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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 001-10887
JENNY CRAIG, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0366188
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11355 NORTH TORREY PINES ROAD, LA JOLLA, CALIFORNIA 92037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 812-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.000000005 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of August 28, 1998, there were 20,688,971 shares of the registrant's
common stock outstanding, par value $.000000005, which is the only class of
common or voting stock of the registrant. As of that date, the aggregate market
value of the shares of common stock held by non-affiliates of the registrant
(based on the closing price for the common stock on the New York Stock Exchange
on August 28, 1998) was approximately $32,787,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended June 30, 1998 are incorporated by reference into Part II. The
information called for by Part III is incorporated by reference from the
definitive Proxy Statement of the Registrant which will be filed with the
Securities and Exchange Commission not later than 120 days after June 30, 1998.
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JENNY CRAIG, INC.
1998 FORM 10-K
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
ITEM 1. BUSINESS 1
ITEM 1a. EXECUTIVE OFFICERS OF THE REGISTRANT 8
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 11
ITEM 6. SELECTED FINANCIAL DATA 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 11
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 12
ITEM 11. EXECUTIVE COMPENSATION 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 12
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 12
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 12
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL BUSINESS DESCRIPTION
Jenny Craig, Inc. (the "Company") provides a comprehensive weight management
program (the "Program") through a chain of Company-owned and franchised weight
loss Centres operating under the name JENNY CRAIG WEIGHT LOSS CENTRES
("Centres"). As of August 28, 1998, there were 532 Company-owned and 98
franchised weight loss Centres throughout the United States, and 110
Company-owned and 37 franchised Centres in Australia, New Zealand and Canada.
Through these Centres the Company sells JENNY CRAIG CUISINE, its portion and
calorie controlled food products ("Jenny's Cuisine"), to participants in the
Program. As of August 28, 1998, there were approximately 87,000 active
participants in the Program in the United States, and 23,000 active participants
in foreign markets.
FORWARD-LOOKING STATEMENTS
Information provided herein may contain, and the Company may from time to
time disseminate material and make statements which may contain
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1996 (the "Act"). The words "expects," "anticipates,"
"believes" and similar words generally signify a "forward-looking" statement.
The cautionary statements below are being made pursuant to the provisions of the
Act and with the intention of obtaining the benefit of the "safe harbor"
provisions of the Act. The reader is cautioned that all forward-looking
statements are necessarily speculative and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward-looking statements. The discussion below,
together with portions of the discussion elsewhere in this Report, highlight
some of the more important risks identified by management of the Company but
should not be assumed to be the only things that could affect future financial
performance of the Company. Certain risk factors may also be identified by the
Company from time to time in other filings with the Securities and Exchange
Commission, press releases and other communications.
Competition; Technological and Scientific Developments. The weight loss
business is highly competitive and the Company competes against a large number
of companies of various sizes, some of which may have greater financial
resources than the Company. The Company competes against self-administered
weight loss regimens, doctors, nutritionists, dietitians, the pharmaceutical
industry and certain government agencies and non-profit groups which offer
weight control help by means of medication, diets, exercise and weight loss
drugs. The Company also competes against food manufacturers and distributors
which are developing and marketing low-calorie and diet products to
weight-conscious consumers. In addition, new or different products or methods of
weight control are continually being introduced. Such competition and any
increase in competition, including new pharmaceuticals and other technological
and scientific developments in weight control, may have a material adverse
impact on the Company.
From time to time, medical and health professionals have identified health
risks associated with weight loss. Weight loss pharmaceuticals are not risk-free
and side effects and potential health problems for certain users have been
identified. In September 1997, the United States Food and Drug Administration
requested the withdrawal of fenfluramine (one of the pharmaceuticals used in a
combination commonly known as "phen-fen") and dexfenfluramine, commonly referred
to by its trade name Redux, from the U.S. market based upon potential health
risks. The manufacturer and distributor of these pharmaceuticals agreed to an
immediate recall of these drugs. Medical and scientific developments or public
announcements associating a health risk with weight loss could have a material
adverse effect on the Company. See "Competition."
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Legislative and Regulatory Restrictions; Litigation. The Company is subject
to a number of laws and regulations regarding its advertising, food products,
franchise operations and relations with consumers. See "Regulation." The Federal
Trade Commission ("FTC") and certain states regulate advertising, disclosures to
consumers and franchisees, and other consumer matters and the Food and Drug
Administration and the United States Department of Agriculture specify quality
standards for foods. The Company's customers may file actions on their own
behalf, as a class or otherwise, and may file complaints with the FTC or state
or local consumer affairs offices and these agencies may take action on their
own initiative or on a referral from consumers or others. See "Item 3. Legal
Proceedings" for information regarding a Consent Order entered into by the
Company with the FTC relating to the advertising practices of the Company, and
certain class action litigation matters commenced against the Company, other
weight loss programs, and certain pharmaceutical companies relating to the
distribution and sale of weight loss pharmaceuticals Remedies sought in such
actions may include the refund of amounts paid by the complaining customer,
refunds to an entire class of participants, other damages, as well as changes in
the Centres' method of doing business. A complaint because of a practice at one
Centre, whether or not that practice is authorized by the Company, could result
in an order affecting some or all Centres in the particular state, and an order
in one state could influence courts or government agencies in other states
considering similar matters. Proceedings resulting from complaints may result in
significant defense costs, settlement payments or judgments and could have a
material adverse effect on the Company.
Future legislation or regulations including, without limitation, legislation
or regulations affecting the Company's marketing and advertising practices,
relations with consumers or franchisees or its food products, could have a
material adverse impact on the Company.
The Company's foreign operations and franchises are also generally subject
to regulations of the applicable country regarding the offer and sale of
franchises, the content of advertising, the labeling and packaging of food, and
promotion of diet products and programs. Although the Company is not currently
subject to any government-imposed restriction on the withdrawal of funds from
any foreign country, if Australia or any foreign country in which the Company
operates were to impose currency restrictions, the Company's business could be
materially adversely affected.
Effectiveness of Marketing and Advertising Program. The Company's business
is marketing intensive. Its success depends upon its ability to attract new
participants to the program. The effectiveness of the Company's marketing
practices, in particular its advertising campaigns, is important to the
Company's financial performance. If the Company's marketing and advertising
programs do not generate sufficient "leads" and "sales," the Company's results
of operations will be materially adversely affected.
Market Acceptance of New Products and Services. The Company's future success
will depend on its ability to enhance its existing products and services and to
develop and market new products and services on a timely basis that respond to
new and evolving customer demands, achieve market acceptance and keep pace with
new technological and scientific developments. There can be no assurance that
the Company will be successful in developing, introducing on a timely basis and
marketing such new products and services, or that any such new products or
services will be accepted by the market. The failure of such products and
services to be accepted by the market could have a material adverse impact on
the Company.
Cost of Food and Services. As a large percentage of the Company's revenues
are derived from sales of the Company's food products, increases in the cost of
food and food services could have a material adverse impact on the Company.
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Fluctuations In Quarterly Operating Results; Seasonality. The Company has
experienced and expects to continue to experience fluctuations in its quarterly
results of operations. The Company's revenues are affected by a number of
factors, including the volume and timing of customer leads, success of marketing
and advertising programs, success of introductions of new services and products,
activities of competitors and the ability of the Company to penetrate new
markets. The Company's business is seasonal with revenues generally decreasing
in the quarter ended December 31 and during the summer months. The Company may
also choose to reduce prices or to increase spending in response to competition
or to pursue new market opportunities, all or any of which may materially
adversely affect the Company's results of operations.
General Economy. The Company's future success will depend on the general
strength of the economy in the regions where the Company's Centres are located,
both within and outside the United States . Any weakness in the general economy
of such areas may have a material adverse impact on the Company's results of
operations.
THE PROGRAM
The Program offers a comprehensive, competitively priced approach to the
problem of losing and maintaining weight, combining a calorie controlled,
nutritionally balanced diet with education and motivation that assists
participants in achieving their weight loss needs. The Program features
individual counseling to assist participants in identifying and modifying their
eating habits to reach and maintain their desired weight. A cornerstone of the
Program is the purchase by participants of Jenny's Cuisine. These food products,
which are sold only at Centres to participants in the Program, are manufactured
by the Company's suppliers to specifications approved by registered dietitians
employed by the Company and are designed to provide nutritionally balanced and
good tasting low calorie foods to facilitate weight loss. During fiscal 1998,
the Company introduced its ABC program which simplified the overall program
content and provided participants with greater flexibility in food choices. The
Program recommends mild exercise to participants, and the Company offers weight
maintenance assistance after completion of the Program. The Program is used by
men and women, and to a much lesser extent by adolescents, although most
participants in the Program are women of all ages and income levels who wish to
lose in excess of 30 pounds. During fiscal 1997, the Company introduced an
adjunct to its traditional weight loss program which incorporated weight loss
pharmaceuticals for qualified participants. This program adjunct utilized
independently-contracted physicians to examine clients and prescribe Redux (the
trade name for dexfenfluramine, a medication for obesity approved by the U.S.
Food and Drug Administration in April 1996) and a combination of two other
medications commonly known as "phen-fen" to participants who met the appropriate
medical criteria for these medications. In August 1997, the Company ceased
offering a weight loss medication adjunct to its Program following reports from
the medical community as to possible health risks associated with the use of
Redux and phen-fen.
Each prospective participant in the Program meets with a Program Director at
the Centre, where statistical information regarding height, weight, activity
patterns, and related information is obtained. This information is analyzed
using standards fixed by the Company to assist the prospective participant in
establishing a weight loss goal and the Program Director then explains the
Program. After enrollment, the participant is referred to a Weight Loss
Consultant to begin the Program and purchase the first week's supply of Jenny's
Cuisine. Other than in connection with the now terminated program adjunct which
offered weight loss medications to qualified participants, the Company does not
engage physicians to examine or monitor the progress of participants, nor does
it undertake a medical examination of new participants. However, prior to
commencing the Program each new participant is asked to complete a health
questionnaire to disclose any current medical treatment and medical history in
order to determine whether participation in the Program is inadvisable or should
be monitored by the participant's personal physician.
For the first half of the Program, participants are encouraged to eat
Jenny's Cuisine for every meal along with fresh fruits, vegetables and dairy
products. During this initial period, participants are expected to visit the
Centre once a week to attend a private counseling session with a Weight Loss
Consultant during which the participant's progress is discussed, meal plans are
selected and the participant purchases Jenny's Cuisine.
After the initial period of the Program, participants are advised to eat
Jenny's Cuisine five days a week from various menus furnished by the Centre, and
are given guidelines for their own food preparations two days a week, continuing
on this regimen until their weight loss goal is achieved. Throughout the course
of the Program participants continue their individual counseling sessions.
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Each participant is allowed to utilize the Centre's facilities and personnel
until the participant's weight loss goal has been achieved. During the course of
the Program a participant loses an average of 1 to 1.5 pounds per week. While
the length of time a participant remains on the weight loss portion of the
Program varies with the amount of desired weight loss and how long a participant
chooses to continue on the Program, an average participant remains on the
Program for approximately four months.
Participants in the Program pay a fixed service fee which covers all aspects
of the Program other than the purchase of Jenny's Cuisine (and, while it was
being offered, certain fees associated with the weight loss medication program
adjunct). For the year ended June 30, 1998, the initial service fee for the
basic program in Company-owned Centres ranged from $10 to $197. As of August 28,
1998, the initial service fee in Company-owned Centres was $15. In addition, the
Company may offer special limited introductory programs for a lower fee. During
the weight loss portion of the Program, participants pay an average of between
$50 and $75 per week for Jenny's Cuisine. The Company also offers a Gold Program
which includes a weight loss module, lifestyle audio tapes, and a walking
program for a fee which was $148 as of August 28, 1998. A significant number of
participants who enroll in the Program purchase a Platinum Program for a fixed
fee which was $296 at August 28, 1998. The Platinum Program includes a weight
loss module, a weight maintenance module, a walking program, exercise video
tapes, Program return privileges, lifestyle video and audio cassette tapes, as
well as an ability to obtain a refund of a portion of the service fee if certain
criteria are met. Fees charged for the service portion of the Program are
generally paid at commencement. In some states participants have the legal right
to withdraw from the Program within specified periods following purchase and to
receive a refund of the fees. Even when not so required, the Company's policy is
to refund a pro rata portion of the fees upon request.
JENNY CRAIG CUISINE
Jenny's Cuisine is portion and calorie controlled and consists of a
nutritionally balanced variety of foods. The Company employs registered
dietitians to assist it in developing its meal plans and food products.
The Company believes that its healthful, high quality and good tasting food
products have contributed in large part to the Company's success. Currently, the
Company supplies its Centres with approximately 70 different breakfast, lunch,
dinner and snack food items for use in the Program, including prepackaged frozen
meals, shelf-stable and canned foods, snacks, and dried products. The Company
believes that its prepackaged frozen meals give it a strong competitive
advantage. The Company generally updates its menu once per year. Current food
items include such entrees as Blueberry Waffles, French Toast with Berries,
Stuffed Shells, Baked Turkey, Fish Festiva, Chicken Golden Gate, Chicken
Fajitas, Teriyaki Beefsteak, Pasta Primavera, and Chili Con Carne.
Product sales, principally comprised of Jenny's Cuisine, accounted for 91%
and 93% of the Company's revenues in fiscal 1997 and 1998, respectively. For the
year ended June 30, 1997, the Company's gross revenues from product sales were
$333,917,000 compared to $327,804,000 for the year ended June 30, 1998.
The Company purchases its food products from various companies which
manufacture the products to specifications approved by the Company. The
Company's major food suppliers are Overhill Farms and ZB Industries, Inc., which
supply frozen foods, Truitt Bros., which supplies shelf-stable food products,
Campbell's Soup Company and Nestle Food Company, which supply canned food, and
Natural Alternatives, Inc., which supplies vitamin supplements. The Company
believes that alternative sources for all of its food products are available
without material disruption of its operations.
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HISTORICAL GROWTH
The Company commenced operations in Australia in 1983 and became one of the
largest weight loss companies in that country with 69 Company-owned and
franchised Centres by the end of fiscal 1985. Following its success in the
Australian market, and recognizing the opportunities to market the Program
successfully in the United States, the Company expanded its operations to the
United States by initially opening 13 Company-owned Centres in the Los Angeles
metropolitan area in February 1985 and six Centres in the Chicago metropolitan
area in September 1985. The Company's growth through August 28, 1998 as measured
by the number of Centres operating is shown in the following table:
<TABLE>
<CAPTION>
AT JUNE 30, AT
---------------------------------------------------------- 8/28
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company-owned
United States 151 273 326 370 476 502 478 485 542 533 532
Foreign 70 84 86 88 103 106 102 103 106 110 110
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
221 357 412 458 579 608 580 588 648 643 642
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Franchise
United States 47 126 186 199 176 159 154 159 113 101 98
Foreign 37 29 30 37 39 43 43 36 36 37 37
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
84 155 216 236 215 202 197 195 149 138 135
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total 305 512 628 694 794 810 777 783 797 781 777
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
The number of franchise Centres owned by affiliates at June 30, 1998 and
August 28, 1998 was 17.
In fiscal 1998, the Company acquired 8 Centres from two franchisees in the
United States, opened 13 United States Company-owned Centres and closed 30
United States Company-owned Centres. Also during fiscal 1998, 2 United States
franchise Centres were opened and 6 United States franchise Centres were closed.
The increase in United States Company-owned Centres and the decrease in
United States franchise Centres in 1997 reflects the Company's acquisition of 51
Centres from three franchisees during fiscal 1997.
MARKETING
The Company's business is marketing intensive, because both maintaining its
market position and continued growth depend upon the Company's ability to
attract new participants for the Program. The Company conducts ongoing research
to better understand the prospective weight loss customer and needs of existing
clients. The data obtained is then utilized in the improvement and development
of the Company's products and services and the Company's marketing activities.
The Company also researches each prospective market to determine the appropriate
number and distribution of Centres for that market. This determination is a
significant factor in developing leads, improving client convenience and
maximizing return on advertising investment.
The Company's advertising is designed to make the customer aware of the
Company's and the Program's attributes. The Company's advertising presents a
company which is caring, supportive, and understanding of the problems of being
overweight, and through the person of Jenny Craig, is differentiated from other
generic sounding weight loss companies. Testimonial advertising, featuring
participants in the Program, demonstrates the success of the Program on a
personal level. The Company's advertising contains a state-of-the-art 800
telephone number (800-98JENNY) that connects the caller directly to the nearest
Centre in every market in the United States.
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The Company presently spends more than 10% of gross revenues on advertising
to generate leads, advertising extensively in each local market where it owns
and operates Centres. The majority of this amount is spent on television
advertising, with the balance allocated to print advertising and radio
advertisements. The size of the Company's advertising budget, coupled with the
television spot media buying power of its agency enables the Company to
advertise on a low cost-per-spot basis. Franchise agreements generally require
that franchisees spend the greater of 10% of gross receipts or $1,000 per Centre
per week for local advertising to promote the Program. Franchisees may elect to
use the Company's advertising, which the Company makes available to franchisees,
rather than generate their own advertising. In addition to its consumer
endorsements, the Company occasionally uses celebrity endorsements among its
other advertising campaigns. As is common in the weight loss industry, the
Company regularly utilizes various sales promotion campaigns, including a
reduction of the service fee for the Program.
