September
14, 2006
Mr.
Joseph A. Foti
Senior
Assistant Chief Accountant
Securities
and Exchange Commission
Division
of Corporate Finance
Washington,
D.C. 20549-0305
| RE: | Franklin Covey Co. (the Company) |
| Form 10-K for the year ended August 31, 2005 | |
| File No. 1-11107 | |
| Response to Commission Letter Dated August 17, 2006 |
Dear
Mr.
Foti:
This
letter is written in response to the Staff’s review of the Company’s Form 10-K
for the year ended August 31, 2005 as outlined in the Commission’s letter dated
June 26, 2006 and subsequent letters dated July 24, 2006 and August 17, 2006.
The Company is providing the following additional information regarding the
inclusion of outstanding management common stock loan shares in the denominator
of the Company’s Basic EPS calculation. Pursuant to the telephonic discussion
with the Staff held on August 23, 2006, the following response is designed
to
provide the Staff with additional information related to the Company’s
determination of the treatment of the management common stock loan shares in
its
EPS calculations and is being presented in the format requested by the
Staff.
Our
current fiscal year ends on August 31, 2006 and our deadline for filing our
Form
10-K is November 14, 2006. Due to the proximity of our fiscal year end and
the
corresponding auditing and reporting processes, the Company requests that the
Commission consider our filing deadlines as we seek a timely resolution to
this
matter.
Company
Overview
Franklin
Covey Co. provides consulting, training, and performance improvement solutions
to organizations and individuals in strategy execution, productivity,
leadership, sales force effectiveness, effective communications, and other
areas. Our products and services are available through professional consulting
services, public workshops, retail stores, catalogs, and the Internet. The
Company’s historically best-known offerings include the FranklinCovey Planner™
and a suite of individual-effectiveness and leadership-development training
products based on the best-selling book The
7
Habits of Highly Effective People.
We also
offer a range of other training and assessment products to help organizations
achieve superior results by focusing and executing on top priorities, building
the capability of knowledge workers, and aligning business
processes.
The
following is selected financial information for the Company as of and for the
fiscal periods indicated (in thousands, except per-share data):
|
May
27,
2006
|
August
31,
2005
|
August
31,
2004
|
||||||||
|
Balance
Sheet:
|
||||||||||
|
Current
assets
|
$
|
86,989
|
$
|
105,182
|
$
|
92,229
|
||||
|
Total
assets
|
211,857
|
233,233
|
227,625
|
|||||||
|
Total
liabilities
|
91,752
|
100,407
|
69,146
|
|||||||
|
Total
shareholders’ equity
|
120,105
|
132,826
|
158,479
|
|||||||
|
|
|
|
Three
Quarters Ended
May
27, 2006
|
Fiscal
Year
Ended
August
31, 2005
|
Fiscal
Year
Ended
August
31, 2004
|
|||||
|
Income
Statement:
|
||||||||||
|
Net
sales
|
$
|
213,966
|
$
|
283,542
|
$
|
275,434
|
||||
|
Gross
margin
|
128,872
|
168,695
|
155,801
|
|||||||
|
Income
(loss) from operations
|
13,313
|
8,943
|
(9,064
|
)
|
||||||
|
Net
income
|
13,465
|
10,186
|
(10,150
|
)
|
||||||
|
Income
(loss) available to common shareholders
|
10,013
|
(5,837
|
)
|
(18,885
|
)
|
|||||
|
Weighted
average shares outstanding:
|
||||||||||
|
Basic
|
20,234
|
19,949
|
19,734
|
|||||||
|
Diluted
|
20,670
|
19,949
|
19,734
|
|||||||
|
Earnings
per share:
|
||||||||||
|
Basic
|
$
|
.50
|
$
|
(.34
|
)
|
$
|
(.96
|
)
|
||
|
Diluted
|
.48
|
(.34
|
)
|
(.96
|
)
|
|||||
Background
Information Regarding the Accounting Issue
During
the fiscal year ended August 31, 2000, certain of the Company’s management
personnel borrowed funds from an external lender, on a full-recourse basis,
to
acquire shares of the Company’s common stock. The loan program closed during
fiscal 2001 with 3.825 million shares of common stock purchased by the loan
participants for a total cost of $33.6 million, which was the market value
of
the shares acquired and distributed to loan participants. The Company initially
participated in these management common stock loans as a guarantor to the
lending institution. However, in connection with a new credit facility obtained
during the fourth quarter of fiscal 2001, the Company acquired the loans from
the external lender at fair value and is currently the creditor for these loans.
The management stock loans originally accrued interest at 9.4 percent
(compounded quarterly) and were due in March 2005. Although interest accrues
on
the outstanding balance over the life of the loan, no interest payments are
due
from participants until the loans mature. The Company originally accounted
for
the loans and the corresponding shares using a loan-based accounting model
that
included guidance found in SAB 102, Selected
Loan Loss Allowance Methodology and Documentation Issues;
SFAS
No. 114, Accounting
by Creditors for Impairment of A Loan - an Amendment of FASB Statements No.
5
and 15;
and
SFAS No. 5, Accounting
for Contingencies.
Corresponding to this accounting treatment, the management loan shares were
included in outstanding shares for purposes of calculating Basic earnings per
share (EPS). An example of the original management stock loan promissory note
has been included as Exhibit A to this document.
In
May
2004, the Company’s Board of Directors approved modifications to the terms of
the management stock loans. While these changes had significant implications
for
nearly all management stock loan program participants, the Company did not
formally amend or modify the stock loan program notes. Rather, the Company
chose
to forego certain of its rights under the terms of the loans by granting
participants the modifications described below in order to potentially improve
their ability to pay, and the Company’s ability to collect, the outstanding
balances of the loans. These modifications to the management stock loan terms
applied to all current and former employees whose loans did not fall under
the
provisions of the Sarbanes-Oxley Act of 2002. Loans to the Company’s officers
and directors (as defined by the Sarbanes-Oxley Act of 2002) were not affected
by the approved modifications.
The
significant modifications to the management stock loan terms approved in May
2004 were as follows:
| Waiver of Right to Collect - The Company waived its right to collect the outstanding balance of the loans prior to the earlier of (a) March 30, 2008, or (b) the date after March 30, 2005 on which the closing price of the Company’s stock multiplied by the number of shares purchased equals the outstanding principal and accrued interest on the management stock loans. The Company also waived the prepayment penalty previously applicable to the loans. | ||
| Lower Interest Rate - Effective May 7, 2004, the Company prospectively waived collection of all interest on the loans in excess of 3.16 percent per annum, which was the “Mid-Term Applicable Federal Rate” for May 2004. | ||
|
Use
of the Company’s Common Stock to Pay Loan
Balances
- The
Company may consider receiving shares of its common stock as payment
on
the loans, which were previously only payable in
cash.
|
The
May
2004 modifications to the management common stock loans caused the Company
to
reconsider its accounting for the loans as full recourse loans, even though
legally the loans remained full-recourse to the participants. Although the
Company has not relinquished its legal recourse rights and has received payment
in full from several loan participants, these modifications demonstrated actions
taken by the Company that could be argued as contrary to those that a
third-party lender might take. An example of the letter sent to management
loan
participants regarding the May 2004 modifications has been included as Exhibit
B
to this document.
In
considering the accounting guidance to apply to the May 2004 modifications,
neither the Company nor its auditors (KPMG) were aware of any accounting
guidance, including previously issued SEC Staff positions, which specifically
addressed the accounting for this type of modification to a loan program
arrangement. In most instances, the accounting literature applied to the
exercise of existing stock options for full-recourse notes, which suggested
certain ownership characteristics and a compensation element in the accounting
model. In the Company’s situation, the loan program was never intended to be a
compensation arrangement, but rather a mechanism to allow employees to purchase
an equity ownership in the Company. Due to the lack of specific accounting
literature for these modifications, the Company, by analogy, utilized the
guidance found in EITF Issue 00-23, Issues
Related to the Accounting for Stock Compensation under APB Opinion No. 25 and
FASB Interpretation No. 44 (primarily
Issue 50), and EITF Issue 95-16, Accounting
for Stock Compensation Agreements with Employer Loan Features under APB Opinion
No. 25.
