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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, 1999
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11355 NORTH TORREY PINES ROAD, LA JOLLA, CALIFORNIA 92037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 812-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------- -----------------------------------------
<S> <C>
COMMON STOCK, $.000000005 NEW YORK STOCK EXCHANGE
</TABLE>
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. [ ]
As of August 27, 1999, 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 27, 1999) was approximately $17,001,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended June 30, 1999 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, 1999.
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JENNY CRAIG, INC.
1999 FORM 10-K
TABLE OF CONTENTS
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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 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 10
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 10
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 10
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 11
ITEM 11. EXECUTIVE COMPENSATION 11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 11
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 11
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 11
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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 27, 1999, there were 527 Company-owned and 79
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 27, 1999, there were approximately 65,000 active
participants in the Program in the United States, and 26,000 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 pharmacueticals 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 pharmacueticals 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."
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
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"Regulation" for information regarding a Consent Order entered into by the
Company with the FTC relating to the advertising practices of the Company.
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.
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 advertising 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
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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 1999, the Company introduced a new
program option entitled On-the-Go. The On-the-Go program was designed to be a
more convenient, portable option for today's busy consumers utilizing a
lower-cost menu option of meal supplements for clients compared to the Company's
traditional program. The Company expected that the decrease in the average
dollar amount per client of food products purchased by clients in the On-the-Go
program would be offset by an increase in the number of active clients enrolled
in the new program. Although a significant portion of the Company's clients
purchased the On-the-Go meal supplements, the Company was unable to increase the
number of new program participants to a level to offset the drop in the average
dollar amount per client of food products purchased. The Company continues to
offer the On-the-Go program, however it is not emphasized in the Company's
advertising.
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. 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.
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. The Company offers a
Gold Program which includes a weight loss module, lifestyle audio tapes, and a
walking program for a fee which was $199 as of August 27, 1999. A significant
number of participants who enroll in the Program purchase a Platinum Program for
a fixed fee which was $349 at August 27, 1999. 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. 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. 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.
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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
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 93%
and 94% of the Company's revenues in fiscal 1998 and 1999, respectively. For the
year ended June 30, 1998, the Company's gross revenues from product sales were
$327,804,000 compared to $301,120,000 for the year ended June 30, 1999.
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 International Home Foods, 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 27, 1999 as measured
by the number of Centres operating is shown in the following table:
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AT JUNE 30, AT
---------------------------------------------------------------------------- 8/27
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company-owned
United States 273 326 370 476 502 478 485 542 533 524 527
Foreign 84 86 88 103 106 102 103 106 110 110 110
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
357 412 458 579 608 580 588 648 643 634 637
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Franchise
United States 126 186 199 176 159 154 159 113 101 86 79
Foreign 29 30 37 39 43 43 36 36 37 37 37
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
155 216 236 215 202 197 195 149 138 123 116
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total 512 628 694 794 810 777 783 797 781 757 753
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
The number of franchise Centres owned by affiliates at June 30, 1999 and
August 27, 1999 was 17.
In fiscal 1999, the Company acquired 6 Centres from a franchisee in the
United States and closed 15 United States Company-owned Centres. Also during
fiscal 1999, two United States franchise Centres were opened and 11 United
States franchise Centres were closed.
The increase in United States Company-owned Centres and the decrease in
United States franchise Centres in 1997 principally 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 that connects the caller directly to the nearest Centre in
every market in the United States.
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
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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 27, 1999, the Company had 116 Centres operating pursuant to
franchise agreements, of which 79 were located throughout the United States, 16
in Australia, 17 in New Zealand and 4 in Canada. During fiscal 1999, the Company
acquired 6 Centres from a franchisee.
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. 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 and the Federal Trade Commission entered into a Consent Order
effective May 4, 1998 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 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 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
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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.
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 27, 1999 the Company had approximately 3,520 employees, of
which 2,710 were located in the United States, 670 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>
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NAME OF EXECUTIVE OFFICER AGE POSITION(S) HELD
-------------------------- ------- -----------------------------------------------------
<S> <C> <C>
Sidney Craig 67 Chairman of the Board, Chief Executive Officer and
Director
Jenny Craig 67 Vice-Chairman and Director
Philip Voluck 57 President and Chief Operating Officer
Janet Rheault 38 Senior Vice President, Operations
Leslie Koll 48 Senior Vice President, Marketing
James S. Kelly 38 Vice President, Chief Financial Officer and Treasurer
Alan V. Dobies 51 Vice President, Corporate 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 served as President of the Company from October 1997
through December 1998. Sidney Craig and Jenny Craig are husband and wife.
Philip Voluck has served as President and Chief Operating Officer since
December 1998 after having 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.
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.
James S. Kelly has served as Vice President, Chief Financial Officer and
Treasurer since June 1999 after having served as Vice President and Controller
since 1993 and as Controller from 1989 through 1993. From January 1983 to
January 1989, Mr. Kelly was employed by KPMG Peat Marwick, an international
accounting firm, most recently as an audit manager.
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 1999 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 27, 1999, there were 637 Company-owned Centres, all of which are
in leased premises, of which 527 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 1,800 to 2,200 square feet of
space consisting of a reception area, individual counseling rooms, and food
storage space.
The Company owns a 75,000 square foot office building located in La Jolla,
California in which its executive offices are located. The building is subject
to a promissory note to a bank, secured by a deed of trust, which had a balance
owing of $5,526,000 as of June 30, 1999. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company, along with other weight loss programs and certain
pharmaceutical companies, has been named as a defendant in an action filed in
the Second Judicial District Court, State of Nevada, Washoe County (the "Nevada
Litigation"). The action was commenced in August 1999 by a group of four
plaintiffs, who are seeking to maintain the action as a class action on behalf
of all persons in the State of Nevada who have purchased and used fenfluramine,
dexfenfluramine and phentermine, alone or in combination, and who have not yet
been diagnosed as having pulmonary heart disease or hypertension and/or valvular
heart disease, but who are allegedly at an increased risk of developing such
illnesses. The complaint includes claims against the Company and other
defendants for alleged breach of express and implied warranties concerning the
safety of using fenfluramine, dexfenfluramine and phentermine, and for alleged
negligence in the advertising, warning, marketing and sale of these drugs. The
complaint seeks a Court-supervised program funded by the defendants through
which class members would undergo periodic medical testing, preventative
screening and monitoring, as well as incidental damages not to exceed $75,000
per each class member, and costs of litigation including expert and attorneys'
fees.
9
<PAGE> 12
The Company has tendered the Nevada Litigation to its insurance
carriers. The claims have not progressed sufficiently for the Company to
estimate a range of possible loss, if any. The Company intends to defend the
matter vigorously.
The Alabama Litigation and the Pennsylvania Litigation described in
Item 3 of the Company's Report on Form 10-K for the year ended June 30, 1998
have been dismissed against the Company by the plaintiffs in these matters. The
Pennsylvania Litigation was dismissed without prejudice, which means that the
plaintiffs in that case may reinstitute the litigation if they choose to do so.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Material appearing under the caption "Common Stock Data" on page 30 of the
Annual Report to Shareholders of Jenny Craig, Inc. for the fiscal year ended
June 30, 1999 ("1999 Annual Report") is hereby incorporated by this reference.
ITEM 6. SELECTED FINANCIAL DATA
Material appearing under the caption "Selected Financial Data" on page 4
of the Company's 1999 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 5 through 14 of the
Company's 1999 Annual Report is hereby incorporated by this reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Material appearing under the caption "Quantitative and Qualitative
Disclosures About Market Risk" on page 14 of the Company's 1999 Annual Report
is hereby incorporated by this reference.