One of the Company's most valuable assets is the participants who have
already joined the Program. Information on participants is maintained in the
Company's data base and is utilized in the Company's direct marketing programs
to existing and former participants. The Company encourages participants in the
Program to introduce other individuals to the Program by giving food discounts
and other incentives, and the Company believes that such referrals are an
important source of revenues.
FRANCHISE OPERATIONS
The Company's strategy is to have predominantly Company-owned Centres. The
Company's general practice concerning franchising, with some exceptions, is to
offer franchised Centres in smaller markets. However, from time to time
franchises have been granted to enable the Company to enter a large market more
quickly. Franchising frequently gives the Company the benefit of obtaining
franchisees who are more familiar with a local market than the Company, and also
enables the Company to expand its business without increasing the number of
employees by using franchisee management.
The Company believes that one of the factors contributing to its success has
been its strong commitment to franchisee relationships. The Company seeks
franchisees who demonstrate the management skills, experience and financial
capability to develop multiple Centres. In particular, the Company seeks
franchisees who demonstrate experience in businesses that are similar to or have
characteristics similar to the Company.
Franchised Centres are required to adhere to the Company's policies and
procedures with respect to the operation of the Centres and the implementation
of the Program. Although the franchise agreements do not require them to do so,
present owners of franchises have actively participated in the operation of the
Centres. Franchisees are required to undergo training at a Company training
facility. To date, all franchisees have purchased their food from the Company,
although franchisees are not required to do so under the terms of the franchise
agreement.
As of August 28, 1998, the Company had 135 Centres operating pursuant to
franchise agreements, of which 98 were located throughout the United States, 16
in Australia, 17 in New Zealand and 4 in Canada. During fiscal 1998, the Company
acquired 8 Centres from two franchisees.
TRADE NAMES AND TRADEMARKS
The Company believes the names it uses are important to its business and
that its business could be harmed if others used the names. JENNY CRAIG WEIGHT
LOSS CENTRES is a registered service mark and JENNY'S CUISINE is a registered
trademark of the Company under the laws of the United States. The registration
of JENNY CRAIG WEIGHT LOSS CENTRES and JENNY'S CUISINE will expire in the United
States in October 2006 and in January 2008, respectively, if not renewed by the
Company. The Company has obtained registrations or filed applications under
applicable trademark and service mark laws in Australia, New Zealand, Canada,
Mexico and in various other countries to protect its use of JENNY CRAIG WEIGHT
LOSS CENTRES and JENNY'S CUISINE.
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COMPETITION
The weight loss business is highly competitive and the Company competes
against a number of companies of various sizes, some of which may have greater
financial resources than the Company. The Company's principal direct competitors
are national chains such as Weight Watchers International, Nutri/System, Inc.
("Nutri/System"), and Diet Center, Inc. as well as regional and local weight
loss businesses, some of which include supervision by or consultation with
doctors or nurses. The Company also competes against self-administered weight
loss regimens, doctors, nutritionists, dietitians, the pharmaceutical industry
and certain government agencies and non-profit groups which offer weight control
help by means of medication, diets, exercise and weight loss drugs. The Company
also competes against food manufacturers and distributors which are developing
and marketing low-calorie and diet products to weight-conscious consumers. In
addition, new or different products or methods of weight control are continually
being introduced. Such competition and any increase in competition, including
new pharmaceuticals and other technological and scientific developments in
weight control, may have a materially adverse impact on the Company.
The Company believes that it competes on the basis of the effectiveness of
the Program, its competitive pricing, the quality of Jenny's Cuisine, and the
marketing and management skills of its management and franchisees.
REGULATION
The Federal Trade Commission (the "FTC"), and certain states, regulates
advertising and other consumer matters. The Company's customers may file actions
on their own behalf, as a class or otherwise, and may file complaints with the
FTC or state or local consumer affairs offices and these agencies may take
action on their own initiative or on a referral from consumers or others.
Remedies sought in such actions may include the refund of amounts paid by the
complaining consumer, refunds to an entire class of participants, other damages,
as well as changes in the Centres' method of doing business. A complaint because
of a practice at one Centre, whether or not that practice is authorized by the
Company, could result in an order affecting some or all Centres in the
particular state, and an order in one state could influence courts or government
agencies in other states considering similar matters. See "Item 3. Legal
Proceedings" for information regarding a Consent Order entered into by the
Company with the FTC relating to the advertising practices of the Company, and
certain class action litigation matters commenced against the Company, other
weight loss programs, and certain pharmacuetical companies relating to the
distribution and sale of weight loss pharmacueticals. Proceedings resulting from
complaints may result in significant defense costs, settlement payments or
judgements and could have a material adverse effect on the Company.
The Company is subject to certain United States laws and regulations in
connection with its food products. The Food, Drug and Cosmetic Act prohibits
adulteration and misbranding and provides for penalties and other remedies such
as seizure of products. The Food and Drug Administration ("FDA") enforces the
Food, Drug and Cosmetic Act, including specifying quality standards for foods
and, as do many states, regulating food labeling.
Those foods which contain 2% or more meat or poultry products, and the
plants which manufacture them, are subject to regulation (including labeling
requirements) and continuous inspection by the United States Department of
Agriculture ("USDA"). Although the FDA and the USDA require the manufacturers of
the Company's food products to obtain appropriate governmental approvals and to
comply with applicable regulations, the Company has responsibility for the
quality and labeling of food and for compliance with FDA and USDA regulations.
Prior to offering franchises in the United States, the Company, as is
generally the case with franchisors, is required under regulations of the
Federal Trade Commission to furnish potential franchisees with a disclosure
document describing the Company, the franchise agreement and related matters.
Some states require their own version of the disclosure document. In addition,
state franchise laws may require the Company to furnish a bond, escrow monies,
submit annual reports and meet other conditions.
Many states have statutes which may be applicable to the Company and require
that a written contract be provided to the participant, and that participants be
permitted to cancel their contract within specified periods following purchase
and receive a refund of the service fee.
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The Company's foreign operations and franchises are also generally subject
to regulations of the applicable country regarding the offer and sale of
franchises, the content of advertising, the labeling and packaging of food, and
promotion of diet products and programs.
EMPLOYEES
As of August 28, 1998 the Company had approximately 4,100 employees, of
which 3,390 were located in the United States, 570 were located in Australia,
and 140 were located in Canada. None of the Company's workers in the United
States are represented by a labor union. The Company has never had a strike or
lockout and considers its employee relations to be excellent.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company:
<TABLE>
<CAPTION>
NAME OF EXECUTIVE
OFFICER AGE POSITION(S) HELD
- ------------------------- ------- ---------------------------------------
<S> <C> <C>
Sidney Craig 66 Chairman of the Board, Chief Executive
Officer and Director
Jenny Craig 66 Vice-Chairman, President and Director
Philip Voluck 56 Executive Vice President and Chief
Operating Officer
Michael L. Jeub 55 Senior Vice President, Chief Financial
Officer and Treasurer
Janet Rheault 37 Senior Vice President, Operations
Leslie Koll 47 Senior Vice President, Marketing
William K. Dix 42 Vice President, General Counsel
Alan V. Dobies 50 Vice President, Corporate Services
Stuart Gaiber 49 Vice President, Information Services
Marvin Sears 71 Secretary and Director
</TABLE>
Sidney Craig has been Chairman of the Company or its predecessors since 1983
and served as Chief Executive Officer from 1983 through April 1994. In October
1997, Mr. Craig was elected Chief Executive Officer of the Company.
Jenny Craig has served as Vice-Chairman of the Company since September 1991,
as President and Chief Operating Officer of the Company or its predecessors from
1983 to August 1991 and as a director of the Company or its predecessors from
1983 to date. Mrs. Craig was elected President of the Company in October 1997.
Sidney Craig and Jenny Craig are husband and wife.
Philip Voluck has served as Executive Vice President and Chief Operating
Officer since July 1998. From March 1997 to August 1997 Mr. Voluck was President
of WSI-Miami Inc., a joint venture with Sylvan Learning System, Inc. involved in
the teaching of English as a second language. From August 1996 to November 1996
Mr. Voluck served as President of H. Katz Capital Group, a privately held
venture capital firm. From January 1994 to August 1996, Mr. Voluck was President
and Chief Operating Officer of Nutri/System, L.P. a privately held operator of
approximately 700 corporate and franchised weight loss centers. From 1986 to
1993, Mr. Voluck was Managing General Partner of Nutri/System of
Florida/Georgia, an operator of approximately 90 weight loss centers.
Michael L. Jeub has served as Senior Vice President, Chief Financial Officer
and Treasurer since July 1994. From July 1993 to July 1994, Mr. Jeub was Chief
Financial Officer, Executive Vice President and Treasurer of National Health
Laboratories, Inc., a publicly held clinical laboratory chain. From June 1991 to
April 1993, Mr. Jeub served as President and Chief Operating Officer of Medical
Imaging Centers of America, Inc., a publicly held chain of high technology
imaging centers.
Janet Rheault has served as Senior Vice President, Operations since April
1996. Ms. Rheault, who joined the Company in 1988, served in various operating
capacities, most recently as Divisional Supervisor, prior to her current
position.
8
<PAGE> 11
Leslie Koll has served as Senior Vice President, Marketing since November
1994. From 1991 to 1994, Mr. Koll was managing partner with Pelletier, Koll and
Weil, a marketing and business development firm, which he founded in 1987. Mr.
Koll was Vice President, Marketing of Hanna-Barbera Productions, Inc. from 1989
to 1991.
William K. Dix has served as Vice President, General Counsel since May 1996.
From March 1994 to May 1996 Mr. Dix was Counsel for Aetna Health Plans, Inc.
From 1989 through March 1994 Mr. Dix was Corporate Counsel for Science
Applications International Corporation, a high technology research and
development company.
Stuart Gaiber has served as Vice President, Information Systems since June
1997. From April 1995 to June 1997 Mr. Gaiber was Director of Information
Technology for KCET, a public television station in Los Angeles, California.
From October 1989 through April 1995, Mr. Gaiber served as Director of MIS for
Avery Dennison, an office products company.
Alan V. Dobies has served as Vice President, Corporate Services since June
1990. From July 1988 to May 1990, Mr. Dobies was Vice President, Operations of
Joico International, a manufacturer of professional hair-care products.
Marvin Sears, a director of the Company since July 1989, has served as the
Secretary of the Company since June 1991, and as Assistant Secretary of the
Company from August 1985 to June 1991. Mr. Sears is a practicing attorney in Los
Angeles, California where, since May 1989, he has been a partner in the law firm
of Proskauer Rose LLP, counsel to the Company during fiscal 1998 and currently.
From June 1960 until May 1989, Mr. Sears was a senior partner of the Los Angeles
law firm of Pacht, Ross, Warne, Bernhard & Sears, Inc. and its successor, Shea &
Gould. Mr. Sears is a member of the Board of various privately-owned business
enterprises.
Executive officers are elected to serve until their successors are elected
and qualified.
ITEM 2. PROPERTIES
At August 28, 1998, there were 642 Company-owned Centres, all of which are in
leased premises, of which 532 were in the United States, 84 were in Australia,
and 26 were in Canada. A majority of the leases for Company-owned Centres were
entered into for an initial period of five years. The leases require fixed
monthly rental payments which are subject to various adjustments. The Centres
are generally located in retail shopping areas on major commercial thoroughfares
and generally occupy approximately 2,000 to 2,500 square feet of space
consisting of a reception area, individual counseling rooms, and food storage
space.
In July 1996 the Company purchased a 75,000 square foot office building
located in La Jolla, California in which its executive offices are located. The
total purchase price was $8.36 million and the building is subject to a
promissory note to a bank, secured by a deed of trust, which had a balance owing
of $5,716,000 as of June 30, 1998. The Company leases a warehouse in Rancho
Cucamonga, California for its food and non-food inventory. The Company's
executive offices in Australia are leased and are located in Melbourne, and the
Company also owns a warehouse in Sunshine, Australia.
The Company believes that its executive office and warehouse space is
adequate for its current needs and that additional space will be available at
reasonable costs as needed.
9
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
The Company and the Federal Trade Commission have entered into a Consent
Order settling all contested issues raised in a complaint filed in September
1993 against the Company alleging that the Company violated the Federal Trade
Commission Act by the use and content of certain advertisements for the
Company's weight loss program featuring testimonials, claims for the program's
success and safety, and statements as to the program's costs to participants.
The Consent Order does not admit any issue of fact or law or any violation by
the Company of any law or regulation, and does not involve payment by the
Company of any civil money penalty, damages, or other financial relief. The
Consent Order requires certain procedures and disclosures in connection with the
Company's advertisements of its products and services. The full Commission
accepted the Consent Order, and it has been made effective as of May 4, 1998.
The Company does not believe that compliance with the Consent Order will have a
material adverse effect on the Company's consolidated financial position or
results of operations or its current advertising and marketing practices.
The Company, along with other weight loss programs and certain
pharmaceutical companies, has been named as a defendant in an action filed in
the Circuit Court for the Eleventh Judicial Circuit in Pickens County, Alabama
(the "Alabama Litigation"). The action was commenced in August, 1997 by three
plaintiffs who are seeking to maintain the action as a class action on behalf of
all persons in the United States and United States Territories who have suffered
or may in the future suffer injury due to the administration of phentermine,
fenfluramine (commonly known as "phen-fen" when taken together) and/or
dexfenfluramine (tradename "Redux(TM)"), which were manufactured or sold by the
defendants. The complaint includes claims against the Company and other
defendants, acting separately and in concert, for alleged unlawful and tortious
acts, including sale of allegedly dangerous and defective products, negligent
marketing and distribution, failure to warn of the risks associated with the
weight loss medications, breach of warranty, fraud, and negligent
misrepresentation. The complaint seeks compensatory and punitive damages in
unspecified amounts and equitable relief including the establishment of a
medical fund to cover future medical expenses resulting from the use of the
weight loss medications, and a requirement that the defendants adequately warn
the public of the risks associated with the use of the weight loss medications.
The Company, along with certain pharmaceutical companies, has also been
named as a defendant in an action filed in the Court of Common Pleas,
Philadelphia County, Pennsylvania (the "Pennsylvania Litigation"). The action
was commenced in November 1997 by a plaintiff, a participant in the Company's
program, who is seeking to maintain the action as a class action on behalf of
all persons in the Commonwealth of Pennsylvania who have purchased and used
fenfluramine, dexfenfluramine and phentermine, alone or in combination. The
complaint includes claims against the Company and the other defendants for
alleged false and misleading statements concerning the safety and
appropriateness of using fenfluramine, dexfenfluramine, and phentermine, and the
benefits, uses and ingredients of these drugs, negligence in the distribution,
sale, and prescribing of these medications, and breach of the warranty of
merchantability. The complaint seeks compensatory and punitive damages in
unspecified amounts and a Court-supervised program funded by the defendants
through which class members would undergo periodic medical examination and
testing.
The Company has tendered the Alabama Litigation and the Pennsylvania
Litigation matters to its insurance carriers. The Company and the provider of
the independent physicians who prescribed the weight loss medications in the
Company's centres have each asserted their rights with respect to these
litigations under contractual provisions for indemnification in the agreement
between them. The claims have not progressed sufficiently for the Company to
estimate a range of possible loss, if any. The Company intends to defend the
matters vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Material appearing under the caption "Common Stock Data" on page 36 of the
Annual Report to Shareholders of Jenny Craig, Inc. for the fiscal year ended
June 30, 1998 ("1998 Annual Report") is hereby incorporated by this reference.
ITEM 6. SELECTED FINANCIAL DATA
Material appearing under the caption "Selected Financial Data" on page 8 of
the Company's 1998 Annual Report is hereby incorporated by this reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Material appearing under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 9 through 18 of the
Company's 1998 Annual Report is hereby incorporated by this reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments and the cost of its debt, and
foreign currency fluctuations.
At June 30, 1998, the Company maintains a portion of its cash and cash
equivalents in financial instruments with original maturities of three months or
less. The Company also maintains a short-term investment portfolio containing
financial instruments with original maturities of greater than three months but
less than twelve months. These financial instruments, principally comprised of
high quality commercial paper, are subject to interest rate risk and will
decline in value if interest rates increase. Due to the short duration of these
financial instruments, an immediate 10 percent increase in interest rates would
not have a material effect on the Company's financial condition or results of
operations. The Company has not used derivative financial instruments in its
investment portfolio.
The Company's only long-term debt at June 30, 1998 is comprised of a note
payable to a bank, secured by the Company's corporate office building, with a
total balance of $5,716,000. The note bears interest at the London Interbank
Offered Rate plus one percent, with quarterly interest rate adjustments. Due to
the relative immateriality of the note payable, an immediate 10 percent change
in interest rates would not have a material effect on the Company's financial
condition or results of operations.