Based
upon this guidance, the Company determined that it was most appropriate to
adopt
the basic concepts of a non-recourse stock option model rather than continue
with a loan-based accounting model, even though the loans remain full recourse
to the participants and despite the fact that the intent of the loan program
was
not compensatory. As a result of this new accounting treatment, the remaining
carrying value of notes and interest receivable, which totaled $7.6 million
prior to loan program modifications, was reduced to zero with a corresponding
reduction in paid-in capital. Following adoption of the non-recourse accounting
model, outstanding shares of the Company’s common stock held by loan
participants continued to be included in the denominator of the Company’s Basic
EPS calculation.
During
the quarter ended May 27, 2006, the Company offered participants in the
management common stock loan program the opportunity to formally modify the
terms of their loans in exchange for placing their shares of common stock
purchased through the loan program in an escrow account that allows the Company
to have a security interest in the loan program shares. The key modifications
to
the management common stock loans for the participants accepting the offer
are
as follows:
|
Modification
of Promissory Note
-
The management stock loan due date was changed to be the earlier
of (a)
March 30, 2013, or (b) the date on which the Company’s stock closes, as
reported by the exchange or market that is the principal market for
our
common stock, at or above the price per share such that the value
of the
shares acquired by the participants under the program is equal to
the
principal and accrued interest on the participants’ promissory notes
(Breakeven Date). The interest rate on the loans will increase from
3.16
percent compounded annually to 4.72 percent compounded
annually.
|
||
|
Redemption
of Management Loan Program Shares
-
The Company will have the right to redeem the shares on the due date
in
satisfaction of the promissory notes as follows:
|
| (a) | On the Breakeven Date, the Company has the right to purchase and redeem from the loan participants the number of loan program shares necessary to satisfy the participant’s obligation under the promissory note. The redemption price for each such loan program share will be equal to the closing price of the Company’s common stock on the Breakeven Date. | ||
| (b) |
If
the Company’s stock has not closed at or above the breakeven price on or
before March 30, 2013, the Company has the right to purchase and
redeem
from the participants all of their loan program shares at the closing
price on that date as partial payment on the participant’s
obligation.
|
The
fiscal 2006 modifications were intended to give the Company a measure of control
of the outstanding loan program shares and to facilitate payment of the loans
should the market value of the Company’s stock equal the principal and accrued
interest on the management stock loans. To date, the market value of the
Company’s common stock has not achieved a price necessary to trigger the
Breakeven Date as defined above. Loan program participants may choose whether
or
not to place their loan program shares in the escrow account and accept the
modification agreement. If a loan participant declines the offer to modify
their
management stock loan, their loan will continue to have the same terms and
conditions that were previously approved in May 2004 by the Company’s Board of
Directors and their loans will be due at the earlier of March 30, 2008 or the
Breakeven Date. Consistent with the May 2004 modifications, participants will
be
unable to realize a gain on the loan program shares unless they pay cash to
satisfy the promissory note obligation prior to the due date. As of the closing
date of the extension offer, which was substantially completed in June 2006,
87
percent of the remaining management stock loan participants holding
approximately 3,508,000 shares, or 94 percent of the remaining loan shares,
elected to accept the extension offer and placed their management stock loan
shares into the escrow account. An example of the Redemption and Note
Modification agreement sent to management stock loan participants in the third
quarter of fiscal 2006 is included as Exhibit C to this document.
Specific
Accounting Question Raised
Because
the Company utilized the non-recourse stock option model defined in Issue 50
of
EITF 00-23, by analogy, to account for the May 2004 management stock loan
modifications, a question has arisen regarding whether the shares of Company
common stock purchased by loan participants should continue to be included
in
the denominator of the Company’s Basic EPS calculation.
Conclusion
and Basis for Conclusion
After
considering the accounting guidance found in EITF 00-23 and other related
pronouncements, the facts and circumstances that applied to the management
common stock loan shares, and the characteristics of the outstanding loan
program shares, the Company determined that it was appropriate to continue
to
include the management common stock loan shares in the denominator of its Basic
EPS calculation following the May 2004 modifications and is determining whether
to include management loan shares as participating securities in periods of
income after the fiscal 2006 modifications. The primary factors considered
by
the Company in this determination were as follows.
|
May
2004 Modifications -
Although the non-recourse stock option accounting model was adopted
due to
the May 2004 modifications, the underlying nature of the shares purchased
by management loan participants did not change. Because the shares
of
stock purchased by loan participants were registered shares, the
shares
were entitled to vote the same as other shares of common stock, entitled
to participate in common dividends (refer to discussion below) the
same as
other common shares, and the Company could not control the holder’s
transferability of the shares nor hold the shares as collateral for
the
note. The Company considered the combination of these characteristics
related to the outstanding loan shares to be significantly different
from
the description of non-recourse loan shares described in EITF 00-23
in
which the issuer maintains a measure of control over the shares issued.
The Company interpreted the non-recourse stock option model found
in Issue
50 of EITF 00-23 to apply to situations where the issuer may recover
shares issued with a loan at the due date of the non-recourse note
because
the “stock option” (non-recourse note) characteristics have not been
“exercised” (paid) and control of the underlying shares has not
transferred to the note holder. Without the ability to reclaim shares
issued with a non-recourse note in the event the note is not repaid,
the
Company believes that the issuer would have essentially conveyed
fully-vested shares, which would have required an altogether different
accounting treatment. We have provided, as Exhibit D, an excerpt
from the
Working Group Report No. 9 (from files maintained by KPMG’s Department of
Professional Practice) that provides the background for the deliberations
of issue 50 and the basis for the Working Group’s recommendation to the
EITF. Paragraph 19 of that paper clearly contemplates the non-recourse
note after the modification to have terms consistent with footnote
2 to
APB 25, Accounting for Stock Issued to Employees. That is, the
non-recourse note is secured by the stock issued. In contrast, the
underlying shares held by employees after the May 2004 modifications
were
not restricted nor escrowed to prevent the holders from transferring
or
selling those shares without prior satisfaction of the note. Due
to the
lack of control over the management stock loan shares and the
participants’ ability to sell, assign, or otherwise transfer the loan
shares, the Company is aware of at least one participant that has
sold
their underlying loan shares, even though the loan remains unpaid
and full
recourse to this individual.
|
||
|
In
researching the archives of Issue 00-23, we also observed that the
Working
Group asked the EITF at the January 23-24, 2002 meeting to reconsider
a
consensus reached on issue 35 at the November 14-15, 2001 meeting.
Issue
35 addressed how to account for the exercise of a stock option award
with
a recourse note negotiated at the date of exercise if the terms of
the
note or other agreement provide that the note will be forgiven in
whole or
in part if specified performance goals are achieved. Exhibit E provides
an
excerpt from Working Group Report No. 8, dated January 11, 2001,
which
served as the basis for the issue’s reconsideration by the EITF.
|
||
|
Under
the original consensus, set forth in paragraph 3 of the Exhibit E
excerpt,
the EITF concluded that a loan forgiveness arrangement associated
with a
recourse note causes uncertainty regarding the exercise price for
the
options and that “variable accounting” should apply. The FASB staff
subsequently received inquiries on how to apply variable accounting,
causing the issue to be reconsidered. As discussed in the report,
the
Working Group presented two views to the EITF for consideration.