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 15 through 28 of the
Company's 1999 Annual Report are hereby incorporated by this reference. Material
appearing under the caption "Selected Quarterly Financial Information" on page
29 of the Company's 1999 Annual Report is hereby incorporated by this
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
10
<PAGE> 13
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, 1999. 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, 1999.
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, 1999.
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, 1999.
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 1999 Annual Report at the pages indicated below
and are incorporated into Part II by reference:
<TABLE>
<S> <C>
(1) Independent Auditors' Report Page 28
(2) Consolidated Balance Sheets as of June 30, 1998 and 1999 Page 15
(3) Consolidated Statements of Operations for the Years Ended June 30,
1997, 1998 and 1999 Page 16
(4) Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 1997, 1998 and 1999 Page 17
(5) Consolidated Statements of Cash Flows
for the Years Ended June 30, 1997, 1998 and 1999 Page 18
(6) Notes to Consolidated Financial Statements Pages 19 to 27
</TABLE>
SCHEDULES
The following financial statement schedule appears on page 16 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.
11
<PAGE> 14
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 Agreement dated as of May 10, 1999 between Jenny Craig, Inc. and
James Kelly.(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 10.8 for Amendment thereto.(1)(3)
10.5 Executive Employment Agreement between Jenny Craig, Inc. and Sid
Craig. See Exhibit 10.10 for Amendment thereto.(1)(3)
10.6 Agreement dated as of May 10, 1999 between Jenny Craig, Inc. and
Alan Dobies.(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 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)
10.9 Standard Form of Franchise Agreement of Jenny Craig International,
Inc.(1)
10.10 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)
10.11 Agreement dated as of July 7, 1998 between Jenny Craig, Inc. and
Philip Voluck. See Exhibit 10.15 for Amendment thereto
(Incorporated herein by reference to Exhibit 10.41 to the Report
on Form 10-K of the Company for the fiscal year ended June 30,
1998). (3).
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.)
10.15 Agreement dated as of December 3, 1998 between Jenny Craig, Inc.
and Philip Voluck amending Exhibit 10.11 . (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, 1998.)(3)
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)
10.17 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)
10.18 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and
IBM Foods, d/b/a Overhill Farms, dated September 22, 1988, with
amendments.(1)
10.19 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)
10.20 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and
Campbell Soup Company, dated June 1, 1991.(1)
</TABLE>
12
<PAGE> 15
<TABLE>
<S> <C>
10.21 Metropolitan Insurance and Annuity Company Key Man Life Insurance
Policy Relating to Jenny Craig.(1)
10.22 Consent Order, effective May 4, 1998, in the matter of Jenny
Craig, Inc., a corporation, and Jenny Craig International, Inc., a
corporation. (Incorporated herein by reference to Exhibit 10.42 to
the Report on Form 10-K of the Company for the fiscal year ended
June 30, 1998.)
10.23 Prudential Insurance Company of America Key Man Life Insurance
Policy Relating to Jenny Craig.(1)
10.24 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)
10.25 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)
10.26 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.)
10.27 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.)
13. Portions of the Annual Report to Shareholders with respect to the
fiscal year ended June 30, 1999 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>
- ----------
(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.
13
<PAGE> 16
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.
14
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Jenny Craig, Inc.:
Under date of August 18, 1999, we reported on the consolidated balance
sheets of Jenny Craig, Inc. and subsidiaries as of June 30, 1998 and 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 1999,
as contained in the 1999 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, 1999. 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 LLP
San Diego, California
August 18, 1999
15
<PAGE> 18
SCHEDULE II
JENNY CRAIG, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
($ IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED CHARGED
TO CHARGED TO CHARGED
BALANCE COSTS TO BALANCE COSTS TO
AT AND OTHER WRITE AT AND OTHER WRITE
DESCRIPTION 6/30/96 EXPENSES ACCOUNTS OFFS 6/30/97 EXPENSES ACCOUNTS OFFS
- ------------------- ------- -------- -------- ------ ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts 1,464 -- -- (274) 1,190 -- -- (110)
Accumulated
Amortization -
Reacquired Area
Franchise Rights 3,705 1,015 (122) -- 4,598 1,051 (408) --
Accumulated
Amortization -
Computer Software 1,285 75 -- -- 1,360 91 -- --
</TABLE>
<TABLE>
<CAPTION>
CHARGED
TO CHARGED
BALANCE COSTS TO BALANCE
AT AND OTHER WRITE AT
DESCRIPTION 6/30/98 EXPENSES ACCOUNTS OFFS 6/30/99
- ------------------- ------- -------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts 1,080 500 -- -- 1,580
Accumulated
Amortization -
Reacquired Area
Franchise Rights 5,241 805 144 -- 6,190
Accumulated
Amortization -
Computer Software 1,451 164 -- -- 1,615
</TABLE>
- ----------
See accompanying Independent Auditors' Report.
16
<PAGE> 19
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 24, 1999 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 Chief Executive September 24, 1999
--------------------------- Officer (Principal Executive Officer)
Sidney Craig
/s/ JENNY CRAIG Vice Chairman and Director September 24, 1999
---------------------------
Jenny Craig
/s/ JAMES S. KELLY Vice President, Chief Financial Officer September 24, 1999
--------------------------- and Treasurer
James S. Kelly (Principal Financial and Accounting
Officer)
/s/ SCOTT BICE Director September 24, 1999
---------------------------
Scott Bice
/s/ MARVIN SEARS Director September 24, 1999
---------------------------
Marvin Sears
/s/ ANDREA VAN DE KAMP Director September 24, 1999
---------------------------
Andrea Van de Kamp
/s/ ROBERT WOLF Director September 24, 1999
---------------------------
Robert Wolf
</TABLE>
17
<PAGE> 1
EXHIBIT 10.2
May 10, 1999
Mr. Jim Kelly, Vice President & Controller
Jenny Craig International
11355 N. Torrey Pines Road
La Jolla, CA 92038
Dear Jim:
I am pleased to offer you, as part of your employment with Jenny Craig, a
Severance Agreement (Agreement) as described below. This offer is being made to
you in recognition of your service to the Company. Included in this letter are
the conditions for receiving this severance payment should that become
necessary. Please read this letter carefully before signing, keep the signed
original and return a copy of same to Roberta Baade.
AGREEMENT
1. Both you and the Company agree that this employment relationship is entirely
"at-will." "At-will" means that you are free to resign from the Company at
any time for any or no reason. Similarly, the Company shall have the right
to terminate your employment at any time, with or without cause, by written
notice to you.
2. 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, upon
receipt of a general release signed by you, you will receive a severance
payment equal to your then current annual salary payable in twelve (12)
equal monthly installments. Further, 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 your duties, 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. If employment is
terminated "for cause," then all compensation, benefits and rights under the
agreement, including the right to severance, will terminate.
3. 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 related to the operations, business or affairs of the Company.
<PAGE> 2
4. 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 ro entity to leave his or her employment with the
Company, terminate an independent contractor relationship with the Company
or terminate or reduce any contractual relationship with the Company.
5. 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 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. This arbitration
agreement includes, but is not limited to, any claim based on state or
federal laws regarding: age, sex, pregnancy, race, color, national origin,
marital status, religion, veteran status, disability, sexual orientation,
medical condition, or other anti-discrimination or non-retaliation laws,
including, without limitation, Title VII, the Age Discrimination In
Employment Act, the Americans With Disabilities Act, the Equal Pay Act, the
California Fair Employment and Housing Act, all as amended. You and the
Company understand and agree that they are both waiving any right to a jury
trial based on these claims. The arbitrator(s) cannot have the power to
modify any of the provisions of the agreement.
6. Should any provision of this agreement be declared or be determined by an
arbitrator or any court to be illegal or invalid, the validity of the
remaining parts, terms, or provisions shall not be affected thereby and said
illegal or invalid part, term or provision shall be deemed not to be a part
of this agreement.
