF THE INCENTIVE PLAN
The Purchase Plan is administered by a committee appointed by the Board
of Directors (the "Board") consisting of three or more disinterested members of
the Board (the "Committee"). Members of the Committee are ineligible to purchase
stock under the Purchase Plan. The Board may, in its sole discretion, remove or
add members to the Committee from time to time and fill any vacancy, however
caused. Members of the Committee serve until the expiration or termination of
the Purchase Plan unless they resign or are removed by the Board before the
expiration or termination of the Purchase Plan.
The Committee has plenary authority in its discretion to interpret and
construe any and all provisions of the Purchase Plan, to adopt rules and
regulations for administering the Purchase Plan, to appoint custodians,
accountants and other advisors, and to make all other determinations deemed
necessary or advisable for administering the Purchase Plan. All determinations
and decisions of the Committee are made by a majority of its members, whether by
a vote in a meeting of the Committee or by the written consent of a majority of
the Committee. The Committee's determination on the foregoing matters shall be
conclusive.
DURATION OF THE PURCHASE PLAN
The Purchase Plan became effective as of March 30, 1992 and currently
expires August 31, 2000. If the Amendment is approved, the Purchase Plan will
remain in effect until August 31, 2004 unless terminated earlier by the Board in
accordance with the terms of the Purchase Plan.
23
SHARES SUBJECT TO THE PURCHASE PLAN
Upon approval of the Amendment, the maximum number of shares of Common
Stock that may be issued under the plan is 1,300,000 shares.
If the total number of shares for which options are exercised on the
termination date of any Offering exceeds the maximum number of shares under the
Purchase Plan, the Company shall make a pro-rata allocation of the shares
available in as nearly a uniform manner as shall be practicable and the balance
of payroll deductions credited to the account of each participant under the
Purchase Plan shall be returned to him/her as promptly as possible together with
interest accrued thereon. (See -- "Withdrawal from Purchase Plan" for
determination of the applicable rate of interest). For purposes of calculating
interest, the payroll deductions shall be allocated so that the earliest payroll
deductions shall apply to purchase of the stock and the most recent payroll
deductions shall be deemed to be the deductions that are to be returned.
In the event the outstanding shares of Common Stock of the Company
increase, decrease, change into, or are exchanged for a different number or kind
of security of the Company through reorganization, merger, recapitalization,
reclassification, stock split, reverse stock split or similar transaction
("Changes in Capital"), the number and/or kind of shares which may be offered in
the Offerings shall be proportionately adjusted. No adjustments will be made for
stock dividends. Any distribution of shares to shareholders aggregating less
than twenty percent of the outstanding shares of Common Stock shall be deemed to
be a stock dividend. Any distribution of shares to shareholders aggregating
twenty percent or more shall be deemed to be a stock split.
ELIGIBILITY
Any employee who completes 90 days employment is eligible to participate in
any Offerings under the Purchase Plan which commences on or after such 90 day
period and for so long thereafter as such employee remains continuously employed
by the Company. For purposes of participation in the Purchase Plan, a person on
leave of absence shall be deemed to be an employee for the first 90 days of such
leave of absence and such employee's employment shall be deemed to have
terminated at the close of business on the 90th day of such leave of absence.
Notwithstanding the above, no employee shall be granted an option under
the Purchase Plan:
(a) if immediately after the grant, such employee would own stock,
and/or hold outstanding options to purchase stock, possessing 5 percent or
more of the total combined voting power or value of all classes of stock of
the Company as determined under the rules of Section 424 of the Code; or
(b) which permits his/her rights to purchase stock under all employee
stock purchase plans of the Company to accrue at a rate which exceeds
$20,000 in fair market value of the stock (determined at the time such
option is granted) for each calendar year in which such option is
outstanding.