View A
proponents believed that the forgiveness feature was equivalent to
an
exercise of options with a recourse loan that does not bear a market
rate
of interest, causing a new measurement date for the related options
at the
date of exercise. View B proponents believed that forgiveness provision
caused the recourse note to be non-recourse in nature, creating a
stock
option award for accounting purposes. As discussed in paragraph 8
of the
report, opponents of View B pointed to several reasons for why View
B was
not a viable alternative. Most notably, they observed in paragraph
8(a)
that the employee is able to sell the shares received upon the issuance
of
the recourse note. Accordingly, if the shares were sold, the employer
would be accounting for stock options even though the employee no
longer
holds the shares. In addition, they observed in paragraph 8(e) that
in the
recourse note arrangement, there is no provision that requires the
employer subsequently to accept the shares issued as full payment
for the
note. In contrast, a non-recourse note permits the borrower to tender
the
collateral shares in full repayment of the note, even if the fair
value of
the collateral is less than the amount due under the note.
|
||
|
In
Exhibit F, we have provided an excerpt from the final minutes of
the
January 23-24, 2002 EITF meeting that reflects the revisions to issue
35
resulting from the deliberations. The revision is consistent with
View A
described above, such that variable accounting is a single day measurement
performed at the exercise date, and not an ongoing stock option accounting
model subsequent to the date of exercise.
|
||
|
The
Company believes that the debate surrounding the original consensus
on
issue 35 and the basis in the Working Group report for why View B
should
be (and ultimately was) rejected is consistent with the Company’s fact set
and supports the Company’s position that the loan shares should be
considered outstanding shares for EPS purposes.
|
||
|
The
Company also believes that its treatment of the underlying loan shares
was
consistent with the guidance in paragraph 7 of SFAS No. 123, Accounting
for Stock-Based Compensation, related to the rights and obligations
of the Company and the loan participants even though the management
stock
loans are not considered compensatory. As the underlying shares were
actually issued and were out of the Company’s control similar to an
issuance of fully vested common stock, the Company believes that
these
circumstances warranted different treatment than a transfer of stock
to an
employee for consideration of a non-recourse note in which the issuer
maintains control of the shares until the note is paid and the shares
are
actually issued and become outstanding for purposes of calculating
EPS.
The Company also considered guidance on contingently issuable shares
in
Basic EPS as found in SFAS No. 128, Earnings Per Share, paragraph
10, and determined that the shares should be included because the
necessary conditions for the issuance of the management stock loans
had
occurred and the management loan shares were not contingently returnable
(due to the lack of control) as defined by that literature. As a
result of
these considerations, the Company determined that it was appropriate
to
continue the inclusion of management stock loan shares in Basic EPS
following the May 2004 modifications.
|
||
|
Fiscal
2006 Modifications - The
Company believes that the fiscal 2006 modifications, in which participants
could elect to transfer their management loan shares into an escrow
account in exchange for an extension in the due date, represented
a
significant change with respect to the Company’s ability to control the
underlying loan program shares. As a result of this modification,
the
Company reevaluated its accounting treatment regarding the loan shares
and
their inclusion in Basic EPS. Because the Company now has a measure
of
control over the loan shares, the accounting model described in EITF
00-23
appears to be closer to the actual situation of the Company. In order
to
determine the EPS treatment of loan program shares in escrow, the
Company
is in the process of determining the legal income participation rights
of
the management stock loan shares. If it is determined that the loan
shares
held in escrow continue to have the same income participation rights
as
other shareholders, the Company believes that the escrowed loan shares
are
participating securities as defined by EITF 03-06, Participating
Securities and the Two-Class Method under FASB Statement No. 128,
Issue 2. According to EITF 03-06 Issue 2, a participating security
is a
security that may participate in undistributed earnings with common
stock,
whether that participation is conditional upon the occurrence of
a
specified event or not. Although EITF 03-06 Issue 2(a) specifically
excludes stock-based compensation instruments subject to SFAS No.
123(R),
Share-Based Payment, the Company believes that the shares issued
in the management stock loan program were non-compensatory, which
is
further supported by the May 2004 and fiscal 2006 modifications,
whereby
the loan participants are essentially prevented from receiving
compensation income from the loan shares and the Company is virtually
assured of never incurring any compensation cost related to the loans.
If
the loan shares held in escrow are determined to be participating
securities, the Company will be required to include the management
loan
shares in its Basic EPS calculation because their rights to undistributed
income continue to be the same as other common shareholders. Since
the
management stock loan shares do not have a clear contractual obligation
to
share in the losses of the Company (as defined by EITF 03-06), due
to the
favorable modifications made to the loan program in the past, the
Company
believes that the management loan shares should be considered outstanding
for purposes of Basic EPS in periods of net income and excluded from
Basic
EPS in periods of net loss starting in the fourth quarter of fiscal
2006,
which was the completion of the escrow agreement
modification.
|
Based
upon the above considerations, the Company included the outstanding loan shares
in the denominator of its calculation of Basic EPS subsequent to the May 2004
modifications. Although this topic is complex and involved significant
professional judgment, the Company believes that this accounting treatment
best
represents the substance of the management stock loan modifications and is
in
compliance with GAAP in the United States.
Due
to the fiscal 2006 change in the control of loan
shares held in the escrow account, the Company is in the process of determining
whether the management stock loan shares should be treated as participating
securities (as defined by EITF 03-06) beginning in the fourth quarter of fiscal
2006.
Views
of the Audit Committee and Auditors
Based
upon the facts and circumstances surrounding the management stock loan shares
and the associated modifications to the program, the Company’s Audit Committee
supports the accounting treatment described above.
The
accounting for Company’s management stock loan program has been the subject of
continuing dialogue and consultations with the Salt Lake City office of KPMG
LLP
and their national Department of Professional Practice, who agrees with the
accounting conclusions reached by the Company. The Company’s local audit
engagement partner is Larry A. Ward (801) 237-1528 and we have consulted with
Carmen L. Bailey (212) 909-5803 at KPMG’s national office regarding these
issues.
Alternative
Accounting Treatment
With
the
analogous accounting change to the non-recourse stock option model, the Company
could have alternatively excluded the outstanding management loan shares from
the denominator of its Basic EPS calculation in periods after May 2004. However,
the Company rejected this approach because of the characteristics of the
underlying common stock (as described above) and the resulting variation from
the specific accounting treatment detailed in Issue 50 of EITF 00-23. The
Company believes that it would have been confusing and misleading to financial
statement users to exclude the management stock loan shares from the Basic
EPS
calculation while the loans remain full recourse to the participants especially
given that the underlying nature of the shares did not change. Neither the
accounting treatment used by the Company nor the method rejected by the Company
have an impact upon reported net income or net income available to common
shareholders. However, the rejected accounting treatment of excluding the shares
from the denominator of Basic EPS would have increased the reported Basic EPS
in
periods of net income and decreased Basic EPS in periods of net
loss.
Disclosure
of Accounting Treatment
Over
the
life of the management common stock program, the Company has strived to present
full and transparent disclosure of facts and circumstances surrounding the
loan
program and the impact of loan modifications on the accounting for the loans.
In
order to add transparency to the Company’s financial statements, the Company
will increase disclosure in each of the Management Common Stock Loan and
Earnings Per Share footnotes regarding the treatment of outstanding loan shares
as described above for purposes of calculating EPS.
Previous
Correspondence on the Matter
While
not
addressing EPS issues, the Company has previously received Staff comment letters
from the Division of Corporate Finance requesting more information regarding
various accounting aspects of the management common stock loan program. The
Company believes that these issues have been properly resolved with the
Staff.
During
fiscal 2002, we received a subpoena from the SEC’s Salt Lake City, Utah office
seeking documents and information relating to the management stock loan program.
The Company provided the documents and information requested by the SEC,
including the testimonies of our Chief Executive Officer, Chief Financial
Officer, and other key employees. During February 2006, the Company received
notification from the SEC that the investigation was terminated without a
recommendation for enforcement action.
Other
Items Requested by the Staff
At
August
31, 2004 and 2005, the number of outstanding management common stock loan shares
totaled 3,824,802 shares and 3,760,925 shares, respectively.
Participants
have been eligible to vote, and many have voted, on all actions or events that
have required a vote since the modifications were made to the loan program
in
May 2004. Participants will continue to have the ability to vote their shares
purchased with the management stock loans subsequent to placing them in the
escrow account in fiscal 2006.
The
market value of the Company’s common stock has not risen to a price that equals
the outstanding principal and accrued interest on the loans. According to the
May 2004 and fiscal 2006 modifications, the loans are due immediately on the
Breakeven Date.
Hopefully
the supplemental information presented above is fully responsive to the Staff’s
comment regarding the inclusion of management stock loan shares in the
calculation of Basic EPS. Although the topic of this response is complex and
involved significant professional judgment, the Company believes that the
accounting treatment described above best represents the substance of the
transaction and is in compliance with United States GAAP. Please contact me
at
(801) 817-7076 with any further questions that you may have regarding these
matters.