7. This agreement does not restrict the Company's right to pursue claims and
obtain injunctive relief and/or other equitable relief, including but not
limited to claims for unfair competition and/or the use and/or unauthorized
disclosure of trade secrets or confidential information, as to which the
Company may seek and obtain relief from a court of competent jurisdiction.
Jim, this offer is being made to you in recognition of the contributions you
have made and will continue to make at Jenny Craig.
Regards,
/s/ PHILIP VOLUCK
Phil Voluck
President and Chief Operating Officer
ACCEPTED AND AGREED: JIM KELLY
/s/ JAMES S. KELLY 6/4/99
- ----------------------------------------
Signature Date
cc: Roberta Baade
<PAGE> 1
EXHIBIT 10.6
May 10, 1999
Mr. Alan Dobies, Vice President Corporate Services
Jenny Craig International
11355 N. Torrey Pines Road
La Jolla, CA 92038
Dear Alan:
I am pleased to offer you, as part of your employment with Jenny Craig, a
Severance Agreement (Agreement) as described below. This offer is being made to
you in recognition of your service to the Company. Included in this letter are
the conditions for receiving this severance payment should that become
necessary. Please read this letter carefully before signing, keep the signed
original and return a copy of same to Roberta Baade.
AGREEMENT
1. Both you and the Company agree that this employment relationship is entirely
"at-will." "At-will" means that you are free to resign from the Company at
any time for any or no reason. Similarly, the Company shall have the right
to terminate your employment at any time, with or without cause, by written
notice to you.
2. 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, upon
receipt of a general release signed by you, you will receive a severance
payment equal to your then current annual salary payable in twelve (12)
equal monthly installments. Further, 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 your duties, 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.
3. 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 related to the operations, business or affairs of the Company.
4. You agree that for a period of two (2) years following termination of your
<PAGE> 2
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 or her employment with the
Company, terminate an independent contractor relationship with the Company
or terminate or reduce any contractual relationship with the Company.
5. 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 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. This arbitration
agreement includes, but is not limited to, any claim based on state or
federal laws regarding: age, sex, pregnancy, race, color, national origin,
marital status, religion, veteran status, disability, sexual orientation,
medical condition, or other anti-discrimination or non-retaliation laws,
including, without limitation, Title VII, the Age Discrimination In
Employment Act, the Americans With Disabilities Act, the Equal Pay Act (the
California Fair Employment and Housing Act), all as amended. You and the
Company understand and agree that they are both waiving any right to a jury
trial based on these claims. The arbitrator(s) cannot have the power to
modify any of the provisions of the agreement.
6. Should any provision of this agreement be declared or be determined by an
arbitrator or any court to be illegal or invalid, the validity of the
remaining parts, terms, or provisions shall not be affected thereby and said
illegal or invalid part, term or provision shall be deemed not to be a part
of this agreement.
7. "This agreement does not restrict the Company's right to pursue claims and
obtain injunctive relief and/or other equitable relief, including but not
limited to claims for unfair competition and/or the use and/or unauthorized
disclosure of trade secrets or confidential information, as to which the
Company may seek and obtain relief from a court of competent jurisdiction."
Alan, this offer is being made to you in recognition of the contributions you
have made and will continue to make at Jenny Craig.
Regards,
/s/ PHILIP VOLUCK
Phil Voluck
President and Chief Operating Officer
ACCEPTED AND AGREED: ALAN DOBIES
/s/ ALAN DOBIES
- ----------------------------------------
Signature Date
cc: Roberta Baade
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL DATA
Years ended June 30, all amounts in thousands except per share data
<TABLE>
<CAPTION>
1995 1996 1997(1) 1998 1999(2)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 378,093 $ 401,018 $ 365,134 $ 352,249 $ 320,952
Operating income (loss) 17,363 35,521 11,840 2,040 (2,784)
Income (loss) before cumulative
effect of accounting change 11,772 22,912 8,332 2,126 (672)
Per share amounts:
Income (loss) before cumulative
effect of accounting change, basic .46 .95 .40 .10 (0.03)
Net income (loss), basic .46 .95 .04 .10 (0.03)
Income (loss) before cumulative effect
of accounting change, diluted .46 .93 .40 .10 (0.03)
Net income (loss), diluted .46 .93 .04 .10 (0.03)
Total assets 115,376 104,401 112,297 106,245 112,614
Note payable -- -- 5,716 5,526 5,336
Shares outstanding 25,196 20,856 20,688 20,689 20,689
</TABLE>
(1) 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.
(2) Operating results for 1999 include a pre-tax charge of $8,203,000
for a litigation judgment. See Note 8 of Notes to Consolidated Financial
Statements.
JENNY CRAIG, INC. AND SUBSIDIARIES
4
<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, 1999, 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,
------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CENTRES OPEN AT END OF YEAR:
Company-owned
United States 478 485 542 533 524
Foreign 102 103 106 110 110
---- ---- ---- ---- ----
580 588 648 643 634
Franchise
United States 154 159 113 101 86
Foreign 43 36 36 37 37
---- ---- ---- ---- ----
197 195 149 138 123
---- ---- ---- ---- ----
Total 777 783 797 781 757
==== ==== ==== ==== ====
AVERAGE REVENUE PER CENTRE
IN THOUSANDS:
Company-owned
United States $600 642 538 502 463
Foreign 356 407 483 447 461
Franchise
United States 654 659 517 510 487
Foreign 343 328 452 438 450
</TABLE>
The decrease in United States Company-owned centres in 1999 reflects the
Company's acquisition of six centres from a franchisee and the closure of 15
centres. The decrease in United States franchise centres reflects the Company's
acquisition of the six centres from a franchisee and the net closure of nine
franchise centres.
The decrease in United States Company-owned centres in 1998 reflects the
Company's acquisition of eight 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 franchise centres in 1997 principally reflects the Company's
acquisition of 51 centres from three franchisees during 1997.
See Note 14 of Notes to Consolidated Financial Statements for additional
information regarding United States and foreign operations.
JENNY CRAIG, INC. AND SUBSIDIARIES
5
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
YEAR ENDED JUNE 30, 1999 AS COMPARED TO YEAR ENDED JUNE 30, 1998
The following table presents selected operating results for United States
Company-owned operations and foreign Company-owned operations for fiscal 1999
and fiscal 1998 (U.S. $ in thousands):
<TABLE>
<CAPTION>
Foreign Company-Owned
U.S. Company-Owned Operations Operations(1)
-------------------------------- --------------------------
1998 1999 % Change 1998 1999 % Change
--------- -------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Product sales $ 256,538 231,196 -10% 45,264 47,676 5%
Service revenue 16,820 13,107 -22% 3,065 3,023 -1%
--------- ------- ------ ------
Total 273,358 244,303 -11% 48,329 50,699 5%
Costs and expenses 262,225 231,621 -12% 40,183 40,531 1%
General and administrative 19,308 18,492 -4% 2,737 2,765 1%
Litigation judgment -- 8,203 -- -- -- --
--------- ------- ------ ------
Operating income (loss) $ (8,175) (14,013) -71% 5,409 7,403 37%
========= ======= ====== ======
Average number of centres 544 528 -3% 108 110 2%
========= ======= ====== ======
</TABLE>
- ----------
(1) Foreign Company-owned operations reflect the Company's 84 centres in
Australia and 26 centres in Canada, with the Canadian centres generating
revenues of $11,149,000 and $10,333,000 in 1998 and 1999, respectively,
and an operating loss of $680,000 and $544,000 in 1998 and 1999,
respectively.