24
ELECTION TO PARTICIPATE IN THE PLAN
The Purchase Plan provides for annual offerings of the Company's Common
Stock (the "Annual Offering(s)") commencing on September 1 of each year covered
under the Purchase Plan and ending on August 31 of the following year. Each
Annual Offering, at the discretion of the Committee exercised prior to the
commencement thereof, may be divided into four three-month offerings commencing,
respectively on September 1, December 1, March 1 and June 1 and terminating on
November 30, February 28/29, May 31 and August 31 respectively (the" Quarterly
Offering(s)") (Annual Offerings and Quarterly Offerings are sometimes
collectively referred to as the "Offering(s)"). "Commencement Date" means the
commencement date for any Annual or Quarterly Offering as described above and
"Termination Date" means the termination date for any Annual or Quarterly
Offering as described above.
Eligible employees have the opportunity to elect to participate in the
Purchase Plan prior to every Offering. An eligible employee may become a
participant in the Purchase Plan by completing an authorization for payroll
deduction under the Purchase Plan on the form provided by the Company and filing
it with the office of the General Counsel of the Company on or before the date
set by the Committee (the "Election Date"). The Election Date shall always be
prior to the Commencement Date for each Offering.
GRANTING OF OPTIONS
On the Commencement Date of each Offering, each employee who has
elected to participate in the Offering (the "Participant") is deemed to have
been granted an option to purchase a maximum number of shares of the Company's
Common Stock (the "Option"). The maximum number of shares that can be purchased
under an Option shall be equal to an amount (rounded down to a whole number)
determined as follows:
The percentage rate selected by the Participant on his/her authorization
for payroll deduction form shall be multiplied by the Participant's base
pay during the period of the Offering and then the product of such
computation shall be divided by 85 percent of the market value of the
Company's Common Stock on the applicable Offering Commencement Date.
The market value of the stock shall be the average between the highest and
lowest sale prices per share of the Company's Common Stock on the New York Stock
Exchange ("NYSE") on the Offering Commencement Date or the nearest prior
business day on which trading occurred on the NYSE. A Participant's base pay
during the period of an Offering shall be determined by multiplying, in the case
of an Annual Offering, the Participant's normal weekly rate of pay (as in effect
on the last day prior to the Commencement Date) by 52 or the hourly rate by
2,080, or in the case of a Quarterly Offering, by 13 or 520 as the case may be.
"Base Pay" shall include base salary, adjusted compensation, incentive
compensation, overtime, bonuses and/or other regular payments, unless otherwise
determined by the Committee. Base Pay does not include any payments for shift
differential, reimbursement for expenses, deferred compensation in any form, or
other non-regular payments unless otherwise determined by the Committee. In the
case of a part-time hourly employee, the employee's Base Pay during the period
of an Offering shall be determined by multiplying the employee's hourly rate by
the number of regularly scheduled hours of work for the employee during such
Offering.
The exercise price of any Option granted during any given Offering shall be
the average between the highest and lowest sale prices per share of the
Company's Common Stock on the NYSE on the Offering Termination Date or the
nearest prior business day on which trading occurred on the NYSE. If the
Company's Common Stock is not admitted to trading on any of the aforesaid dates
for which closing prices of the Common Stock are to be determined, then
reference shall be made to the fair market value of the Common Stock on that
date, as determined on such basis as shall be established or specified for that
purpose by the Committee.
25
In the event of a Change in Capital (as defined above), appropriate and
proportionate adjustments may be made by the Committee in the number and/or kind
of shares which are subject to purchase under outstanding Options and in the
exercise price or prices applicable to such outstanding Options.
Upon the dissolution or liquidation of the Company, or upon reorganization,
merger or consolidation of the Company with one or more corporations as a result
of which the Company is not the surviving corporation, or upon a sale of
substantially all of the property or stock of the Company to another corporation
(the "Reorganization Transactions"), the holder of each Option then outstanding
under the Purchase Plan will thereafter be entitled to receive at the next
Offering Termination Date upon the exercise of such Option for each share as to
which such Option shall be exercised as nearly as reasonably may be determined,
the cash, securities and/or property which a holder of one share of the Common
Stock was entitled to receive upon and at the time of such Reorganization
Transaction. The Board shall take such steps in connection with any
Reorganization Transaction, as the Board shall deem necessary, to assure that
holders of Options under the Purchase Plan shall be entitled to receive, as
nearly as reasonably may be determined, the cash, securities and/ or property as
described above.