Sincerely,
Stephen
D. Young
Chief
Financial Officer
EXHIBIT
A
(Example
Original Promissory Note)
MASTER
PROMISSORY NOTE
Chicago,
Illinois
«GrantedLoan»March
30,
2000
FOR
VALUE
RECEIVED, the undersigned (the "Borrower"),
HEREBY PROMISES TO PAY to the order of BANK ONE, NA, a national banking
association with its principal office in Chicago, Illinois, as Agent, for the
benefit of all of the Lenders (as defined below), the principal sum of
«GrantedLoan»
or, if
less, the aggregate principal amount of Loans made by the Lenders to the
Borrower pursuant to the Facility Agreement (as hereinafter defined) in
accordance herewith, but in no event later than the Final Payment Date. The
Advances evidenced by this Note (collectively, the "Loan")
are
being made pursuant to the Facility and Guaranty Agreement, dated as of March
27, 2000, by and among Franklin Covey Co., a Utah corporation (the "Company"),
Bank
One, NA, in its individual capacity ("Bank
One")
and as
agent for all the Lenders party thereto (the "Agent"),
and
the financial institutions party thereto (the "Lenders")
(as
the same shall be amended, supplemented, restated or otherwise modified from
time to time, the "Facility
Agreement").
Capitalized terms defined in the Facility Agreement are used herein with their
defined meanings therein unless otherwise defined herein.
Subject
to the following sentence and Section
5
hereof,
the principal amount of this Note shall be drawn down from time to time during
the period from the date on which funds are first advanced to the Borrower
(the
"Closing
Date")
through the Conversion Date by Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill
Lynch")
on
behalf of the Borrower by delivery of a Notice of Borrowing not later than
10:00 a.m. (Chicago time) on the date of the proposed borrowing pursuant to
the terms of that certain Letter of Direction among the Borrower, the Company,
Merrill Lynch and the Agent dated as of the Closing Date (the "Letter
of Direction").
Notwithstanding the foregoing, any portion of the Loan which is an Incremental
Loan shall be drawn down on the Conversion Date pursuant to a Notice of
Borrowing delivered by the Company on behalf of the Borrower not later than
10:00 a.m. (Chicago time) on the date which is two (or, at the Agent's
option, three) Business Days prior to the Conversion Date or upon such other
notice to which the Agent may agree.
1. Interest.
(a) The
Borrower promises to pay interest to each Lender (based on each Lender's
Pro-rata share of the outstanding principal amount hereof) on the outstanding
principal amount hereof from the Closing Date hereunder until such principal
amount is paid in full, payable to the Agent, for the benefit of the Lenders,
at
an interest rate per annum equal to (i) from the date hereof to but excluding
the Conversion Date, the Alternate Base Rate (as defined below) and (ii) at
all
times on and after the Conversion Date, the Interest Rate as determined pursuant
to Section 2.02(b) of the Facility Agreement. Notwithstanding the fact that
from
and after the Conversion Date interest shall accrue at the Interest Rate if,
and
only if, a fixed Interest Rate and Pricing Information have been agreed upon
by
the Agent and the Company pursuant to Section 2.02(b) of the Facility
Agreement, then (subject to the following sentence and Section 1(b) of this
Note) the Borrower shall not be obligated to make current interest payments
prior to the Maturity Date. All accrued and unpaid interest on this Note shall
be payable in full on the Maturity Date and shall not itself accrue interest
pending such payment. The
Borrower acknowledges that by virtue of the foregoing deferral of interest,
the
amount of interest which will be payable on the Maturity Date will be
substantially greater than that which would otherwise be payable if interest
had
been paid on a current basis. Examples of this interest amount, calculated
on
various assumptions, have previously been disclosed to the Borrower by the
Company.
(b) Upon
the
occurrence and during the continuance of a matured Borrower Event of Repayment
described in Section 5
hereof,
the outstanding principal amount hereof shall bear interest at the greater
of
(i) the Interest Rate plus two percent (2%) per annum and (ii) the Alternate
Base Rate plus two percent (2%) per annum. "Corporate
Base Rate"
means
a
rate per annum equal to the corporate base rate or prime rate of interest
announced by Bank One or by its parent, Bank One Corporation, from time to
time,
changing when and as said corporate base rate or prime rate changes (except
that
any change in such corporate base rate occurring on the first or second Business
Day next preceding the Conversion Date shall not be given effect until the
Conversion Date).
The
Corporate Base Rate is a reference rate and does not necessarily represent
the
lowest or best rate of interest actually charged to any customer. Bank One
may
make loans at rates of interest at, above or below the Corporate Base Rate.
"Alternate
Base Rate"
means a
fluctuating rate of interest equal to the higher of (a) the Corporate Base
Rate
and (b) the sum of the Federal Funds Effective Rate most recently determined
by
the Agent plus 1/2% per annum. "Federal
Funds Effective Rate"
means,
for any day, an interest rate per annum equal to the weighted average of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day
by
the Federal Reserve Bank of New York, or if such rate is not so published for
such day, the average of the quotations for such day on such transactions
received by Bank One from three Federal funds brokers of recognized standing
selected by it.
(c) Interest
and fees shall be calculated for actual days elapsed on the basis of a 360-day
year. Interest payable with respect to this Note or any portion hereof which
is
prepaid shall be payable for the day on which payment on the Loan evidenced
by
this Note is made but not for the day of any payment on the amount paid if
payment is received by the Agent prior to 12:00 noon (Chicago time) at the
place
of payment.
2. Scheduled
Repayment; Voluntary Prepayment.
(a) The
aggregate outstanding principal amount of, and all accrued and unpaid interest
and other amounts owing under, this Note shall be repayable in full on the
earlier to occur of (i) the Final Payment Date, (ii) the occurrence of a Change
of Control and (iii) the acceleration of this Note pursuant to
Section
5
hereof
(the "Maturity
Date").
(b) During
the term of this Note, the Borrower may (subject to the terms of Section
6
hereof)
prepay the outstanding principal amount of this Note in whole or in part,
provided
that the
Borrower has given the Agent at least five (5) Business Days' prior notice
stating the name of the Borrower and the aggregate principal amount of the
prepayment; provided further,
that
any such prepayment shall be in the minimum principal amount of $25,000 or
any
integral multiple of $5,000 in excess thereof; provided further,
that no
prepayment shall be permitted during the period from but excluding the Business
Day following the Determination Date to and including the Conversion Date.
All
prepayments (voluntary and otherwise) shall be made together with (A) all
interest accrued (whether or not deferred) at the applicable interest rate
from
the date funds are first advanced hereunder to the date of payment on the
amounts prepaid, (B) to the extent applicable and to the extent the amount
thereof has been communicated to the Borrower, any Early Payment Fee as required
under Section
6
hereof
and (C) a prepayment administrative fee of $500 payable to the Agent for its
own
account. Any principal amount prepaid on the Note by the Borrower may not be
reborrowed.
3. Method
of Payment.
All
payments of principal, interest and other amounts owing hereunder shall be
made,
without setoff, deduction or counterclaim, in funds which are available to
the
Agent at the Agent's address at 1 Bank One Plaza, Chicago, Illinois 60670,
or at
any other office of the Agent specified in writing by the Agent to the Borrower,
by 12:00 noon (Chicago time) on the date when due and shall be applied by the
Agent among the Lenders based on each Lender's Pro-rata share of the outstanding
principal amount of this Note. Each payment delivered to the Agent for the
account of any Lender shall be delivered promptly by the Agent to such Lender
in
the same type of funds that the Agent received at its address specified above
or
at any office specified in a notice received by the Agent from such Lender.
Whenever any payment to be made hereunder shall be stated to be due on a day
other than a Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall in such case be included in
the
computation of payment of interest.
4. Loan
Proceeds.
