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. .. . . . .. . . ... . . . .. . . . .. .. . .. . . . . . . # # # # .. .. . . .. . . # . A N N UA L R E P O R T 2 0 0 6 . # . .. OUR MISSION We enable greatness in people . and organizations e ver ywhere. . . . . FranklinCovey has impacted millions of lives around the world. We have direct and licensee offices and retail stores worldwide. ARGENTINA FINLAND JAPAN POLAND SRI LANKA AUSTRALIA FRANCE KENYA PORTUGAL SWEDEN BELGIUM GERMANY KSA PUERTO RICO TAIWAN BERMUDA GREECE LEBANON ROMANIA THAILAND BRAZIL HONG KONG MALAYSIA RUSSIA TURKEY CANADA HUNGARY MEXICO SERBIA UAE CHINA ICELAND NETHERLANDS SINGAPORE UKRAINE COLOMBIA INDIA NIGERIA SLOVAK REPUBLIC UNITED KINGDOM CZECH REPUBLIC INDONESIA NORWAY SOUTH AFRICA UNITED STATES DENMARK ISRAEL PANAMA SOUTH KOREA VIETNAM EGYPT ITALY PHILIPPINES SPAIN WEST INDIES ESTONIA Executive Team Board of Directors Shareholder Information Robert A. Whitman Chairman of the Board of Directors and Chief Executive Officer Robert A. Whitman Chairman of the Board of Directors Annual Meeting We invite shareholders to attend our Annual Meeting of Shareholders at 8:30 a.m. on Friday, January 19, 2007, at the Hyrum W. Smith Auditorium on the Franklin Covey Co. headquarters campus, 2200 West Parkway Boulevard, Salt Lake City, Utah 84119. Robert William Bennett Jr. President, Organizational Solutions Business Unit Mission Statement We enable greatness in people and organizations everywhere. Sarah E. Merz President, Consumer Solutions Business Unit Stephen D.Young Senior Vice President, Chief Financial Officer and Secretary Stephen R. Covey Vice Chairman of the Board of Directors Clayton M. Christensen Director Robert H. Daines Director E.J. \"Jake\" Garn Director Dennis G. Heiner Director Donald J. McNamara Director Vision Our vision is to profoundly impact the way billions of people throughout the world live, work, and achieve their own great purposes. Joel C. Peterson Director E. Kay Stepp Director Independent Registered Public Accountants KPMG LLP 15 West South Temple, Suite 1500 Salt Lake City, Utah 84101-9800 Counsel Dorsey & Whitney LLP 170 South Main Street Salt Lake City, Utah 84111 Jones Day Reavis & Pogue 222 East 41st Street New York, New York 10017-6702 Registrar and Transfer Agent Zions First National Bank, N.A. Stock Transfer Department One South Main Street Salt Lake City, Utah 84111 Common Stock The Company's Common Stock is traded on the New York Stock Exchange under the ticker symbol FC.There were approximately 350 shareholders of record on the Company's record date of November 24, 2006. Dividend No dividends have been paid or declared on the Company's common stock. Foundational Beliefs Values We believe 1. People are inherently capable, aspire to greatness, and have the power to choose. 1. Commitment to Principles We are passionate about our content and strive to be models of the principles and practices we teach. 2. Principles are timeless and universal and the foundation for lasting effectiveness. 3. Leadership is a choice, built inside out on a foundation of character. Great leaders unleash the collective talent and passion of people toward the right goal. 4. Habits of effectiveness come only from the committed use of integrated processes and tools. 5. Sustained superior performance requires P/PC Balancea focus on achieving results and on building capability. 2. Lasting Customer Impact We are relentless about delivering on our promise to our customers. Our success comes only with their success. Request for Additional Information Additional financial information is available to shareholders. Requests should be directed to the attention of Investor Relations, Franklin Covey Co., 2200 West Parkway Boulevard, Salt Lake City, Utah 841192331, or call at 801-817-1776. Additional information on the Company is available on the Internet at http://www.franklincovey.com. 3. Respect for the Whole Person We value each other and treat each person with whom we work as a true partner. 4. Profitable Growth We embrace profitability and growth as the lifeblood of our organization; they give us the freedom to fulfill our mission and vision. 2006 FranklinCovey. All rights reserved. 0611071 TABLE OF CONTENTS Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Letter from the Chairman . . . . . . . . . . . . . . . . . . . . . . .3 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Form 10K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Management's Discussion & Analysis . . . . . . . . .52 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . .72 Consolidated Financial Statements . . . . . . . . . . .74 Notes to Consolidated Financial Statements . . . .78 Corporate Information . . . . . . . . . . . .Inside Back Cover 2 Financial Highlights Franklin Covey 2006 Annual Report Financial Highlights August 31, 2006 2005 2004 2003 2002 $278,623 14,046 $283,542 8,443 $275,434 (9,064) $307,160 (47,665) $332,998 (122,573) 13,631 14,942 9,101 1,085 (8,801) (1,349) (47,790) 2,537 (122,179) 32,122 28,573 10,186 (10,150) (45,253) (90,057) - - In thousands, except per share data Income Statement Data: Net sales Income (loss) from operations Net income (loss) from continuing operations before income taxes Income tax benefit (provision)(1) Net income (loss) from continuing operations(1) Cumulative effect of accounting change, net of income taxes Net income (loss) available to common shareholders(1) Earnings (loss) per share: Basic Diluted 24,188 $ $ 1.20 1.18 - (5,837) $ $ (.34) (.34) - (18,885) $ $ (.96) (.96) (53,988) $ $ (2.69) (2.69) (75,928) (117,399) $ $ (5.90) (5.90) Balance Sheet Data: Total current assets Other long-term assets Total assets Long-term obligations of continuing operations Total liabilities Preferred stock Shareholders' equity $ 87,120 12,249 216,559 $105,182 9,051 233,233 $ 92,229 7,305 227,625 $110,057 10,472 262,146 $124,345 11,474 308,344 35,347 83,210 46,171 100,407 13,067 69,146 15,743 84,479 15,231 81,922 37,345 133,349 57,345 132,826 87,203 158,479 87,203 177,667 87,203 226,422 (1) Net income in fiscal 2006 includes the impact of deferred tax asset valuation allowance reversals totaling $20.4 million. Common Stock Price Range FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER Fiscal Year Ended August 31, 2006: High Low $ 7.35 6.42 $ 7.79 6.00 $9.79 7.00 $ 8.37 5.16 Fiscal Year Ended August 31, 2005: High Low $ 1.98 1.61 $ 2.80 1.65 $ 7.13 2.22 $ 8.10 5.80 Letter from the Chairman Franklin Covey 2006 Annual Report To our Shareholders: O ver the past four years we have seen steady improvements in operating results in almost every quarter, and in almost every major operation. Thanks to the tremendous efforts, capabilities, and passion of our associates and partners in more than thirty-five countries around the world, this progress continued in fiscal year 2006. As shown below, during fiscal year 2006 Operating Income increased from $8.4 million to $14.0 million (66.4%). ROLLING 4 QUARTERS PERFORMANCE KEY GROWTH INITIATIVES Trailing 4 Quarters In Millions EBITDA(1) Operating Income/(Loss) Q4 02 ($83.6) ($122.6) Q1 03 Q2 03 Q3 03 Q4 03 (63.1) (32.1) (30.0) (16.9) (99.6) (68.4) (65.7) (47.7) Q1 04 Q2 04 Q3 04 Q4 04 (14.1) (10.7) (4.6) 6.9 (42.5) (34.0) (22.9) (9.1) Q1 05 Q2 05 Q3 05 Q4 05 9.9 15.9 20.6 20.4 (4.7) 2.3 7.6 8.4 