Approximately 16% of the Company's revenues for the year ended June 30, 1998
were generated from foreign operations, located principally in Australia and
Canada. In fiscal 1998, the Company was subjected to a 12% weighted average
decrease in the Australian and Canadian currencies in relation to the U.S.
dollar compared to fiscal 1997. Currently, the Company does not enter into
forward exchange contracts or other financial instruments with respect to
foreign currency.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and subsidiaries,
related notes to consolidated financial statements, and material appearing under
the caption "Independent Auditors' Report" on pages 19 through 34 of the
Company's 1998 Annual Report are hereby incorporated by this reference. Material
appearing under the caption "Selected Quarterly Financial Information" on page
35 of the Company's 1998 Annual Report is hereby incorporated by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after June 30, 1998. Information
regarding executive officers of the Registrant is set forth under the caption
"Executive Officers of the Registrant" in Item 1a hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after June 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after June 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after June 30, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
FINANCIAL STATEMENTS
The following appear in the 1998 Annual Report at the pages indicated below
and are incorporated into Part II by reference:
<TABLE>
<S> <C>
(1) Independent Auditors' Report Page 34
(2) Consolidated Balance Sheets as of June 30, 1997 and 1998 Page 19
(3) Consolidated Statements of Income for the Years Ended Page 20
June 30, 1996, 1997 and 1998
(4) Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 1996, 1997 and 1998 Page 21
(5) Consolidated Statements of Cash Flows
for the Years Ended June 30, 1996, 1997 and 1998 Page 22
(6) Notes to Consolidated Financial Statements Pages 23-33
</TABLE>
SCHEDULES
The following financial statement schedule appears on page 18 of this
report:
II. Valuation and Qualifying Accounts
Schedules other than the schedule listed above are omitted because they are
either not required or not applicable.
12
<PAGE> 15
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ---------- --------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Registrant
(Incorporated herein by reference to Exhibit 3.1 to the Report on
Form 10-K of the Company for the fiscal year ended June 30, 1997.)
3.4 Restated By-laws of Registrant.(1)
10.1 Jenny Craig, Inc. Management Deferred Bonus Program.(1)(2)
10.2 Executive Employment Agreement between Jenny Craig, Inc. and C.
Joseph LaBonte. (Incorporated herein by reference to Exhibit 10.2 to
the Report on Form 10-K of the Company for the fiscal year ended
June 30, 1994.)(3)
10.3 Jenny Craig, Inc. Stock Option Plan, as amended. (Incorporated
herein by reference to Exhibit 10.3 to the Report on Form 10-Q of
the Company for the three month period ended December 31, 1996.)(2)
10.4 Executive Employment Agreement between Jenny Craig, Inc. and Jenny
Craig. See Exhibit 10.30 for Amendment thereto.(1)(3)
10.5 Executive Employment Agreement between Jenny Craig, Inc. and Sid
Craig. See Exhibit 10.29 for Amendment thereto.(1)(3)
10.6 Employment Agreement between Jenny Craig, Inc. and Michael L. Jeub.
(Incorporated herein by reference to Exhibit 10.6 to the Report on
Form 10-K of the Company for the fiscal year ended June 30,
1994.)(3)
10.7 Settlement Agreement among Class Plaintiffs, Jenny Craig, Inc. and
Jenny Craig International, Inc. (Incorporated herein by reference to
Exhibit 10.7 to the Report on Form 10-K of the Company for the
fiscal year ended June 30, 1994.)
10.8 Agreement dated as of March 27, 1997 between Jenny Craig, Inc. and
Sunil Dewan. (Incorporated herein by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q for the three month period ended
March 31, 1997.) (3)
10.9 Standard Form of Franchise Agreement of Jenny Craig International,
Inc.(1)
10.10 Agreement dated as of April 21, 1997 between Jenny Craig, Inc. and
Stuart Gaiber. (Incorporated herein by reference to Exhibit 10.10 to
the Report on Form 10-K of the Company for the fiscal year ended
June 30, 1997.) (3)
10.11 Office Building Lease between Jenny Craig Weight Loss Centres, Inc.
and JLRB Associates dated September 15, 1988.(1)
10.11.1 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated.(1)
10.11.2 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated.(1)
10.11.3 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, dated February 21, 1991.(1)
10.11.4 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated.(1)
10.11.5 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated. (Incorporated herein by
reference to Exhibit 10.11.5 to the Report on Form 10-K of the
Company for the fiscal year ended June 30, 1993.)
10.12 Lease between Jenny Craig Distributing Pty. Ltd. and Indalia Pty.
Ltd. dated November 16, 1990.(1)
10.13 Agreement dated as of June 4, 1997 between Jenny Craig, Inc. and
Eileen Piersa. (Incorporated herein by reference to Exhibit 10.13 to
the Report on Form 10-K of the Company for the fiscal year ended
June 30, 1997.) (3)
10.14 Standard Form Lease dated May 14, 1996 between Jenny Craig Products,
Inc. and RCDC Associates Limited Partnership (Incorporated herein by
reference to Exhibit 10.14 to the Report on Form 10-K of the Company
for the fiscal year ended June 30, 1997.)
10.16 Tax Allocation and Indemnity Agreement among New York Life Insurance
Company et al, Security Pacific National Bank individually and as
Agent, Jenny Craig, Inc., Jenny Craig Weight Loss Centres, Inc.,
Craig Enterprises, Inc., SJF Enterprises, Inc., Sid Craig and Jenny
Craig dated as of June 30, 1989, as amended.(1)
</TABLE>
13
<PAGE> 16
<TABLE>
<S> <C>
10.17 Shareholders Agreement among Sid Craig, Jenny Craig, W. James
Mallen, New York Life Insurance Company, et al., Security Pacific
National Bank individually and as Agent, Craig Enterprises, Inc.,
SJF Enterprises, Inc. and Jenny Craig, Inc. dated as of June 30,
1989.(1)
10.18 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and
IBM Foods, d/b/a Overhill Farms, dated September 22, 1988, with
amendments.(1)
10.20 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and
Campbell Soup Company, dated June 1, 1991.(1)
10.21 Metropolitan Insurance and Annuity Company Key Man Life Insurance
Policy Relating to Jenny Craig.(1)
10.23 Prudential Insurance Company of America Key Man Life Insurance
Policy Relating to Jenny Craig.(1)
10.29 Agreement dated as of September 14, 1994 between Sidney Craig and
Jenny Craig, Inc., amending Exhibit 10.5. (Incorporated herein by
reference to Exhibit 10.2 to the Report on Form 10-Q of the Company
for the three month period ended September 30, 1994.)(3)
10.30 Agreement dated as of September 14, 1994 between Jenny Craig and
Jenny Craig, Inc. amending Exhibit 10.4. (Incorporated herein by
reference to Exhibit 10.3 to the Report on Form 10-Q of the Company
for the three month period ended September 30, 1994)(3)
10.32 Agreement dated as of November 10, 1994 between Leslie Alan Koll and
Jenny Craig, Inc. (Incorporated herein by reference to Exhibit 10.1
to the Report on Form 10-Q of the Company for the three month period
ended December 31, 1994.)(3)
10.33 Settlement Agreement dated March 29, 1996 with respect to the
settlement of a series of class actions collectively entitled In Re
Jenny Craig Securities Litigation. (Incorporated herein by reference
from Exhibit 10.33 to the Report on Form 10-K of the Company for the
fiscal year ended June 30, 1995.)
10.34 Agreement dated as of April 11, 1996 between Janet Rheault and Jenny
Craig, Inc. (Incorporated herein by reference to Exhibit 10.1 to the
Report on Form 10-Q of the Company for the three month period ended
March 31, 1996.)(3)
10.35 Agreement dated as of April 26, 1996 between William K. Dix and
Jenny Craig, Inc. (Incorporated herein by reference to Exhibit 10.35
to the Company's Report on Form 10-K for the fiscal year ended June
30, 1996.) (3)
10.36 Amended and Restated Agreement dated as of August 20, 1996 between
Marvin Sears and Jenny Craig, Inc. (Incorporated herein by reference
to Exhibit 10.36 to the Company's Report on Form 10-K for the fiscal
year ended June 30, 1996.) (2)
10.37 Asset Purchase Agreement dated as of August 12, 1996 among Rose
Enterprises, Inc., Rose Enterprises, Inc. NJ, Rose Enterprises of
Connecticut, Inc., Chris Lin Enterprises, Inc. Chris Lin Enterprises
New York, Inc. Audrey Sedita, Bradley Morley and Jenny Craig
Operations, Inc. (Incorporated herein by reference to Exhibit 10.37
to the Company's Report on Form 10-K for the fiscal year ended June
30, 1996.)
10.38 Purchase and Sale Agreement dated as of May 22, 1997 between Jenny
Craig Management, Inc. and M & S Balanced Property Fund, L.P.
(Incorporated herein by reference to Exhibit 10.38 to the Company's
Report on Form 10-K for the fiscal year ended June 30, 1996.)
10.39 Agreement and Release dated as of October 1, 1997 between Jenny
Craig, Inc. and C. Joseph LaBonte (Incorporated herein by reference
to Exhibit 10.1 to the Report on Form 10-Q of the Company for the
three month period ended December 31, 1997.)
10.40 Stock Option Termination Agreement dated November 4, 1997 between
Jenny Craig, Inc. and C. Joseph LaBonte (Incorporated herein by
reference to Exhibit 10.2 to the Report on Form 10-Q of the Company
for the three month period ended December 31, 1997.)
10.41 Agreement dated as of July 7, 1998 between Jenny Craig, Inc. and
Philip Voluck (3).
10.42 Consent Order, effective May 4, 1998, in the matter of Jenny Craig,
Inc., a corporation, and Jenny Craig International, Inc., a
corporation.
13. Portions of the Annual Report to Shareholders with respect to the
fiscal year ended June 30, 1998 which are incorporated by reference
in this Form 10-K.
18. Preferability Letter from KPMG Peat Marwick LLP with respect to
change in accounting method. (Incorporated herein by reference to
Exhibit 18 to the Report on Form 10-K of the Company for the fiscal
year ended June 30, 1997.)
22. List of Subsidiaries (Incorporated herein by reference to Exhibit 22
to the Report on Form 10-K of the Company for the fiscal year ended
June 30, 1997.)
23. Independent Auditors' Consent.
27. Financial Data Schedule.
</TABLE>
14
<PAGE> 17
- ----------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-1 filed October 29, 1991, Registration No. 33-42564. Each of the
exhibits so incorporated by reference bears the same exhibit number in
Registration Statement No. 33-42564.
(2) Compensatory Plan.
(3) Management contract.
15
<PAGE> 18
B. REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during the last
quarter of the period covered by this report.
16
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Jenny Craig, Inc.:
Under date of August 17, 1998, we reported on the consolidated balance
sheets of Jenny Craig, Inc. and subsidiaries as of June 30, 1997 and 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1998, as
contained in the 1998 annual report to shareholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year ended June 30, 1998. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule as listed in Item
14. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
San Diego, California
August 17, 1998
17
<PAGE> 20
SCHEDULE II
JENNY CRAIG, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998
($ IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED CHARGED CHARGED
TO CHARGED TO CHARGED TO CHARGED
BALANCE COSTS TO BALANCE COSTS TO BALANCE COSTS TO BALANCE
AT AND OTHER WRITE AT AND OTHER WRITE AT AND OTHER WRITE AT
DESCRIPTION 6/30/95 EXPENSES ACCOUNTS OFFS 6/30/96 EXPENSES ACCOUNTS OFFS 6/30/97 EXPENSES ACCOUNTS OFFS 6/30/98
- ------------------- ------- -------- -------- -------- ------- -------- -------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts 5,620 (900) -- (3,256) 1,464 -- -- (274) 1,190 -- -- (110) 1,080
Accumulated
Amortization -
Reacquired Area
Franchise Rights 2,708 837 160 -- 3,705 1,015 (122) -- 4,598 1,051 (408) -- 5,241
Accumulated
Amortization -
Computer Software 1,013 272 -- -- 1,285 75 -- -- 1,360 91 -- -- 1,451
</TABLE>
- ----------
See accompanying Independent Auditors' Report.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 25, 1998 JENNY CRAIG, INC.
By: /s/ SIDNEY CRAIG
-------------------------------
Sidney Craig
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- --------------------------------------- ---------------------
<S> <C> <C>
/s/ SIDNEY CRAIG Chairman of the Board and September 25, 1998
- ----------------------------- Chief Executive Officer
Sidney Craig (Principal Executive Officer)
/s/ JENNY CRAIG President, Vice Chairman and Director September 25, 1998
- -----------------------------
Jenny Craig
/s/ MICHAEL L. JEUB Senior Vice President, September 25, 1998
- ----------------------------- Chief Financial Officer and Treasurer
Michael L. Jeub (Principal Financial and Accounting
Officer)
/s/ SCOTT BICE Director September 25, 1998
- -----------------------------
Scott Bice
/s/ MARVIN SEARS Director September 25, 1998
- -----------------------------
Marvin Sears
/s/ ANDREA VAN DE KAMP Director September 25, 1998
- -----------------------------
Andrea Van de Kamp
/s/ ROBERT WOLF Director September 25, 1998
- -----------------------------
Robert Wolf
</TABLE>
19
<PAGE> 1
EXHIBIT 10.41
[JENNY CRAIG LETTERHEAD]
July 7, 1998
Mr. Philip Voluck
2704 Bridgewood Circle
Boca Raton, FL 33434
Dear Phil:
It's been a pleasure to meet with you regarding the opportunities and challenges
at Jenny Craig, and this letter will formalize our employment offer to you.
While your duties will involve the broad spectrum of Jenny Craig Inc.'s
business, the following is an outline of the specific responsibilities you will
assume upon your joining the Company:
1. Your position will be Executive Vice President/Chief Operating Officer.
2. The duties for this position shall include, but not be limited to,
oversight of day to day operations of all business of the Company as
directed by the Chief Executive Officer ("CEO"), assisting in
preparation and providing management oversight of marketing and
advertising strategies, policies and procedures, managing line and
staff functions as directed by the CEO, developing and implementing
long and short range business objectives of the Company and carrying
out all other business of the Company as necessary or as directed by
the CEO.
3. Your annual compensation will be three hundred thousand dollars
($300,000) per year payable on a bi-monthly basis. You will also become
eligible to participate in any executive incentive plan which may exist
for vice presidents for fiscal year 1999, which begins on July 1, 1998.
4. You will receive an option to purchase one hundred thousand (100,000)
shares of common stock of the Company in concert with the Company's
Stock Option Plan. The option price will be the average of the high and
low price for a share of JCI common stock on the New York Stock
Exchange on the day you begin your employment. The vesting period for
options will be over a four (4) year period in four annual equal
installments of twenty five percent (25%), the first of which will vest
on the first anniversary of your employment with the Company. If your
employment is terminated by the Company without cause, all options not
then exercisable will become exercisable.
<PAGE> 2
Mr. Phil Voluck
Page 2
5. Upon joining the Company you will be afforded the same fringe benefit
opportunities as other senior executives in the Company.
6. It is the intent of the Company to assist you in relocation to San
Diego. As a result, the following terms shall apply to your relocation:
(a) The Company will pay the expense of moving the reasonable and
ordinary household effects and one automobile to the new location
including, packing and unpacking, transportation, and insurance. Items
such as boats, large equipment and other items that do not fit on the
moving van will not be paid for by the Company. If needed, the Company
will also reimburse you for storage charges on household furniture
until your purchase of a new home in San Diego has been finalized.
(b) The Company will pay for coach class air transportation expenses or
cash equivalent thereof for you to the new location, including
reasonable expenses incurred for meals and lodging en route.
(c) The Company will pay the necessary and reasonable expense of
temporary residence for you for a period of up to one hundred eighty
(180) days for a furnished, two bedroom apartment.
7. This Agreement shall expire on July 6, 1999 unless the Company, in its
sole discretion elects to extend the Agreement in writing prior to such
date. The Company shall provide written notice to you of its intention
regarding the renewal of this Agreement at least thirty (30) days prior
to the expiration of this Agreement. Additionally, the Company shall
have the right to terminate your employment at any time, with or
without cause, by written notice to you. If your employment is
terminated by the Company without cause, or by you within ninety (90)
days following a change of control of the Company, you will receive a
severance payment equal to your then current annual salary payable
until the end of this Agreement. In no event, however, shall such
severance payment be less than six (6) months in duration or amount. If
your employment is terminated, all compensation, benefits, and rights
you may have under this agreement will terminate on the date of
termination of employment, except your right to receive the severance
payment described above and your rights under the Company's Stock
Option Plan. For purposes of this agreement, "cause" shall mean your
death, disability (the inability to perform services for a period of
one hundred twenty (120) days in any consecutive twelve (12) month
period), a breach of this agreement or your duty of loyalty to the
Company, willful misconduct or negligence in the performance of the
duties contemplated hereby, your conviction of a felony, or conduct by
you which brings you or the Company into public disrepute, or which
could have a substantial adverse effect on the Company or its business.
In the event your employment is terminated without cause or due to a
change in control of ownership, the Company shall pay the reasonable
moving costs associated with relocating you to a new residence within
the 48 states.