PAYMENT
Payment for shares issued under the Purchase Plan shall be made solely by
payroll deductions except in the case of a leave of absence and then only in
accordance with the terms of the Purchase Plan. All payroll deductions made for
a Participant shall be credited to the Participant's account under the Purchase
Plan.
At the time a Participant files an authorization for payroll deduction, the
Participant may elect to have a payroll deduction of any whole percentage amount
up to 15 percent of his/her Base Pay in effect at the Commencement Date of the
Offering made from his/her pay on each payday during an Offering. The rate of
payroll deduction under the Purchase Plan can in no event exceed 15 percent.
Payroll deductions shall commence on the Commencement Date for the Offering for
which an authorization for payroll deduction has been received. Payroll
deductions for a Participant shall automatically continue for all subsequent
Offerings unless the Participant withdraws from an Offering or delivers written
notice of his/her election not to participate in the subsequent Offering to the
Company. Such notice must be delivered to the Office of General Counsel of the
Company prior to the Election Date for the subsequent Offering. Payroll
deductions will be terminated for a Participant during an Offering if the
Participant elects to withdraw from the Offering in accordance with the terms of
the Purchase Plan. See "-- Withdrawal from Purchase Plan." A Participant's
decision not to participate in any given Offering will not prevent him/her from
participating in any subsequent Offering under the Purchase Plan. Once a
Participant has withdrawn from an Offering or elected not to participate in an
Offering, he/she must file a new authorization for payroll deduction to
participate in any subsequent Offering. A Participant may change the rate of
payroll deduction for any subsequent Offering by filing a new authorization for
payroll deduction prior to the Election Date for the subsequent Offering. A
Participant may discontinue his/her participation in an Offering as provided
below but may not make any other changes during an Offering, including without
limitation, altering the amount of his/her payroll deductions during any
Offering.
If a Participant goes on a leave of absence, such Participant shall have
the right to elect: (a) to withdraw the balance in his/her account; (b) to
discontinue contributions to the Plan but remain a participant in the Purchase
Plan; or (c) to remain a participant in the Plan during such leave of absence,
authorizing deductions to be made from payments by the Company to such
Participant during his/her leave of absence and undertaking to make cash
26
payments to the Purchase Plan at the end of each payroll period to the extent
that amounts payable by the Company to such Participant are insufficient to meet
his/her authorized payroll deductions. Notwithstanding the above, a
Participant's interest in the Purchase Plan and any Offering shall be terminated
if such leave of absence extends beyond certain time periods. See "--
Termination of Employment."
All payroll deductions received or held by the Company under the Purchase
Plan may be used by the Company for any corporate purpose and the Company shall
not be obligated to segregate such payroll deductions.
EXERCISE OF OPTIONS
Options granted to Participants for an Offering shall be deemed to have
been exercised automatically on the Offering Termination Date unless the
Participant has withdrawn from the Offering. Options will automatically be
deemed to be exercised for the purchase of the number of shares of Common Stock
which the accumulated payroll deductions in the Participant's account will
purchase at the applicable exercise price. Notwithstanding the above, the number
of shares purchased shall in no event exceed the maximum number of shares for
which the Option was granted on the Offering Commencement Date. Any excess funds
in a Participant's account after the purchase of the maximum number of shares
will be promptly returned to the Participant without interest.