Q1 06 Q2 06 Q3 06 Q4 06 21.5 22.9 21.4 22.6 10.3 12.9 12.3 14.0 (1) EBITDA is calculated by adding back depreciation and amortization to Operating Income. Other highlights for the year include: Increasing income before taxes, from $9.1 million to $13.6 million (49.8%). Continuing solid top-line growth in both our domestic and international Organizational Solutions Business Unit channels. Achieving positive same-store-sales results in our retail stores. Redeeming an additional $20 million of our outstanding preferred stock and repurchasing 681,000 shares of our common stock. Much of our progress over the past years has been driven by our ongoing focus on costs and operational improvements, and we expect such improvements to continue in the future. The pace and magnitude of our future progress, however, will depend primarily on achieving consistent revenue increases, and these are expected to be driven by the following: In our Organizational Solutions Business Unit: Successfully hiring and \"ramping-up\" new client partners (sales representatives). Achieving consistent productivity increases from our existing client partners. Maintaining the success of existing training/ consulting offerings, while successfully developing and bringing new offerings to market. Increasing royalty revenues from our international licensee partners. In our Consumer Solutions Business Unit: Increasing revenue per customer and outbound sales in our retail channel. Increasing revenue per existing customer and increasing the number of customers in our Consumer Direct channels (e-commerce and call center). Increasing the number of retail outlets through which 3 4 Letter from the Chairman Franklin Covey 2006 Annual Report we distribute products in our wholesale business. During fiscal year 2006 we made significant progress on each of these fronts: OUTLOOK FOR FISCAL YEAR 2007 Exceeding both hiring and sales ramp-up targets for client partners hired in fiscal year 2005 and fiscal year 2006. During fiscal year 2007 we will continue to focus on achieving further improvements in the key drivers identified above, and to realize additional profit flowthrough from the significant investments in new client partners, new consultants, and new offerings made over the past few years. Exceeding the productivity target for our existing client partner group. Growing royalty revenues from our international licensee partners. Successfully re-launching a major update of our 7 Habits of Highly Effective People individual effectiveness course, while firmly establishing our 4 Disciplines of Execution offering as our most important organizational offering. Increasing both revenue per client and outbound revenues per store in our retail channel, resulting in positive same store sales growth for the first time in many years. We would like to express our heartfelt thanks to: Our Associates: for their tremendous commitment to our mission, our clients and customers, and to our shareholders. Our Clients/Customers: for the tremendous opportunity we have to work with you in your own pursuit of greatness. Our Shareholders: for your continued support during our transformation. Growing the number of customers in our consumer direct channels. Increasing the number of retail outlets through which we distribute our products in our wholesale business. Sincerely, Robert A. Whitman Chairman of the Board of Directors and Chief Executive Officer Proxy Statement Notice of Annual Meeting of Shareholders Franklin Covey Co. You are cordially invited to attend the Annual Meeting of Shareholders of Franklin Covey Co. (the \"Company\"), which will be held on Friday, January 19, 2007 at 8:30 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 three 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 2009 and until their respective successors shall be duly elected and shall qualify; (ii) To consider and vote on a proposal to ratify the appointment of KPMG LLP as the Company's independent registered public accountants for the fiscal year ending August 31, 2007; (iii) 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 24, 2006, 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 of Directors December 15, 2006 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 card without delay in the enclosed envelope, which requires no additional postage if mailed in the United States. Your proxy will not be used if you are present at the Annual Meeting and desire to vote your shares personally. 6 Voting Franklin Covey 2006 Annual Report SOLICITATION OF PROXIES VOTING This Proxy Statement is being furnished to the shareholders of Franklin Covey Co., a Utah corporation (\"FranklinCovey\" or the \"Company\"), in connection with the solicitation by the board of directors (the \"Board\" or \"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 19, 2007, at 8:30 a.m., at the Hyrum W. Smith Auditorium, 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331, 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 December 15, 2006. The Board of Directors has fixed the close of business on November 24, 2006 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 20,109,886 shares of Common Stock and 1,493,776 shares of Series A Preferred Stock. The holders of record of the shares of Common Stock on the Record Date 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 two votes for each share of Series A Preferred Stock they hold. In the aggregate, the holders of outstanding shares of Series A Preferred Stock are entitled to 2,987,552 votes for all of the outstanding Series A Preferred Stock. The shares of Common Stock and Series A Preferred Stock vote together as a single class on all matters to be presented at the Annual Meeting. There are no shares of Series B Preferred Stock outstanding. PURPOSE OF THE ANNUAL MEETING Proxies Shareholders of the Company will consider and vote on the following proposals: (i) to elect three directors to serve for a term of three years; (ii) to consider and vote on a proposal to ratify the appointment of KPMG LLP (\"KPMG\") as the Company's independent registered public accountants for the fiscal year ending August 31, 2007; and (iii) to transact such other business as may properly come before the Annual Meeting or at any adjournment or postponement thereof. COSTS OF SOLICITATION 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 therefore, may solicit proxies personally or by telephone, facsimile or electronic mail. 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. 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 (i) FOR the election of each of the three director nominees, and (ii) FOR the ratification of the appointment of KPMG as the Company's independent registered public accountants for the fiscal year ending August 31, 2007. It is not anticipated that any other matters will be presented at the Annual Meeting. If other matters are presented, proxies will be voted in accordance with the discretion of the proxy holders. 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 or Series A Preferred Stock covered thereby in person at the Annual Meeting. Franklin Covey 2006 Annual Report 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. Holders of Common Stock and Series A Preferred Stock will vote together as a single class. 