The
Borrower hereby irrevocably authorizes and directs the Lenders (a) to disburse
the proceeds of the Loan (other than any portion thereof disbursed as an
Incremental Loan) in accordance with the Letter of Direction and any Notice
of
Borrowing received by the Agent from the Company and (b) to disburse the
proceeds of any Incremental Loan directly to the Lenders for the account of
the
Borrower in payment of the Shortfall Amount of the Borrower in accordance with
the Letter of Direction and any Notice of Borrowing received by the Agent from
the Company. The Borrower agrees that any funds so disbursed (regardless of
how
applied by the recipient thereof) shall be considered received by the Borrower
upon the disbursement of such funds in accordance with the Letter of Direction
and any Notice of Borrowing.
5. Borrower
Event of Repayment.
If any
Program Event of Default shall occur and be continuing or if any of the
following events (each such event, a "Borrower
Event of Repayment")
shall
occur and be continuing:
(a) The
Borrower shall fail to pay any amount of principal on this Note when due, or
the
Borrower shall fail to pay any amount of interest on, or other amount due under,
this Note when due and such failure to pay shall continue for five (5)
days;
(b) The
Borrower shall generally not pay his or her debts as such debts become due,
or
shall admit in writing his or her inability to pay his or her debts generally,
or shall make a general assignment for the benefit of creditors; or any
proceeding shall be instituted by or against the Borrower seeking to adjudicate
him or her a bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or composition
of
him or her or his or her debts under any law relating to bankruptcy, insolvency
or reorganization or relief of debtors, or seeking the entry of an order for
relief or the appointment of a receiver, trustee, or other similar official
for
him or her or for any substantial part of his or her property;
(c) Any
representation or warranty made by, or any financial or other information
provided by, the Borrower to the Agent or any Lender shall prove to have been
incorrect in any material respect when made;
(d) Death
of
the Borrower;
(e) The
Pledge Agreement or Securities Control Agreement executed by the Borrower shall
fail to be in full force and effect or to give the Agent and/or the Lenders
the
rights, powers and privileges purported to be created thereby; or
(f) The
Agent
shall receive a written notice from the Company to the effect that the Borrower
has breached its Reimbursement Agreement or has ceased to be an employee of
the
Company or its Affiliates other than as a result of death, disability or
retirement at normal retirement age (it being understood that the Company has
no
duty to give such notice);
then
the
Agent, upon written direction from (or with the consent of) the Required
Lenders, may, by notice to the Company and the Borrower, declare the principal
amount and interest and other amounts outstanding under this Note owing by
the
Borrower, to be forthwith due and payable, whereupon such principal amount,
all
accrued and unpaid interest and all such other amounts shall become and be
forthwith due and payable, without presentment, demand, protest or notice of
any
kind by any Lender, all of which are hereby expressly waived by the Borrower;
provided,
however,
that if
a Borrower Event of Repayment described in clause
(b)
above
occurs with respect to the Borrower or a Program Event of Default described
in
Section 6.01(f) or (g) of the Facility Agreement (relating to Company
bankruptcy, etc.) occurs, the principal amount and interest and other amounts
outstanding under this Note shall immediately become due and payable without
any
election or action on the part of the Agent or any Lender. The Borrower shall,
as soon as possible, and in any event within five (5) Business Days after
becoming aware of the occurrence of a Borrower Event of Repayment or an event
which, with notice or lapse of time or both, could constitute a Borrower Event
of Repayment, deliver to the Agent a statement setting forth details of such
Borrower Event of Repayment.
6. Early
Payment Fee.
In the
event of any voluntary or mandatory (whether as a result of acceleration, a
Change of Control or otherwise) repayment of all or any portion of the principal
of this Note on or after the Conversion Date and prior to the Final Payment
Date, the Borrower will indemnify each Lender upon demand for any loss or cost
incurred by it resulting from liquidating or employing deposits acquired to
fund
or maintain its Loan or in terminating or unwinding any interest rate exchange
or similar arrangement entered into by such Lender in connection with this
Loan.
The Borrower acknowledges that, in order to permit such Lender(s) to extend
the
Interest Rate to the Borrower, and in reliance upon this Section
6,
one or
more of the Lenders has entered into, or in connection with accepting an
assignment of the Loans or otherwise, will enter into such arrangements
(including, without limitation, an interest compensation agreement pursuant
to
which the Lenders other than Bank One fund the Loans on a three-month LIBOR
basis). The amount payable pursuant to this Section is referred to as the
"Early
Payment Fee".
The
obligations of the Borrower under this Section
6
shall
survive payment of the principal, interest and other amounts under this Note.
With respect to the payment of an Early Payment Fee to Bank One only (and not
with respect to any other Lender), the amount of such Early Payment Fee shall
be
calculated pursuant to Section 2.05 and Schedules 2.05(A) and 2.05(B) to the
Facility Agreement. The Borrower acknowledges that he or she has had the
opportunity to review Section 2.05 and Schedules 2.05(A) and 2.05(B) of the
Facility Agreement and has done so to the extent he or she felt necessary to
understand the calculation of the Early Payment Fee (which may be substantial).
Promptly after any full or partial prepayment of this Note prior to the Final
Payment Date, each Lender will deliver to the Agent, and the Agent shall deliver
to the Borrower, with a copy to the Company, a written statement showing in
reasonable detail the calculation of the amount of the Early Payment Fee, which
statement shall, absent manifest error, be conclusive and binding on the
Borrower and the Company. No Early Payment Fee shall be payable in respect
of
any prepayment of any Loan prior to the Conversion Date or, if and only if
a
fixed rate of interest has not become applicable to the Notes pursuant to
Section 2.02(b) of the Facility Agreement, any prepayment made on or after
the Conversion Date.
7. Setoff.
In
addition to, and without limitation of, any rights of the Lenders under
applicable law, if any Program Event of Default or Borrower Event of Repayment
occurs and is continuing, any and all deposits (including all account balances,
whether provisional or final and whether or not collected or available) and
any
other indebtedness and other obligations at any time held or owing by any Lender
to or for the credit or account of the Borrower may be offset and applied toward
the payment of the principal, interest and other amounts owing under this Note
to such Lender, whether or not the principal, interest or other amounts, or
any
part thereof, shall then be due.
8. Taxes.
Any
taxes (excluding income taxes on the overall net income of the Agent or any
Lender imposed by the jurisdiction in which the Agent or such Lender is
incorporated or has its principal place of business) or other similar
assessments or charges payable or ruled payable by any governmental authority
in
respect of this Note or any of the other Loan Documents pertaining to the
Borrower shall be paid by the Borrower, together with interest and penalties,
if
any. Any payments made by the Borrower under this Note shall be made free and
clear of, and without deduction or withholding for or on account of, any present
or future income, stamp or other taxes, levies, imposts, duties, charges, fees,
deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any Governmental Authority (excluding taxes imposed
on
its overall net income by the jurisdiction in which the Agent or such Lender
is
incorporated or has its principal place of business) ("Taxes").
If
any such Taxes are required to be withheld from any amounts payable to the
Agent
or any Lender hereunder, the amounts so payable to the Agent or such Lender
shall be increased to the extent necessary to yield to the Agent or such Lender
(after payment of all Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in or pursuant to this Note.
Whenever any Taxes are payable by the Borrower, as promptly as practicable
thereafter the Borrower shall send to the Agent for its own account or for
the
account of such Lender, as the case may be, a certified copy of an original
official receipt received by the Borrower showing payment thereof. If the
Borrower fails to pay any Taxes when due to the appropriate taxing authority
or
fails to remit the required receipts or other required documentary evidence,
the
Borrower shall indemnify the Agent and the Lenders for any incremental taxes,
interest or penalties that may become payable by the Agent or any Lender as
a
result of any such failure. The agreements in this Section
8
shall
survive the payment in full of all amounts payable under this Note.
9. Agreements;
Representations and Warranties.