The purchase of shares of Common Stock upon the exercise of Options under
the Purchase Plan shall be conducted solely through Merrill, Lynch, Pierce,
Fenner & Smith ("Merrill Lynch"). The relationship between a Participant and
Merrill Lynch shall be governed by an agreement to be entered into by the
Participant with Merrill Lynch at the time the Participant elects to participate
in the Purchase Plan. The Common Stock purchased under the Purchase Plan shall
be registered in the name of a nominee named by Merrill Lynch and credited to
the Participant's account at Merrill Lynch. Stock certificates representing the
shares of Common Stock purchased under the Purchase Plan shall be delivered to
Merrill Lynch as soon as practicable after the Offering Termination Date.
WITHDRAWAL FROM PURCHASE PLAN
A Participant may withdraw from an Offering at anytime prior to the
Offering Termination Date by giving written notice of such election to the
General Counsel of the Company (the "Withdrawing Employee"). All of the
Withdrawing Employee's payroll deductions credited to his/her account will be
paid to the Withdrawing Employee together with simple interest accrued thereon
from the date of withholding to the date of return promptly after receipt of
his/her notice of withdrawal . Upon receipt of a Withdrawing Employee's election
to withdraw, the Company shall make no further payroll deductions from the
Withdrawing Employee's pay during the Offering. Withdrawal from any Offering
will not have any effect upon the Withdrawing Employee's eligibility to
participate in any subsequent Offering under the Purchase Plan or in any similar
plan which may hereafter be adopted by the Company.
TERMINATION OF EMPLOYMENT
Upon the termination of a Participant's employment with the Company for any
reason including retirement (but excluding death while in the employ of the
Company or a continuation of a leave of absence for a period beyond ninety (90)
days), the Participant's participation in the Purchase Plan and in any current
Offering shall be terminated. All the payroll deductions credited to the
terminated Participant's account shall be returned to him/her together with
interest accrued thereon from the date of withholding to the date of return.
Upon the termination of a Participant's employment because of death, the
Participant's beneficiary (as determined under the Purchase Plan) shall have the
right to elect either to: (i) withdraw all of the payroll deductions credited to
such Participant's account under the Purchase Plan together with interest
accrued thereon from the date of withholding to the date of return; or (ii) to
exercise such Participant's Option on the Offering Termination Date following
the Participant's death for the purchase of the number of full shares of stock
which the accumulated payroll deduction in such Participant's account at the
date of the Participant's death will purchase at the applicable exercise price
on the Offering Termination Date. In the event the beneficiary elects the latter
option, any excess in the account will be returned to said beneficiary without
interest. The beneficiary must make such election by written notice to the
General Counsel of the Company prior to the earlier of: (i) the Offering
Termination Date; or (ii) the expiration of a period of sixty (60) days
commencing with the date of the death of the Participant. If the beneficiary
fails to make such election within the prescribed time period, then the
beneficiary shall be deemed to have selected to exercise the Participant's
Option as described above.
27
If a Participant who is on leave of absence does not return to regular full
time or part time employment with the Company at the earlier of (i) the
termination of such leave of absence or (ii) three months from the 90th day of
such leave of absence, then such Participant's participation in the Purchase
Plan and any Offering shall terminate on whichever of such dates occur first.
All payroll deductions credited to such Participant's account shall be returned
to him/her together with interest accrued thereon from the date of withholding
to the date of return. In addition, a Participant who has been on a leave of
absence for more than 90 days shall not be entitled to participate in any
Offering commencing after the 90th day of such leave of absence.
Interest that is accrued on amounts to be returned to Participants as set
forth above shall accrue at the regular passbook savings account rates per annum
in effect at Zions First National Bank, N.A., Salt Lake City Utah. If such rate
is not published or otherwise available for such purpose, then the applicable
rate shall be the regular passbook savings account rates per annum in effect
during such period at another major commercial bank in Salt Lake City, selected
by the Committee.
TRANSFERABILITY
Neither payroll deductions credited to a Participant's account nor any
rights with regard to the exercise of an Option or to receive stock under the
Purchase Plan may be assigned, transferred, pledged, or otherwise disposed of in
any way by the Participant other than by will or the laws of descent and
distribution. During a Participant's lifetime, Options may only be exercised by
the Participant who holds such Options. Any such attempted assignment, transfer,
pledge or other disposition shall be without effect, except that the Company may
treat such act, in its sole discretion, as an election to withdraw from the
Purchase Plan.