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 for directors. The ratification of the appointment of KPMG as the Company's independent registered public accountants requires that the number of votes cast in favor of the proposals exceed the number of votes cast in opposition. Abstentions and broker non-votes will not affect the outcome of this proposal. Proposal I TO APPROVE THE ELECTION OF THE THREE NOMINEES AS DIRECTORS At the Annual Meeting, three directors 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 2009 and until their successors shall be duly elected and qualified. Unless the shareholder indicates otherwise, the accompanying proxy will be voted in favor of the following persons: Joel C. Peterson, E. Kay Stepp and Robert A. Whitman. 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. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR EACH OF THE THREE NOMINEES TO THE BOARD OF DIRECTORS. Nominees for Election to the Board of Directors Certain information with respect to the nominees is set forth below. Nominees for Election Joel C. Peterson, 59, has been a director of the Company since May 1997. Mr. Peterson served as a director of Covey Leadership Center from 1993 to 1997 and as Vice Chairman of Covey Leadership Center from 1994 to 1997. Mr. Peterson founded Peterson Partners LP, and its predecessor Private Equity Investment Enterprises, a privately-held equity investment firm in 1996 and has served as its Founding Partner from its inception. Mr. Peterson also has taught MBA courses at Stanford Business School since 1992. Mr. Peterson also serves on the boards of directors of Asurion and JetBlue Airways Corporation (NASDAQ). Mr. Peterson earned his MBA from Harvard Business School. E. Kay Stepp, 61, has been a director of the Company since May 1997. Ms. Stepp served as a director of Covey Leadership Center from 1992 to 1997. Ms. Stepp is the chairperson of the board of Providence Health and Services, and is the former President and Chief Operating Officer of Portland General Electric, an electric utility. Ms. Stepp is also currently a director of StanCorp Financial Group (NYSE) and Planar Systems, Inc. (NASDAQ). She formerly was principal of Executive Solutions, an executive coaching firm, and was a director of the Federal Reserve Bank of San Francisco. She received her Bachelor of Arts degree from Stanford University and a Master of Arts in Management from the University of Portland and attended the Stanford Executive Program and the University of Michigan Executive Program. Robert A. Whitman, 53, has been a director of the Company since May 1997 and has served as Chairman of the Board of Directors since June 1999 and President and Chief Executive Officer of the Company since January 2000. Mr. Whitman served as a director of Covey Leadership Center from 1994 to 1997. Prior to joining the Company, Mr. Whitman served as President and Co-Chief Executive Officer of The Hampstead Group 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. 7 8 Nominees for Election 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 R. Covey, Robert H. Daines and Dennis G. Heiner are currently serving terms which expire at the annual meeting of the Company's shareholders to be held following the end of fiscal year 2008. Clayton M. Christensen, 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 2007. Stephen R. Covey, 74, has been Vice Chairman of the Board of Directors since June 1999. He 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 Living the 7 Habits: Stories of Courage and Inspiration, and is the co-author of First Things First. His latest book, The 8th Habit: From Effectiveness to Greatness, was released in November 2004. He is also a director of the Points of Light foundation and a fellow of the Center for Organizational and Technological Advancement at Virginia Tech. Robert H. Daines, 72, has been a director of the Company since April 1990. Dr. Daines is an Emeritus Driggs Professor of Strategic Management at Brigham Young University, where he was employed for 44 years. While employed by Brigham Young University, Dr. Daines taught courses in finance, strategic financial management and advanced financial management. During that time, Dr. Daines also taught financial strategy and management controls courses for corporations such as Chase Manhattan Bank, Bank of America and British Petroleum. He also co-authored the finance textbook Strategic Financial Management, published by Irwin as well as several articles and cases. Franklin Covey 2006 Annual Report Additionally, Dr. Daines served as a consultant to Aetna Life and Casualty where he managed their treasury services including cash management, accounting controls and financial policies and procedures. Dr. Daines also currently serves on the board of directors for Volvo Commercial Credit Corporation. Dr. Daines received his MBA from Stanford and his DBA from Indiana University. Dennis G. Heiner, 63, was appointed as a director of the Company in January 1997. Mr. Heiner served from 1999 to 2004 as President and Chief Executive Officer of Werner Holding Co., a leading manufacturer of climbing products and aluminum extrusions. 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 Hardware and Home Improvement Group, a world leader in residential door hardware and plumbing fixtures. From 1979 to 1985 Mr. Heiner was employed by Beatrice Foods where he served as a Division President. From 1972 to 1999 Mr. Heiner was employed by Conroy Inc, a manufacturer of recreational vehicles, where he held positions of Director of Marketing and Vice President of Finance and International Marketing. Mr. Heiner received his Bachelor of Arts degree from Weber State University and his MBA degree from Brigham Young University. He also completed Executive programs at Northwestern's Kellogg School of Management and Harvard Business School. Clayton M. Christensen, 54, was appointed as a director of the Company in March 2004 and began his service in July 2004. Dr. Christensen is the Robert and Jane Cizik Professor of Business Administration at the Harvard Business School where he has been a faculty member since 1992. His research and teaching interests center on the management issues related to the development and commercialization of business model innovation and technology. His specific area of focus is in developing organizational capabilities. Dr. Christensen was a Rhodes Scholar and received his Masters of Philosophy degree from Oxford and his MBA and DBA from the Harvard Business School. He also served as President and Chairman of Ceramics Process Systems from 1984 to 1989. From 1979 to 1984 he worked as a consultant and project manager for the Boston Consulting Group. Franklin Covey 2006 Annual Report Corporate Governance / Board of Director Meetings and Committees E. J. \"Jake\" Garn, 74, was elected to serve as a director of the Company in January 1993. Mr. Garn is a selfemployed consultant. 