12.SHARE-BASED COMPENSATION PLANS

Overview

We utilize various share-based compensation plans as integral components of our overall compensation and associate retention strategy. Our shareholders have approved various stock incentive plans that permit us to grant performance awards, unvested share awards, stock options, and employee stock purchase plan (ESPP) shares. In addition, our Board of Directors and shareholders may, from time to time, approve fully vested share awards. Our share-based compensation plans are overseen and approved by the Organization and Compensation Committee of the Board of Directors (the Compensation Committee). At August 31, 2012, our stock option incentive plan, which permits the granting of performance awards, unvested stock awards to non-employee members of the Board of Directors and employees, and incentive stock options had approximately 770,000 shares available for granting. Our 2004 ESPP had approximately 615,000 shares remaining for purchase by plan participants as of August 31, 2012. The total cost of our share-based compensation plans for the fiscal years ended August 31, 2012, 2011, and 2010 were as follows (in thousands):



YEAR ENDED
AUGUST 31,		2012		2011		2010
Performance awards	$	3,188	$	827	$	327
Unvested share awards		340		411		458
Stock options		168		820		261
Compensation cost of the ESPP		77		61		53
Fully vested share awards		62		669		-
	$	3,835	$	2,788	$	1,099

The compensation cost of our share-based compensation plans was included in selling, general, and administrative expenses in the accompanying consolidated statements of operations, and no share-based compensation was capitalized during fiscal years 2012, 2011, or 2010. We issue shares of common stock for our share-based compensation plans from shares held in treasury. The following is a description of our share-based compensation plans.

Performance Awards

Common Stock Price Performance Award – On July 15, 2011, the Compensation Committee approved a share-based compensation plan that will allow certain members of our management team to receive shares of the Company’s common stock if the price of our common stock averages specified levels over a five-day period. If the price of our common stock achieves the specified levels within three years of the grant date, 100 percent of the awarded shares will vest. If the price of our common stock reaches the specified levels between three and five years from the grant date, only 50 percent of the performance shares will vest. No shares will vest to participants if the specified price targets are met after five years from the grant date. We believe that this award program will increase shareholder value as shares will only be awarded to participants if the Company’s share price significantly increases over a relatively short period of time.

This award was designed to grant approximately one-half of the total award shares in fiscal 2011, approximately one-fourth of the award shares in fiscal 2012, and the remaining approximate one-fourth are expected to be granted in fiscal 2013. We granted performance awards for 177,616 shares in fiscal 2012 and 294,158 shares in fiscal 2011 under this award.

Since this performance award has market-based vesting conditions, the fair value and expected term of the grants under this award were determined using Monte Carlo simulation valuation models. The following assumptions were made in estimating the fair values of the grants made under this market-based performance award:


Model Input	Fiscal 2012 Grant	Fiscal 2011 Grant
Grant date share price per share	$ 9.55	$ 11.34
Volatility	54.6%	49.83%
Dividend yield	0.0%	0.0%
Risk-free rate	0.62%	1.48%
Grant date	July 19, 2012	July 15, 2011

The fair value of the fiscal 2012 performance award was determined to be $1.2 million, which is being amortized over 1.4 years. The fair value of the fiscal 2011 award was $2.6 million, which was amortized over 0.9 years (fully amortized in fiscal 2012). At August 31, 2012, there was $1.0 million of unrecognized compensation cost associated with the fiscal 2012 grant.

Fiscal 2012 Executive Award - During the first quarter of fiscal 2012, the Compensation Committee granted a new performance based equity award for the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and the Chief People Officer (CPO). A total of 106,101 shares may be issued to the participants based on six individual vesting conditions that are divided into two performance measures, Adjusted EBITDA and Productivity Practice sales. Three tranches of 24,757 shares will immediately vest to the participants when consolidated trailing four-quarter Adjusted EBITDA totals $26.0 million, $33.0 million, and $40.0 million. Another three tranches of 10,610 shares will immediately vest when trailing four-quarter Productivity Practice sales total $20.5 million, $23.5 million, and $26.5 million. These performance awards have a maximum life of six years. Compensation expense is recognized as we determine that it is probable that the shares will vest. Adjustments to compensation expense to reflect the number of shares expected to be awarded will be made on a cumulative basis at the date of the adjustment. As of August 31, 2012, the Company met the first Adjusted EBITDA goal and the first tranche of 24,757 shares vested to the participants. The first tranche of the Productivity Practice sales component of the award is not expected to vest until mid-fiscal 2013.