RESTRICTIONS ON ISSUANCE AND TRANSFER OF COMMON STOCK ISSUABLE UNDER THE
PURCHASE PLAN
Conditions To Issuance of Common Stock
--------------------------------------
The Company shall not be required to issue any Common Stock under the
Purchase Plan unless and until the Committee reasonably determines that such
issuance will be in compliance with the Securities Act of 1933, as amended and
other governing securities laws. The Committee may impose and enforce any
condition required by applicable securities law in connection with the issuance
or transfer of any Common Stock issued or issuable under the Purchase Plan.
Prohibitions on Trading While In Possession of Material
Non-Public Information
--------------------------------------------------------------
Under governing securities laws, no shares of Common Stock acquired under
the Purchase Plan Plan may be offered or sold while the holder thereof is in
possession of material nonpublic information. Violation of such prohibition may
result in civil or criminal sanctions.
Limitations on Transfer By Certain Insiders Subject to Section 16
of the Exchange Act
--------------------------------------------------------------------
The securities laws of the United States subject officers, directors and
certain beneficial owners of 10 percent or more of the Common Stock
(collectively, "Insiders") to the reporting and liability provisions of Section
16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
28
SECTION 16(B) LIABILITY PROVISIONS. Section 16(b) of the Exchange Act
generally provides that any profit realized by an Insider from any purchase and
sale, or any sale and purchase, of any equity security of the Company within six
months is recoverable by the Company. Transactions by Insiders of the Company in
Common Stock are subject to such short-swing liability provisions under Section
16(b), unless an exemption is available thereunder. Rule 16b-3 provides that a
transaction pursuant to an employee stock purchase plan that satisfies certain
requirements of Section 423 of the Code is exempt from the short-swing
restrictions of Section 16(b). The Purchase Plan satisfies such requirements of
Section 423 of the Code and, accordingly, the issuance of Common Stock Pursuant
to Purchase Plan will be exempt (i.e., not counted as a purchase transaction)
for purposes of the short-swing liability provisions of Section 16(b).
Although receipt by an Insider of Common Stock under the Purchase Plan may
be exempt from short-swing liability, as discussed above, the sale of such
Common Stock by an Insider of the Company will generally not be exempt.
Therefore, unless one of the limited number of exceptions applies, the sale to
any party other than the Company of Common Stock acquired under the Purchase
Plan may be matchable against any non-exempt purchase transaction occurring
within six months before or after such sale. Insiders of the Company are advised
to take appropriate measures to assure compliance with the provisions of Section
16.
SECTION 16(A) REPORTING REQUIREMENTS AND SECTION 16(C) DERIVATIVE TRADING
RESTRICTIONS. The Rules promulgated under the Exchange Act also impose various
reporting requirements pursuant to Section 16(a) for Insiders of the Company
with respect to transactions under the Purchase Plan. Violations of such
requirements could result in penalties, fines and disclosure of such violations
in the Company's Proxy Statement and Annual Report on Form 10-K. Section 16(c)
of the Exchange Act continues to prohibit generally sales of an equity security
by an Insider if he does not own the security or, if he owns the security, he
does not deliver it within 20 days after sale.
The preceding summary of certain provisions of the securities laws of the
United States is based upon the existing rules and regulations, which are
subject to further change and interpretation, and does not purport to be a
complete discussion of such securities laws. Participants who are Insiders of
the Company are encouraged to consult with legal counsel with respect to the
securities laws, rules and regulations applicable to any contemplated
transaction under the Purchase Plan.