<PAGE> 3
Mr. Phil Voluck
Page 3
8. You will assume your responsibilities here at Jenny Craig on July 7,
1998.
9. You agree that at all times, both during and after your employment by
the Company, you will not use or disclose to any third party any
information, knowledge or data not generally known to the public which
you may have learned during your employment by the Company which
relates to the operations, business or affairs of the Company. You
agree to comply with all procedures which the Company may adopt from
time to time to preserve the confidentiality of any information and
immediately following termination of your employment to return to the
Company all materials created by you or others which relate to the
operations, business or affairs of the Company. You agree that for a
period of two (2) years following termination of your employment you
will not, directly or indirectly (a) employ or engage as an independent
contractor or seek to employ, engage or retain any person who, during
any portion of the two (2) years prior to the date of termination of
your employment was, directly or indirectly, employed as an employee,
engaged as an independent contractor or otherwise retained by the
Company; or (b) induce any person or entity to leave his employment
with the Company, terminate an independent contractor relationship with
the Company or terminate or reduce any contractual relationship with
the Company.
10. Any controversy or dispute arising out of or relating to this
agreement, or the interpretation thereof, shall be settled exclusively
by arbitration conducted in San Diego, California before one or more
arbitrators in accordance with the commercial arbitration rules of the
American Arbitration Association then in effect and with discovery
permitted by both parties in accordance with Section 1283.05 of the
Code of Civil Procedure of the State of California or any successor
thereto, subject to such modification as may be directed by the
arbitrator. The award of the arbitrator(s) shall be final and binding
and judgment may be entered on the arbitrator's award in any court
having jurisdiction. In the event of any such arbitration (or if legal
action shall be brought in connection therewith), the party prevailing
in such proceeding shall be entitled to recover from the other party
the reasonable costs thereof, including reasonable attorney and
accounting fees.
Phil, we are looking forward to your joining Jenny Craig and the experience and
knowledge you will bring in helping us achieve new heights. I personally look
forward to working with you and to having your assistance in the many challenges
ahead.
Warm regards,
ACCEPTED AND AGREED:
/s/ SIDNEY H. CRAIG /s/ PHILIP VOLUCK 7-15-98
- ---------------------------- ----------------------------------------
Sidney H. Craig Signature Date
Chairman & CEO
<PAGE> 1
EXHIBIT 10.42
B234118
UNITED STATES OF AMERICA
BEFORE FEDERAL TRADE COMMISSION
COMMISSIONERS: Robert Pitofsky, Chairman
Mary L. Azcuenaga
Sheila F. Anthony
Mozelle W. Thompson
Orson Swindle
- ------------------------------------
)
In the Matter of )
)
JENNY CRAIG, INC., ) DOCKET NO. 9260
a corporation, and )
) DECISION AND ORDER
JENNY CRAIG INTERNATIONAL, INC., )
a corporation. )
- ------------------------------------)
The Commission having heretofore issued its complaint charging the
respondents named in the caption hereof with violation of Sections 5 and 12 of
the Federal Trade Commission Act, as amended, and the respondents having been
served with a copy of that complaint, together with a notice of contemplated
relief; and
The respondents, their attorneys, and counsel for the Commission having
thereafter executed an agreement containing a consent order, an admission by the
respondents of all the jurisdictional facts set forth in the complaint, a
statement that the signing of said agreement is for settlement purposes only and
does not constitute an admission by respondents that the law has been violated
as alleged in such complaint, or that the facts as alleged in such complaint,
other than jurisdictional facts, are true, and waivers and other provisions as
required by the Commission's Rules; and
The Secretary of the Commission having thereafter withdrawn this matter
from adjudication in accordance with Section 3.25(c) of its Rules; and
The Commission having considered the matter and having thereupon
accepted the executed consent agreement and placed such agreement on the public
record for a period of sixty (60) days, and having duly considered the comments
filed thereafter by interested persons
<PAGE> 2
pursuant to Section 3.25(f) of its Rules, and having modified the order in
several respects, now in further conformity with the procedure prescribed in
Section 3.25(f) of its Rules, the Commission hereby makes the following
jurisdictional findings and enters the following order:
1. Respondent Jenny Craig, Inc. is a corporation organized, existing,
and doing business under and by virtue of the laws of the State of Delaware,
with its office and principal place of business located at 445 Marine View
Avenue, #300, Del Mar, California, 92014.
Respondent Jenny Craig International, Inc. is a corporation organized,
existing, and doing business under and by virtue of the laws of the State of
California, with its office and principal place of business located at 445
Marine View Avenue, #300, Del Mar, California, 92014.
2. The Federal Trade Commission has jurisdiction of the subject matter
of this proceeding and of the respondents, and the proceeding is in the public
interest.
ORDER
DEFINITIONS
For the purposes of this order, the following definitions shall apply:
A. "Competent and reliable scientific evidence" shall mean those tests,
analyses, research studies, surveys or other evidence based on the expertise of
professionals in the relevant area, that have been conducted and evaluated in an
objective manner by persons qualified to do so, using procedures generally
accepted in the profession to yield accurate and reliable results.
B. "Weight loss program" shall mean any program designed to aid consumers
in weight loss or weight maintenance.
C. "Broadcast medium" shall mean any radio or television broadcast,
cablecast, home video, or theatrical release.
D. For any order-required disclosure in a print medium to be made "clearly
and prominently" or in a "clear and prominent manner," it must be given both in
the same type style and in: (1) twelve point type where the representation that
triggers the disclosure is given in twelve point or larger type; or (2) the same
type size as the representation that triggers the disclosure where that
representation is given in a type size that is smaller than twelve point type.
E. For any order-required disclosure given orally in a broadcast medium to
be made "clearly and prominently" or in a "clear and prominent manner," the
disclosure must be given at the same volume and in the same cadence as the
representation that triggers the disclosure.
-2-
<PAGE> 3
F. For any order-required disclosure given in the video portion of a
television or video advertisement to be made "clearly and prominently" or in a
"clear and prominent manner," the disclosure must be of a size and shade and
must appear on the screen for a duration sufficient for an ordinary consumer to
read and comprehend it.
G. "Short broadcast advertisement" shall mean any advertisement of thirty
seconds or less duration made in a broadcast medium.
I.
IT IS ORDERED that Jenny Craig, Inc., a corporation, and Jenny Craig
International, Inc., a corporation ("respondents"), their successors and
assigns, and respondents' officers, representatives, agents, and employees,
directly or through any corporation, subsidiary, division, or other device,
including franchisees or licensees, in connection with the advertising,
promotion, offering for sale, or sale of any weight loss program, in or
affecting commerce, as "commerce" is defined in the Federal Trade Commission
Act, do forthwith cease and desist from:
A. Making any representations, directly or by implication, about
the success of participants on any weight loss program in achieving or
maintaining weight loss or weight control unless, at the time of making
any such representation, respondents possess and rely upon competent
and reliable evidence, which when appropriate must be competent and
reliable scientific evidence, that substantiates the representation;
provided, further, that for any representation that:
(1) any weight loss achieved or maintained through the
weight loss program is typical or representative of all or any
subset of participants of respondents' program, said evidence
shall, at a minimum, be based on a representative sample of:
(a) all participants who have entered the
program, where the representation relates to such
persons; provided, however, that the required sample
may exclude those participants who dropped out of the
program within two weeks of their entrance or who
were unable to complete the program due to change of
residence or medical reasons, such as pregnancy; or
(b) all participants who have completed a
particular phase of the program or the entire
program, where the representation only relates to
such persons;
(2) any weight loss is maintained long-term, said
evidence shall, at a minimum, be based upon the experience of
participants who were followed for a period of at least two
years from their completion of the active maintenance phase of
respondents' program, or earlier termination, as applicable;
and
-3-
<PAGE> 4
(3) any weight loss is maintained permanently, said
evidence shall, at a minimum, be based upon the experience of
participants who were followed for a period of time after
completing the program that is either:
(a) generally recognized by experts in the field
of treating obesity as being of sufficient length for
predicting that weight loss will be permanent, or
(b) demonstrated by competent and reliable
survey evidence as being of sufficient duration to
permit such a prediction.
B. Representing, directly or by implication, except through endorsements
or testimonials referred to in paragraph I.E. herein, that participants of any
weight loss program have successfully maintained weight loss, unless respondents
disclose, clearly and prominently, and in close proximity to such
representation, the statement: "For many dieters, weight loss is temporary.";
provided, further, that respondents shall not represent, directly or by
implication, that the above-quoted statement does not apply to dieters in
respondents' weight loss program;
provided, however, that a truthful statement that merely describes the
existence, design or content of a weight maintenance or weight management
program or notes that the program teaches clients about how to manage their
weight will not, without more, be considered for purposes of this order a
representation regarding weight loss maintenance success;
C. Representing, directly or by implication, except through short
broadcast advertisements referred to in paragraph I.D. herein, and except
through endorsements or testimonials referred to in paragraph I.E. herein, that
participants of any weight loss program have successfully maintained weight
loss, unless respondents disclose, clearly and prominently, and in close
proximity to such representation, the following information:
(1) the average percentage of weight loss maintained by those
participants,
(2) the duration over which the weight loss was maintained,
measured from the date that participants ended the active weight loss
phase of the program, provided, further, that if any portion of the
time period covered includes participation in a maintenance program(s)
that follows active weight loss, such fact must also be disclosed, and
(3) if the participant population referred to is not
representative of the general participant population for respondents'
programs:
(a) the proportion of the total participant population in
respondents' programs that those participants represent,
expressed in terms of a percentage or actual numbers of
participants, or
-4-
<PAGE> 5
(b) the statement: "Jenny Craig makes no claim that this
[these] result[s] is [are] representative of all participants
in the Jenny Craig program.";
provided, however, that for representations about weight loss
maintenance success that do not use a number or percentage, or
descriptive terms that convey a quantitative measure such as "most of
our customers maintain their weight loss long-term," respondents may,
in lieu of the disclosures required in C.(1)-(3) above,
(i) include, clearly and prominently, and in immediate
conjunction with such representation, the statement: "Check at
our centers for details about our maintenance record."; and
(ii) for a period of time beginning with the date of the
first dissemination or broadcast of any such advertisement and
ending no sooner than thirty (30) days after the last
dissemination or broadcast of such advertisement, give to each
potential client, upon the first presentation of any form
asking for information from the potential client, but in any
event before such person has entered into any agreement with
respondents, a separate document entitled "Maintenance
Information," which shall include all the information required
by paragraph I.B. and subparagraphs I.C.(1)-(3) of this order,
formatted in the exact type size and style as the example form
described in paragraph I.D.(2)(a) and set out below;
provided, further, that compliance with the obligations of this
paragraph I.C. in no way relieves respondents of the requirement under
paragraph I.A. of this order to substantiate any representation about
the success of participants on any weight loss program in maintaining
weight loss.
D. Representing, directly or by implication, in short broadcast
advertisements, that participants of any weight loss program have successfully
maintained weight loss, unless respondents:
(1) include, clearly and prominently, and in immediate conjunction
with such representation, the statement: "Check at our centers for
details about our maintenance record.";
(2) for a period of time beginning with the date of the first
broadcast of any such advertisement and ending no sooner than thirty
days after the last broadcast of such advertisement, comply with the
following procedures upon the first presentation of any form asking for
information from a potential client, but in any event before such
person has entered into any agreement with respondents:
(a) give to each potential client a separate document
entitled "Maintenance Information," which shall include all
the information required by paragraph I.B. and subparagraphs
I.C.(1)-(3) of this order and shall be formatted in the exact
type size and style as the example form below, and shall
include the heading (Helvetica
-5-
<PAGE> 6
14 pt. bold), lead-in (Times Roman 12 pt.), disclosures
(Helvetica 14 pt. bold), acknowledgment language (Times Roman
12 pt.) and signature block therein; provided, further, that
no information in addition to that required to be included in
the document required by this subparagraph I.D.(2) shall be
included therein;
-6-
<PAGE> 7
MAINTENANCE INFORMATION
You may have seen our recent ad about maintenance success. Here's some
additional information about our maintenance record.
[DISCLOSURE OF MAINTENANCE STATISTICS GOES HERE
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXX] FOR MANY DIETERS,
WEIGHT LOSS IS TEMPORARY.
I have read this notice. __________________________________ _____________
(Client Signature) (Date)
-7-
<PAGE> 8
(b) require each potential client to sign such document;
and
(c) give each client a copy of such document; and
(3) retain in each client file a copy of the signed maintenance
notice required by this paragraph;
provided, further, that: (1) compliance with the obligations of this paragraph
I.D. in no way relieves respondents of the requirement under paragraph I.A. of
this order to substantiate any representation about the success of participants
on any weight loss program in maintaining weight loss; and (2) respondents must
comply with both paragraph I.D. and paragraph I.C. of this order if respondents
include in any such short broadcast advertisement a representation about
maintenance success that states a number or percentage, or uses descriptive
terms that convey a quantitative measure such as "most of our customers maintain
their weight loss long-term";
provided, however, that the provisions of paragraph I.D. shall not apply to
endorsements or testimonials referred to in paragraph I.E. herein.
E. Using any advertisement containing an endorsement or testimonial about
weight loss success or weight loss maintenance success by a participant or
participants of respondents' weight loss program if the weight loss success or
weight loss maintenance success depicted in the advertisement is not
representative of what participants of respondents' weight loss programs
generally achieve, unless respondents disclose, clearly and prominently, and in
close proximity to the endorser's statement of his or her weight loss success or
weight loss maintenance success:
(1) What the generally expected success would be for Jenny Craig
customers in losing weight or maintaining achieved weight loss;
provided, however, that in determining the generally expected success
for Jenny Craig customers, respondents may exclude those customers who
dropped out of the program within two weeks of their entrance or who
were unable to complete the program due to change of residence or
medical reasons, such as pregnancy; and that for endorsements or
testimonials about weight loss success, respondents can satisfy the
requirements of this subparagraph by accurately disclosing:
(a) the generally expected success for Jenny Craig
customers in the following phrase: "Weight loss averages
(number) lbs. over ___ weeks;" or
(b) the average number of pounds lost by Jenny Craig
customers, using the following phrase: "Average weight loss
(number) lbs. More details at centers;" and, for a period of
time beginning with the date of the first dissemination of any
such advertisement and ending no sooner than thirty days after
the last dissemination of such advertisement, making in any
on-
-8-
<PAGE> 9
site video promotion the preceding disclosure orally and
complying with the following procedures upon the first
presentation of any form asking for information from a
potential client, but in any event before such person has
entered into any agreement with respondents:
(i) give to each potential client a separate
one-page document with an appropriate title that
alerts customers that important information follows,
which shall disclose, clearly and prominently, what
the generally expected success would be for Jenny
Craig customers in losing weight, expressed in terms
of both average number of pounds lost and average
duration of participation in the Jenny Craig program;
such document shall be formatted in the following
type size and style: heading (Helvetica 14 pt. bold),
disclosures (Helvetica 14 pt. bold), signature block
(Times Roman 12 pt.), and any other language (no
larger than 14 pt.); provided, further, that no
information that contradicts this information shall
be included in the document required by this
subparagraph;
(ii) ask each potential client to sign such
document;
(iii) give each client a copy of such document;
and
(iv) retain in each client file a copy of the
notice provided to clients under the requirements of
this subparagraph; or
(2) the limited applicability of the endorser's experience to what
consumers may generally expect to achieve; i.e., that consumers should
not expect to experience similar results; respondents can satisfy the
requirements of this subparagraph by clearly and prominently disclosing
in close proximity to the representation one of the following
statements:
(a) "You should not expect to experience these results."
(b) "This result is not typical. You may not do as well."
(c) "This result is not typical. You may be less
successful."
(d) "_____________'s success is not typical. You may not
do as well."
(e) "_____________'s experience is not typical. You may
achieve less."
(f) "Results not typical."
(g) "Results not typical of program participants."
-9-
<PAGE> 10
provided, however, that a truthful statement that merely describes the
existence, design or content of a weight maintenance or weight management
program or notes that the program teaches clients how to manage their weight, or
which states either through the endorser or in nearby copy that under the
program "weight loss maintenance is possible," or words to that effect, will
not, without more, be considered for purposes of this paragraph a representation
regarding weight loss maintenance success or trigger the need for separate or
additional maintenance disclosures required by other paragraphs of the order;
provided, further, that:
(i) a representation about maintenance by an endorser that states
a number or percentage, or uses descriptive terms that convey a
quantitative measure, such as "I have kept of most of my weight loss
for 2 years," shall be considered a representation regarding weight
loss maintenance success;
(ii) if endorsements or testimonials covered by this paragraph are
made in a broadcast medium, any disclosure required by this paragraph
must be communicated in a clear and prominent manner and in immediate
conjunction with the representation that triggers the disclosure.
F. Representing, directly or by implication, that the price at which any
weight loss program can be purchased is the only cost associated with losing
weight on that program, unless such is the case.