The
Borrower hereby (i) acknowledges that he or she has had the opportunity to
review a copy of the Facility Agreement and has done so to the extent he or
she
felt necessary in connection with the Loan evidenced hereby, (ii) consents
to be
governed by the terms of the Facility Agreement to the extent the terms thereof
are applicable to the Loan evidenced hereby, (iii) represents that such
Borrower's name, address, home phone number and social security number or
similar number is correct as listed below, (iv) agrees that any notice permitted
or required to be given by the Agent or the Lenders to the Borrower pursuant
hereto shall be deemed given upon the earlier of actual receipt by the Borrower
and three (3) Business Days after posting in the U.S. first class mail addressed
to the Borrower at the address set forth below or at such other address as
specified in writing by the Borrower to the Agent, (v) agrees that the Agent
and
the Lenders may from time to time disclose to the Company any information with
respect to this Note or any default by the Borrower hereunder, and may from
time
to time disclose information regarding the Borrower to "Transferees"
as
described in Section
10.04
of the
Facility Agreement, and waives and releases any claims arising out of any such
disclosure, (vi) agrees that assignments of and participations in this Note
may
be effected as set forth in Article X of the Facility Agreement, (vii) agrees
that the Facility Agreement is not intended to, and shall not be construed
to,
create any rights (contractual, equitable, pursuant to law or otherwise) in
favor of the Borrower against the Agent, any Lender or the Company, and the
Borrower in his or her individual capacity shall have no right to enforce any
rights of the Company thereunder, (viii) the Borrower acknowledges that he
or
she is accepting the Loan and acquiring the Common Stock for the purpose of
investment or profit and that the Loan is intended to be a "business loan"
under
the Illinois General Interest Act, (ix) represents and agrees that it has not
caused and will not cause the Borrower's Reimbursement Obligations to be secured
or "indirectly secured" (as defined in Regulation U) by the Common Stock or
any
other Margin Stock, (x) represents that the proceeds of the Loan will be used
only to acquire shares of Common Stock and (xi) acknowledges and agrees that
the
Interest Rate and Pricing Information shall be determined as set forth in
Section 2.02(b) of the Facility Agreement and agrees to be bound by such
determination.
10. Amendments.
This
Note may not be amended orally but only in writing signed by the Borrower and
signed or consented to in writing by the Agent with the consent of the Required
Lenders (or all the Lenders if so required by Section 12.01 of the Facility
Agreement) and the Company.
11. Preservation
of Rights; Survival.
No
delay or omission of the Lenders or the Agent to exercise any right under this
Note shall impair such right or be construed to be a waiver of any Program
Event
of Default or Borrower Event of Repayment or an acquiescence therein. Any single
or partial exercise of any such right shall not preclude other or further
exercise thereof or the exercise of any other right. All remedies contained
in
the Loan Documents or afforded by law shall be cumulative and all shall be
available to the Agent and the Lenders until this Note has been paid in full.
All representations and warranties of the Borrower contained in this Note and
any other Loan Document shall survive delivery of this Note and the making
of
the Loan herein contemplated.
12. Headings;
Entire Agreement.
Section
headings in this Note are for convenience of reference only, and shall not
govern the interpretation of any of the provisions of this Note. The Loan
Documents embody the entire agreement and understanding among the Borrower,
the
Company, the Agent and the Lenders and supersede all prior agreements and
understandings among the Borrower, the Company, the Agent and the Lenders
relating to the subject matter thereof.
13. Benefits
of this Agreement.
This
Note shall be binding upon the Borrower and the Borrower's personal
representatives, heirs and assigns and, subject to the following sentence,
shall
not be construed so as to confer any right or benefit upon any Person other
than
the Borrower and his or her personal representatives, heirs and assigns. This
Note shall inure to the benefit of the Agent, the Lenders and their respective
successors and assigns, it being understood that any Lender may, subject to
the
provisions of Article X of the Facility Agreement, from time to time assign,
or
grant participations in, its rights hereunder in whole or in part. The Borrower
shall not have the right to assign his or her rights or obligations
hereunder.
14. Expenses;
Indemnification.
The
Borrower agrees to reimburse the Agent and the Lenders for any costs, internal
charges and out-of-pocket expenses (including reasonable attorneys' fees and
time charges of attorneys for the Agent and the Lenders, which attorneys may
be
employees of the Agent or the Lenders) paid or incurred by the Agent or any
Lender in connection with the collection or enforcement of this Note. The
Borrower further agrees to indemnify the Agent and each Lender, its directors,
officers and employees against all losses, claims, damages, penalties,
judgments, liabilities and expenses (including, without limitation, all expenses
of litigation or preparation therefor whether or not the Agent or any Lender
is
a party thereto) which any of them may pay or incur arising out of or relating
to this Note, the transactions contemplated hereby or the direct or indirect
application or proposed application of the proceeds of the Loan evidenced hereby
except to the extent that they arise out of the gross negligence or willful
misconduct of the party seeking indemnification. The obligations of the Borrower
under this Section shall survive the repayment of this Note.
15. Replacement
Notes.
The
Borrower agrees that upon the occurrence and during the continuance of any
Program Event of Default or Borrower Event of Repayment, upon the request of
the
Agent and in exchange for this single master Note, the Borrower will execute
and
deliver substitute multiple notes (in substantially the form hereof) (each
a
"Replacement
Note"),
one
for each Lender in the principal amount of such Lender's Pro-rata share of
the
Loan evidenced hereby.
16. Severability
of Provisions.
Any
provision in this Note that is held to be inoperative, unenforceable, or invalid
in any jurisdiction shall, as to that jurisdiction, be inoperative,
unenforceable, or invalid without affecting the remaining provisions in that
jurisdiction or the operation, enforceability, or validity of that provision
in
any other jurisdiction, and to this end the provisions of this Note are declared
to be severable. If any interest payment or other charge or fee payable by
the
Borrower under this Note to any Lender exceeds the maximum amount then permitted
to be paid to such Lender by applicable law, the Borrower shall be obligated
to
pay, and such Lender shall be entitled to receive, only the maximum amount
permitted by applicable law. If any Lender has collected interest or other
charges in excess of such maximum permitted amount, the Borrower's only remedy
will be that such Lender will apply such excess interest or other amounts as
a
full or partial prepayment of the unpaid balance of the principal amount to
the
extent of the unpaid principal balance and refund any additional excess amount
to the Borrower.
17. CHOICE
OF LAW.
THE
LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS
(INCLUDING 735 ILCS 105/5-1 ET SEQ., BUT OTHERWISE, WITHOUT REGARD TO CONFLICT
OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL
LAWS
APPLICABLE TO NATIONAL BANKING ASSOCIATIONS, FEDERAL AGENCIES, BRANCHES OF
FOREIGN BANKS AND OTHER FINANCIAL INSTITUTIONS.
18. CONSENT
TO JURISDICTION.
THE
AGENT, EACH LENDER AND THE BORROWER HEREBY IRREVOCABLY SUBMIT TO THE
NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT
SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS NOTE AND THE PARTIES HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT
OF
SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND
IRREVOCABLY WAIVE ANY OBJECTION THEY MAY NOW OR HEREAFTER HAVE AS TO THE VENUE
OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH
COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE
AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS
OF
ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE
AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO,
ILLINOIS.
19. WAIVER
OF JURY TRIAL.
THE
BORROWER AND, BY ACCEPTANCE HEREOF, THE AGENT AND EACH LENDER HEREBY WAIVE
TRIAL
BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER
(WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED WITH THIS NOTE.
(May
2004
Modification Letter)
May
7,
2004
RE:
Management Stock Purchase Loan Program
Dear
Loan
Program Participant,
I
am
pleased to inform you that FranklinCovey is making the following three important
changes in its handling of your Loan Program loan:
1. Due
Date Extension; Prepayment.
Although
the maturity date of your loan is March 30, 2005, the Company will forego its
right to collect the outstanding balance of your note at any time prior to
the
earlier of (i) March 30, 2008 and (ii) the date after March 30, 2005 on which
the closing price of FranklinCovey stock multiplied by the number of shares
you
purchased under the Loan Program equals the outstanding principal and accrued
interest on that date. We will notify you if and when the circumstances
described in part (ii) above appear likely.
Of
course, you are free to pay your loan, in whole or in part, at any time. If
you
do prepay your loan, the Company will forego its right under the terms of your
note to charge or collect any prepayment penalty.