Restrictions on Transfer of Shares Held By Affiliates
-----------------------------------------------------
Even if a Registration Statement on Form S-8 is in effect with respect to
shares of Common Stock issued under the Purchase Plan, shares of Common Stock
issued to "affiliates" of the Company (a term which includes Insiders and other
persons who are deemed to control the Company) pursuant to the Purchase Plan may
not be resold unless the re-sale transaction is registered under the Securities
Act or such shares are re-sold pursuant to an applicable exemption, including
the exemption provided by Rule 144 under the Securities Act ("Rule 144").
Pursuant to Rule 144, an affiliate of the Company is entitled to sell, within
any three-month period, a number of Common Shares that does not exceed the
greater of one percent of the outstanding shares of such class or the average
weekly trading volume of such shares during the four calendar weeks preceding
such sale. Although Rule 144 imposes certain manner of sale and other
restrictions, affiliates of the Company are not subject to the one-year holding
period under the rule with respect to shares of Common Stock acquired in
connection with the Purchase Plan so long as a Registration Statement on Form
S-8 or other registration statement was in effect for such shares at the time
the shares were acquired by the affiliate from the Company.
Transferability of Shares Held by Non-Insiders and Non-Affiliates
------------------------------------------------------------------
Subject to the limitations set forth in the preceding paragraphs,
limitations imposed by applicable state securities laws, and other limitations
which may apply to a particular Participant, shares of Common Stock issued to
Participants that are not Insiders or affiliates of the Company pursuant to the
Purchase Plan are "free trading" shares if a Registration Statement on Form S-8
or other registration statement is in effect for such shares at the time such
shares are acquired. The Company is under no obligation to maintain the
effectiveness of the Registration Statement on Form S-8 of which this Disclosure
Document is a part, and accordingly, Participants should verify that such
Registration Statement is effective prior to electing to participate in the
Purchase Plan.
29
AMENDMENTS TO THE PURCHASE PLAN
The Board may, at any time and for any reason, amend or terminate the
Purchase Plan. The Board, however, may not, without shareholder approval, amend
the Purchase Plan to (i) increase the maximum number of shares which may be
issued under any Offering (except in the case of Change in Capital); or (ii)
amend the requirements as to the class of employees eligible to purchase stock
under the Purchase Plan or permit the members of the Committee to purchase stock
under the Purchase Plan. No termination, modification, or amendment of the
Purchase Plan may, without the consent of an employee then having an Option to
purchase stock, adversely affect the rights of such employee under such Option.
GENERAL PROVISIONS
An employee shall have no interest in any shares of Common Stock
covered by an Option under the Purchase Plan until such Option has been
exercised. Neither the Purchase Plan nor any grant of Options thereunder shall
be deemed to give any individual the right to remain employed by the Company,
nor shall the Purchase Plan be deemed to interfere in any way with the Company's
right to terminate, or otherwise modify, an employee's employment at any time.
Employees shall not have any rights or interest under the Purchase Plan in any
Option or shares of the Company's Common Stock prior to the grant of an Option
to such employee.
A Participant may designate a beneficiary under the Purchase Plan by filing
a written designation of a beneficiary who is to receive any stock and/or cash
upon the death of such Participant. Such designation may be changed by the
Participant at any time by written notice to the General Counsel of the Company.
Upon the death of a Participant and upon receipt by the Company of proof of
identity of the beneficiary, the Company shall deliver any stock and/or cash
entitled to be received by the deceased Participant to a beneficiary validly
designated by the Participant under the Purchase Plan. In the event of the death
of a Participant and the absence of a beneficiary validly designated under the
Purchase Plan who is living at the time of such Participant's death, the Company
shall deliver such stock and/or cash to the executor or administrator of the
estate of the Participant, or if no such executor or administrator has been
appointed (to the knowledge of the Company), the Company , in its discretion,
may deliver such stock and/or cash to the spouse or to any one or more
dependents of the deceased Participant as the Company may designate.
