NOTE 4 – SHARE-BASED COMPENSATION

We utilize various share-based compensation plans as integral components of our overall compensation and associate retention strategy. The compensation cost of our share-based compensation plans is included in selling, general, and administrative expenses in the accompanying condensed consolidated income statements. The total cost of our share-based compensation plans was as follows for the periods presented (in thousands).



		Quarter Ended			Three Quarters Ended
		May 31,		June 1,		May 31,		June 1,
		2014		2013		2014		2013
Performance awards	$	318	$	360	$	2,326	$	1,061
Unvested share awards		75		100		258		284
Employee stock purchase plan		32		28		85		69
Management stock loan shares		-		-		-		497
Fully-vested share awards		191		-		191		22
	$	616	$	488	$	2,860	$	1,933

During the quarter and three quarters ended May 31, 2014, we issued approximately 9,000 shares and 563,000 shares of our common stock to employees and members of our board of directors from our various share-based compensation plans. The following is a description of recent developments in our share-based compensation plans.

Performance Awards

During the first quarter of fiscal 2014, the Organization and Compensation Committee of the Board of Directors (the Compensation Committee) granted new performance-based equity awards for our executive officers. A total of 89,418 shares may be awarded to the participants based on six individual vesting conditions that are divided into two performance measures, adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA) and increased sales of courses related to The 7 Habits of Highly Effective People (the 7 Habits). Three tranches of 20,864 shares will immediately vest to the participants when consolidated trailing four-quarter Adjusted EBITDA totals $37.0 million, $43.0 million, and $49.0 million. Another three tranches of 8,942 shares will immediately vest when trailing four-quarter sales of courses related to the 7 Habits increase $5.0 million, $10.0 million, and $12.5 million over the previous trailing four quarters. These performance awards have a maximum life of six years. Compensation expense is recognized as we determine it is probable that the shares will vest. Adjustments to compensation expense to reflect the timing of and the number of shares expected to be awarded will be made on a cumulative basis at the date of the adjustment.

On November 22, 2013, the Compensation Committee granted two of our employees performance-based awards for a total of 8,352 shares. These awards have the same vesting conditions as the fiscal 2013 common stock price performance award. For the participants to receive this award, the closing price of our common stock must average $22.00 per share over five days, which represents a market vesting condition. If the price of our common stock reaches this price within three years of the grant date, 100 percent of the award shares will vest. If the price of our common stock averages $22.00 per share between three and five years from the grant date, 50 percent of the shares will vest. No shares will vest after five years from the grant date. This grant was valued using a Monte Carlo simulation similar to previous tranches granted with these terms. Based on the valuation, this grant had a fair value of approximately $155,000 with a derived service period of 0.2 years and was fully amortized at March 1, 2014. Subsequent to May 31, 2014 our closing share price averaged $22.00 per share over five consecutive days and this award, plus the other shares granted in the fiscal 2013 common stock price award, vested to participants.

On April 16, 2014, the Compensation Committee granted a performance-based award to one of our employees. This award was based on the fiscal 2012 and fiscal 2013 common stock price award criteria and included 9,557 shares of common stock with a vesting price of $18.05 per share (2012 common stock price award vesting price) and 3,920 shares with a vesting price of $22.00 per share with the same terms as shares granted in November 2013 as described above. Based on these award elements, 9,557 shares were fully vested on the grant date and 3,920 shares had a market vesting condition that required a valuation similar to other similar award tranches. Based on our closing share price at the grant date, the fair value of the fully vested portion of the award was approximately $191,000 and was immediately expensed. Based on a Monte Carlo simulation consistent with other tranches of the Ring the Bell award, the remaining 3,920 shares had an estimated fair value of approximately $74,000 with a derived service period of 0.2 years. This award was fully amortized at May 31, 2014. Subsequent to May 31, 2014 our closing share price averaged $22.00 per share for five consecutive days and this award vested.

Compensation expense recognized during the quarter and three quarters ended May 31, 2014 for performance awards includes expense related to awards granted in previous periods for which the performance targets are probable of being achieved.

Unvested Share Awards

Our annual unvested share award granted to non-employee members of our Board of Directors is administered under the terms of the Franklin Covey Co. Second Amended and Restated 1992 Stock Incentive Plan, and is designed to provide our non-employee directors, who are not eligible to participate in our employee stock purchase plan, an opportunity to obtain an interest in the Company through the acquisition of shares of our common stock. The annual unvested award is generally granted in January (following the annual shareholders’ meeting) of each year. For the fiscal 2014 award, each eligible director received a whole-share grant equal to $50,000 with a one-year vesting period, which resulted in a total of 14,616 shares granted to members of the Board of Directors under this program. The fiscal 2013 grant of 30,672 shares vested in January 2014 and was awarded to members of our Board of Directors. At May 31, 2014, there was approximately $175,000 of unrecognized compensation expense associated with the fiscal 2014 Board of Director unvested share award.

Employee Stock Purchase Plan

We have an employee stock purchase plan (ESPP) that offers qualified employees the opportunity to purchase shares of our common stock at a price equal to 85 percent of the average fair market value of our common stock on the last trading day of the calendar month in each fiscal quarter. During the quarter and three quarters ended May 31, 2014, we issued 8,599 shares and 26,993 shares, respectively, to participants in the ESPP.

Stock Options

Our stock option activity during the three quarters ended May 31, 2014 consisted of the following:



			Weighted
			Avg. Exercise
	Number of		Price Per
	Stock Options		Share
Outstanding at August 31, 2013	675,000	$	11.25
Granted	-		-
Exercised	(43,750)		9.00
Forfeited	-		-

Outstanding at May 31, 2014	631,250	$	11.41

Options vested and exercisable at
May 31, 2014	631,250	$	11.41

The stock options exercised during fiscal 2014 were exercised on a net share basis during our first fiscal quarter and had an aggregate intrinsic value of $0.5 million.