2. Lower
Interest. As
you
know, the interest rate on your loan is fixed at 9.36499% per year, compounded
quarterly. However, from the date of this letter until March 30, 2008 (or the
date you repay your loan, if earlier), the Company will forego all interest
on
your note in excess of 3.16% per annum, compounded annually. In other words,
the
interest that will be accruing on the outstanding balance of your note beginning
May 1, 2004, is effectively being reduced from the 9.36499% fixed rate (which
is
compounded quarterly) to a 3.16% fixed rate (which is compounded
annually).
3. Use
of Stock to Pay Loan Balances.
The
terms of your note allow you to repay the loan only with cash. However, if
you
wish to pay or prepay your loan by delivering to the Company shares of
FranklinCovey stock that you purchased pursuant to the Management Stock Purchase
Loan Program, please contact me to discuss. If we arranged to accept
FranklinCovey shares as payment, each share would be valued at the closing
price
of the stock on the day you transferred it to the Company. For example, if
you
transferred 5,000 shares on a day when the closing price of the stock was $5.00
per share, the amount we would credit against your loan balance would be
$25,000.00. Please contact me for details if at any time you desire to pay
your
loan balance with your FranklinCovey shares.
The
following approximates the beneficial effect the actions described in items
1
and 2 above will have on a loan with the original principal balance of
$100,000:
|
IF
THE COMPANY DID NOTHING
|
WITH
THE BENEFITS OF 1 AND 2
|
||
|
Principal
and Interest Balance on March 30, 2005
|
Stock
Price Necessary to Pay Loan Balance
|
Principal
and Interest Balance on March 30, 2008
|
Stock
Price Necessary to Pay Loan Balance
|
|
$157,056.07
|
$13.15
|
$163,231.23
|
$13.66
|
Please
understand that the Company is not amending or modifying the Loan Program notes.
The Company is simply foregoing certain of its rights under the notes and
granting participants the benefits described above in order to enhance their
ability to pay and the Company’s ability to collect the outstanding balances of
the Loan Program notes.
There
is
nothing you need to do to take advantage of these actions. There are no
documents to sign and you need not contact us unless you have questions specific
to your loan. If you do have questions, please contact any of the
following:
Val
John
Christensen (801) 817-7102
Tami
Donavon (801) 817-7022
Richard
Putnam (801) 817-7134
Sincerely,
Val
John
Christensen
Executive
Vice President / General Counsel
EXHIBIT
C
(Fiscal
2006 Stock Loan Modifications)
REDEMPTION
AND NOTE MODIFICATION AGREEMENT
THIS
REDEMPTION AND NOTE MODIFICATION AGREEMENT (this “Agreement”), dated as of April
14, 2006, is made between «First» «MI» «Last»
(“Shareholder”) and FRANKLIN COVEY CO. (“Franklin Covey”).
RECITALS
A. Shareholder,
as a participant in the Franklin Covey Management Stock Purchase Loan Program
(the “Loan Program”), executed a Promissory Note in the principal amount of
$«Promissory_Note_Principal»,
with an
original due date of March 30, 2005 (the “Note”).
B. Shareholder
used the proceeds from Shareholder’s Loan Program loan evidenced by the Note to
purchase «Shares»
shares
of the common stock of Franklin Covey (the “Loan Program Shares”).
C. In
July,
2001, Bank One assigned to Franklin Covey its right and interest in the Note.
In
May, 2004, Franklin Covey informed Shareholder that it was foregoing collection
of the Note until the earlier to occur of (i) March 30, 2008, or (ii) the date
on which Franklin Covey’s common stock closes at a price, as reported by the New
York Stock Exchange or such exchange or market as is then the principal market
for the common stock of Franklin Covey, at which the aggregate value of Loan
Program Shares purchased by all participants in the Loan Program equals or
exceeds the aggregate principal and accrued interest that would be due on all
Loan Program Loans on that date, whether or not previously paid (the “Breakeven
Price”). Also in May 2004, Franklin Covey reduced the interest on the Notes to
the then applicable federal interest rate of 3.16%, compounded
annually.
D. Franklin
Covey is willing, in consideration of Shareholder executing this Agreement
and
performing each of the covenants and obligations set forth herein, to extend
the
due date of the Note to the earlier to occur of (i) March 30, 2013, or (ii)
the
date on which Franklin Covey’s common stock closes at or above the Breakeven
Price. This extension is a material amendment to the Note and in order to avoid
current income tax consequences to the Shareholder, the interest rate must
be
adjusted to the applicable federal rate for the month of April 2006 of 4.72%,
compounded annually.
AGREEMENT
NOW,
THEREFORE, in consideration of the premises and Franklin Covey extending the
due
date of the Note until the earlier to occur of (i) March 30, 2013, or (ii)
the
date on which Franklin Covey stock closes at or above the Breakeven Price,
and
all other financial accommodation heretofore or hereafter at any time made
or
granted by Franklin Covey to Shareholder, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the
parties agree as follows:
1. Modification
of Note.
The due
date of the Note shall be the earlier to occur of (i) March 30, 2013, or (ii)
the date on which Franklin Covey’s common stock closes, as reported by the New
York Stock Exchange or such exchange or market as is then the principal market
for the common stock of Franklin Covey, at or above the Breakeven Price (the
“Breakeven Due Date”). From April 14, 2006 until paid, the Note shall bear
interest at the rate of 4.72%, compounded annually. Except as specifically
modified by the terms of this Section, all of the other terms and conditions
of
the Note shall remain in full force and effect and are hereby
ratified.
2. Redemption
of the Loan Program Shares.
Franklin Covey shall purchase and redeem Shareholder’s Loan Program Shares as
follows:
(a) On
the
Breakeven Due Date, Franklin Covey shall purchase and redeem from Shareholder
the number of Shareholder’s Loan Program Shares necessary to satisfy the
Shareholder’s obligation under the Note, and the Shareholder shall sell such
Loan Program Shares to Franklin Covey in a single sale. The redemption price
for
each such Loan Program Share redeemed by Franklin Covey shall be equal to the
closing price of the common stock of Franklin Covey on the Breakeven Due Date.
Franklin Covey shall redeem said Loan Program Shares by crediting the amount
due
to Franklin Covey from the Shareholder under the terms of the Note. Such
redemption and payment shall be deemed to have occurred on the Breakeven Due
Date. If the Purchase Price exceeds the Breakeven Price on the Breakeven Due
Date, then any Loan Program Shares not redeemed pursuant to the provisions
of
this Section 2(a) shall be released from the Pledge Agreement and shall be
transferred and delivered to Shareholder; provided, however, that Franklin
Covey
shall not redeem fractional shares and any such fractional share shall be
rounded up to the nearest whole share and Franklin Covey shall pay the
Shareholder the cash equivalent of the fractional share in excess of
Shareholder’s obligations under the Note.
(b) If
on
March 30, 2013, the closing price of the common stock of Franklin Covey is
less
than the Breakeven Price, Franklin Covey shall purchase and redeem from
Shareholder all of Shareholder’s Loan Program Shares, and the Shareholder shall
sell such Loan Program Shares to Franklin Covey in a single sale as partial
payment of Shareholder’s Note obligations. The redemption price for the Loan
Program Shares shall be equal to the closing price of the common stock of
Franklin Covey on March 30, 2013, and the redemption and payment shall be deemed
to have occurred on that date. Franklin Covey shall redeem said Loan Program
Shares by crediting the value of said shares as partial payment against the
amount due to Franklin Covey from the Shareholder under the terms of the
Note.
3. Pledge.
To
secure Shareholder’s obligation to sell the Loan Program Shares to Franklin
Covey under this Agreement and the prompt and complete payment and performance
of Shareholder’s obligations under the Note (“Shareholder’s Obligations”),
Shareholder agrees to pledge the Loan Program Shares in accordance with the
terms of the Pledge Agreement attached hereto as Exhibit A. Shareholder shall
also deliver or cause to be delivered to Franklin Covey the Pledged Shares
in
certificated form, accompanied by a fully executed stock power. Such
certificates shall bear a legend stating that the Shares are subject to
redemption under this Agreement and a security interest under the Pledge
Agreement.
4.Representations,
Warranties and Covenants of Shareholder.