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 for Headwaters, Inc. (NYSE), and Nu Skin Enterprises, Inc. (NYSE). Donald J. McNamara, 53, was appointed to serve as a director of the Company in June 1999. Mr. McNamara is the founder of The Hampstead Group, LLC (\"The Hampstead Group\"), a private equity investor based in Dallas, Texas, and has served as its Chairman since its inception in 1989. He currently serves as Director of FelCor Lodging Trust, a NYSE listed hotel REIT, as well as Kimpton Hotel Company. He received an undergraduate degree in architecture from Virginia Tech in 1976 and an MBA from Harvard University in 1978. The Hampstead Group is the sponsor of Knowledge Capital, and Mr. McNamara serves as a designee of Knowledge Capital. CORPORATE GOVERNANCE FranklinCovey upholds a set of basic values and principles to guide its actions and is committed to maintaining the highest standards of business conduct and corporate governance. We have adopted a code of business conduct and ethics for our directors, officers, senior financial officers that include the Chief Executive Officer and Chief Financial Officer and other members of the Company's financial leadership team and other employees. The Corporate Governance Guidelines and Code of Business Conduct and Ethics are available on the Company's website at www.franklincovey.com. In addition, each of the Corporate Governance Guidelines and the Code of Business Conduct and Ethics are available in print to any shareholder who requests it by making a written request to Investor Relations, Franklin Covey Co., 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331. The Code of Business Conduct and Ethics applies to all directors, officers and employees of FranklinCovey. Affirmative Determination Regarding Board Independence The Board of Directors has determined each of the following directors to be an \"independent director\" under the listing standards of the New York Stock Exchange (the \"NYSE\"): Clayton M. Christensen, Robert H. Daines, Jake Garn, Dennis G. Heiner, Joel C. Peterson and E. Kay Stepp. In assessing the independence of the directors, the Board of Directors determines whether or not any director has a material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). The Board of Directors considers all relevant facts and circumstances in making independence determinations, including the director independence standards adopted by the Board of Directors. BOARD OF DIRECTOR MEETINGS AND COMMITTEES During the 2006 fiscal year, there were five 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. Although the Company encourages Board members to attend the Annual Meetings, it does not have a formal policy regarding director attendance at annual shareholder meetings. There were eight members of the Board of Directors in attendance at the Annual Meeting held in January 2006. The non-management directors meet regularly in executive sessions, as needed, without the management directors or other members of management. Joel C. Peterson, chairperson of the Nominating and Corporate Governance Committee and the Lead Independent Director, generally presides over these meetings. The Board of Directors has a standing Audit Committee, Nominating and Corporate Governance Committee (the \"Nominating Committee\"), and an Organization and Compensation Committee (the \"Compensation Committee\"). The members of the Audit Committee are Messrs. Jake Garn, Chairperson, Robert H. Daines and Joel C. Peterson. The Nominating Committee consists of Messrs. Joel C. Peterson, Chairperson, Robert H. Daines, Dennis G. Heiner and Ms. E. Kay Stepp. The Compensation Committee consists of Ms. E. Kay Stepp, Chairperson, and Messrs. Dennis G. Heiner and Robert H. Daines. 9 10 Director Nomination Process The Board of Directors has adopted a written charter for each of the committees. These charters are available at the Company's website at www.franklincovey.com. In addition, shareholders may obtain a printed copy of any of these charters by making a written request to Investor Relations, Franklin Covey Co., 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331. A copy of the Audit Committee Charter is attached as Appendix A to this proxy statement. The Audit Committee functions on behalf of the Board of Directors in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the \"Exchange Act\"), and met six times during the 2006 fiscal year. Its functions are: (i) to review and approve the selection of, and all services performed by, the Company's independent registered public accountants; (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. Each of the members of the Audit Committee is independent as described under NYSE rules. The Board of Directors has determined that one of the Audit Committee members, Robert Daines, is a \"financial expert\" as defined in Item 401(h) of Regulation S-K. The Nominating Committee met three times during the 2006 fiscal year. The Nominating Committee assists the Board of Directors by: (i) identifying individuals who are qualified and willing to become Board members; (ii) recommending that the Board nominate as many identified individuals as needed for appointment as a director for each annual Company shareholder meeting; (iii) ensuring that the Audit Committee, the Compensation Committee, and the Nominating Committees of the Board are comprised of qualified and experienced \"independent\" directors; (iv) developing and recommending succession plans for the Chief Executive Officer; and (v) developing corporate governance policies and procedures applicable to the Company and recommending that the Board adopt said policies and procedures. All of the members of the Nominating Committee are \"independent\" as defined under NYSE rules. Franklin Covey 2006 Annual Report The Compensation Committee met five times during the 2006 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 plan, 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, employees and the independent directors of the Company. All of the Compensation Committee members are \"independent\" as defined under NYSE rules. OUR DIRECTOR NOMINATION PROCESS As indicated above, the Nominating Committee of the Board of Directors oversees the director nomination process. This committee is responsible for identifying and evaluating candidates for membership on the Board of Directors and recommending to the Board of Directors nominees to stand for election. Each candidate to serve on the Board of Directors must meet the expectations for directors set out in the Corporate Governance Guidelines approved by the Board of Directors. In addition to the qualifications set forth in the Corporate Governance Guidelines, nominees for Director will be selected on the basis of such attributes as their integrity, experience, achievements, judgment, intelligence, personal character, ability to make independent analytical inquiries, willingness to devote adequate time to Board duties, and the likelihood that he or she will be able to serve on the Board for a sustained period. In connection with the selection of nominees for director, consideration will be given to the Board's overall balance of diversity of perspectives, backgrounds and experiences. Accordingly, the Board will consider factors such as global experience, experience as a director of a large public company and knowledge of particular industries. Although not an automatically disqualifying factor, the inability of a candidate to meet independence standards of the NYSE will weigh negatively in any assessment of a candidate's suitability, as will a candidate's service on a number of boards exceeding the standards contained in the Company's Corporate Governance