Revenues from United States Company-owned operations decreased 11% in 1999
compared to 1998, reflecting reduced demand for the Company's products and
services at United States Company-owned centres, which represented 83% of the
worldwide Company-owned centres at June 30, 1999. The overall 11% decrease in
revenues from United States Company-owned operations was the result of an 8%
decrease in the average revenue per United States Company-owned centre, from
$502,000 in 1998 to $463,000 in 1999, and a 3% decrease in the average number of
United States Company-owned centres in operation. Product sales, which consists
primarily of food products, from United States Company-owned operations
decreased 10%, principally due to a 7% decrease in the number of active
participants in the program and a decrease in the average dollar amount of
products purchased per active client which resulted principally from the January
1999 introduction of a new program option entitled On-the-Go. The On-the-Go
program was designed to be a more convenient, portable option for today's busy
consumers utilizing a lower-cost menu option of meal supplements for clients
compared to the Company's traditional program. The Company expected that the
decrease in the average dollar amount per client of food products purchased by
clients in the On-the-Go program would be offset by an increase in the number of
active clients enrolled in the new program. Although a significant portion of
the Company's clients purchased the On-the-Go meal supplements, the Company was
unable to increase the number of new program participants to a level to offset
the drop in the average dollar amount per client of food products purchased. The
Company continues to offer the On-the-Go program, although it is not emphasized
in the Company's advertising. The 22% decrease in service revenues
JENNY CRAIG, INC. AND SUBSIDIARIES
6
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
from United States Company-owned operations was primarily due to a decrease in
the number of new participants enrolled in the program between the years.
Revenues from foreign Company-owned operations increased 5% in 1999
compared to 1998. This increase was the result of a 3% increase in the average
revenue per foreign Company-owned centre, from $447,000 in 1998 to $461,000 in
1999, and a 2% increase in the average number of foreign Company-owned centres
in operation. There was an 8% weighted average decrease in the Australian and
Canadian currencies in relation to the U.S. dollar between the years.
Costs and expenses of United States Company-owned operations decreased 12%
in 1999 compared to 1998, principally due to the reduced variable costs
associated with the decreased revenues and a $6,319,000 decrease in advertising
expenses. Additionally, costs and expenses of United States Company-owned
operations in 1998 included $2,437,000 of costs associated with the terminated
medical weight loss program. Costs and expenses of United States Company-owned
operations as a percentage of United States Company-owned revenues decreased
from 96% to 95% between the years principally due to the reduced advertising
expenses and the absence of costs in 1999 associated with the terminated medical
weight loss program, offset, in part, by the higher proportion of fixed costs
when compared to the reduced level of revenues.
Costs and expenses of foreign Company-owned operations increased 1% in
1999 compared to 1998 principally due to the increased variable costs associated
with the increased revenues.
Operating income from foreign Company-owned operations, primarily
reflecting the Company's Australian operations, was $5,409,000 and $7,403,000 in
1998 and 1999, respectively, compared to an operating loss from United States
Company-owned operations of $8,175,000 and $14,013,000 in 1998 and 1999,
respectively. The Company believes that the favorable results achieved by its
Australian operations in 1998 and 1999 compared to its United States operations
are attributable principally to a less competitive marketplace for commercial
weight loss programs in Australia. In addition, the Company believes that its
advertising more effectively reaches its target audience in Australia as a
result of the favorable audience demographics of certain magazines and
broadcast media in Australia.
The Company's gross margin on product sales from Company-owned operations
increased from 4% in 1998 to 6% in 1999, and its gross margin on service
revenues increased from 30% in 1998 to 31% in 1999. 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
increase in gross margins in 1999 compared to 1998 resulted principally from the
decreased advertising expenses and the absence of costs associated with the
terminated medical weight loss program.
Revenues from franchise operations decreased 15% from $30,562,000 in 1998
to $25,950,000 in 1999. This decline was principally due to a 6% decrease in the
average number of franchise centres in operation and a decrease in the number of
new participants enrolled in the program at franchise centres, resulting in
reduced product sales and royalties. The decrease in the number of franchise
centres
JENNY CRAIG, INC. AND SUBSIDIARIES
7
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
reflects the Company's acquisition of six centres from a franchisee and the net
closure of nine franchise centres in 1999.
Costs and expenses of franchise operations, which consist primarily of
product costs, decreased 15% from $21,224,000 in 1998 to $17,944,000 in 1999
principally because of the reduced level of franchise operations. Franchise
costs and expenses as a percentage of franchise revenues remained constant at
69% between the years.
General and administrative expenses decreased 4% from $26,577,000 in 1998
to $25,437,000 in 1999 but increased from 7.5% to 7.9% of total revenues in 1998
and 1999, respectively. The decrease in general and administrative expenses in
1999 was due to the absence of expenses totaling $3,500,000 included in 1998
related to the separation of a former senior executive of the Company. After
allowing for these expenses in 1998, general and administrative expenses in 1999
would have increased by $2,360,000 over 1998 principally due to additional
compensation and legal expenses.
In June 1999, a jury of the California Superior Court found that the
Company breached the terms of a commercial lease agreement related to its former
headquarters location in Del Mar, California. The jury awarded the Company's
former landlord $2,261,000 in compensatory contract and tort damages and
$5,942,000 in punitive damages, or $8,203,000 in aggregate, which was recorded
as a charge in the accompanying consolidated statement of operations and has
been accrued in the accompanying consolidated balance sheet. In addition, the
former landlord is seeking reimbursement of attorney fees. The Company has made
appropriate motions to the trial court to set aside the verdict and will appeal
any adverse judgment.
The elements discussed above combined to result in an operating loss of
$2,784,000 in 1999 compared to operating income of $2,040,000 in 1998.
Other income, net, principally interest, increased 24% from $1,374,000 in
1998 to $1,700,000 in 1999 principally due to an increase in the average balance
of cash investments between the periods.
For 1999 the net loss was $672,000, or $.03 per share, compared to net
income of $2,126,000, or $.10 per share, in 1998.
The Company, along with other weight loss programs and certain
pharmaceutical companies, has been named as a defendant in an action filed in
the Second Judicial District Court, State of Nevada, Washoe County (the "Nevada
Litigation"). The action was commenced in August 1999 by a group of four
plaintiffs, who are seeking to maintain the action as a class action on behalf
of all persons in the State of Nevada who have purchased and used fenfluramine,
dexfenfluramine and phentermine, alone or in combination, and who have not yet
been diagnosed as having pulmonary heart disease or hypertension and/or valvular
heart disease, but who are allegedly at an increased risk of developing such
illnesses. The complaint includes claims against the Company and other
defendants for alleged breach of express and implied warranties concerning the
safety of using fenfluramine, dexfenfluramine and phentermine, and for alleged
negligence in the advertising, warning, marketing and sale of these drugs. The
complaint seeks a Court-supervised program funded by the defendants through
which class members would undergo periodic medical testing, preventative
screening and monitoring, as well as incidental damages not to exceed $75,000
per each class member,
JENNY CRAIG, INC. AND SUBSIDIARIES
8
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
and costs of litigation including expert and attorneys' fees.
The Company has tendered the Nevada Litigation to its insurance carriers.
The claims have not progressed sufficiently for the Company to estimate a range
of possible loss, if any. The Company intends to defend the matter vigorously.
APPROVAL OF XENICAL
In April 1999, the United States Food and Drug Administration ("FDA") approved
Xenical, a prescription drug for the treatment of obesity. Unlike other weight
loss drugs (including Redux and fenfluramine which were recalled in September
1997) which are appetite suppressors, Xenical blocks an enzyme in the
gastrointestinal tract which decreases absorption of dietary fat by
approximately 30%. The FDA approved Xenical for use by the seriously obese,
defined by a body mass index (a measure of weight in relation to height) of 30
or more, or 27 or greater by individuals who have related medical conditions,
such as high blood pressure, diabetes, or high cholesterol. The Company does
not currently plan to incorporate Xenical as a program option and cannot
estimate the effect that Xenical will have on demand for the Company's products
or services; however, prior introductions of weight loss medications have had a
material adverse impact on the Company's operating results.