Notwithstanding the above, no beneficiary shall , prior to the death of the
Participant by whom he has been designated, acquire any interest in the stock or
cash credited to such Participant under the Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following tax discussion is a brief summary of current federal income
tax law applicable to the Purchase Plan. The discussion is intended solely for
general information, and the Company does not make specific representations to
any Participant or recipient of this information. A taxpayer's particular
situation may be such that some variation of the basic rules is applicable to
him or her. In addition, the federal income tax laws and regulations have been
revised frequently and may be changed again at any time in the future, and, in
some circumstances, with retroactive effect. Foreign, state and local tax
treatment may vary from the federal income tax treatment of participating in the
Purchase Plan, and is not discussed in this summary. Therefore, each Participant
or recipient is urged to consult a tax adviser before exercising any purchasing
rights or before disposing of any shares of Common Stock acquired under the
Purchase Plan both with respect to federal income tax consequences as well as
any foreign, state or local tax consequences.
30
The Purchase Plan is intended to qualify as an "employee stock purchase
plan" within the meaning of Section 423 of the Code, and the income and
employment tax consequences of participating in the Purchase Plan will depend
upon whether the Purchase Plan so qualifies. The Purchase Plan will only meet
the qualification requirements of Code Section 423 if the shareholders of the
Company approve the Amendment within twelve months after the date of its
adoption by the Company. The Company intends to submit the Amendment for
shareholder approval at the annual meeting of the shareholders later this year.
Assuming a quorum is present at that meeting and that a majority of the shares
present are voted in favor of the Amendment, the federal income tax consequences
of participating in the Purchase Plan will be as follows:
FEDERAL INCOME TAX CONSEQUENCES IF AMENDMENT IS APPROVED WITHIN TWELVE MONTHS
1. ELECTION TO PARTICIPATE AND INITIAL GRANT OF OPTIONS. Participants who
have filed with the Company the proper enrollment materials will be deemed to
have been granted rights to purchase Common Stock exercisable on the given
purchase date. A recipient of such purchase rights under the Purchase Plan
incurs no income tax liability, and the Company obtains no deduction, upon the
grant of the purchase rights.
2. PAYROLL DEDUCTIONS. Payroll deductions taken from Participant's Base Pay
and accumulated to pay the exercise price for shares purchased under the
Purchase Plan, are made on an after-tax basis. Participants will not be entitled
to deduct or exclude from income or their taxable social security wages any part
of the payroll deductions withheld under the plan.
3. EXERCISE OF PURCHASE RIGHTS. An employee will not be subject to federal
income tax upon the exercise of purchase rights under the Purchase Plan, nor
will the Company be entitled to a tax deduction by reason of such exercise,
provided that the employee is still employed by the Company on the purchase date
(or terminated employment no longer than three months before the purchase date).
The employee will have a cost basis in the shares of Common Stock acquired upon
such exercise equal to the exercise price paid. While the issue is not fully
settled, the Company believes that no social security taxes will apply to the
discount on shares of Common Stock purchased under the Purchase Plan.
4. DISPOSITION OF SHARES ACQUIRED UNDER PLAN. The tax consequences upon the
disposition of shares acquired under the Purchase Plan will depend upon whether
the employee has held the shares for the required holding period. The required
holding period runs through the later of one year after the purchase date or two
years after the date the purchase right was granted.
Except as noted below, if an employee disposes of shares of Common Stock
acquired under the Purchase Plan before expiration of the above holding period,
such as by gift or ordinary sale of such shares, the employee must recognize as
ordinary compensation income in the year of disposition the difference between
the shares' fair market value as of the date of exercise and the exercise price
paid, and the Company will be entitled to a corresponding compensation expense
deduction. This amount must be recognized as income by the employee even if the
fair market value of the shares as of the date of exercise exceeds the fair
market value of the shares as of the date of disposition or the amount of the
sales proceeds received. The employee's tax basis in the shares, however, will
be increased by the amount of ordinary income recognized, and the employee will
recognize a capital gain or loss on the sale of the shares equal to the
difference between (i) the sales price of the shares and (ii) the sum of the
exercise price paid for the shares and the ordinary income recognized as a
result of the disposition of the shares prior to the expiration of the holding
period.