Guidelines. Franklin Covey 2006 Annual Report The Nominating Committee intends to use a variety of means of identifying nominees for director, including outside search firms and recommendations from current Board members and from shareholders. In determining whether to nominate a candidate, the Nominating Committee will consider the current composition and capabilities of serving Board members, as well as additional capabilities considered necessary or desirable in light of existing Company needs and then assess the need for new or additional members to provide those capabilities. Unless well known to one or more members of the Nominating Committee, normally at least one member of the Nominating Committee will interview a prospective candidate who is identified as having high potential to satisfy the expectations, requirements, qualities and capabilities for Board membership. Shareholder Nominations The Nominating Committee, which is responsible for the nomination of candidates for appointment or election to the Board of Directors, will consider, but shall not be required to nominate, candidates recommended by the Company's shareholders who beneficially own at the time of the recommendation not less than one percent of the Company's outstanding stock (\"Qualifying Shareholders\"). Generally speaking, the manner in which the Nominating Committee evaluates nominees for director recommended by a Qualifying Shareholder will be the same as that for nominees from other sources. However, the Nominating Committee will seek and consider information concerning the relationship between a Qualifying Shareholder's nominee and that Qualifying Shareholder to determine whether the nominee can effectively represent the interests of all shareholders. Qualifying Shareholders wishing to make such recommendations to the Nominating Committee for its consideration may do so by submitting a written recommendation, including detailed information on the proposed candidate, including education, professional experience and expertise, via mail addressed as follows: c/o Stephen D. Young, Corporate Secretary Franklin Covey Co. 2200 West Parkway Boulevard Salt Lake City, Utah 84119-2331. Director Nomination Process Contractual Rights of Knowledge Capital to Designate Nominees Currently, under the Amended and Restated Shareholders Agreement dated March 8, 2005 between the Company and Knowledge Capital, the Company is obligated to nominate two designees of Knowledge Capital for election to the Board of Directors and all such designees must be nominated to be elected in different classes. Currently, only one designee of Knowledge Capital is a member of the Board of Directors, Donald J. McNamara. Upon the mutual agreement of the Company and Knowledge Capital, Robert A. Whitman, the Chairman of the Board of Directors, does not currently serve as a designee of Knowledge Capital. To the extent requested by Knowledge Capital, the Company is obligated at each meeting of the shareholders of the Company at which directors are elected to cause the Knowledge Capital designees to be nominated for election and will solicit proxies in favor of such nominees and vote all management proxies in favor of such nominees except for proxies that specifically indicate to the contrary. The Amended and Restated Shareholders Agreement also provides that the Company is obligated, to the extent permitted by law and applicable rules of the New York Stock Exchange, to ensure that at least one designee of Knowledge Capital is a member of all committees of the Board other than any special committee of directors formed as a result of any conflict of interest arising from any Knowledge Capital designee's relationship with Knowledge Capital. No designee of Knowledge Capital currently serves on any committee of the Board. Knowledge Capital is not currently exercising their rights of additional designees, other than Mr. McNamara, and committee membership under the Stockholders Agreement and we do not anticipate that they will do so in the foreseeable future. 11 12 Communication With Directors / Director Compensation / Executive Officers Franklin Covey 2006 Annual Report COMMUNICATIONS WITH DIRECTORS EXECUTIVE OFFICERS Shareholders or other interested parties wishing to communicate with the Board of Directors, the nonmanagement directors as a group, or any individual director may do so in writing by addressing the correspondence to that individual or group, c/o Stephen D. Young, Corporate Secretary, Franklin Covey Co., 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331 or by using the Company's website at www.franklincovey.com. All such communications will initially be received and processed by the office of the Corporate Secretary. The Secretary or Assistant Secretary will initially review such correspondence and either (i) immediately forward the correspondence to the indicated director and to the Chair of the Nominating Committee, or (ii) hold for review for before or after the next regular meeting of the Board of Directors. In addition to Mr. Whitman, certain information is furnished with respect to the following executive officers of the Company: DIRECTOR COMPENSATION Messrs. Robert A. Whitman and Donald J. McNamara do not currently receive compensation for Board or committee meetings. The remaining directors are paid as follows: Each Board member is paid an annual retainer of $30,000 paid quarterly for service on the Board and attending Board meetings; Each Board member is paid an additional annual retainer of $7,000 for service on each committee that they serve in lieu of committee meeting fees; Committee chairpersons are paid an additional annual retainer of $5,000 for the Audit and Compensation committees and $3,000 for all other committees; Each non-employee Board member receives an annual grant of a restricted stock award of 4,500 shares which vests over a 3-year term; Directors are reimbursed by the Company for their out-of-pocket travel and related expenses incurred in attending all Board and committee meetings. Robert W. Bennett, Jr., 50, has been President of the Organizational Solutions Business Unit of the Company since July 2002. Mr. Bennett joined the Company in February 2000 as Vice President of Sales and later served as Senior Vice President of Global Sales and Delivery. Prior to joining the Company, Mr. Bennett served as President of PowerQuest from 1998 to 2000 and as General Manager and President of Folio from 1993 to 1998. Mr. Bennett has 24 years of sales and sales management experience with Fortune 500 companies including IBM. Mr. Bennett earned his Bachelor of Arts in Government and Law from Lafayette College in Pennsylvania. Sarah Merz, 42, has been President and General Manager of the Consumer Solutions Business Unit since October 2003. Ms. Merz joined the Company in May 2000 as Vice President of Marketing. Prior to joining the Company, Ms. Merz was a Partner and coowner of Kannon Consulting, Inc. and an associate for Booz, Allen & Hamilton, where she created marketing strategies for Fortune 100 businesses throughout the U.S. as well as major corporations overseas. Ms. Merz also served as Vice President of International Sales and Business Development for Revell-Monogram, Inc. Ms. Merz received an MBA with honors from Northwestern's Kellogg Graduate