Fiscal 2011 Executive Award – During the fourth quarter of fiscal 2011, the Compensation Committee approved a share-based award for three members of our executive team for strong financial performance during the fiscal year. The target award totaled 72,134 shares of which 24,045 shares were approved and granted as performance awards (the remaining shares were issued as fully vested awards—refer to the discussion below). For these shares to vest to the participants, the Company was required to achieve a certain level of earnings, which occurred at August 31, 2011, and the participants were required to complete a one-year service condition that started once the earnings condition was met. The compensation cost of this award totaled $0.3 million, which was recognized over 1.2 years. During the fourth quarter of fiscal 2012, the Compensation Committee allowed the participants in this award to receive cash rather than the shares which would have been awarded at the completion of the service period. This transaction was treated as a repurchase of the original equity award and participants received a cash award equal to the number shares that were to be issued multiplied by our closing common stock price on August 31, 2012, which was less than the share price on the grant date.

Fiscal 2010 Long-Term Incentive Plan Award – Our shareholders have approved a performance based long-term incentive plan (the LTIP) that provides for grants of share-based performance awards to certain managerial personnel and executive management as directed by the Compensation Committee. The number of common shares that eventually vest and are issued to LTIP participants is variable and is based entirely upon the achievement of specified financial performance objectives during a defined performance period. Due to the variable number of common shares that may be issued under the LTIP, we reevaluate our LTIP grants on a quarterly basis and adjust the number of shares expected to be issued based upon actual and estimated financial results of the Company compared to the performance goals set for the award. Adjustments to the number of shares awarded, and to the corresponding compensation expense, are made on a cumulative basis at the adjustment date based upon the estimated probable number of common shares to be issued.

During fiscal 2010, the Compensation Committee approved the fiscal 2010 LTIP award, which includes the following key terms:

·	Adjusted Target Number of Shares Expected to Vest at August 31, 2012 – 182,385 shares

·	Vesting Dates – August 31, 2012, February 28, 2013, and August 31, 2013

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

The fiscal 2010 LTIP has a four-year performance period, but has three vesting dates if certain financial measures are achieved during the performance period. Therefore, we record compensation expense based on the estimated number of shares expected to be issued at each of the vesting dates. Based on financial performance for the three-year period ending August 31, 2012, it was determined that plan participants were entitled to receive 94.7% of the target shares, or 172,737 shares, at the first vesting date. Based on projected financial results through the second and third vesting dates, we currently expect to award approximately 40,000 additional shares over the remainder of the fiscal 2010 LTIP award. The cumulative adjustment to the fiscal 2010 LTIP award at August 31, 2012 was immaterial to our financial statements.

Stock Options

We have an incentive stock option plan whereby options to purchase shares of our common stock may be issued to key employees at an exercise price not less than the fair market value of the Company’s common stock on the date of grant. The term, not to exceed ten years, and exercise period of each incentive stock option awarded under the plan are determined by the Compensation Committee.

Information related to our stock option activity during the fiscal year ended August 31, 2012 is presented below:



				Weighted
			Weighted	Average
			Avg. Exercise	Remaining		Aggregate
	Number of		Price Per	Contractual		Intrinsic Value
	Stock Options		Share	Life (Years)		(thousands)
Outstanding at August 31, 2011	675,000	$	11.25
Granted	-		-
Exercised	-		-
Forfeited	-		-

Outstanding at August 31, 2012	675,000	$	11.25	7.8	$	287

Options vested and exercisable at
August 31, 2012	-	$	-	-	$	-

Our stock options awarded in fiscal 2011 and fiscal 2010 each have a contractual life of 10 years and are divided into four equal tranches with exercise prices of $9.00 per share, $10.00 per share, $12.00 per share, and $14.00 per share. The options vest upon resolution of the management common stock loan program, subject to Board of Director approval of the resolution, which was determined to be a market vesting condition based upon our common stock price. Accordingly, the fair value of these stock options was determined using a Monte Carlo simulation with an embedded Black-Scholes valuation model. The following assumptions were used to estimate the stated fair value of the stock options awarded during the fiscal years ended August 31, 2011 and 2010 (fair value of the options is stated in thousands):


Model Input	Fiscal 2011 Stock Options	Fiscal 2010 Stock Options
Grant date share price per share	$ 8.43	$ 5.28
Volatility	59.02%	51.47%
Dividend yield	0.0%	0.0%
Risk-free rate	0.7%	1.57%

Fair value of award	$ 756	$ 493
Estimated time to vest (years)	0.9	1.8

At August 31, 2012, there was no remaining unrecognized compensation expense related to our stock options. The following additional information applies to our stock options outstanding at August 31, 2012:



		Weighted
	Number	Average		Options
	Outstanding	Remaining	Weighted	Exercisable at	Weighted
	at August 31,	Contractual	Average	August 31,	Average
Exercise Prices	2012	Life (Years)	Exercise Price	2012	Exercise Price
$9.00	168,750	7.8	$9.00	-	$ -
$10.00	168,750	7.8	$10.00	-	-
$12.00	168,750	7.8	$12.00	-	-
$14.00	168,750	7.8	$14.00	-	-
	675,000			-

Stock options exercised during fiscal 2011 were settled using the net share method by issuing 4,061 shares of our common stock and we therefore did not receive any proceeds from this transaction. No stock options were exercised during fiscal 2012 or fiscal 2010. The intrinsic value of stock options exercised was $36,750 for the fiscal year ended August 31, 2011. No stock options vested during the fiscal years ended August 31, 2012, 2011, or 2010.