The rules requiring recognition of ordinary income upon disposition within
the one- and two-year holding periods do not apply to disposition of shares upon
death, as part of a tax-free exchange of shares in a corporate reorganization,
or into joint tenancy with right of survivorship with one other person, or the
mere pledge or hypothecation of shares.
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The disposition of shares of Common Stock after expiration of the required
holding period will result in the recognition of gain or loss in the amount of
the difference between the amount realized on the sale of the shares and the
exercise price for such shares. Any loss on such a sale will be a long-term
capital loss. Any gain on such sale will be included in gross income for the
taxable year of the disposition as ordinary compensation income up to the lesser
of (i) the amount by which the price paid at the time of exercising the purchase
rights was exceeded by the fair market value of the shares at the time the
purchase right was granted or (ii) the amount by which the price paid under the
Purchase Plan at the time of exercising the purchase right was exceeded by the
fair market value of the shares at the time of such disposition. Additional
gain, if any, will be taxed as long-term capital gain. Disposition of the shares
of Common Stock on account of death (at any time) will trigger a like amount of
ordinary income recognition
ADVERSE FEDERAL INCOME TAX TREATMENT IF THE AMENDMENT IS NOT APPROVED WITHIN
TWELVE MONTHS
The federal income tax consequences of the Purchase Plan will be
significantly less favorable to Participants than outlined above if the
shareholders fail to approve the Amendment within twelve months after its date
of adoption. If shareholder approval is not timely received, the Purchase Plan
will not qualify as an employee stock purchase plan under Code Section 423 and
each Participant will be deemed to have taxable compensation income, subject to
taxation at ordinary rates as well as social security taxation, upon exercising
his or her purchase rights. The taxable income realized upon exercise would
equal the amount by which the fair market value of the shares of Common Stock
received on the purchase date exceeds the exercise price paid for the shares.
This treatment would apply regardless of whether the purchase date occurs before
or after expiration of the twelve-month shareholder approval deadline. In
effect, each Participant would be taxable on the full discount he or she
receives at the time of purchase. The Company would be required to withhold
taxes with respect to the income deemed earned and would have to report that
income to the Internal Revenue Service on each Participant's Form W-2 for the
year of purchase.
Each Participant would then take a basis in his or her shares of Common
Stock equal to their value on the purchase date. Any later sale of the shares at
a price above that basis amount would result in long-term capital gain if the
shares are held more than one year from the purchase date; short term capital
gain would result if the shares are held one year or less. Sale of the shares of
Common Stock at a price below the applicable basis amount would produce capital
loss, again long term or short term depending upon whether or not held for more
than one year.
The Company can provide no assurance that the shareholders will approve the
Amendment within the twelve-month period required for continued qualification of
the Purchase Plan under Code Section 423. Each prospective Participant must
evaluate the tax risk associated with the potential uncertainty regarding future
shareholder approval.
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SELECTION OF AUDITOR
The Audit Committee of the Board of Directors has recommended, and the
Board of Directors has selected, the firm of Arthur Andersen LLP, independent
certified public accountants, to audit the financial statements of the Company
for the fiscal year ending August 31, 2001, subject to ratification by the
shareholders of the Company. The Board of Directors anticipates that one or more
representatives of Arthur Andersen 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.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHHOLDERS VOTE
IN FAVOR OF THE PROPOSAL TO RATIFY THE SELECTION OF ARTHUR ANDERSEN, LLP AS
INDEPENDENT CERTIFIED PUBLIC ACCOUNTS FOR THE COMPANY FOR THE FISCAL YEAR ENDING
AUGUST 31, 2001.
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 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 2002 must be received by Val John
Christensen, Executive Vice President, Secretary and General Counsel of the
Company, at the Company's executive offices (2200 West Parkway Boulevard, Salt
Lake City, Utah 84119-2331) no later than August 15, 2001.
ADDITIONAL INFORMATION
The Company 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 the Company's 2000 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. Richard Putnam.
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