## Gross Margin 

Gross margin was 56.2 percent of sales for fiscal 1999, compared to 60.9 percent in the prior year. The Company’s gross margin was adversely affected during fiscal 1999 by inventory write-offs, changes in product mix, channel pricing, decreased core training volume, and declining book royalties. The Company’s product mix continues to be affected by an overall decrease in high-margin planner sales and an increase in lower-margin technology-related product sales. Increased sales from the contract stationer channel also adversely affected gross margin due to contracted pricing terms that have resulted in higher unit sales volume, but at reduced margins. Core training programs offered by the Company have gross margins that are generally higher than the Company’s gross margin on product sales. Continued declining sales of these higher-margin programs resulted in a lower total gross margin for the Company during fiscal 1999. 

Additionally, book royalties received in the prior year reflect the impact of The 7 Habits of Highly Effective Families, which was released in fiscal 1998 and had declining sales during the year, thus directly impacting the Company’s gross margin in fiscal 1999. 

## Operating Expenses 

Selling, general and administrative expenses increased $13.7 million, to 42.4 percent of sales, compared to 40.5 percent in the prior year. The increase was primarily due to the development of electronic-based products and electronic commerce channels, increased promotional spending during the fourth quarter, and the acquisition of King Bear. In addition, SG&A expenses increased due to the opening of five new stores during fiscal 1999. 

During the year, the Company invested heavily to develop and market new electronic-based products, such as the Franklin Planner for Microsoft Outlook™. The Company also spent significant amounts to improve its electronic commerce infrastructure to meet changing consumer preferences and committed significant resources to the development of its Internet web site and other on-line products and services. During the fourth quarter of fiscal 1999, the Company increased its promotional spending, primarily for catalogs and direct mailings, to advertise new products, such as the Millen- nium edition of the Franklin Planner, and to improve training program sales performance. Increased SG&A expenses can also be attributed to the acquisition of 

King Bear during fiscal 1998, which added $5.9 million of incremental expenses to fiscal 1999. These increases were partially offset by the sale of the Institute of Fitness, which recorded $3.8 million of SG&A expenses prior to its sale in fiscal 1998. 

Depreciation charges increased by $3.5 million over the prior year primarily due to new computer software and hardware purchased in conjunction with the Company’s business transformation project and the addition of leasehold improvements for new stores. Equipment and software purchased in connection with the business transformation project are depreciated over estimated useful lives of three to five years. Amortization charges increased by $3.0 million due to amortization of contingent earnout payments made during the second quarter of fiscal 1999 and the amortization of certain business transformation project costs. 

## Restructuring Costs 

During the fourth quarter of fiscal 1999, the Company initiated a restructuring plan designed to restructure the Company’s operations, reduce its workforce and formally exit the majority of its leased office space located in Provo, Utah. As part of the restructuring plan, the Company intended to reduce its workforce from 4,200 employees to approximately 3,600 employees. The cost to provide severance and related benefits was estimated to be $11.7 million. Also included in the restructuring provision is a charge to exit certain leased office space in Provo, Utah. These facilities formerly accommodated sales, marketing, and other functions primarily aligned with the training and education SBU. 

## Loss on Impaired Assets 

At each balance sheet date, the Company reviews its goodwill, other intangible assets, and other long-term assets to determine whether events or circumstances may have occurred which indicate possible impairment. As part of the restructuring plan initiated during the fourth quarter of fiscal 1999, all programs, products, and curriculum were evaluated to determine their future value in the restructured Company. As a result of this evaluation, certain products, services, and curricula were discontinued. Other intangible and long-term assets were also reviewed for future value using undiscounted cash flows or other appropriate valuation methodologies. Based upon this analysis, the Company recognized a $16.6 million loss on impaired long-lived assets for the year ended August 31, 1999. 