Unvested Stock Awards

The fair value of our unvested stock awards is calculated by multiplying the number of shares awarded by the closing market price of our common stock on the date of the grant. The corresponding compensation cost of unvested stock awards is amortized to selling, general, and administrative expense on a straight-line basis over the vesting period of the award. The following is a description of our unvested stock awards granted to non-employee members of our Board of Directors.

The annual Board of Director unvested stock award, which is administered under the terms of the Franklin Covey Co. Second Amended and Restated 1992 Stock Incentive Plan, is designed to provide our non-employee directors, who are not eligible to participate in our employee stock incentive plan, an opportunity to obtain an interest in the Company through the acquisition of shares of our common stock. Each eligible director is entitled to receive a whole-share grant equal to $50,000 with a one-year vesting period, which is generally granted in January (following the Annual Shareholders’ Meeting) of each year. Shares granted under the terms of this annual award are ineligible to be voted or participate in any common stock dividends until they are vested.

Under the terms of this award, we issued 37,975 shares, 37,960 shares, and 61,064 shares of our common stock to eligible members of the Board of Directors during the fiscal years ended August 31, 2012, 2011, and 2010. The fair value of the shares awarded to the directors was approximately $0.3 million for each fiscal year as calculated on the grant date of the award. The corresponding compensation cost is being recognized over the vesting period of the awards, which is one year. The cost of the common stock issued from treasury for these awards was $0.5 million, $0.6 million, and $0.9 million in fiscal years 2012, 2011, and 2010.

The following information applies to our unvested stock awards for the fiscal year ended August 31, 2012:



			Weighted-
			Average Grant-
			Date Fair
	Number of		Value Per
	Shares		Share
Unvested stock awards at
August 31, 2011	37,960	$	8.43
Granted	37,975		9.39
Forfeited	-		-
Vested	(37,960)		8.43
Unvested stock awards at
August 31, 2012	37,975	$	9.39

A fiscal 2011 award for 24,045 shares that was previously included in the unvested share award table was subsequently determined to be a performance award. Therefore, discussion of these shares is included in the performance awards section above. There was no impact on the compensation expense recognized for this award. At August 31, 2012, there was $0.1 million of unrecognized compensation cost related to unvested stock awards, which is expected to be recognized over the weighted-average vesting period of approximately three months. The total recognized tax benefit from unvested stock awards totaled $0.1 million, $0.1 million, and $0.2 million for the fiscal years ended August 31, 2012, 2011, and 2010, respectively. The intrinsic value of our unvested stock awards at August 31, 2012 was $0.4 million.

Fully Vested Stock Awards

During fiscal 2011, the Compensation Committee approved two fully vested share awards. The fair value of these fully vested share awards is calculated by multiplying the number of shares awarded by the closing price of the Company’s common share price on the date of grant.

Executive Leadership Award – During fiscal 2011, the Compensation Committee approved a share-based award for three members of our executive team for strong financial performance during the fiscal year. The target award totaled 72,134 shares of which 48,049 shares were approved and granted as fully vested shares (the remaining shares were issued as unvested awards—refer to the discussion above). The resulting share-based compensation expense of $0.5 million was recorded on the date of grant.

Client Partner and Consultant Award – During fiscal 2011 we implemented a new fully vested share-based award program that is designed to reward client partners and consultants for exceptional performance. The program grants 2,000 shares of common stock to each client partner or consultant who has sold over $20.0 million in cumulative sales or delivered over 1,500 hours of consulting during their career. For the year ended August 31, 2012, three individuals qualified for the award and 6,000 shares of our common stock were awarded to these individuals. In fiscal 2011, eight individuals qualified for the award and 16,000 shares in total were subsequently issued to these individuals. Accordingly, we expensed $0.1 million of share-based compensation cost for these awards during the fiscal years ended August 31, 2012 and August 31, 2011. We anticipate that only a limited number of client partners or consultants may qualify for this award in future years. Due to the immateriality of expected awards in future periods, we did not record an obligation for future awards at August 31, 2012 or August 31, 2011.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (ESPP) that offers qualified employees the opportunity to purchase shares of our common stock at a price equal to 85 percent of the average fair market value of our common stock on the last trading day of each quarter. A total of 55,423 shares, 49,962 shares, and 56,475 shares were issued to ESPP participants during the fiscal years ended August 31, 2012, 2011, and 2010, which had a corresponding cost basis of $0.8 million, $0.7 million, and $0.8 million, respectively. The Company received cash proceeds from the ESPP participants totaling $0.4 million in fiscal 2012 and $0.3 million in each of the fiscal years 2011 and 2010.