Shareholder represents and warrants to Franklin Covey:
(a) Shareholder
is the lawful owner of the Loan Program Shares subject to this Agreement and
such shares represent all of the shares acquired by Shareholder with the
proceeds of the Note. Shareholder holds such shares free of all liens,
encumbrances, and claims and has full right to deliver, pledge, assign and
transfer such shares to Franklin Covey under the terms of this Agreement and
the
Pledge Agreement. Shareholder has not assigned or transferred any right to
the
Loan Program Shares to any other person or entity. The entry into this Agreement
and the pledge and sale of the Loan Program Shares on the terms of this
Agreement and the Pledge Agreement will not violate any other agreement to
which
Shareholder is a party or to which the Shareholder or the shares are
subject.
(b) As
long
as any of Shareholder’s obligations under this Agreement or the Pledge Agreement
remain outstanding, (i) Shareholder will promptly deliver to Franklin Covey,
from time to time, upon request of Franklin Covey, such stock powers and other
documents, satisfactory in form and substance to Franklin Covey, as Franklin
Covey may reasonably request to enforce its rights and remedies hereunder;
(ii)
Shareholder will not pledge any of the Loan Program Shares or create or suffer
to exist any lien, encumbrance or claim on or with respect to Loan Program
Shares, or take or fail to take any action which would in any manner impair
the
enforceability of Franklin Covey’s rights with respect to the Loan Program
Shares under the terms of this Agreement and Pledge Agreement; and (iii)
Shareholder will not sell, assign or otherwise dispose of or transfer any of
the
Loan Program Shares.
5. Right
to Prepay.
At any
time prior to the due date of the Note, Shareholder shall have the right to
pay
all of Shareholder’s obligations under the Note in full, without any prepayment
penalty. Such payment shall be made by immediately available funds acceptable
to
Franklin Covey. On satisfaction of Shareholder’s obligations under the Note in
full, this Agreement shall be terminated and Franklin Covey shall release the
Loan Program Shares from the security interest evidenced by the Pledge Agreement
and, as soon as reasonably practicable, remove the legend and return the
certificates representing the Loan Program Shares to Shareholder.
6. Rights
Regarding Loan Program Shares.
Notwithstanding any other provisions of this Agreement, during the term of
this
Agreement and prior to the redemption of the Loan Program Shares, Shareholder
shall be entitled to (i) vote the Loan Program Shares, and (ii) receive any
and
all cash dividends and payments on the Loan Program Shares which Shareholder
would otherwise be entitled to receive; provided, however, that any and all
capital stock and/or liquidating dividends, payments, distributions in property,
returns of capital made on or in respect of the Loan Program Shares, whether
resulting from a subdivision, combination, reclassification or conversion of
the
outstanding common stock of Franklin Covey, or received in exchange for the
Loan
Program Shares or any part thereof or as a result of any merger, consolidation,
acquisition or other exchange of assets to which Franklin Covey may be a party
or otherwise, shall be and become part of the Loan Program Shares pledged under
the terms of the Pledge Agreement and subject to redemption under the terms
of
this Agreement and, if received by Shareholder, shall forthwith be delivered
to
Franklin Covey (accompanied, if appropriate, by proper instruments of assignment
and/or stock powers executed by Shareholder in accordance with Franklin Covey’s
instructions) to be held subject to the terms of this Agreement.
7. Termination.
This
Agreement shall terminate only when Shareholder’s Loan Program Shares have been
redeemed or all of Shareholder’s obligations under the Note shall have been
satisfied in full.
8. Miscellaneous.
(a) All
notices or other communications hereunder shall be given in the manner specified
in the Note.
(b) This
Agreement, and the terms, covenants and conditions hereof, shall be binding
upon
and inure to the benefit of the parties hereto, and their respective successors
and assigns, except Shareholder shall not be permitted to assign this Agreement
nor any interest herein nor in the Loan Program Shares, nor any part thereof,
nor otherwise pledge, encumber or grant any option with respect to such Loan
Program Shares, nor any part thereof.
(c) The
provisions of this Agreement may from time to time be amended, modified or
waived, if such amendment, modification or waiver is in writing and consented
to
by Shareholder and by Franklin Covey, and then any such amendment, modification,
waiver or consent shall be effective only in the specific instance and for
the
specific purpose for which given.
(d) The
section headings in this Agreement are inserted for convenience of reference
and
shall not be considered a part of this Agreement or used in its
interpretation.
(e) Shareholder
hereby expressly waives: (i) notice of the acceptance by Franklin Covey of
this
Agreement, (ii) notice of nonpayment of Shareholder’s obligations under the
Note, (iii) presentment, demand, notice of dishonor, protest, and all other
notices whatsoever (except as otherwise required herein), and (iv) all diligence
in collection or protection of or realization upon Shareholder’s obligations
under the Note, or any security for or guaranty of any of the
foregoing.
(f) Shareholder
agrees that, if at any time all or any part of any payment theretofore applied
by Franklin Covey to any of Shareholder’s obligations under the Note is or must
be rescinded or returned by Franklin Covey for any reason whatsoever (including,
without limitation, the insolvency, bankruptcy or reorganization of
Shareholder), such obligations shall, for the purposes of this Agreement, to
the
extent that such payment is or must be rescinded or returned, be deemed to
have
continued in existence, notwithstanding such application by Franklin Covey,
and
the pledge by Shareholder under the Pledge Agreement shall continue to be
effective or be reinstated, as the case may be, as to such obligations, all
as
though such application by Franklin Covey had not been made.
(g) No
action
of Franklin Covey permitted hereunder shall in any way affect or impair the
rights of Franklin Covey and Shareholder’s obligations under the Note and this
Agreement. Shareholder hereby acknowledges that there are no conditions to
the
effectiveness of this Agreement.
(h) All
Shareholder’s obligations and rights of Franklin Covey or obligations expressed
in this Agreement shall be in addition to and not in limitation of those
provided in applicable law or in any other written instrument or
agreement.
(j) This
Agreement may be executed in any number of counterparts, each of which shall
for
all purposes be deemed an original, but all such counterparts shall constitute
but one and the same agreement. Shareholder hereby acknowledges receipt of
a
true, correct and complete counterpart of this Agreement.
(k) CHOICE
OF LAW.
THIS
AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS, BUT WITHOUT
REGARD TO CONFLICT OF LAWS PROVISIONS, OF THE STATE OF UTAH.
(1) CONSENT
TO JURISDICTION.
FRANKLIN COVEY AND THE SHAREHOLDER HEREBY IRREVOCABLY SUBMIT TO THE
NON-EXCLUSIVE JURISDICTION OF UNITED STATES FEDERAL OR UTAH STATE COURT SITTING
IN SALT LAKE CITY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS
AGREEMENT AND THE PARTIES HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT
OF
SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND
IRREVOCABLY WAIVE ANY OBJECTION THEY MAY NOW OR HEREAFTER HAVE AS TO THE VENUE
OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH
COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF FRANKLIN
COVEY TO BRING PROCEEDINGS AGAINST THE SHAREHOLDER IN THE COURTS OF ANY OTHER
JURISDICTION. ANY JUDICIAL PROCEEDING BY THE SHAREHOLDER AGAINST FRANKLIN COVEY
OR ANY LENDER OR ANY AFFILIATE OF FRANKLIN COVEY OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN SALT LAKE
CITY, UTAH.
(m) WAIVER
OF JURY TRIAL.
THE
SHAREHOLDER AND, BY ACCEPTANCE HEREOF, FRANKLIN COVEY HEREBY WAIVE TRIAL BY
JURY
IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER
(WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED WITH THE NOTE OR THIS AGREEMENT.
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
SHAREHOLDER:
«Full_Name»
FRANKLIN
COVEY CO.
By:
Steve
Young, Chief Financial Officer
Exhibit
D
Excerpt
from EITF Working Group Report No. 9
(See
Attached)
Exhibit
E
Excerpt
from EITF Working Group Report No.8
(See
Attached)
Exhibit
F
Excerpt
from the final minutes of the January 23-24, 2002 EITF Meeting
(See
Attached)