YEAR 2000
The Company is in the process of remediating 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 550 Company-owned centres in North America
to record sales to customers. With respect to the corporate office system, the
Company determined that its then-current system, implemented in 1991, was 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 is
substantially complete, with all critical software functions having been placed
in service by June 1, 1999. The cost of the new corporate office system software
of $189,000 was capitalized and is being amortized over the five-year estimated
useful life of the new software. The cost of new hardware, which was purchased
in January 1999 for the corporate office system, was $201,000 and is being
depreciated over the five-year estimated useful life of the new hardware.
Application development and installation costs, principally fees paid to
external consultants, are estimated to be $920,000, of which $719,000 has been
paid as of June 30, 1999, and are being capitalized as incurred.
With respect to the point-of-sale system, there are two basic components:
the software and the hardware. The point-of-sale software has been assessed, and
estimated costs to modify this software to effect year 2000 compliance totaling
approximately $400,000, of which $222,000 has been paid as of June 30, 1999, are
being expensed as incurred. The point-of-sale hardware is essentially a personal
computer ("PC") configuration of two to four PCs at each Company-owned and
franchise centre in North America. The Company completed an analysis of the
hardware at these centres and concluded, based upon a study performed by an
independent consultant engaged by the Company, that
JENNY CRAIG, INC. AND SUBSIDIARIES
9
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
substantially all of this hardware required replacement. The estimated cost to
replace and install this hardware is approximately $9,000 per Company-owned
centre, or $4,950,000 in aggregate, which will be leased over a 48-month period.
As of June 30, 1999, the Company had successfully installed the new hardware at
approximately 14 centres on a test basis. The installation of the new hardware
to the remaining centres began in late July 1999 and will continue through the
planned completion date of November 30, 1999. Substantially all of these costs
will be capitalized and depreciated over their estimated useful life of four
years.
The Company believes, based upon inquiries of its franchisees, that a
majority of the franchisees will acquire the point-of-sale hardware being
installed at the Company's centres, and the remainder will acquire their own
year 2000 compliant hardware or operate manually.
With respect to non-IT systems, the Company has assessed its embedded
systems contained in the corporate office building and Company-owned centre
locations. This assessment focused principally on the Company's telephone system
hardware and software. The Company believes that all significant non-IT systems
are year 2000 compliant.
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 has sent
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.
The Company engaged two consulting firms during 1999 to assist in the
assessment and administration of the year 2000 project. Fees paid to these firms
totaled $226,000 and were expensed as incurred.
The Company does not separately track the internal costs, principally
comprised of compensation costs for the Information Systems department, incurred
with respect to the year 2000 project.
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 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. With respect to the corporate office system, the
Company believes that its newly implemented system is year 2000 compliant.
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 that could cause
actual results to differ materially include, without limitation, the following:
the Company's assessment of the impact of year 2000 is ongoing and further
analysis and study, as well as the testing and implementation of planned
solutions, could disclose additional remedial work, with the resultant
additional time and expense necessary to permit the
JENNY CRAIG, INC. AND SUBSIDIARIES
10
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
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; and, 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.
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 years. Product sales, 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
JENNY CRAIG, INC. AND SUBSIDIARIES
11
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
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 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 eight centres from franchisees and the net closure of three
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
JENNY CRAIG, INC. AND SUBSIDIARIES
12
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
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, $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 and the Federal Trade Commission entered into a Consent Order
dated May 4, 1998 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 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash, cash equivalents, and short-term
investments of $42,014,000 compared to $43,360,000 at June 30, 1998. 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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 requires
the recognition of all derivative instruments as either assets or liabilities in
the balance sheet and measurement of those derivative instruments at fair value.
SFAS 133, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company
JENNY CRAIG, INC. AND SUBSIDIARIES
13
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
does not currently hold derivative instruments or engage in hedging activities.
The adoption of SFAS 133 is not expected to have a material impact on the
Company's financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." In April 1998, the same committee issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities." These standards are
effective for financial statements for fiscal years beginning after December 15,
1998. The adoption of these standards is not expected to have a material impact
on the Company's financial position or results of operations.
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, 1999, 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 12 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% 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 is a note payable to a bank, secured by
the Company's corporate office building, with a total balance of $5,526,000 at
June 30, 1999. The note bears interest at the London Interbank Offered Rate plus
1%, with quarterly interest rate adjustments. Due to the relative immateriality
of the note payable, an immediate 10% change in interest rates would not have a
material effect on the Company's financial condition or results of operations.
Approximately 18% of the Company's revenues for the year ended June 30,
1999 were generated from foreign operations, located principally in Australia
and Canada. In fiscal 1999, the Company was subjected to an 8% weighted average
decrease in the Australian and Canadian currencies in relation to the U.S.
dollar compared to fiscal 1998. Currently, the Company does not enter into
forward exchange contracts or other financial instruments with respect to
foreign currency.
JENNY CRAIG, INC. AND SUBSIDIARIES
14
<PAGE> 12
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1999
($ in thousands)
<TABLE>
<CAPTION>
1998 1999
---------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 42,124 38,864
Short-term investments 1,236 3,150
Accounts receivable, net 2,617 1,925
Inventories 14,469 18,036
Deferred tax assets 7,863 13,406
Prepaid expenses and other assets 4,685 4,795
---------- --------
Total current assets 72,994 80,176
Cost of reacquired area franchise rights, net 8,419 8,078
Property and equipment, net 24,832 24,360
---------- --------
$ 106,245 112,614
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 15,256 16,393
Accrued liabilities 19,399 15,110
Accrual for litigation judgment -- 8,203
Deferred service revenue 10,278 10,075
---------- --------
Total current liabilities 44,933 49,781
Note payable 5,526 5,336
---------- --------
Total liabilities 50,459 55,117
Stockholders' equity:
Common stock $.000000005 par value,
100,000,000 shares authorized;
Issued: 1998 and 1999 - 27,580,260 shares;
Outstanding: 1998 and 1999 - 20,688,971 shares -- --
Additional paid-in capital 71,622 71,622