G. Representing, directly or by implication, the price at which any weight
loss program can be purchased, unless respondents disclose, clearly and
prominently, either (1) in close proximity to such representation, the existence
and amount of all mandatory costs and fees associated with the program offered;
or (2) in immediate conjunction with such representation, the following
statement: "Plus the cost of [list of products or services that participants
must purchase at additional cost].";
provided, further, that in a broadcast medium, if the representation that
triggers the disclosure is oral, the required disclosure must also be made
orally.
H. Failing to disclose over the telephone, for a period of time beginning
with the date of any advertisement of the price at which any weight loss program
can be purchased and ending no sooner than 180 days after the last dissemination
of any such advertisement, to consumers who inquire about the cost of any weight
loss program, or are told about the cost of any weight loss program, the
existence and amount of any mandatory costs or fees associated with
participation in the program.
I. Representing, directly or by implication, that prospective participants
in respondents' weight loss program will reach a specified weight within a
specified time
-10-
<PAGE> 11
period, unless at the time of making such representation, respondents possess
and rely upon competent and reliable scientific evidence substantiating the
representation.
J. Misrepresenting, directly or by implication, the rate or speed at which
any participant in any weight loss program has experienced or will experience
weight loss.
K. Failing to disclose, clearly and prominently, in writing either:
1) to all participants when they enter the program; or
2) to each participant whose average weekly weight loss exceeds
two percent (2%) of his or her initial body weight, or three pounds,
whichever is less, for at least two consecutive weeks;
that failure to follow the program protocol and eat all of the food recommended
may involve the risk of developing serious health complications.
L. Misrepresenting, directly or by implication, the performance, efficacy,
price, or safety of any weight loss program or weight loss product.
M. Representing, directly or by implication, that participants on any
weight loss program recommend or endorse the program unless, at the time of
making any such representation, respondents possess and rely upon competent and
reliable evidence, which when appropriate must be competent and reliable
scientific evidence, that substantiates such representation.
N. Misrepresenting, directly or by implication, the existence, contents,
validity, results, conclusions, or interpretations of any test, study, or
survey.
II.
IT IS FURTHER ORDERED that respondents shall notify the Commission at
least thirty (30) days prior to the effective date of any proposed change such
as dissolution, assignment, or sale resulting in the emergence of a successor
corporation(s), the creation or dissolution of subsidiaries, or any other change
in the corporation(s) that may affect compliance obligations arising out of this
order.
III.
IT IS FURTHER ORDERED that for three (3) years after the last date of
dissemination of any representation covered by this order, respondents, or their
successors and assigns, shall maintain and upon request make available to the
Federal Trade Commission for inspection and copying:
A. All materials that were relied upon in disseminating such
representation; and
-11-
<PAGE> 12
B. All tests, reports, studies, surveys, demonstrations or other
evidence in their possession or control that contradict, qualify, or
call into question such representation, or the basis relied upon for
such representation, including complaints from consumers.
IV.
IT IS FURTHER ORDERED that respondents shall distribute a copy of this
order to each of their officers, agents, representatives, independent
contractors and employees who are involved in the preparation and placement of
advertisements or promotional materials or in communication with customers or
prospective customers or who have any responsibilities with respect to the
subject matter of this order; and, for a period of ten (10) years from the date
of entry of this order, distribute same to all future such officers, agents,
representatives, independent contractors and employees.
V.
IT IS FURTHER ORDERED that:
A. Respondents shall distribute a copy of this order to each of
their franchisees and licensees and shall contractually bind them to
comply with the prohibitions and affirmative requirements of this
order; respondents may satisfy this contractual requirement by
incorporating such order requirements into their current Operations
Manual; and
B. Respondents shall further make reasonable efforts to monitor
their franchisees' and licensees' compliance with the order provisions;
respondents may satisfy this requirement by: (1) taking reasonable
steps to notify promptly any franchisee or licensee that respondents
determine is failing materially or repeatedly to comply with any order
provision that such franchisee or licensee is not in compliance with
the order provisions and that disciplinary action may result from such
noncompliance; and (2) providing the Federal Trade Commission with the
name and address of the franchisee or licensee and the nature of the
noncompliance if the franchisee or licensee fails to comply promptly
with the relevant order provision after being so notified; provided,
however, that the requirements of this Part V will not, by themselves,
increase the liability of respondents for any acts and practices of
their franchisees or licensees that violate this order.
VI.
IT IS FURTHER ORDERED that this order will terminate on February 19,
2018, or twenty (20) years from the most recent date that the United States or
the Federal Trade Commission files a complaint (with or without an accompanying
consent decree) in federal court alleging any violation of the order, whichever
comes later; provided, however, that the filing of such a complaint will not
affect the duration of:
A. Any paragraph in this order that terminates in less than
twenty (20) years;
-12-
<PAGE> 13
B. This order's application to any respondent that is not named
as a defendant in such complaint; and
C. This order if such complaint is filed after the order has
terminated pursuant to this paragraph.
Provided, further, that if such complaint is dismissed or a federal court rules
that the respondent did not violate any provision of the order, and the
dismissal or ruling is either not appealed or upheld on appeal, then the order
will terminate according to this paragraph as though the complaint was never
filed, except that the order will not terminate between the date such complaint
is filed and the later of the deadline for appealing such dismissal or ruling
and the date such dismissal or ruling is upheld on appeal.
VII.
IT IS FURTHER ORDERED that respondents shall, within sixty (60) days
after the date of service of this order, and one year thereafter, file with the
Commission a report, in writing, setting forth in detail the manner and form in
which they have complied with this order.
By the Commission, Chairman Pitofsky recused and Commissioner Azcuenaga
not participating.
Donald S. Clark
Secretary
ISSUED: February 19, 1998
-13-
<PAGE> 1
EXHIBIT 13
Years ended June 30, all amounts in thousands except per share data
SELECTED
FINANCIAL
DATA
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 403,341 $ 378,093 $ 401,018 $ 365,134 $ 352,249
Operating income 1,021 17,363 35,521 11,840 2,040
Income before cumulative effect
of accounting change 534 11,772 22,912 8,332 2,126
Per share amounts:
Income before cumulative effect
of accounting change, basic .02 .46 .95 .40 .10
Net income, basic .02 .46 .95 .04 .10
Income before cumulative effect
of accounting change, diluted .02 .46 .93 .40 .10
Net income, diluted .02 .46 .93 .04 .10
Dividends declared per share .45 -- -- -- --
Total assets 104,190 115,376 104,401 112,297 106,245
Note payable -- -- -- 5,716 5,526
Shares outstanding 26,076 25,196 20,856 20,688 20,689
</TABLE>
In 1997, the Company changed its method of accounting for service fees received
from customers.
See Note 1 of Notes to Consolidated Financial Statements for further information
regarding this change.
8 JENNY CRAIG, INC.
<PAGE> 2
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Information provided in this Annual Report may contain, and the Company may from
time to time disseminate material and make statements which may contain
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). These cautionary statements are being
made pursuant to the provisions of the Act and with the intention of obtaining
the benefit of "safe harbor" provisions of the Act. The reader is cautioned that
all forward-looking statements are necessarily speculative. The reader should
carefully review the cautionary statements contained in the Company's Annual
Report on Form 10-K for the year ended June 30, 1998, which identify important
factors that could cause actual results to differ materially from those in the
forward-looking statements, as well as the risk factors which may also be
identified by the Company from time to time in other filings with the Securities
and Exchange Commission, press releases, and other communications.
The following table gives certain key statistics regarding the Company
during the past five years:
<TABLE>
<CAPTION>
Years ended June 30,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CENTRES OPEN AT END OF YEAR:
Company-owned
United States 502 478 485 542 533
Foreign 106 102 103 106 110
---- ---- ---- ---- ----
608 580 588 648 643
---- ---- ---- ---- ----
Franchise
United States 159 154 159 113 101
Foreign 43 43 36 36 37
---- ---- ---- ---- ----
202 197 195 149 138
---- ---- ---- ---- ----
Total 810 777 783 797 781
==== ==== ==== ==== ====
AVERAGE REVENUE PER CENTRE IN THOUSANDS:
Company-owned
United States $628 600 642 538 502
Foreign 346 356 407 483 447
Franchise
United States 644 654 659 517 510
Foreign 441 343 328 452 475
</TABLE>
The decrease in United States Company-owned centres in 1998 reflects the
Company's acquisition of 8 centres from two franchisees and the net closure of
17 centres.
The increase in United States Company-owned centres and the decrease in
United States franchised centres in 1997 reflects the Company's acquisition of
51 centres from three franchisees during 1997.
See Note 13 of Notes to Consolidated Financial Statements for additional
information regarding United States and foreign operations.
JENNY CRAIG, INC. 9
<PAGE> 3
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
continued RESULTS OF OPERATIONS
The following table presents the range of service fees charged by the
Company:
<TABLE>
<CAPTION>
INITIAL SERVICE MAINTENANCE
----------------- ----------------
FISCAL YEAR LOW HIGH LOW HIGH
- ----------- --- ---- --- ----
<S> <C> <C> <C> <C>
1994 $10 99 99 125
1995 10 99 99 99
1996 10 180 99 181
1997 10 149 99 99
1998 10 197 99 99
</TABLE>
YEAR ENDED JUNE 30, 1998 AS COMPARED TO YEAR ENDED JUNE 30, 1997
The Company has operated in a difficult and dynamic environment since April 1996
when the United States Food and Drug Administration ("FDA") approved
dexfenfluramine, commonly referred to by its trade name Redux(TM), for use as a
doctor-prescribed medication for the treatment of obesity. The Company believes
that the extensive publicity that accompanied the introduction of Redux
heightened the public's interest in weight loss pharmaceuticals, including
interest in a combination of two other medications (phentermine and
fenfluramine) commonly known as "phen-fen," and resulted in significantly
reduced demand for the Company's program. In July 1996, the Company began test
marketing an adjunct to its traditional weight loss program which incorporated
weight loss pharmaceuticals. This program adjunct utilized independently-
contracted physicians to examine clients and prescribe Redux only to persons who
met the FDA's protocol and phen-fen to persons who met the appropriate medical
criteria for this medication. In January 1997, the weight loss medication
adjunct was incorporated into virtually all of the Company's centres in the
United States. In August 1997, the Company ceased offering a weight loss
medication adjunct to its program following reports from the medical community
as to possible health risks associated with the use of Redux and phen-fen. In
September 1997, Redux and fenfluramine were withdrawn from the United States
market at the request of the FDA.
Revenues from United States Company-owned operations decreased 2% from
$279,090,000 in 1997 to $273,358,000 in 1998. There was a 5% increase in the
average number of United States Company-owned centres in operation during 1998
compared to 1997. Average revenue per United States Company-owned centre
decreased 7% from $538,000 in 1997 to $502,000 in 1998. Service revenues from
United States Company-owned operations decreased 22% from $21,448,000 in 1997 to
$16,820,000 in 1998. This decrease in service revenues was primarily due to a
16% decrease (19% on an average per centre basis) in the number of new
participants enrolled in the program between the periods. Product sales,
10 JENNY CRAIG, INC.
<PAGE> 4
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
continued RESULTS OF OPERATIONS
which consists primarily of food products, from United States Company-owned
operations decreased less than 1% from $257,642,000 in 1997 to $256,538,000 in
1998. This decrease was principally due to a 6% decrease in the number of active
participants in the program offset, in part, by an increase in the average food
amount purchased per active participant. Revenues from foreign Company-owned
operations decreased 4% from $50,308,000 in 1997 to $48,329,000 in 1998, and
average revenue per foreign Company-owned centre decreased 7% from $483,000 in
1997 to $447,000 in 1998 principally due to a 12% weighted average decrease in
the Australian and Canadian currencies in relation to the U.S. dollar between
the years. The number of foreign Company-owned centres in operation increased 4%
from 106 at June 30, 1997 to 110 at June 30, 1998.
Costs and expenses of United States Company-owned operations increased
1% from $258,458,000 in 1997 to $262,225,000 in 1998. Costs and expenses of
United States Company-owned operations in 1997 were reduced by a $3,267,000 net
credit that resulted from the Company's successful litigation recovery from one
of its insurance carriers. Additionally, costs and expenses of United States
Company-owned operations in 1997 included $8,150,000 of costs associated with
the weight loss medication program which was terminated in August 1997 compared
to $2,437,000 of such costs in 1998. The increase in costs and expenses in 1998
is principally due to $5,265,000 of additional advertising expenses, of which
approximately $3,047,000 was associated with the launch of the Company's ABC
weight management program in the quarter ended September 30, 1997. Costs and
expenses of United States Company-owned operations as a percentage of United
States Company-owned revenues increased from 93% to 96% between the years
principally due to the aforementioned additional advertising expenses. After
including the allocable portion of general and administrative expenses, United
States Company-owned operations had an operating loss of $8,175,000 in 1998
compared to operating income of $732,000 in 1997. Costs and expenses of foreign
Company-owned operations decreased 5% from $42,422,000 in 1997 to $40,183,000
in 1998 principally due to the aforementioned 12% weighted average decrease in
the Australian and Canadian currencies in relation to the U.S. dollar between
the years. After including the allocable portion of general and administrative
expenses, foreign Company-owned operations, principally as a result of the
Australian centres, had operating income of $5,409,000, for fiscal 1998 as
compared to operating income of $5,249,000 for fiscal 1997.
The Company's gross margin on product sales from Company-owned
operations decreased from 7% in 1997 to 4% in 1998, and its gross margin on
service revenues decreased from 31% in 1997 to 30% in 1998. Costs and expenses
of Company-owned operations, other than direct product costs, are allocated
between product and service based upon the respective percentage of total
revenue from Company-owned operations derived from product sales and service
revenue. The decline in gross margins in 1998 compared to 1997 resulted
principally from the increased advertising expenses and the decreased service
revenue, which has higher margins than product sales.
Revenues from franchise operations decreased 14% from $35,736,000 in
1997 to $30,562,000 in 1998. This decline was principally due to a 7% decrease
in the number of franchise centres in operation, from 149 at June 30, 1997 to
138 at June 30, 1998, and a decrease in the number of
JENNY CRAIG, INC. 11
<PAGE> 5
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
continued RESULTS OF OPERATIONS
new participants enrolled in the program at franchise centres, resulting in
reduced product sales and royalties. The decrease in the number of franchise
centres reflects the Company's acquisition of 8 centres from franchisees and the
net closure of 3 franchise centres in 1998.
Costs and expenses of franchise operations, which consist primarily of
product costs, decreased 11% from $23,907,000 in 1997 to $21,224,000 in 1998
principally because of the reduced level of franchise operations. Franchise
costs and expenses as a percentage of franchise revenues increased from 67% in
1997 to 69% in 1998, principally due to the reduced royalty revenue, which has a
higher margin than product sales.
General and administrative expenses decreased 7% from $28,507,000 in
1997 to $26,577,000 in 1998 and decreased from 7.8% to 7.5% of total revenues in
1997 and 1998, respectively. The decrease in general and administrative expenses
in 1998 was principally due to a decrease in compensation, consulting, and
professional fees, offset, in part, by expenses totaling $3,500,000 related to
the separation of a former senior executive of the Company. These expenses
include $1,500,000 for the forgiveness of a loan made to the former senior
executive in 1995 (which is reflected on the accompanying consolidated balance
sheets as a decrease in other assets), $1,000,000 for the payment, in
semi-monthly installments, of the former senior executive's salary and benefits
through December 31, 1998, and $1,000,000 for the cancellation of stock options,
payable in five equal annual installments commencing in fiscal 1998, which were
exercisable by the former senior executive.
The elements discussed above combined to result in a decrease in
operating income from $11,840,000 in 1997 to $2,040,000 in 1998 and a decrease
in income before the cumulative effect of accounting change from $8,332,000, or
$.40 per diluted share, in 1997 to $2,126,000, or $.10 per diluted share, in
1998.
The Company is in the process of assessing the functionality of both its
information technology ("IT") and non-IT systems with respect to the "year 2000"
millennium change. The Company utilizes two primary IT systems: the corporate
office system, which includes the general ledger and related applications, and
the point-of-sale system, which is used at each of the 559 Company-owned centres
in North America to record sales to customers. With respect to the corporate
office system, the Company has determined that its current system, implemented
in 1991, is not year 2000 compliant. Accordingly, the Company accelerated the
planned replacement of this system by purchasing a new corporate office system
in the first quarter of fiscal 1999. The implementation process for this new
system has begun and the Company expects the implementation to be completed by
April 1, 1999. The cost of the new corporate office system software of $189,000
is being capitalized and amortized over the five year estimated useful life of
the new software. The cost of new hardware, which will be purchased in the
second quarter of fiscal 1999, necessary to install the new corporate office
system is estimated to be $200,000 and will be depreciated over the five year
estimated useful life of the new hardware. Additional implementation costs,
comprised principally of external consultants, are estimated to be $380,000 and
will be expensed as incurred in fiscal 1999. With respect to the point-of-sale
system, there are two basic components: the software and the hardware. The
point-of-sale software continues to be assessed. Estimated costs to modify this
software to effect year 2000 compliance totaling approximately $150,000 will be
expensed as
12 JENNY CRAIG, INC.
<PAGE> 6
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
continued RESULTS OF OPERATIONS
incurred in fiscal 1999. The point-of-sale hardware is essentially a personal
computer ("PC") network consisting of a file server and three PCs at the
Company-owned and franchised centres in North America. The Company is conducting
an analysis of the hardware at these centres for year 2000 compliance. This
analysis is expected to be completed by November 30, 1998. A preliminary
estimate of the cost to both modify certain hardware and replace other hardware
is approximately $4,000 per Company-owned centre, or $2,236,000 in aggregate.