School of Management and earned her Bachelor of Arts with honors in Economics from the University of Chicago. Stephen D. Young, 53, joined the Company as Executive Vice President of Finance, was appointed Chief Accounting Officer and Controller in January 2001, Chief Financial Officer in November 2002 and Corporate Secretary in March 2005. Prior to joining the Company he served as Senior Vice-President of Finance, Chief Financial Officer and director of international operations for Weider Nutrition for seven years. Mr. Young has 25 years of accounting and management experience. Mr. Young is a CPA and holds a Bachelor of Science in Accounting degree from Brigham Young University. Executive Compensation Franklin Covey 2006 Annual Report EXECUTIVE COMPENSATION The compensation of Robert A. Whitman, the Company's Chairman, President and Chief Executive Officer, and the other named executive officers listed below (collectively, the \"Named Executive Officers\") at August 31, 2006, the most recent fiscal year end, is shown below. Summary Compensation Table Annual Compensation Name and Position Long Term Compensation Awards Securities Unvested Other Annual Stock Fully Vested Underlying All Other Fiscal Compensation Awards Stock Award Options/SARs Compensation Year Salary($) Bonus($) ($)(1) ($)(2) ($)(3) (#)(4) ($)(5) Robert A. Whitman Chairman, President and Chief Executive Officer 2006 2005 2004 500,000 415,500 500,000 728,000 500,004 281,250 43,601 194,400 5,041 486,000 - Robert William Bennett, Jr. President, Organizational Solutions Business Unit 2006 2005 2004 250,000 105,149 250,000 232,896 250,000 126,875 4,333 30,442 1,957 Sarah Merz President, Consumer Solutions Business Unit 2006 2005 2004 250,000 262,500 250,000 262,500 226,154 98,438 Stephen D. Young 2006 Executive Vice President 2005 and Chief Financial Officer 2004 249,038 104,875 222,115 146,667 221,154 86,875 403,920 - 5,769 - 143,325 - 6,467 9,419 7,987 1,951 1,005 58,691 143,325 50,000 8,531 7,791 8,569 2,270 19,090 53,280 128,993 - 8,015 6,342 8,352 (1) Other amounts relate to miscellaneous benefits paid during the year, reimbursement of taxes that were paid during the year and insurance premiums. Fiscal year 2006 amounts included for each Named Executive Officer the following insurance premiums: Robert A. Whitman, $36,180 for disability insurance and $7,310 for life insurance; Robert William Bennett, Jr., $2,196 for life insurance; Sarah Merz, $644 for life insurance; and Stephen D. Young, $2,270 for life insurance. (2) Restricted stock awards vest in full five years from the date of grant. Vesting may occur earlier, either partially or in full, if certain financial targets are met. Holders of restricted shares are entitled to vote the shares. Value was determined by the market price on the grant date. At August 31, 2006, the total number of shares (and value as of that date) of restricted stock (excluding performance-based restricted stock) by each Named Executive Officer was: Robert A. Whitman, 112,500 shares ($646,875); Robert William Bennett, Jr., 26,250 shares ($150,938); Sarah Merz, 26,250 shares ($150,938); and Stephen D. Young, 23,625 ($135,844). The excluded performance-based restricted stock for each Named Executive Officer is listed in the table below. (3) Mr. Whitman was granted 187,000 shares of fully vested common stock. Value was determined by the market price on the grant date. (4) 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, 2006, the Company had not granted any stock appreciation rights. (5) 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. 13 14 Executive Compensation Franklin Covey 2006 Annual Report Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values The following table sets forth number of shares of Common Stock acquired during the fiscal year ended August 31, 2006 upon exercise of stock options, the values realized upon such exercise, the number of unexercised stock options held on August 31, 2006, and the aggregate value of such options held by the Named Executive Officers. This table reflects options to acquire shares of Common Stock granted to the Named Executive Officers by the Company and by certain affiliates of the Company. As of August 31, 2006, the Company had not granted any stock appreciation rights to any of the Named Executive Officers. Name Robert A. Whitman Robert W. Bennett, Jr. Sarah Merz Stephen D. Young Number of Shares Acquired on Exercise Value Realized on Exercise - - Number of Unexercised Options at August 31, 2006 Exercisable 1,602,000 50,000 37,500 35,000 Unexercisable 12,500 - Value of Unexercised In-the-Money Options at August 31, 2006(1) Exercisable $151,875 - Unexercisable $50,625 - (1) Value of unexercised options was determined by the fair market value of the Common Stock at fiscal year end. Long-Term Incentive Plans - Awards in Last Fiscal Year The table below sets forth information concerning long-term incentive compensation awarded to the Named Executive Officers during fiscal year 2006. Name Robert A. Whitman Robert William Bennett, Jr. Sarah Merz Stephen D. Young Number of Shares, Units or Other Rights(1) Performance or Other Period Until Maturation or Payout Threshold Target Maximum 84,151 21,038 21,038 21,038 August 31, 2008 August 31, 2008 August 31, 2008 August 31, 2008 0 0 0 0 84,151 21,038 21,038 21,038 168,302 42,076 42,076 42,076 Estimated Future Payouts Under Non-Stock Priced-Based Plans (1) Performance shares were awarded in January 2006, following shareholder approval of the Long-Term Incentive Plan (LTIP). Shares awarded under the plan do not have voting rights and do not receive dividends. The number of shares actually awarded is based upon the performance of the Company during the three following fiscal years. The Board has established a matrix of business performance and financial objectives, including a combination of revenue growth and operating margin, which will determine the number of shares that will be awarded at the end of the three-year term. Compensation Committee Report Franklin Covey 2006 Annual Report Equity Compensation Plan Information The Company has not issued options with an exercise price less than the market price since 1992. The following table sets forth equity compensation plan information as of August 31, 2006. [a] Plan Category [b] Number of securities to be issued upon exercise of outstanding options, warrants, and rights Weighted-average exercise price of outstanding options, warrants, and rights (in thousands) Equity compensation plans approved by security holders(1)(2) 2,585 [c] Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column [a]) (in thousands) $11.28 1,869 (1) Includes 431,295 unvested restricted stock awards which were valued at the August 31, 2006 closing Common Stock price of $5.75 per share. (2) Excludes performance awards issued under a shareholder approved long-term incentive plan. At August 31, 2006, the Company expected to award 337,588 shares of Common Stock to participants in the long-term incentive plan. The ultimate number of shares awarded is variable and may change between August 31, 2006 and the vesting date of the performance awards. For further information on our stock-based compensation plans, please refer to Note 11 to our consolidated financial statements presented in Item 8 of the Company's report