<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL DATA
Years ended June 30, all amounts in thousands except per share data.
<TABLE>
<CAPTION>
1996 1997(1) 1998 1999(2) 2000(3)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $401,018 $365,134 $352,249 $320,952 $290,985
Operating income (loss)..................... 35,521 11,840 2,040 (2,784) (12,871)
Income (loss) before cumulative effect of
accounting change......................... 22,912 8,332 2,126 (672) (7,092)
Per share amounts:
Income (loss) before cumulative effect of
accounting change, basic............... .95 .40 .10 (.03) (.34)
Net income (loss), basic.................. .95 .04 .10 (.03) (.34)
Income (loss) before cumulative effect of
accounting change, diluted............. .93 .40 .10 (.03) (.34)
Net income (loss), diluted................ .93 .04 .10 (.03) (.34)
Total assets................................ 104,401 112,297 106,245 112,614 106,517
Note payable and obligation under capital
lease..................................... -- 5,716 5,526 5,336 6,879
Shares outstanding.......................... 20,856 20,688 20,689 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 information regarding revenue recognition.
(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.
(3) Operating results for 2000 include a pre-tax restructuring charge of
$6,910,000. See Note 10 of Notes to Consolidated Financial Statements.
<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, 2000, 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 ended June 30:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CENTRES OPEN AT END OF YEAR:
Company-owned
United States............................... 485 542 533 524 437
Foreign..................................... 103 106 110 110 113
---- --- --- --- ---
588 648 643 634 550
---- --- --- --- ---
Franchise
United States............................... 159 113 101 86 72
Foreign..................................... 36 36 37 37 38
---- --- --- --- ---
195 149 138 123 110
---- --- --- --- ---
Total.................................. 783 797 781 757 660
==== === === === ===
AVERAGE REVENUE PER CENTRE IN THOUSANDS:
Company-owned
United States............................... $642 538 502 463 466
Foreign..................................... 407 483 447 461 445
Franchise
United States............................... 659 517 510 487 476
Foreign..................................... 328 452 438 450 438
</TABLE>
The decrease in United States Company-owned centres in 2000 reflects the
Company's closure of 100 centres, principally comprised of the closure of 86
centres in November 1999 in connection with a restructuring plan implemented by
the Company. Also during fiscal 2000, the Company acquired 17 centres from five
franchisees, and sold four centres to a franchisee in the United States.
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.
See Note 14 of Notes to Consolidated Financial Statements for additional
information regarding United States and foreign operations.
5
<PAGE> 3
YEAR ENDED JUNE 30, 2000 AS COMPARED TO YEAR ENDED JUNE 30, 1999
The following table presents selected operating results for United States
Company-owned operations and foreign Company-owned operations for fiscal 2000
and fiscal 1999 (U.S. $ in thousands):
<TABLE>
<CAPTION>
FOREIGN COMPANY OWNED
U.S. COMPANY OWNED OPERATIONS OPERATIONS(1)
------------------------------- ----------------------------
1999 2000 % CHANGE 1999 2000 % CHANGE
-------- ------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Product sales.................. $231,196 204,864 (11)% 47,676 45,982 (4)%
Service revenue................ 13,107 13,213 1% 3,023 3,721 23%
-------- ------- ------ ------
Total.......................... 244,303 218,077 (11)% 50,699 49,703 (2)%
Costs and expenses............. 231,621 214,527 (7)% 40,531 40,158 (1)%
General and administrative..... 18,492 18,107 (2)% 2,765 2,925 6%
Litigation judgment............ 8,203 1,446 -- -- -- --
Restructuring charge........... -- 6,910 -- -- -- --
-------- ------- ------ ------
Operating income (loss)........ $(14,013) (22,913) (64)% 7,403 6,620 (11)%
======== ======= ====== ======
Average number of centres...... 528 468 (11)% 110 112 2%
======== ======= ====== ======
</TABLE>
---------------
(1) Foreign Company-owned operations reflect the Company's 87 centres in
Australia and 26 centres in Canada, with the Canadian centres generating
revenues of $10,333,000 and $10,478,000 in 1999 and 2000, respectively, and
an operating loss of $544,000 and $183,000 in 1999 and 2000, respectively.