Retained earnings 57,179 56,507
Accumulated other comprehensive income 1,747 4,130
Treasury stock, at cost: 1998 and 1999 - 6,891,289 shares (74,762) (74,762)
---------- --------
Total stockholders' equity 55,786 57,497
---------- --------
Commitments and contingencies $ 106,245 112,614
========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
JENNY CRAIG, INC. AND SUBSIDIARIES
15
<PAGE> 13
CONSOLIDATED
STATEMENTS OF OPERATIONS
For the years ended June 30, 1997, 1998 and 1999
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Company-owned operations:
Product sales $304,240 301,802 278,872
Service revenue 25,158 19,885 16,130
-------- -------- --------
329,398 321,687 295,002
-------- -------- --------
Franchise operations:
Product sales 29,677 26,002 22,248
Royalties 5,794 4,505 3,697
Initial franchise fees 265 55 5
-------- -------- --------
35,736 30,562 25,950
-------- -------- --------
Total revenues 365,134 352,249 320,952
-------- -------- --------
Costs and expenses:
Company-owned operations:
Product 283,643 288,450 261,090
Service 17,237 13,958 11,062
-------- -------- --------
300,880 302,408 272,152
-------- -------- --------
Franchise operations:
Product 22,067 19,257 15,761
Other 1,840 1,967 2,183
-------- -------- --------
23,907 21,224 17,944
-------- -------- --------
40,347 28,617 30,856
-------- -------- --------
General and administrative expenses 28,507 26,577 25,437
Litigation judgment -- -- 8,203
-------- -------- --------
Operating income (loss) 11,840 2,040 (2,784)
Other income, net, principally interest 1,585 1,374 1,700
-------- -------- --------
Income (loss) before taxes and cumulative effect of
accounting change 13,425 3,414 (1,084)
Income taxes (benefit) 5,093 1,288 (412)
-------- -------- --------
Income (loss) before cumulative effect of
accounting change 8,332 2,126 (672)
Cumulative effect on prior years of change in accounting for
service revenue, net of $4,498 income tax benefit 7,509 -- --
-------- -------- --------
Net income (loss) $ 823 2,126 (672)
======== ======== ========
Basic and diluted per share amounts:
Income (loss) before cumulative effect of
accounting change $ .40 .10 (.03)
Cumulative effect of accounting change .36 -- --
-------- -------- --------
Net income (loss) per share $ .04 .10 (.03)
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
JENNY CRAIG, INC. AND SUBSIDIARIES
16
<PAGE> 14
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 1997, 1998 and 1999
($ in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive Treasury stockholders'
stock capital earnings income stock equity
------ ---------- -------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 -- $ 71,478 54,230 1,883 (73,129) 54,462
Purchase of 190,200 shares of
common stock, at cost -- -- -- -- (1,633) (1,633)
Exercise of stock options -- 137 -- -- -- 137
Comprehensive income:
Net income -- -- 823 -- -- --
Translation adjustment -- -- -- 129 -- --
Total comprehensive income -- -- -- -- -- 952
---- -------- -------- -------- -------- --------
Balance at June 30, 1997 -- 71,615 55,053 2,012 (74,762) 53,918
Exercise of stock options -- 7 -- -- -- 7
Comprehensive income:
Net income -- -- 2,126 -- -- --
Translation adjustment -- -- -- (265) -- --
Total comprehensive income -- -- -- -- -- 1,861
---- -------- -------- -------- -------- --------
Balance at June 30, 1998 -- 71,622 57,179 1,747 (74,762) 55,786
Comprehensive income:
Net loss -- -- (672) -- -- --
Translation adjustment -- -- -- 2,383 -- --
Total comprehensive income -- -- -- -- -- 1,711
---- -------- -------- -------- -------- --------
Balance at June 30, 1999 -- $ 71,622 56,507 4,130 (74,762) 57,497
==== ======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
JENNY CRAIG, INC. AND SUBSIDIARIES
17
<PAGE> 15
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the years ended June 30, 1997, 1998 and 1999
($ in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 823 2,126 (672)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 7,461 7,101 5,854
Provision for deferred income taxes (benefit) (403) 1,416 (5,543)
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 -- -- 500
Provision for centre closures (400) -- --
Loss on disposal of property and equipment 134 1,035 579
(Increase) decrease in:
Accounts receivable (566) 94 (88)
Inventories 2,526 866 (3,531)
Prepaid expenses and other assets (3,314) 2,533 (98)
Increase (decrease) in:
Accounts payable (5,977) 318 1,137
Accrued liabilities (4,717) 282 (4,289)
Accrual for litigation judgment -- -- 8,203
Income taxes payable 1,948 (4,050) --
Deferred service revenue (1,955) (4,280) (203)
-------- -------- --------
Net cash provided by operating activities 3,069 8,941 1,849
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (17,125) (4,678) (5,073)
Purchase of short-term investments (16,359) (9,008) (7,883)
Proceeds from maturity of short-term investments 21,898 9,278 5,969
Payments for acquisition of franchise centres (2,156) (145) (320)
-------- -------- --------
Net cash used in investing activities (13,742) (4,553) (7,307)
-------- -------- --------
Cash flows from financing activities:
Purchase of treasury stock (1,633) -- --
Proceeds from note payable 6,000 -- --
Principal payments on note payable (95) (190) (190)
Proceeds from exercise of stock options 137 7 --
-------- -------- --------
Net cash provided by (used in) financing activities 4,409 (183) (190)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 167 481 2,388
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (6,097) 4,686 (3,260)
Cash and cash equivalents at beginning of year 43,535 37,438 42,124
-------- -------- --------
Cash and cash equivalents at end of year $ 37,438 42,124 38,864
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 2,848 5,400 3,972
Interest paid 238 399 360
Supplemental disclosure of noncash
investing activities - acquisition of franchise centres:
Fair value of assets acquired 5,052 401 600
Liabilities assumed (1,629) -- --
Cancellation of accounts receivable (1,267) (256) (280)
-------- -------- --------
Cash paid for acquisitions $ 2,156 145 320
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
JENNY CRAIG, INC. AND SUBSIDIARIES
18
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL 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.
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 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 reviews long-lived assets and certain identifiable intangibles 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 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 recoverability 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
JENNY CRAIG, INC. AND SUBSIDIARIES
19
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
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 operations. 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. 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 $1,080,000 and
$1,580,000 at June 30, 1998 and 1999, 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 recorded in accumulated
other comprehensive income.
(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.
(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 (loss) 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
JENNY CRAIG, INC. AND SUBSIDIARIES
20
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
options. All prior period net income per share information is presented in
accordance with SFAS 128.
Net income (loss) and weighted average common shares used to compute net
income (loss) per share, basic and diluted, are presented below (amounts in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) $ 823 2,126 (672)
-------- -------- --------
Common shares, basic 20,767 20,689 20,689
Dilutive effect of
stock options 336 264 --
-------- -------- --------
Common shares, diluted 21,103 20,953 20,689
======== ======== ========
</TABLE>
For the years ended June 30, 1997, 1998 and 1999, stock options totaling
318,000, 55,200 and 2,167,000, respectively, were not included in the
computation of diluted net income (loss) per share because to do so would have
been antidilutive.
(n) COMPREHENSIVE INCOME
In 1999, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This statement establishes
rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income (loss) and foreign currency
translation adjustments and is presented in the consolidated statements of
stockholders' equity. The adoption of SFAS 130 had no impact on the Company's
net income (loss) or total stockholders' equity. Prior year financial statements
have been reclassified to conform to the SFAS 130 requirements.
(o) 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.
2. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets at June 30 are summarized as follows ($ in
thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Prepaid income taxes $2,610 3,223
Other 2,075 1,572
------ ------
$4,685 4,795
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment at June 30 is summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Land $ 2,000 2,000
Building 7,186 7,203
Furniture and equipment 41,738 33,521
Leasehold improvements 23,041 23,772
-------- -------
73,965 66,496
Less accumulated depreciation
and amortization (49,133) (42,136)
-------- -------
$ 24,832 24,360
======== =======
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities at June 30 are summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- ------
<S> <C> <C>
Accrued salaries, wages
and benefits $ 11,708 8,920
Other accruals 7,691 6,190
-------- ------
$ 19,399 15,110
======== ======
</TABLE>
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
JENNY CRAIG, INC. AND SUBSIDIARIES
21
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
Centres, Pty. Ltd. and Jenny Craig Weight Loss Centres (Canada) Company, both
wholly owned 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 components of income (loss) before income taxes (benefit) are as
follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- ------ --------
<S> <C> <C> <C>
United States $ 5,643 (5,030) (11,256)
Foreign 7,782 8,444 10,172
-------- ------ --------
$ 13,425 3,414 (1,084)
======== ====== ========
</TABLE>
The following summarizes income taxes (benefit) ($ in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- ------ ------
<S> <C> <C> <C>
Current:
Federal $ 1,132 (1,301) 2,250
State 371 61 153
Foreign 3,993 1,112 2,728
-------- ------ ------
Total current 5,496 (128) 5,131
-------- ------ ------
Deferred:
Federal 1,112 373 (2,775)
State (153) (86) (429)
Foreign (1,362) 1,129 (2,339)
-------- ------ ------
Total deferred (403) 1,416 (5,543)
-------- ------ ------
Total income
taxes (benefit) $ 5,093 1,288 (412)
======== ====== ======
</TABLE>
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, 1998 and 1999 are as follows ($ in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Employee benefits $ 1,734 1,411
Allowance for doubtful accounts 425 620
Depreciation and amortization 2,752 2,522
Inventories 186 388
Foreign operations 371 990
Deferred service revenue 3,055 2,800
Net operating losses 84 --
Tax credits 353 2,073
Accrual for litigation judgment -- 3,220
Other accruals 1,463 1,941
-------- --------
Total gross deferred tax assets 10,423 15,965
Less valuation allowance (700) (700)
-------- --------
Net deferred tax assets 9,723 15,265
Deferred tax liabilities:
Receivable from foreign subsidiary (1,727) (1,694)
Other (133) (165)
-------- --------
Total deferred tax liabilities (1,860) (1,859)
-------- --------
Net deferred tax assets $ 7,863 13,406
======== ========
</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
JENNY CRAIG, INC. AND SUBSIDIARIES
22
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
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, 1997, 1998 and 1999 differed from
the amounts expected by applying the U.S. federal income tax rate of 35% to
income (loss) before taxes as follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ----
<S> <C> <C> <C>
Computed income
taxes (benefit) $4,699 1,195 (379)
State taxes, net of
federal benefit 237 (17) (183)
Permanent differences -- 65 70
Other 157 45 80
------ ------ ----
$5,093 1,288 (412)
====== ====== ====
</TABLE>
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 1% (6.0% at June 30, 1999). 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, 1998 and 1999.
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 $25,074,000, $25,227,000 and $24,226,000 for the
years ended June 30, 1997, 1998 and 1999, respectively.
As of June 30, 1999, the scheduled minimum annual rental payments,
excluding renewal provisions, are as follows ($ in thousands):
<TABLE>
<S> <C>
2000 $22,592
2001 14,682
2002 7,647
2003 3,121
2004 1,164
Thereafter 244
-------
$49,450
=======
</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.
In late fiscal 1999, the Company entered into a capital lease for computer
hardware associated with year 2000 remediation of its point-of-sale system. The
lease term is 48 months and commences as the equipment is placed into service,
substantially all of which is scheduled for the first half of fiscal 2000. The
aggregate lease amount is expected to be approximately $4,950,000.
8. LITIGATION JUDGMENT
In June 1999, a jury of the California Superior Court found that the Company
breached the terms of a commercial lease agreement related to its former
headquarters location in Del Mar, California. The jury awarded the Company's
former landlord $2,261,000 in compensatory contract and tort damages and
$5,942,000 in punitive damages, or $8,203,000 in aggregate, which was recorded
as a charge in the accompanying consolidated statement of operations and has
been accrued in the accompanying consolidated balance sheet. In addition,
JENNY CRAIG, INC. AND SUBSIDIARIES
23
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
the former landlord is seeking reimbursement of attorney fees. The Company has
made appropriate motions to the trial court to set aside the verdict and will
appeal any adverse judgment.
9. RELATED PARTY TRANSACTIONS
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 $4,997,000, $5,440,000 and $4,174,000 for the years ended
June 30, 1997, 1998 and 1999, respectively.
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 $1,067,000, $616,000 and $568,000 in 1997, 1998 and 1999,
respectively.
In March 1999, the Company entered into an agreement with Denise Altholz,
the daughter of Jenny Craig, under which Ms. Altholz appears in certain of the
Company's commercials and performs related public relations services for the
Company. The agreement specifies a monthly retainer of $5,000 plus a fee of
$5,000 per day while appearing on behalf of the Company. The agreement also
provides for travel and expense reimbursement to Ms. Altholz. Payments made to
Ms. Altholz in accordance with this agreement totaled $98,000 in 1999.
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, $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.
10. 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 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
$1,015,000, $1,051,000 and $805,000 for the years ended June 30, 1997, 1998 and
1999, respectively. Accumulated amortization was $5,241,000 and $6,190,000 at
June 30, 1998 and 1999, respectively.
11. 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 $191,000, $264,000 and $348,000 in
1997, 1998 and 1999, 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
1% 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
$100,000, $20,000 and $0 in 1997, 1998 and 1999, respectively.
JENNY CRAIG, INC. AND SUBSIDIARIES
24
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
12. STOCK OPTION PLAN
The Company's Stock Option Plan (the "Option Plan") was adopted in October 1991
and provides for the grant of incentive stock options to key employees and of
nonqualified stock options to key employees, consultants, directors, and Medical
Advisory Board members. A total of 2,500,000 shares of common stock have been
reserved for issuance under the Option Plan, of which 252,240 shares remain
available for future grant at June 30, 1999. The exercise price of the options
may not be less than fair market value on the date of grant. Additionally, no
options may be exercisable more than 10 years after the date of grant and, with
certain exceptions, no option may become exercisable prior to the expiration of
six months from the date of grant. The options granted to employees generally
become exercisable over three to four years.
The Company applies APB Opinion No. 25 in accounting for the Option Plan
and, accordingly, no compensation cost has been recognized for stock option
grants to employees and directors in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS 123, the Company's net income (loss) and
net income (loss) per share would have been reduced (increased) to the pro forma
amounts as follows ($ in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Net income (loss) - as reported $823 2,126 (672)
Net income (loss) - pro forma 574 2,003 (1,352)
Per share amounts:
Basic and diluted, as reported .04 .10 (.03)
Basic and diluted, pro forma .03 .10 (.07)
</TABLE>
The per share weighted-average fair value of stock options granted during
1997, 1998 and 1999 was $3.70, $2.37 and $2.64, 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 47%, 44% and 49% in 1997, 1998 and 1999, respectively, no dividends, and
risk-free interest rate of 5.0%.
Pro forma net income (loss) reflects only options granted in 1996, 1997,
1998 and 1999. Therefore, the full impact of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net income (loss)
amounts presented above because compensation cost is reflected over the options'
vesting period of three to five 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, 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 17.32 6.31
---------- -------------- ------
Outstanding at
June 30, 1997 1,914,880 4.63 to 21.00 7.36
Granted 1,648,100 5.82 to 17.50 5.84
Cancelled (1,629,580) 5.63 to 21.00 7.49
Exercised (1,200) 5.63 to 15.63 5.63
---------- -------------- ------
Outstanding at
June 30, 1998 1,932,200 4.63 to 15.32 5.96
Granted 547,000 2.88 to 16.79 5.98
Cancelled (311,700) 5.63 to 15.32 6.54
---------- -------------- ------
Outstanding at
June 30, 1999 2,167,500 $2.88 to 16.79 $ 5.88
---------- -------------- ------
Exercisable at
June 30, 1999 564,953 $4.63 to 16.50 $ 5.83
========== ============== ======
</TABLE>
JENNY CRAIG, INC. AND SUBSIDIARIES
25
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
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 out-standing and exercisable by
exercise price range at June 30, 1999 is as follows:
Options Outstanding
<TABLE>
<CAPTION>
Weighted-
Average Weighted-
Remaining average
Range of Number contractual exercise
exercise prices outstanding life (in years) price
- --------------- ---------- --------------- --------
<S> <C> <C> <C>
$2.88 - 4.63 30,000 9.0 $3.17
5.63 - 5.88 1,597,000 8.3 5.84
5.89 - 5.94 300,500 9.5 5.94
5.95 - 6.79 240,000 9.1 6.41
------------ --------- ----- -----
$2.88 - 6.79 2,167,500 8.6 $5.88
============ ========= ===== =====
</TABLE>
Options Exercisable
<TABLE>
<CAPTION>
Weighted
average
Range of Number exercise
exercise prices exercisable price
- --------------- ----------- ---------
<S> <C> <C>
$4.63 - 4.63 5,000 $4.63
5.63 - 5.88 549,453 5.83
5.90 - 5.90 500 5.90
6.50 - 6.50 10,000 6.50
------------ ------- -----
$4.63 - 6.50 564,953 $5.83
============ ======= =====
</TABLE>
At June 30, 1997 and 1998, the number of options exercisable were
1,071,780 and 227,360, respectively, and the weighted-average exercise prices
were $7.11 and $6.21, respectively.