on Form 10K for fiscal year 2006. Employment Agreements The Company does not have an employment agreement with any of its Named Executive Officers, including Robert A. Whitman, the President, Chief Executive Officer and Chairman of the Board. The Company does have Change in Control and Severance agreements with each of the Named Executive Officers and is described in further detail in the Compensation Committee Report below. COMPENSATION COMMITTEE REPORT The following report was prepared by the Compensation Committee, which administers all elements of the Company's executive compensation program, including the Incentive Plan. The Compensation Committee has responsibility for all compensation-related matters, including equity awards, for Robert A. Whitman, the Company's Chairman, President and Chief Executive Officer. It also determines any equity awards under the Incentive Plan for all other executive officers. In consultation with the Committee, Mr. Whitman annually reviews and establishes the amount of cash compensation for the other executive officers. The Compensation Committee reports at least annually to the full Board on the Company's executive compensation program. The Committee recognizes the importance of developing and administering executive compensation and benefit programs that link executive pay to individual and organizational performance. The Compensation Committee and the Board periodically review and revise the Committee's Charter to ensure it accurately reflects these responsibilities. A copy of the Charter is available at www.franklincovey.com. Compensation Committee Membership and Process. Members of the Compensation Committee are composed of independent directors who are not employees of the Company or its subsidiaries. For fiscal year 2006 the members of the Compensation Committee were E. Kay Stepp, who serves as Chairperson, Robert H. Daines and Dennis G. Heiner. None of the Compensation Committee members has any material business relationships with the Company. The Compensation Committee held five meetings during fiscal year 2006. The Compensation Committee regularly meets without any employees present to discuss executive compensation matters, including Mr. Whitman's compensation package. 15 16 Compensation Committee Report Franklin Covey 2006 Annual Report Within its charter, the Committee has the authority to engage the services of outside advisors, experts, and others to assist the Committee. Accordingly, the Compensation Committee has retained the services of an independent compensation consulting firm to advise the Committee on matters related to CEO, executive, and Board compensation. The Compensation Committee has the authority to determine the scope of the consulting firm's services and retains the right to terminate the consultant's contract at any time. Currently, the consulting firm's services include: The Executive Compensation program is designed to reward performance - the successful short-term and long-term execution of each executive's responsibilities and the achievement of the company's WIGs. Under the direction and oversight of the Compensation Committee of the Board of Directors, executive compensation has five main components: base salary, annual incentives, long-term incentives (stock awards and option awards), benefits, and severance and changein-control benefits. Each of these areas will be discussed in greater detail in the following sections of this report. Executive compensation program design Consistent with FranklinCovey's pay for performance philosophy, the CEO's compensation package is approximately 67% at risk. For the other Named Executive Officers, about 50% of target compensation is at risk. Total rewards benchmarking Long-term incentive plan design Executive severance policy design Change-in-control policy design Additionally, the consulting firm calibrates the executive compensation program to Company performance and the competitive market and monitors overall program effectiveness. The Compensation Committee's report on executive compensation matters includes a general overview of executive compensation at FranklinCovey and describes the compensation philosophy and objectives that drive compensation-related decisions. The report describes the compensation elements utilized and the purpose for each of the elements. Further, the report identifies the performance-based compensation awarded to the Named Executive Officers during fiscal year 2006, and reports on material actions taken by the Committee in fiscal 2006 and early fiscal 2007. General Overview of Executive Compensation. Executive compensation at FranklinCovey is designed to reward achievement of our strategic plan and reward the annual milestones that drive the strategic plan. To this end, the Company annually establishes Wildly Important Goals or WIGs - the most powerful and highly leveraged goals that we believe will have the most positive impact on the organization achieving the strategic plan. As the WIGS are defined, performance measures are established for each Named Executive Officer. Executive Compensation Philosophy. The Compensation Committee established an executive compensation strategy and structure based on the following principles: FranklinCovey pays for performance. Executives - who have the greatest direct influence on organizational performance - should have the greatest portion of their compensation at risk. Therefore, executives are held accountable through the compensation program for organizational performance; Compensation should reward successful execution of the business strategy. Therefore, the executive compensation program should be both aligned with achieving the Company's strategic business plan and directly related to Company performance; Company success depends on teamwork from the executive level down through the organization. Therefore, the compensation program should be designed to promote shared destiny and reward entity/team success, not just individual effort; A critical objective must be to attract and retain qualified executive talent. Successful execution of the business strategy necessitates keeping the Company's management team in place and focused on business goals. Therefore, the Company's program must be competitive and equity awards granted with vesting schedules designed to promote retention; Executive pay should be aligned with the interests of shareholders. Equity is used to reward executives for creating shareholder value over a several year horizon. Franklin Covey 2006 Annual Report The Company intends to continue its strategy of compensating its executives through programs that emphasize performance-based compensation. To that end, the Committee reviews quarterly and annual performance targets and achievements for the executive team and approves variable compensation targets tied to the achievement of annual goals and quarterly milestones. Philosophically, we believe that Company stock ownership is important for executives and outside directors. Through the Long-Term Incentive Plan (\"LTIP\") and Restricted Share Awards (\"RSA\"), executives and outside directors have the opportunity to increase stock ownership as the Company achieves specific sales and operating income targets. As a general guideline and consistent with industry best practices, we believe executives should be encouraged to maintain stock ownership where the market value of shares held is equivalent to 2-3 times their base salary; outside directors are encouraged to maintain stock ownership equal to 2-3 times their annual retainer. Based on the current share price multiplied by the number of shares (common shares, vested and unvested RSAs, and LTIP awards) held by each executive and director, all executives and directors meet the recommended guideline. Objectives of the Executive Compensation Program. The executive compensation program is designed to achieve four primary objectives: 1. Ensure base pay is competitive for the role or job to be done. 2. Reward performance of annual objectives and milestones achieved toward the 5-year strategy through annual incentives. 