The Company expects that substantially all of these hardware costs will be
incurred prior to the planned completion date of May 31, 1999 and that
substantially all of these costs will be capitalized and depreciated over their
estimated useful life of five years. With respect to non-IT systems, the Company
is assessing its embedded systems contained in the corporate office building and
centre locations. This assessment is principally focusing on the Company's
telephone system hardware and software. The Company plans to complete the
assessment of non-IT systems by December 31, 1998. The final area of
significance pertaining to the Company's year 2000 planning relates to third
parties with whom the Company transacts business. This includes the Company's
food suppliers, banks, advertising agencies, telecommunications suppliers, and
utility providers. The Company is sending written questionnaires to significant
suppliers and vendors in an effort to assess their year 2000 readiness and the
effect these third parties could have on the Company. The Company plans to
maintain communication with significant suppliers and vendors with respect to
this issue.
As detailed above, the Company estimates that approximately $3,155,000
will be disbursed during fiscal 1999 in connection with year 2000 compliance.
The Company expects that its cash flow from operations, together with cash, cash
equivalents and short-term investments currently on hand, will be sufficient to
fund these disbursements. Disbursements made in fiscal 1998, substantially all
of which was paid to external consultants, related to year 2000 compliance
totaled approximately $75,000 and were expensed as incurred. Although the
Company believes that its planning, as detailed above, will enable the Company
to be adequately prepared for the year 2000, a contingency plan is also being
developed. With respect to the point-of-sale system, the Company has a manual
back-up system which is currently used during computer downtimes and was the
Company's primary point-of-sale system from the Company's inception in 1983
through 1990. The Company believes that this manual point-of-sale system could
be utilized in the event of a delay in the implementation of the plan to have
the point-of-sale system year 2000 compliant during 1999. With respect to the
corporate office system, the Company believes that a third party provider of
data processing services could provide the basic services necessary for the
Company to maintain adequate books and records, similar to the methodology
utilized by the Company prior to 1991. The Company expects to have the specific
third party provider to be utilized as a contingency plan identified by March
31, 1999.
The statements set forth above relating to the Company's analysis and
plans with respect to the year 2000 issue in many cases constitute forward-
looking statements which are necessarily speculative. Actual results may differ
materially from those described above. The factors which could cause actual
results to differ materially include, without limitation, the following: the
Company's assessment of the impact of year 2000 is not complete and further
analysis and study, as well as the testing
JENNY CRAIG, INC. 13
<PAGE> 7
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
continued RESULTS OF OPERATIONS
and implementation of planned solutions, could disclose additional remedial
work, with the resultant additional time and expense, necessary to permit the
Company's IT and non-IT systems to be year 2000 compliant; third party
consultants and software and hardware suppliers could fail to meet timetables
and projected cost estimates; third party suppliers of products and services to
the Company could make mistakes in their advice to the Company with respect to
their year 2000 readiness, and their failure to be year 2000 compliant could
have a material adverse effect on the Company; the Company's estimates of the
periods of time and costs necessary to complete certain analysis and
implementation could be impacted by future events and conditions such as a
shortage of personnel, including Company employees and outside consultants, to
perform the necessary analysis and remediation work.
The Company and the Federal Trade Commission have entered into a Consent
Order settling all contested issues raised in a complaint filed in September
1993 against the Company alleging that the Company violated the Federal Trade
Commission Act by the use and content of certain advertisements for the
Company's weight loss program featuring testimonials, claims for the program's
success and safety, and statements as to the program's costs to participants.
The Consent Order does not admit any issue of fact or law or any violation by
the Company of any law or regulation, and does not involve payment by the
Company of any civil money penalty, damages, or other financial relief. The
Consent Order requires certain procedures and disclosures in connection with the
Company's advertisements of its products and services. The full Commission
accepted the Consent Order, and it has been made effective as of May 4, 1998.
The Company does not believe that compliance with the Consent Order will have a
material adverse effect on the Company's consolidated financial position or
results of operations or its current advertising and marketing practices.
The Company along with other weight loss programs and certain
pharmaceutical companies has been named as a defendant in an action filed in the
Circuit Court for the Eleventh Judicial Circuit in Pickens County, Alabama (the
"Alabama Litigation"). The action was commenced in August 1997 by three
plaintiffs who are seeking to maintain the action as a class action on behalf of
all persons in the United States and United States Territories who have suffered
or may in the future suffer injury due to the administration of phentermine,
fenfluramine (commonly known as "phen-fen" when taken together), and/or
dexfenfluramine (trade name Redux(TM)), which were manufactured or sold by the
defendants. The complaint includes claims against the Company and other
defendants, acting separately and in concert, for alleged unlawful and tortious
acts, including sale of allegedly dangerous and defective products, negligent
marketing and distribution, failure to warn of the risks associated with the
weight loss medications, breach of warranty, fraud, and negligent
misrepresentation. The complaint seeks compensatory and punitive damages in
unspecified amounts and equitable relief including the establishment of a
medical fund to cover future medical expenses resulting from the use of the
weight loss medications, and a requirement that the defendants adequately warn
the public of the risks associated with use of the weight loss medications.
The Company along with certain pharmaceutical companies has also been
named as a defendant in an action filed in the Court of Common Pleas,
Philadelphia County, Pennsylvania (the "Pennsylvania Litigation"). The action
was com-
14 JENNY CRAIG, INC.
<PAGE> 8
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
continued RESULTS OF OPERATIONS
menced in November 1997 by a plaintiff, a participant in the Company's program,
who is seeking to maintain the action as a class action on behalf of all persons
in the Commonwealth of Pennsylvania who have purchased and used fenfluramine,
dexfenfluramine, and phentermine, alone or in combination. The complaint
includes claims against the Company and the other defendants for alleged false
and misleading statements concerning the safety and appropriateness of using
fenfluramine, dexfenfluramine, and phentermine, and the benefits, uses, and
ingredients of these drugs, negligence in the distribution, sale, and
prescribing of these medications, and breach of the warranty of merchantability.
The complaint seeks compensatory and punitive damages in unspecified amounts and
a Court-supervised program funded by the defendants through which class members
would undergo periodic medical examination and testing.
The Company has tendered the Alabama Litigation and the Pennsylvania
Litigation matters to its insurance carriers. The Company and the provider of
the independent physicians who prescribed the weight loss medications in the
Company's centres have each asserted their rights with respect to these
litigations under contractual provisions for indemnification in the agreement
between them. The claims have not progressed sufficiently for the Company to
estimate a range of possible loss, if any. The Company intends to defend the
matters vigorously.
YEAR ENDED JUNE 30, 1997 AS COMPARED TO YEAR ENDED JUNE 30, 1996
Revenues from United States Company-owned operations decreased 10% from
$309,415,000 in 1996 to $279,090,000 in 1997. There was a 12% increase in the
total number of United States Company-owned centres in operation, from 485 at
June 30, 1996 to 542 at June 30, 1997. The increase in United States Company-
owned centres reflects the Company's acquisition of 51 centres from three
franchisees and the net opening of six centres in 1997. Average revenue per
United States Company-owned centre decreased 16% from $642,000 in 1996 to
$538,000 in 1997. Service revenues from United States Company-owned operations
decreased 1% from $21,769,000 in 1996 to $21,448,000 in 1997. This decrease in
service revenues was primarily due to an 11% decrease (18% on an average per
centre basis) in the number of new participants enrolled in the program between
the periods offset, in part, by $804,000 of additional service revenues
recognized in 1997 as a result of the Company's change in method of accounting
for service fees described below. The decline in new enrollments also resulted
in a decline in the number of active participants in the program and led to a
10% decline in product sales, which consists primarily of food products, from
United States Company-owned operations from $287,646,000 in 1996 to $257,642,000
in 1997. Revenues from foreign Company-owned operations increased 21% from
$41,590,000 in 1996 to $50,308,000 in 1997, and average revenue per foreign
Company-owned centre increased 19% from $407,000 in 1996 to $483,000 in 1997
principally due to an increase in the number of new enrollments in the program
at the Company's 81 centres in Australia. There was a 2% average increase in the
Australian and Canadian currencies in relation to the U.S. dollar between the
years. The number of foreign Company-owned centres in operation increased 3%
from 103 at June 30, 1996 to 106 at June 30, 1997.
JENNY CRAIG, INC. 15
<PAGE> 9
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
continued RESULTS OF OPERATIONS
Costs and expenses of United States Company-owned operations decreased 2% from
$264,693,000 in 1996 to $258,458,000 in 1997. Costs and expenses of United
States Company-owned operations were reduced by a $2,200,000 net credit in 1996
and a $3,267,000 net credit in 1997 that resulted from the Company's successful
litigation recoveries from certain of its insurance carriers. The decrease in
costs and expenses in 1997 reflects the decreased variable costs, principally
product costs, related to the lower level of operations offset, in part, by the
additional costs, principally comprised of independently-contracted physicians
and related medical professionals totaling $8,150,000 associated with offering
the program adjunct utilizing weight loss medications, increased compensation
expense associated with the introduction of this program, and increased fixed
costs associated with operating the 57 additional Company-owned centres in 1997
compared to 1996. Costs and expenses of United States Company-owned operations
as a percentage of United States Company-owned revenues increased from 86% to
93% between the years principally due to the higher proportion of fixed costs
when compared to the reduced level of revenues, the increased expenses of the
program component utilizing weight loss medications, and increased compensation
expense related to staffing levels associated with the introduction of this
program. After including the allocable portion of general and administrative
expenses, United States Company-owned operations had operating income of
$732,000 in 1997 compared to operating income of $25,226,000 in 1996. Costs and
expenses of foreign Company-owned operations increased 8% from $39,357,000 in
1996 to $42,422,000 in 1997, principally because of the increased variable costs
related to the higher level of operations. After including the allocable portion
of general and administrative expenses, foreign Company-owned operations had
operating income of $5,249,000, or 44% of total operating income, principally as
a result of the Australian centres, for fiscal 1997 as compared to operating
income of $58,000, or less than 1% of total operating income, for fiscal 1996.
The Company's gross margin on product sales from Company-owned
operations decreased from 11% in 1996 to 7% in 1997, and its gross margin on
service revenues decreased from 39% in 1996 to 31% in 1997. Costs and expenses
of Company-owned operations, other than direct product costs, are allocated
between product and service based upon the respective percentage of total
revenue from Company-owned operations derived from product sales and service
revenue. The decline in gross margins in 1997 compared to 1996 results
principally from the increased expenses associated with the program adjunct
utilizing weight loss medications and the higher proportion of fixed costs,
which include the fixed costs associated with operating the 57 additional
Company-owned centres in 1997 compared to 1996, when compared to the reduced
level of revenues.
Revenues from franchise operations decreased 29% from $50,013,000 in
1996 to $35,736,000 in 1997. This decline was principally due to a 24% decrease
in the number of franchise centres in operation, from 195 at June 30, 1996 to
149 at June 30, 1997, and a decrease in the number of new participants
16 JENNY CRAIG, INC.
<PAGE> 10
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
continued RESULTS OF OPERATIONS
enrolled in the program at franchise centres resulting in reduced product sales
and royalties. The decrease in the number of franchise centres reflects the
Company's acquisition of 51 centres from three franchisees in 1997.
Costs and expenses of franchise operations, which consist primarily of
product costs, decreased 28% from $32,985,000 in 1996 to $23,907,000 in 1997
principally because of the reduced level of franchise operations. Franchise
costs and expenses as a percentage of franchise revenues remained relatively
constant at 66% in 1996 compared to 67% in 1997.
General and administrative expenses remained relatively constant at
$28,462,000 in 1996 compared to $28,507,000 in 1997, but increased from 7.1% to
7.8% of total revenues in 1996 and 1997, respectively. General and
administrative expenses in 1996 included a one time $1,000,000 charge for the
early termination of the Company's corporate office lease, net of estimated
sublease income. After considering this one time charge in the prior year, the
increase in general and administrative expenses in 1997 was principally due to
an increase in consulting expenses, primarily pertaining to information systems.
The elements discussed above combined to result in a decrease in
operating income from $35,521,000 in 1996 to $11,840,000 in 1997 and a decrease
in income before the cumulative effect of accounting change from $22,912,000, or
$.93 per diluted share, in 1996 to $8,332,000, or $.40 per diluted share, in
1997.
In June 1997, the Company changed its method of accounting for service
fees received from customers, retroactively effective as of July 1, 1996.
Previously, the Company recognized $60 as revenue at the time of each new sale
and the remaining service revenue was deferred and recognized as revenue using
an accelerated method based upon expected customer attendance at the centres.
Under the new method, all service fees collected are deferred and recognized as
revenue on a straight-line basis over the 14-month period of expected customer
attendance at the centres. The Company believes the new method is preferable as
it provides a better matching of revenues and expenses because the costs
incurred in performing the weight loss consulting services are generally
incurred on a level basis. The cumulative effect of this accounting change for
periods prior to July 1, 1996 of $7,509,000, or $.36 per diluted share, is shown
as a cumulative adjustment on the consolidated statement of income. The effect
of this change for the year ended June 30, 1997 was to increase income before
cumulative effect of accounting change by $525,000, or $.02 per diluted share.
The pro forma effect of retroactive application of this new method of accounting
would not have materially affected the results of operations for the years ended
June 30, 1996 and 1995. The increase in deferred service revenue from $4,506,000
at June 30, 1996 to $14,558,000 at June 30, 1997 results principally from this
change in accounting method.
JENNY CRAIG, INC. 17
<PAGE> 11
MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND
continued RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash, cash equivalents, and short-term
investments of $43,360,000 compared to $38,944,000 at June 30, 1997. Sources of
cash, cash equivalents, and short-term investments during the year ended June
30, 1998 included $8,941,000 provided by operations, which includes the net
receipt of $3,267,000 resulting from the Company's litigation recovery from an
insurance carrier. Uses of cash, cash equivalents, and short-term investments
during the year ended June 30, 1998 included $4,678,000 for the purchase of
property and equipment. The Company believes that its cash, cash equivalents,
and short-term investments and its cash flow from operations are adequate for
its needs in the foreseeable future.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components in the financial statements.
SFAS 131 establishes standards for the manner in which public business
enterprises report information about operating segments and also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS 130 and SFAS 131 are effective for years beginning
after December 15, 1997. The Company does not expect that the adoption of SFAS
130 and SFAS 131 will have a material impact on the Company's financial position
or results of operations.
18 JENNY CRAIG, INC.
<PAGE> 12
CONSOLIDATED
June 30, BALANCE
1997 and 1998
($ in thousands) SHEETS
<TABLE>
<CAPTION>
1997 1998
------------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 37,438 42,124
Short-term investments 1,506 1,236
Accounts receivable, net 2,967 2,617
Inventories 15,285 14,469
Prepaid expenses and other assets 16,497 12,548
------------- -------
Total current assets 73,693 72,994
Cost of reacquired area franchise rights, net 9,550 8,419
Property and equipment, net 27,554 24,832
Other assets 1,500 --
------------- -------
$ 112,297 106,245
============= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 14,938 15,256
Accrued liabilities 19,117 19,399
Income taxes payable 4,050 --
Deferred service revenue 14,558 10,278
------------- -------
Total current liabilities 52,663 44,933
Note payable 5,716 5,526
------------- -------
Total liabilities 58,379 50,459
Stockholders' equity:
Common stock $.000000005 par value, 100,000,000 shares
authorized; Issued: 1997 - 27,579,060 shares; 1998 -
27,580,260 shares; Outstanding: 1997 - 20,687,771
shares; 1998 - 20,688,971 shares -- --
Additional paid-in capital 71,615 71,622
Retained earnings 55,053 57,179
Equity adjustment from foreign currency translation 2,012 1,747
Treasury stock at cost: 1997 and 1998 - 6,891,289 shares (74,762) (74,762)
------------- -------
Total stockholders' equity 53,918 55,786
Commitments and contingencies
------------- -------
$ 112,297 106,245
============= =======
</TABLE>
See accompanying notes to consolidated financial statements.