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, along with other weight loss programs and certain
pharmaceutical companies, has been named as a defendant in an action filed in
the Second Judicial District Court, State of Nevada, Washoe County (the "Nevada
Litigation"). The action was commenced in August 1999 by a group of four
plaintiffs, who are seeking to maintain the action as a class action on behalf
of all persons in the State of Nevada who have purchased and used fenfluramine,
dexfenfluramine and phentermine, alone or in combination, and who have not yet
been diagnosed as having pulmonary heart disease or hypertension and/or valvular
heart disease, but who are allegedly at an increased risk of developing such
illnesses. The complaint includes claims against the Company and other
defendants for alleged breach of express and implied warranties concerning the
safety of using fenfluramine, dexfenfluramine and phen-termine, and for alleged
negligence in the advertising, warning, marketing and sale of these drugs. The
complaint seeks a Court-supervised program funded by the defendants through
which class members would undergo periodic medical testing, preventative
screening
JENNY CRAIG, INC. AND SUBSIDIARIES
26
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
and monitoring, as well as incidental damages not to exceed $75,000 per each
class member, and costs of litigation including expert and attorneys' fees.
The Company has tendered the Nevada Litigation to its insurance carriers.
The claims have not progressed sufficiently for the Company to estimate a range
of possible loss, if any. The Company intends to defend the matter vigorously.
The Company and the Federal Trade Commission entered into a Consent Order
effective May 4, 1998 settling all contested issues raised in a complaint filed
in September 1993 against the Company alleging that the Company violated the
Federal Trade Commission Act by the use and content of certain advertisements
for the Company's weight loss program featuring testimonials, claims for the
program's success and safety, and statements as to the program's costs to
participants. The Consent Order does not admit any issue of fact or law or any
violation by the Company of any law or regulation, and does not involve payment
by the Company of any civil money penalty, damages, or other financial relief.
The Consent Order requires certain procedures and disclosures in connection with
the Company's advertisements of its products and services. The Company does not
believe that compliance with the Consent Order will have a material adverse
effect on the Company's consolidated financial position or results of operations
or its current advertising and marketing practices.
14. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Company operates in the weight management industry. Substantially all
revenue results from the sale of weight management products and services,
whether the centre is operated by the Company or its franchisees. The Company's
reportable segments consist of Company-owned operations and franchise
operations, further segmented by geographic area. The following presents
information about the respective reportable segments ($ in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue derived
from customers:
Company-owned operations:
United States $279,090 273,358 244,303
Foreign 50,308 48,329 50,699
Franchise operations:
United States 27,525 22,051 18,237
Foreign 8,211 8,511 7,713
Operating income (loss):
Company-owned operations:
United States 732 (8,175) (14,013)
Foreign 5,249 5,409 7,403
Franchise operations:
United States 3,677 2,135 1,436
Foreign 2,182 2,671 2,390
Identifiable assets:
United States 100,689 94,450 99,965
Foreign 11,608 11,795 12,649
</TABLE>
The operating loss for United States Company-owned operations in 1999
includes a litigation judgment totaling $8,203,000. See Note 8 "Litigation
Judgment."
JENNY CRAIG, INC. AND SUBSIDIARIES
27
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Jenny Craig, Inc.:
We have audited the accompanying consolidated balance sheets of Jenny Craig,
Inc. and subsidiaries as of June 30, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Jenny Craig, Inc.
and subsidiaries as of June 30, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
San Diego, California
August 18, 1999
JENNY CRAIG, INC. AND SUBSIDIARIES
28
<PAGE> 26
SELECTED QUARTERLY
FINANCIAL INFORMATION
(Unaudited)
The following is a summary of the unaudited quarterly results of operations ($
in thousands, except per share data):
<TABLE>
<CAPTION>
Three-Month Period Ended
----------------------------------------------------
September 30, December 31, March 31, June 30, Total
Current Year 1998 1998 1999 1999 year
- ------------ ------------- ------------ --------- -------- -------
<S> <C> <C> <C> <C> <C>
Total revenues $85,626 74,253 84,559 76,514 320,952
Operating income (loss) 3,567 (1,153) 1,400 (6,598) (2,784)
Net income (loss) 2,490 (417) 1,066 (3,811) (672)
Basic and diluted
net income (loss) per share .12 (.02) .05 (.18) (.03)
</TABLE>
The quarter ended June 30, 1999 includes a pre-tax charge of $8,203,000 for a
litigation judgment.
<TABLE>
<CAPTION>
Three-Month Period Ended
------------------------------------------------------
September 30, December 31, March 31, June 30, Total
Prior 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 pre-tax charge of
$3,500,000 related to the separation of a former senior executive of the
Company.
The net income (loss) per share computed for each quarter and the year are
separate calculations.
JENNY CRAIG, INC. AND SUBSIDIARIES
29
<PAGE> 27
COMMON STOCK DATA
At August 27, 1999, there were approximately 2,300 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>
1998 1999
------------------- ----------------
High Low High Low
-------- ------- ------- -----
<S> <C> <C> <C> <C>
First quarter ended September 30 $8 15/16 6 5/16 7 4 1/4
Second quarter ended December 31 8 3/4 6 15/16 6 15/16 4 5/8
Third quarter ended March 31 7 5/8 5 6 7/16 2 5/8
Fourth quarter ended June 30 6 15/16 5 7/16 3 15/16 2 3/4
</TABLE>
The Company did not pay any cash dividends in 1998 and 1999. The Company
currently believes that its stockholders are best served by directing cash
resources to the Company's marketing efforts and improvement of its business.
JENNY CRAIG, INC. AND SUBSIDIARIES
30
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Jenny Craig, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-47594 and No. 33-86098) on Form S-8 of Jenny Craig, Inc. of our report dated
August 18, 1999, relating to the consolidated balance sheets of Jenny Craig,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1999, and the related financial
statement schedule, which report appears in the June 30, 1999 annual report on
Form 10-K of Jenny Craig, Inc.
/s/ KPMG LLP
San Diego, California
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED JUNE 30, 1999, INCLUDED IN THE REPORT ON FORM 10-K OF JENNY CRAIG,
INC. FOR THE YEAR ENDED JUNE 30, 1999 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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 38,864
<SECURITIES> 3,150
<RECEIVABLES> 1,925<F1>
<ALLOWANCES> 0
<INVENTORY> 18,036
<CURRENT-ASSETS> 80,176
<PP&E> 24,360<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 112,614
<CURRENT-LIABILITIES> 49,781
<BONDS> 5,336
0
0
<COMMON> 0
<OTHER-SE> 57,497
<TOTAL-LIABILITY-AND-EQUITY> 112,614
<SALES> 301,120
<TOTAL-REVENUES> 320,952
<CGS> 276,851
<TOTAL-COSTS> 290,096
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 360
<INCOME-PRETAX> (1,084)
<INCOME-TAX> (412)
<INCOME-CONTINUING> (672)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (672)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF
ALLOWANCES AND DEPRECIATION, RESPECTIVELY.
</FN>
</TABLE>