3. Maintain focus on the 5-year strategy, reward achievement of long-term objectives, and build wealth through the long-term incentive program. 4. Provide a competitive benefits package as part of a great work environment. Discussion of Compensation Elements. FranklinCovey's Executive Compensation Plan incorporates five main elements: 1. Base Salary 2. Annual Incentive 3. Long-term Incentive Compensation 4. Certain Other Benefits 5. Severance and Change in Control Benefits Compensation Committee Report Each element of the company's executive compensation program serves a somewhat different purpose, as described below: Base Salary. Base salary payments compensate ongoing performance throughout the year. Annual Incentive. Annual incentives reward the achievement of specific business and financial goals achieved during the fiscal year. Because of the way goals are cascaded throughout the organization, if a business unit fails to achieve one or more of its goals, the executive's annual incentive will be adjusted accordingly. If the business unit exceeds its goals, incentive payouts may be increased by up to 50 percent. For executives (excluding the CEO): Thirty percent of total target annual incentive is based on completing objectives established quarterly between the executive and the CEO. Seventy percent of total target annual incentive is based on meeting financial targets. The Chief Executive Officer's goals and target payouts are established annually between the CEO and the Board of Directors. Long-Term Incentive Compensation. FranklinCovey's long-term incentive compensation strategy has evolved over the last several years. The current plan includes restricted share awards and the long-term incentive plan approved by shareholders in January 2006. Restricted Share Awards. Restricted shares were awarded to key employees, including the named executive officers, on December 8, 2004. The restricted shares vest at the end of a five-year period and if the executive's employment terminates prior to vesting, the officer generally forfeits all restricted shares that have not yet vested. Vesting was accelerated 50 percent during fiscal 2005 due to the Company achieving specific financial performance objectives. The Company did not meet the performance objectives required to accelerate additional vesting in fiscal 2006. If specific financial goals are met prior to the five-year vest date, all remaining unvested shares shall vest. If the specific financial goals are not met, shares will remain unvested until the end of the five-year period. 17 18 Compensation Committee Report Long-Term Incentive Plan. In fiscal 2005, the Compensation Committee worked with its independent consultant and outside legal counsel to further align the compensation program with the business strategy, executive compensation philosophy and the changing competitive marketplace. Taking into account emerging financial accounting changes, the evolving expectations of shareholders, market trends, and improved Company performance, the Organization and Compensation Committee adopted in fiscal 2005 a new long-term incentive strategy using performance shares. Shares are awarded only after specific goals are attained. The FranklinCovey Long-Term Incentive Program (LTIP) is designed to reward specific improvements in revenue growth and Operating Income over a threeyear period. The Committee believes the LTIP will: Reward those who have the greatest impact on the financial results of the company. Retain senior leaders and other key leaders identified by the CEO. Align senior leaders with creating shareholder value. The LTIP is a 3-year rolling plan with new stretch goals established each year. The number of shares is determined based upon the performance of the Company during the three following fiscal years. The Board has established a matrix of business performance and financial objectives, including a combination of revenue growth and operating margin, which will determine the number of shares that will be awarded at the end of the three-year term. These awards are granted in accordance with the terms of the Company's Amended and Restated 1992 Stock Incentive Plan which was last approved by the shareholders in January 2006. Other Benefits. The Company maintains 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. Benefits include: The Company's cafeteria plan administered pursuant to Section 125 of the Internal Revenue Code of 1986, as amended (\"the Code\"). The cafeteria plan includes FranklinCovey's medical and dental insurance, medical reimbursement, and dependent care reimbursement plans. Franklin Covey 2006 Annual Report The Company's 401(k) plan, pursuant to which the Company matches 100 percent of the first 1% contributed and 50 percent of the next 4% contributed for a net 3% match on a 5% contribution. 401(k) contributions from highly compensated employees are currently limited to a maximum of 5% of compensation, subject to statutory limits. The Company's Employee Stock Purchase Plan implemented and administered pursuant to Section 423 of the Code. In addition to the benefits available to all full-time associates, FranklinCovey provides the following benefits to the Named Executive Officers: Term Life Insurance. FranklinCovey provides a portable 20-year term life policy for each named executive officer. The coverage amount is 2.5 times each executive's target annual cash compensation (base salary + target annual incentive). Supplemental Disability Insurance. Executives and other highly compensated associates may purchase voluntary supplemental disability insurance. The Company provides Mr. Whitman with sufficient funds to enable him to procure long-term disability insurance which, combined with the Company's current group policy, provides, in aggregate, monthly long-term disability benefits equal to 75 percent of his fiscal 2006 target cash compensation. Severance and Change in Control Benefits. During fiscal 2005, the Compensation Committee established a new executive severance compensation policy as well as a new change in control severance compensation policy for all executive officers, including Mr. Whitman. The Board, acting on the Committee's recommendation, adopted the FranklinCovey Co. Severance Compensation Policy and the FranklinCovey Co. Change in Control Severance Compensation Policy. The Severance Compensation Policy entitles an executive officer to receive, in the event of involuntary employment termination without just cause, an amount equal