Revenues from United States Company-owned operations decreased 11% in 2000
compared to 1999, reflecting reduced demand for the Company's products and
services at United States Company-owned centres, which represented 79% of the
worldwide Company-owned centres at June 30, 2000. The overall 11% decrease in
revenues from United States Company-owned operations was principally the result
of an 11% decrease in the average number of United States Company-owned centres
in operation. The decrease in the number of United States Company-owned centres
reflects the closure of 100 centres between the years, principally comprised of
the closure of 86 centres in November 1999 in connection with a restructuring
plan implemented by the Company. Product sales, which consists primarily of food
products, from United States Company-owned operations decreased 11%, principally
due to a 19% decrease in the number of active participants in the program
between the years (which reflects the 11% decrease in the average number of
centres), offset, in part, by an increase in the average amount of products
purchased per active participant. The average amount of products purchased per
active participant last year was below historical levels as a result of a
program called "On-the-Go" which offered lower priced products and which has
since been discontinued. The 1% increase in service revenues from United States
Company-owned operations was primarily due to an increase in the average service
fee charged per new participant, offset, in part, by a decrease in the number of
new participants enrolled in the program between the years.
Revenues from foreign Company-owned operations, which is derived from 87
centres in Australia and 26 centres in Canada, decreased 2% in 2000 compared to
1999, principally due to reduced demand at the Company's Australian centres.
Revenues at the Company's Australian centres deteriorated during the latter part
of fiscal 2000 and have continued at significantly reduced levels for the first
two months of fiscal 2001, with revenues down 34% for that two month period
compared to the same period last year. The Company believes that the
introduction of Xenical (a prescription drug for the treatment of obesity) in
May 2000 and a new goods and services tax in the Australian market have
contributed to the revenue decline. There was a 1% weighted average increase 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 7%
in 2000 compared to 1999, principally due to the reduced variable costs
associated with the decreased revenues and the decreased fixed costs associated
with the decrease in the number of United States Company-owned centres in
operation, offset, in part, by a charge of $3,068,000 for obsolete inventory
related to the discontinued On-the-Go program. Costs and expenses of United
States Company-owned operations as a percentage of United States
6
<PAGE> 4
Company-owned revenues increased from 95% to 98% between the years principally
due to the charge for obsolete inventory and the higher proportion of fixed
costs when compared to the reduced level of revenues.
In November 1999, the Company implemented a restructuring plan to reduce
annual operating expenses. The plan included the closure of 86 underperforming
Company-owned centres in the United States, which represented 16% of the total
United States Company-owned centres, and a staff reduction of approximately 15%
at the Company's corporate headquarters. All employees were notified in early
November and the centres were closed by November 30, 1999. A charge of
$7,512,000 was recorded in the quarter ended December 31, 1999 in connection
with this restructuring. The charge was comprised of $3,882,000 for lease
termination costs at the 86 centres, $1,563,000 for severance payments to
terminated employees, $1,303,000 for the write-off of fixed assets at the closed
centres, $291,000 for refunds to program participants at the closed centres, and
$473,000 for other closure costs which includes the removal of signs and
leasehold improvements. In June 2000, the Company reversed $602,000 of the
originally estimated $7,512,000 restructuring charge because actual costs were
less than the costs projected when the restructuring was implemented. The
$602,000 reversal was comprised of $289,000 in lease termination costs, $19,000
in severance costs, $159,000 in fixed asset write-offs, and $182,000 in refunds
to program participants, offset, in part, by $47,000 of additional other closure
costs. Of the total revised charge of $6,910,000, approximately $5,766,000
requires cash payments and $1,144,000 represents the non-cash write-off of fixed
assets. As of June 30, 2000, the Company had made cash payments of $2,214,000
for lease termination costs, $1,014,000 for severance to terminated employees,
$109,000 for refunds to program participants, and $622,000 for other closure
costs. The Company estimates that the remaining cash payments of approximately
$1,807,000, which is included in accrued liabilities on the accompanying balance
sheet at June 30, 2000, will be substantially incurred by December 31, 2000.
Costs and expenses of foreign Company-owned operations decreased 1% in 2000
compared to 1999 principally due to the 2% decrease in revenues between the
years.