JENNY CRAIG, INC. 19
<PAGE> 13
For the years
ended June 30,
1996, 1997, CONSOLIDATED
and 1998
($ in thousands, STATEMENTS OF
except per
share amounts) INCOME
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Company-owned operations:
Product sales $ 326,107 304,240 301,802
Service revenue 24,898 25,158 19,885
------------- ------------- ------------
351,005 329,398 321,687
------------- ------------- ------------
Franchise operations:
Product sales 42,059 29,677 26,002
Royalties 7,719 5,794 4,505
Initial franchise fees 235 265 55
------------- ------------- ------------
50,013 35,736 30,562
------------- ------------- ------------
Total revenues 401,018 365,134 352,249
------------- ------------- ------------
Costs and expenses:
Company-owned operations:
Product 288,954 283,643 288,450
Service 15,096 17,237 13,958
------------- ------------- ------------
304,050 300,880 302,408
------------- ------------- ------------
Franchise operations:
Product 30,699 22,067 19,257
Other 2,286 1,840 1,967
------------- ------------- ------------
32,985 23,907 21,224
------------- ------------- ------------
63,983 40,347 28,617
General and administrative expenses 28,462 28,507 26,577
------------- ------------- ------------
Operating income 35,521 11,840 2,040
Other income, net, principally interest 2,960 1,585 1,374
------------- ------------- ------------
Income before taxes and cumulative effect of accounting change 38,481 13,425 3,414
Provision for income taxes 15,569 5,093 1,288
------------- ------------- ------------
Income before cumulative effect
of accounting change 22,912 8,332 2,126
Cumulative effect on prior years of change in accounting
for service revenue, net of $4,498 income tax benefit -- 7,509 --
------------- ------------- ------------
Net income $ 22,912 823 2,126
============= ============= ============
Basic per share amounts:
Income before cumulative effect of accounting change $ .95 .40 .10
Cumulative effect of accounting change -- .36 --
------------- ------------- ------------
Net income per share, basic $ .95 .04 .10
============= ============= ============
Diluted per share amounts:
Income before cumulative effect of accounting change $ .93 .40 .10
Cumulative effect of accounting change -- .36 --
------------- ------------- ------------
Net income per share, diluted $ .93 .04 .10
============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
20 JENNY CRAIG, INC.
<PAGE> 14
CONSOLIDATED
For the years STATEMENTS
ended June 30,
1996, 1997, OF STOCKHOLDERS'
and 1998
($ in thousands) EQUITY
<TABLE>
<CAPTION>
Equity
adjustment
from
Additional foreign
Common paid-in Retained currency Treasury
stock capital earnings translation stock Total
-------- -------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 -- $ 71,148 31,318 415 (28,734) 74,147
Net income -- -- 22,912 -- -- 22,912
Purchase of 4,396,689 shares
of common stock, at cost -- -- -- -- (44,395) (44,395)
Exercise of stock options -- 330 -- -- -- 330
Translation adjustment -- -- -- 1,468 -- 1,468
--------- -------- ---------- ------------ ---------- --------
Balance at June 30, 1996 -- 71,478 54,230 1,883 (73,129) 54,462
Net income -- -- 823 -- -- 823
Purchase of 190,200 shares
of common stock, at cost -- -- -- -- (1,633) (1,633)
Exercise of stock options -- 137 -- -- -- 137
Translation adjustment -- -- -- 129 -- 129
--------- -------- ---------- ------------ ---------- --------
Balance at June 30, 1997 -- 71,615 55,053 2,012 (74,762) 53,918
Net income -- -- 2,126 -- -- 2,126
Exercise of stock options -- 7 -- -- -- 7
Translation adjustment -- -- -- (265) -- (265)
--------- -------- ---------- ------------ ---------- --------
Balance at June 30, 1998 -- $ 71,622 57,179 1,747 (74,762) 55,786
========= ======== ========== ============ ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
JENNY CRAIG, INC. 21
<PAGE> 15
CONSOLIDATED
STATEMENTS
For the years
ended June 30, OF CASH
1996, 1997, and 1998
($ in thousands) FLOWS
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,912 823 2,126
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,405 7,461 7,101
Decrease in other assets - forgiveness of officer loan -- -- 1,500
Cumulative effect of change in accounting
for service revenue -- 7,509 --
Provision for doubtful accounts (900) -- --
Provision for centre closures -- (400) --
Loss on disposal of property and equipment 167 134 1,035
(Increase) decrease in:
Accounts receivable (639) (566) 94
Inventories 275 2,526 866
Prepaid expenses and other assets (461) (3,717) 3,949
Increase (decrease) in:
Accounts payable 4,122 (5,977) 318
Accrued liabilities 4,560 (4,717) 282
Income taxes payable (1,209) 1,948 (4,050)
Deferred service revenue 1,237 (1,955) (4,280)
------------- ------------- -------------
Net cash provided by operating activities 37,469 3,069 8,941
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (3,662) (17,125) (4,678)
Purchase of short-term investments (9,877) (16,359) (9,008)
Proceeds from maturity of short-term investments 10,791 21,898 9,278
Payments for acquisition of franchise centres -- (2,156) (145)
------------- ------------- -------------
Net cash used in investing activities (2,748) (13,742) (4,553)
------------- ------------- -------------
Cash flows from financing activities:
Purchase of treasury stock (44,395) (1,633) --
Proceeds from note payable -- 6,000 --
Principal payments on note payable -- (95) (190)
Proceeds from exercise of stock options 330 137 7
------------- ------------- -------------
Net cash provided by (used in) financing activities (44,065) 4,409 (183)
------------- ------------- -------------
Effect of exchange rate changes on cash 1,060 167 481
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (8,284) (6,097) 4,686
Cash and cash equivalents at beginning of year 51,819 43,535 37,438
------------- ------------- -------------
Cash and cash equivalents at end of year $ 43,535 37,438 42,124
============= ============= =============
Supplemental disclosure of cash flow information:
Income taxes paid $ 16,780 2,848 5,400
Interest paid -- 238 399
Supplemental disclosure of noncash investing activities--
acquisition of franchise centres:
Fair value of assets acquired $ -- 5,052 401
Liabilities assumed $ -- (1,629) --
Cancellation of accounts receivable $ -- (1,267) (256)
------------- ------------- -------------
Cash paid for acquisitions $ -- 2,156 145
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
22 JENNY CRAIG, INC.
<PAGE> 16
NOTES TO
CONSOLIDATED
June 30, FINANCIAL
1996, 1997,
and 1998 STATEMENTS
Jenny Craig, Inc. (the "Company"), through its wholly-owned subsidiaries,
operates and franchises centres offering weight management programs to the
general public in the United States, Australia, New Zealand, Canada, and Puerto
Rico.
NOTE 1.
Summary of Significant
Accounting Policies
(A) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
(B) CASH EQUIVALENTS
Cash equivalents consist principally of money market funds and other highly
liquid interest-bearing instruments with original maturities of three months or
less.
(C) SHORT-TERM INVESTMENTS
Short-term investments consist principally of U.S. Government securities,
tax-exempt municipal obligations, and commercial paper. The Company accounts for
its short-term investments in accordance with the provisions of Statement of
Financial Accounting Standards No.115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). Under SFAS 115, the Company currently
classifies its securities as held-to-maturity. Held-to-maturity securities are
those investments in which the Company has the ability and intent to hold the
security until maturity. Held-to-maturity securities are recorded at amortized
cost, which approximates market value. All investments mature within a 12-month
period. Dividend and interest income are recognized in the period earned.
(D) INVENTORIES
Inventories, which consist primarily of food products held for sale, are stated
at the lower of cost (determined using the first-in, first-out method) or
market.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets, predominantly five years.
Leasehold improvements are amortized over the shorter of their useful life or
related lease term, predominantly five years. The Company's corporate
headquarters building, purchased in 1997, is being depreciated using the
straight-line method over 30 years.
(F) REACQUIRED AREA FRANCHISE RIGHTS
The cost of reacquired area franchise rights is amortized using the
straight-line method over the then remaining term of the acquired franchise
territorial rights, which averages 13 years.
(G) IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for its long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is
JENNY CRAIG, INC. 23
<PAGE> 17
NOTES TO
CONSOLIDATED
FINANCIAL
continued STATEMENTS
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Reacquired area franchise rights are evaluated for
recovery of the carrying amount on an individual area franchise basis. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
(H) REVENUE RECOGNITION
In June 1997, the Company changed its method of accounting for service fees
received from customers, retroactively effective as of July 1, 1996. Previously,
the Company recognized $60 as revenue at the time of each new sale and the
remaining service revenue was deferred and recognized as revenue based upon
expected customer attendance at the centres. Under the new method, all service
fees collected are deferred and recognized as revenue on a straight-line basis
over the 14-month period of expected customer attendance at the centres. The
Company believes the new method is preferable as it provides a better matching
of revenues and expenses because the costs incurred in performing the weight
loss consulting services are generally incurred on a level basis. The cumulative
effect of this accounting change, net of related income tax benefit, for periods
prior to July 1, 1996 of $7,509,000, or $.36 per diluted share, is shown as a
cumulative effect adjustment on the consolidated statements of income. The
effect of this change for the year ended June 30, 1997 was to increase income
before cumulative effect of accounting change by $525,000, or $.02 per diluted
share. The pro forma effect of retroactive application of this new method of
accounting would not have materially affected the results of operations for the
year ended June 30, 1996. Service revenue not recognized in income is recorded
as deferred service revenue in the accompanying consolidated balance sheets.
The Company grants franchises in exchange for an initial franchise fee
which is recorded as revenue when substantially all services have been performed
and the franchisee commences operations. Costs associated with such sales,
substantially all of which are incurred prior to the franchisee commencing
operations, are expensed as incurred. Franchise royalties are calculated as a
percentage of franchisees' revenue in accordance with the franchise agreements.
The Company's allowance for doubtful accounts amounted to $1,190,000 and
$1,080,000 at June 30, 1997 and 1998, respectively.
(I) ADVERTISING COSTS
Advertising costs are charged to expense as incurred.
(J) TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS
Assets and liabilities of foreign operations where the functional currency is
other than the U.S. dollar are translated at fiscal year-end rates of exchange,
and the related revenue and expense amounts are translated at the average rates
of exchange in effect for the fiscal year. Gains or losses resulting from
translating foreign currency financial statements are accumulated in a separate
component of stockholders' equity.
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable, and accrued liabilities approximate their
fair value because of the short-term nature of those instruments. The carrying
amount of the note payable approximates fair value because the interest rate is
reset each quarter to reflect current market rates and the other terms are
comparable to those currently available in the marketplace.
24 JENNY CRAIG, INC.
<PAGE> 18
NOTES TO
CONSOLIDATED
FINANCIAL
continued STATEMENTS
(L) STOCK-BASED COMPENSATION
The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Accordingly, the Company continues to account for stock-based
compensation under APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation expense for
employee stock option grants is recorded on the date of grant only if the
current market price of the Company's stock exceeds the exercise price.
(M) EARNINGS PER SHARE
The consolidated financial statements are presented in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
Basic net income per common share is computed using the weighted-average number
of shares outstanding during the period. Diluted net income per share
incorporates the incremental shares issuable upon the assumed exercise of stock
options. All prior period net income per share information is presented in
accordance with SFAS 128.
Net income and weighted average common shares used to compute net income
per share, basic and diluted, are presented below (amounts in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- ------------
<S> <C> <C> <C>
Net income $ 22,912 823 2,126
============= ============= ===========
Common shares, basic 24,195 20,767 20,688
Dilutive effect
of stock options 559 336 265
------------- ------------- ------------
Common shares, diluted 24,754 21,103 20,953
============= ============= ===========
</TABLE>
(N) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2.
Prepaid Expenses and
Other Assets
Prepaid expenses and other assets at June 30 are summarized as follows ($ in
thousands):
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Net deferred tax asset $ 9,279 7,863
Insurance settlement receivable 4,000 --
Other 3,218 4,685
------------- -------------
$ 16,497 12,548
============= =============
</TABLE>
The insurance settlement was received by the Company in July 1997.
JENNY CRAIG, INC. 25
<PAGE> 19
NOTES TO
CONSOLIDATED
FINANCIAL
continued STATEMENTS
NOTE 3.
Property and Equipment
Property and equipment at June 30 is summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Land $ 2,000 2,000
Building 7,128 7,186
Furniture and equipment 43,750 41,738
Leasehold improvements 23,931 23,041
------------- -------------
76,809 73,965
Less accumulated depreciation
and amortization (49,255) (49,133)
------------- -------------
$ 27,554 24,832
============= =============
</TABLE>
In July 1996, the Company purchased a 75,000-square-foot office building
located in LaJolla, California which serves as the Company's corporate
headquarters.
NOTE 4.
Accrued Liabilities
Accrued liabilities at June 30 are summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Accrued salaries, wages
and benefits $ 12,283 11,708
Other accruals 6,834 7,691
-------------- --------------
$ 19,117 19,399
============== ==============
</TABLE>
NOTE 5.
Income Taxes
The Company and its United States subsidiaries file consolidated federal and
combined or separate state income tax returns. Jenny Craig Weight Loss Centres,
Pty. Ltd. and Jenny Craig Weight Loss Centres (Canada), Ltd., both foreign
corporations, are subject to income tax in foreign jurisdictions.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The following summarizes income taxes ($ in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal $ 11,459 1,132 (1,301)
State 2,494 371 61
Foreign 1,347 3,993 1,112
------------- ------------- -------------
Total current 15,300 5,496 (128)
------------- ------------- -------------
Deferred:
Federal 794 1,112 373
State 215 (153) (86)
Foreign (740) (1,362) 1,129
------------- ------------- -------------
Total deferred 269 (403) 1,416
------------- ------------- -------------
Total provision for
income taxes $ 15,569 5,093 1,288
============= ============= =============
</TABLE>
26 JENNY CRAIG, INC.
<PAGE> 20
NOTES TO
CONSOLIDATED
FINANCIAL
continued STATEMENTS
Deferred income taxes result from the temporary differences between the
tax basis of an asset or a liability and its reported amount in the consolidated
balance sheets. The components that comprise deferred tax assets and liabilities
at June 30, 1997 and 1998 are as follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Employee benefits $ 2,158 1,734
Allowance for doubtful
accounts 463 425
Depreciation and
amortization 3,294 2,752
Inventories 358 186
Foreign operations 1,500 371
Deferred service revenue 3,853 3,055
Net operating losses -- 84
Tax credits -- 353
Other accruals 1,710 1,463
------------- -------------
Total gross deferred
tax assets 13,336 10,423
Less valuation allowance (700) (700)
------------- -------------
Net deferred
tax assets 12,636 9,723
Deferred tax liabilities:
Receivable from
foreign subsidiary (3,357) (1,727)
Other -- (133)
------------- -------------
Total deferred
tax liabilities (3,357) (1,860)
------------- -------------
Net deferred tax asset $ 9,279 7,863
============= =============
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and management's projections for
future taxable income over the reversing periods, management believes it is more
likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowance which has been established
to offset a portion of the deferred tax assets based upon the above factors.
Income taxes for the years ended June 30, 1996, 1997, and 1998 differed
from the amounts expected by applying the U.S. federal income tax rate of 35% to
income before taxes as follows ($ in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Computed
income taxes $ 13,468 4,699 1,195
State taxes, net of
federal benefit 1,761 237 (17)
Change in the
valuation allowance
for deferred
tax assets (1,456) -- --
Permanent differences -- -- 65
Other 1,796 157 45
------------- ------------- -------------
$ 15,569 5,093 1,288
============= ============= =============
</TABLE>
JENNY CRAIG, INC. 27
<PAGE> 21
NOTES TO
CONSOLIDATED
FINANCIAL
continued STATEMENTS
NOTE 6.
Note Payable
In October 1996, the Company borrowed $6,000,000 from a bank, secured by the
Company's corporate office building. The note bears interest at the London
Interbank Offered Rate plus one percent (6.75% at June 30, 1998). Quarterly
principal payments of $47,390 are due until the maturity date in November 2006,
at which time all remaining unpaid principal is due.
The current portion of the note, amounting to $190,000, is included in
accrued liabilities at June 30, 1997 and 1998.
NOTE 7.
Leases
The Company's centre operations are conducted from premises leased under
noncancellable operating leases, generally for terms of five years with renewal
options for like periods. The Company's rent expense under such noncancellable
operating leases amounted to $24,217,000, $25,074,000, and $25,227,000 for the
years ended June 30, 1996, 1997, and 1998, respectively.
As of June 30, 1998, the scheduled minimum annual rental payments,
excluding renewal provisions, are as follows ($ in thousands):
<TABLE>
<S> <C>
1999 $20,142
2000 14,065
2001 8,692
2002 4,181
2003 1,393
Thereafter 195
-------
$48,668
=======
</TABLE>
Management expects that in the normal course of business, leases that
expire will be renewed or replaced by other leases. A majority of the leases
provide for the payment of taxes, maintenance, insurance, and certain other
expenses applicable to the leased premises.
NOTE 8.
Related
Party Transactions
In March 1996, a corporation controlled by the beneficial owners of a majority
of the outstanding stock of the Company sold 2,000,000 shares of the Company's
common stock to the Company at a price of $10 per share pursuant to a Dutch
Auction self tender offer commenced by the Company in February 1996 and open to
all shareholders.
The beneficial owners of a majority of the outstanding stock of the
Company own the franchise operations in New Zealand. The Company's revenue
derived from these operations was $4,143,000, $4,997,000, and $5,440,000 for the
years ended June 30, 1996, 1997, and 1998, respectively.
28 JENNY CRAIG, INC.
<PAGE> 22
NOTES TO
CONSOLIDATED
FINANCIAL
continued STATEMENTS
A director and officer of the Company is a partner in a law firm which
provided certain legal services to the Company. Legal fees incurred with such
firm were $2,096,000, $1,067,000, and $616,000 in 1996, 1997, and 1998,
respectively.
In September 1997, the Company recorded expenses totaling $3,500,000
related to the separation of a former senior executive of the Company. These
expenses include $1,500,000 for the forgiveness of a loan made to the former
senior executive in 1995 (which is reflected on the accompanying consolidated
balance sheets as a decrease in other assets), $1,000,000 for the payment of the
former senior executive's salary and benefits in semi-monthly installments
through December 31, 1998, and $1,000,000 for the cancellation of stock options,
payable in five equal annual installments commencing in fiscal 1998, which were
exercisable by the former senior executive.
NOTE 9.
Cost of Reacquired
Area Franchise Rights
The Company has acquired, from time to time, centres which were previously owned
by franchisees. The excess cost over net assets acquired of $13,660,000 at June
30, 1998 is being amortized using the straight-line method over the then
remaining term of the acquired franchise territorial rights, which averages 13
years. Amortization expense was $837,000, $1,015,000, and $1,051,000 for the
years ended June 30, 1996, 1997, and 1998, respectively. Accumulated
amortization was $4,598,000 and $5,241,000 at June 30, 1997 and 1998,
respectively.
NOTE 10.
Employee Benefits
In 1996, the Company adopted a 401(k) Retirement Plan which allows all employees
with one or more years of service to participate. The Company currently matches
25% of an employee's voluntary contribution up to a maximum of 6% of eligible
compensation. The Company recorded expense of $91,000, $191,000, and $264,000 in
1996, 1997, and 1998, respectively, in connection with this plan.
In 1991, the Company adopted a management deferred bonus plan covering
certain members of the Company's management group. The bonus pool, which is
determined by the Board of Directors following each fiscal year, cannot exceed
one percent of operating income for the fiscal year plus a percentage of the
increase, if any, in operating income over the prior fiscal year. Participants
receive 25% of their allocated portion of the bonus pool approximately 90 days
after the end of each fiscal year. Payment of the remaining 75% is deferred for
five years and is subject to vesting at the rate of 20% per year. The unvested
portion is forfeited if the participant terminates employment for any reason
other than retirement after attainment of age 65 and completion of 10 years of
participation in the management plan. Amounts expensed under this plan were
$386,000, $100,000, and $20,000 in 1996, 1997, and 1998, respectively.
JENNY CRAIG, INC. 29
<PAGE> 23
NOTES TO
CONSOLIDATED
FINANCIAL
continued STATEMENTS
NOTE 11.
Stock Option Plan
The Company's Stock Option Plan (the "Option Plan") was adopted in October 1991
and provides for the grant of incentive stock options to key employees and of
nonqualified stock options to key employees, consultants, directors, and Medical
Advisory Board members. A total of 2,500,000 shares of common stock have been
reserved for issuance under the Option Plan, of which 487,540 shares remain
available for future grant at June 30, 1998. The exercise price of the options
may not be less than fair market value on the date of grant. Additionally, no
options may be exercisable more than 10 years after the date of grant and, with
certain exceptions, no option may become exercisable prior to the expiration of
six months from the date of grant. The options granted to employees generally
become exercisable over three to four years.
The Company applies APB Opinion No.25 in accounting for the Option Plan
and, accordingly, no compensation cost has been recognized for stock option
grants to employees and directors in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts as follows ($
in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net income - as reported $ 22,912 823 2,126
Net income - pro forma 22,883 574 2,003
Per share amounts:
Basic, as reported .95 .04 .10
Basic, pro forma .95 .03 .10
Diluted, as reported .93 .04 .10
Diluted, pro forma .92 .03 .10
</TABLE>
The per share weighted-average fair value of stock options granted
during 1996, 1997, and 1998 was $4.36, $3.70, and $2.37, respectively, on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected life of four years, expected volatility
of 44%, 47%, and 44% in 1996, 1997, and 1998, respectively, no dividends, and
risk-free interest rate of 5.0%.
Pro forma net income reflects only options granted in 1996, 1997, and
1998. Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of four years, and compensation cost for options granted prior to July 1,
1995 is not considered.
The following summarizes the status of the Option Plan:
<TABLE>
<CAPTION>
Weighted-
average
Number of Range of exercise
options exercise prices price
- ------------------------------------- -------------- -------------
<S> <C> <C> <C>
Outstanding at
June 30, 1995 1,677,900 $4.63 to 21.00 $ 6.73
Granted 187,000 9.13 to 16.25 11.68
Cancelled (59,380) 5.63 to 21.00 7.09
Exercised (56,940) 5.63 to 7.32 5.82
- ------------------------------------- -------------- -------------
Outstanding at
June 30, 1996 1,748,580 4.63 to 21.00 7.28
Granted 267,000 6.00 to 15.75 8.62
Cancelled (78,980) 5.63 to 16.25 10.14
Exercised (21,720) 5.63 to 7.32 6.31
- ------------------------------------- -------------- -------------
Outstanding at
June 30, 1997 1,914,880 4.63 to 21.00 7.36
Granted 1,648,100 5.82 to 7.50 5.84
Cancelled (1,629,580) 5.63 to 21.00 7.49
Exercised (1,200) 5.63 to 5.63 5.63
- ------------------------------------- -------------- -------------
Outstanding at
June 30, 1998 1,932,200 $4.63 to 15.32 $ 5.96
===================================== ============== =============
Exercisable at
June 30, 1998 227,360 $4.63 to 15.32 $ 6.21
===================================== ============== =============
</TABLE>
30 JENNY CRAIG, INC.
<PAGE> 24
NOTES TO
CONSOLIDATED
FINANCIAL
continued STATEMENTS
During fiscal 1998, the compensation committee of the Board of Directors
authorized the grant of 543,600 options at an exercise price of $5.88 per share,
the fair market value on the date of grant. These grants were conditioned upon
the cancellation of an equal number of previously existing options which had
exercise prices ranging from $7.07 to $21.00 per share. The new options vest at
the rate of 33% per year, commencing on the grant date of the new options, with
the exception of 61,500 options granted to non-employee directors which were
exercisable immediately upon grant.
Information with respect to options outstanding and exercisable by
exercise price range at June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
- -------------------------------------------------------------------
Weighted-
average Weighted-
remaining average
Range of Number contractual exercise
exercise prices outstanding life (in years) price
- -------------------------------------------------------------------
<S> <C> <C> <C>
$4.63- 4.63 5,000 6.1 $ 4.63
5.63- 5.88 1,832,000 9.4 5.84
5.89- 9.38 80,200 7.9 7.04
9.39-15.32 15,000 7.9 15.32
- -------------------------------------------------------------------
$4.63-15.32 1,932,200 9.3 $ 5.96
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
- ----------------------------------------------------
Weighted-
average
Range of Number exercise
exercise prices exercisable price
- ----------------------------------------------------
<S> <C> <C>
$4.63- 4.63 5,000 $ 4.63
5.63- 5.88 186,240 5.82
5.89- 9.38 30,120 7.10
9.39- 15.32 6,000 15.32
- ----------------------------------------------------
$4.63- 15.32 227,360 $ 6.21
====================================================
</TABLE>
At June 30, 1996 and 1997, the number of options exercisable were
671,810 and 1,071,780, respectively, and the weighted-average exercise prices
were $6.99 and $7.11, respectively.
NOTE 12.
Contingencies
Because of the nature of its activities, the Company is, at times, subject to
pending and threatened legal actions which arise out of the normal course of
business. In the opinion of management, based in part upon advice of legal
counsel, the disposition of all such matters will not have a material effect on
the consolidated financial statements.
The Company and the Federal Trade Commission have entered into a Consent
Order settling all contested issues raised in a complaint filed in September
1993 against the Company alleging that the Company violated the Federal Trade
Commission Act by the use and content of certain advertisements for the
Company's weight loss program featuring testimonials, claims for the program's
success and safety, and statements as to the program's costs to participants.
The Consent Order does not admit any issue of fact or law or any violation by
the Company of any law or regulation, and does not involve payment by the
Company of any civil money penalty, damages, or other financial relief. The
Consent Order requires certain procedures and disclosures in connection with the
Company's advertisements of its products
JENNY CRAIG, INC. 31
<PAGE> 25
NOTES TO
CONSOLIDATED
FINANCIAL
continued STATEMENTS
and services. The full Commission accepted the Consent Order, and it has been
made effective as of May 4, 1998. The Company does not believe that compliance
with the Consent Order will have a material adverse effect on the Company's
consolidated financial position or results of operations or its current
advertising and marketing practices.
The Company, along with other weight loss programs and certain
pharmaceutical companies, has been named as a defendant in an action filed in
the Circuit Court for the Eleventh Judicial Circuit in Pickens County, Alabama
(the "Alabama Litigation"). The action was commenced in August 1997 by three
plaintiffs who are seeking to maintain the action as a class action on behalf of
all persons in the United States and United States Territories who have suffered
or may in the future suffer injury due to the administration of phentermine,
fenfluramine (commonly known as "phen-fen" when taken together), and/or
dexfenfluramine (trade name Redux(TM)), which were manufactured or sold by the
defendants. The complaint includes claims against the Company and other
defendants, acting separately and in concert, for alleged unlawful and tortious
acts, including sale of allegedly dangerous and defective products, negligent
marketing and distribution, failure to warn of the risks associated with the
weight loss medications, breach of warranty, fraud, and negligent
misrepresentation. The complaint seeks compensatory and punitive damages in
unspecified amounts and equitable relief including the establishment of a
medical fund to cover future medical expenses resulting from the use of the
weight loss medications, and a requirement that the defendants adequately warn
the public of the risks associated with the use of the weight loss medications.
The Company, along with certain pharmaceutical companies, has also been
named as a defendant in an action filed in the Court of Common Pleas,
Philadelphia County, Pennsylvania (the "Pennsylvania Litigation"). The action
was commenced in November 1997 by a plaintiff, a participant in the Company's
program, who is seeking to maintain the action as a class action on behalf of
all persons in the Commonwealth of Pennsylvania who have purchased and used
fenfluramine, dexfenfluramine, and phentermine, alone or in combination. The
complaint includes claims against the Company and other defendants for alleged
false and misleading statements concerning the safety and appropriateness of
using fenfluramine, dexfenfluramine, and phentermine, and the benefits, uses,
and ingredients of these drugs, negligence in the distribution, sale, and
prescribing of these medications, and breach of the warranty of merchantability.
The complaint seeks compensatory and punitive damages in unspecified amounts and
a Court-supervised program funded by the defendants through which class members
would undergo periodic medical examination and testing.
32 JENNY CRAIG, INC.
<PAGE> 26
NOTES TO
CONSOLIDATED
FINANCIAL
continued STATEMENTS
The Company has tendered the Alabama Litigation and the Pennsylvania
Litigation matters to its insurance carriers. The Company and the provider of
the independent physicians who prescribed the weight loss medications in the
Company's centres have each asserted their rights with respect to these
litigations under contractual provisions for indemnification in the agreement
between them. The claims have not progressed sufficiently for the Company to
estimate a range of possible loss, if any. The Company intends to defend the
matters vigorously.
NOTE 13.
Business Segments
and Geographic Information
The Company operates in one industry segment. Substantially all revenue results
from the sale of weight management products and services, whether the centre is
operated by the Company or its franchisees. The following presents information
about operations in different geographic areas ($ in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenue derived
from customers:
Company-owned
operations:
Unaffiliated:
United States $ 309,415 279,090 273,358
Foreign 41,590 50,308 48,329
Franchise operations:
Unaffiliated:
United States 43,119 27,525 22,051
Foreign 2,751 3,214 3,071
Affiliated:
United States -- -- --
Foreign 4,143 4,997 5,440
Operating income (loss):
Company-owned
operations:
United States 25,226 732 (8,175)
Foreign 58 5,249 5,409
Franchise operations:
United States 8,818 3,677 2,135
Foreign 1,419 2,182 2,671
Identifiable assets:
United States 93,208 100,689 94,450
Foreign 11,193 11,608 11,795
</TABLE>
JENNY CRAIG, INC. 33
<PAGE> 27
INDEPENDENT
AUDITORS'
REPORT
The Shareholders and Board of Directors
Jenny Craig, Inc.:
We have audited the accompanying consolidated balance sheets of Jenny
Craig, Inc. and subsidiaries as of June 30, 1997 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended June 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Jenny Craig,
Inc. and subsidiaries as of June 30, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
San Diego, California
August 17, 1998
34 JENNY CRAIG, INC.
<PAGE> 28
SELECTED
QUARTERLY
FINANCIAL
(Unaudited) INFORMATION
The following is a summary of the unaudited quarterly results of
operations ($ in thousands, except per share data):
<TABLE>
<CAPTION>
Three-Month Period Ended
- --------------------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, Total
Current Year 1997 1997 1998 1998 year
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 86,704 78,843 93,132 93,570 352,249
Operating income (loss) (7,906) 160 3,000 6,786 2,040
Net income (loss) (4,617) 283 2,042 4,418 2,126
Basic and diluted
net income (loss) per share (.22) .01 .10 .21 .10
</TABLE>
The quarter ended September 30, 1997 includes a pretax charge of
$3,500,000 related to the separation of a former senior executive of the
Company.
<TABLE>
<CAPTION>
Three-Month Period Ended
- --------------------------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, Total
Prior Year 1996 1996 1997 1997 year
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 91,012 83,388 96,536 94,198 365,134
Operating income 3,649 751 1,170 6,270 11,840
Income before cumulative
effect of accounting change 2,489 879 908 4,056 8,332
Cumulative effect of change in
accounting for service revenue (7,509) -- -- -- (7,509)
Net income (loss) (5,020) 879 908 4,056 823
Basic and diluted per share amounts:
Income before cumulative
effect of accounting change 0.12 0.04 0.04 0.20 0.40
Cumulative effect of change in
accounting for service revenue (0.36) -- -- -- (0.36)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.24) 0.04 0.04 0.20 0.04
================================================================================================================================
</TABLE>
In the fourth quarter of fiscal 1997, the Company changed its method of
accounting for service fees received from customers, retroactively effective as
of July 1, 1996 (see Note 1 of Notes to Consolidated Financial Statements). The
quarterly results of operations for the first three quarters of fiscal 1997
reflect the effect of the change in accounting method as if the change had
occurred on July 1, 1996 and do not differ materially from the amounts as
originally reported.
The quarter ended June 30, 1997 includes a pretax credit of $3,267,000
resulting from the Company's litigation recovery from an insurance carrier.
The net income (loss) per share computed for each quarter and the year
are separate calculations.
JENNY CRAIG, INC. 35
<PAGE> 29
COMMON
STOCK
DATA
At August 28, 1998, there were approximately 2,600 holders of the Company's
common stock, which is traded on the New York Stock Exchange (NYSE) under the
symbol JC. The following table reflects the range of high and low sales prices
as reported by the NYSE for the indicated periods.
<TABLE>
<CAPTION>
1997 1998
--------------------------------------------------------
High Low High Low
--------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter ended September 30 $17 3/4 9 1/8 8 15/16 6 5/16
Second quarter ended December 31 9 7/8 8 1/8 8 12/16 6 15/16
Third quarter ended March 31 10 3/4 6 1/2 7 10/16 5
Fourth quarter ended June 30 7 7/8 5 1/8 6 15/16 5 7/16
</TABLE>
In June 1994, the Company suspended payment of its quarterly dividend, subject
to quarterly review by the Board of Directors. The Company currently believes
that its stockholders are best served by directing cash resources to the
Company's marketing efforts and further improvement of its business.
36 JENNY CRAIG, INC.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Jenny Craig, Inc.
We consent to incorporation by reference in the registration statements (No.
33-17591 and No. 33-86098) on Form S-8 of Jenny Craig, Inc. of our reports dated
August 17, 1998, relating to the consolidated balance sheets of Jenny Craig,
Inc. and subsidiaries as of June 30, 1997 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended June 30, 1998, and the related financial
statement schedule, which reports appear in the June 30, 1998 annual report on
Form 10-K of Jenny Craig, Inc.
/s/ KPMG PEAT MARWICK LLP
San Diego, California
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR
ENDED JUNE 30, 1998, INCLUDED IN THE REPORT ON FORM 10-K OF JENNY CRAIG, INC.
FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 42,124
<SECURITIES> 1,236
<RECEIVABLES> 2,617<F1>
<ALLOWANCES> 0
<INVENTORY> 14,469
<CURRENT-ASSETS> 72,994
<PP&E> 24,832<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 106,245
<CURRENT-LIABILITIES> 44,933
<BONDS> 5,526
0
0
<COMMON> 0
<OTHER-SE> 55,786
<TOTAL-LIABILITY-AND-EQUITY> 106,245
<SALES> 327,804
<TOTAL-REVENUES> 352,249
<CGS> 307,707
<TOTAL-COSTS> 323,632
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 413
<INCOME-PRETAX> 3,414
<INCOME-TAX> 1,288
<INCOME-CONTINUING> 2,126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,126
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF
ALLOWANCES AND DEPRECIATION, RESPECTIVELY.
</FN>
</TABLE>