Operating income from foreign Company-owned operations, primarily
reflecting the Company's Australian operations, declined 11% from $7,403,000 to
$6,620,000 in 1999 and 2000, respectively, compared to an operating loss from
United States Company-owned operations of $14,013,000 and $22,913,000 in 1999
and 2000, respectively. The Company believes that the favorable results achieved
by its Australian operations in 1999 and 2000 compared to its United States
operations were attributable principally to a less competitive marketplace for
commercial weight loss programs and lower operating costs in Australia. In
addition, the Company believes that its advertising more effectively reached its
target audience in Australia as a result of the favorable audience demographics
of certain magazines and broadcast media in Australia. However, as previously
discussed, revenues at the Company's Australian centres deteriorated during the
latter part of fiscal 2000 and have continued at significantly reduced levels
for the first two months of fiscal 2001, with the result that Australian
operating income was only slightly above breakeven for that two month period.
The Company's gross margin on product sales from Company-owned operations
decreased from 6% in 1999 to 3% in 2000, and its gross margin on service
revenues decreased from 31% in 1999 to 30% in 2000. 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
decrease in gross margins in 2000 compared to 1999 resulted principally from the
charge for obsolete inventory and the higher proportion of fixed costs when
compared to the reduced level of revenues.
Revenues from franchise operations decreased 11% from $25,950,000 in 1999
to $23,205,000 in 2000. This decline was principally due to an 11% 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 reflects the Company's acquisition of 17 centres from five
franchisees and the Company's sale of four centres to a franchisee in the United
States.
Costs and expenses of franchise operations, which consist primarily of
product costs, decreased 11% from $17,944,000 in 1999 to $15,954,000 in 2000
principally because of the reduced level of franchise operations.
7
<PAGE> 5
Franchise costs and expenses as a percentage of franchise revenues remained
constant at 69% between the years.
General and administrative expenses decreased 2% from $25,437,000 in 1999
to $24,861,000 in 2000 but increased from 7.9% to 8.5% of total revenues in 1999
and 2000, respectively. The decrease in general and administrative expenses in
2000 was primarily due to reduced compensation expenses resulting from the
restructuring plan implemented in November 1999.
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 for the
year ended June 30, 1999 and is accrued in the accompanying consolidated balance
sheet at June 30, 1999 and 2000. An additional $1,446,000 was recorded in the
year ended June 30, 2000 for attorney fees awarded to the plaintiff and interest
accrued on the judgment, pending the appeal which has been filed seeking to
overturn the judgment.
The elements discussed above combined to result in an operating loss of
$12,871,000 in 2000 compared to an operating loss of $2,784,000 in 1999.
Other income, net, principally interest, decreased 16% from $1,700,000 in
1999 to $1,432,000 in 2000 principally due to a decrease in the average balance
of cash investments between the periods.
For 2000, the net loss was $7,092,000, or $.34 per share, compared to a net
loss of $672,000, or $.03 per share, in 1999.
Year 2000
The Company did not experience any material disruption of its information
technology ("IT") or non-IT systems with respect to the "year 2000" millenium
change. As previously reported, the Company essentially replaced its two primary
IT systems in connection with its planning with respect to the "year 2000"
issue. The total cost of the remediation was approximately $5,644,000, which was
principally comprised of equipment purchases, a portion of which was financed
under a 48 month capital lease agreement with a total balance of $2,374,000 as
of June 30, 2000.
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.
8
<PAGE> 6
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 participant 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 participants compared to the Company's traditional program. The Company
expected that the decrease in the average dollar amount per participant of food
products purchased by participants in the On-the-Go program would be offset by
an increase in the number of active participants enrolled in the new program.
Although a significant portion of the Company's participants 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 participant of food products purchased. The 22% decrease in service revenues
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.
9
<PAGE> 7
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 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 for the
year ended June 30, 1999 and has been accrued in the accompanying consolidated
balance sheet at June 30, 1999.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had cash, cash equivalents, and short-term
investments of $35,635,000 compared to $42,014,000 at June 30, 1999, reflecting
a decrease of $6,379,000 during the year ended June 30, 2000. This decrease was
principally due to cash payments of $3,959,000 in connection with the Company's
restructuring plan and $1,923,000 used to acquire centres from franchisees. 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.
10
<PAGE> 8
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, as
amended by SFAS 137, 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 was amended by SFAS 137 which
defers the effective date to all fiscal quarters of fiscal years beginning after
June 15, 2000. The adoption of SFAS 133, as amended, 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, 2000, the Company maintains a portion of its cash and cash
equivalents in financial instruments with original maturities of three months or
less. The Company also maintains a short-term investment portfolio containing
financial instruments with original maturities of greater than three months but
less than twelve months. These financial instruments, principally comprised of
high quality commercial paper, are subject to interest rate risk and will
decline in value if interest rates increase. Due to the short duration of these
financial instruments, an immediate 10% 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 long-term debt at June 30, 2000 is comprised of a note
payable to a bank, secured by the Company's corporate office building, with a
total balance of $5,337,000 and a capital lease agreement covering certain
computer hardware with a total balance of $2,374,000. The note payable bears
interest at the London Interbank Offered Rate plus one percent, with quarterly
interest rate adjustments, and the capital lease is at a fixed rate. Due to the
relative immateriality of the note payable, an immediate 10 percent change in
interest rates would not have a material effect on the Company's financial
condition or results of operations.
Approximately 20% of the Company's revenues for the year ended June 30,
2000 were generated from foreign operations, located principally in Australia
and Canada. In fiscal 2000, the Company was subjected to a 1% weighted average
increase in the Australian and Canadian currencies in relation to the U.S.
dollar compared to fiscal 1999. Currently, the Company does not enter into
forward exchange contracts or other financial instruments with respect to
foreign currency.
11
<PAGE> 9
JENNY CRAIG, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 2000
($ IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1999 2000
-------- -------
<S> <C> <C>
Cash and cash equivalents................................... $ 38,864 34,710
Short-term investments...................................... 3,150 925
Accounts receivable, net.................................... 2,617 2,271
Inventories................................................. 18,036 11,785
Prepaid expenses and other assets........................... 4,002 4,181
Deferred tax assets......................................... 1,008 864
-------- -------
Total current assets.............................. 67,677 54,736
Deferred tax assets......................................... 12,398 16,696
Cost of reacquired area franchise rights and other
intangibles, net.......................................... 7,386 8,658
Property and equipment, net................................. 24,360 25,797
Other assets................................................ 793 630
-------- -------
$112,614 106,517
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 16,393 13,473
Accrued liabilities......................................... 15,110 14,071
Current installments of obligations under capital lease..... -- 642
Accrual for litigation judgment............................. 8,203 9,649
Deferred service revenue.................................... 10,075 10,175
-------- -------
Total current liabilities......................... 49,781 48,010
Note payable, excluding current installments................ 5,336 5,147
Obligation under capital lease, excluding current
installments.............................................. -- 1,732
-------- -------
Total liabilities................................. 55,117 54,889
-------- -------
Stockholders' equity:
Common stock $.000000005 par value, 100,000,000 shares
authorized; issued: 1999 and 2000 -- 27,580,260 shares;
outstanding: 1999 and 2000 -- 20,688,971 shares........ -- --
Additional paid-in capital................................ 71,622 71,622
Retained earnings......................................... 56,507 49,415
Accumulated other comprehensive income.................... 4,130 5,353
Treasury stock, at cost: 1999 and 2000 -- 6,891,289
shares................................................. (74,762) (74,762)
-------- -------
Total stockholders' equity........................ 57,497 51,628
Commitments and contingencies...............................
-------- -------
$112,614 106,517
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 10
JENNY CRAIG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1999 AND 2000
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999 2000
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Company-owned operations:
Product sales.......................................... $301,802 278,872 250,846
Service revenue........................................ 19,885 16,130 16,934
-------- ------- -------
321,687 295,002 267,780
-------- ------- -------
Franchise operations:
Product sales.......................................... 26,002 22,248 19,935
Royalties.............................................. 4,505 3,697 3,235
Initial franchise fees................................. 55 5 35
-------- ------- -------
30,562 25,950 23,205
-------- ------- -------
Total revenues.................................... 352,249 320,952 290,985
-------- ------- -------
Costs and expenses:
Company-owned operations:
Product................................................ 288,450 261,090 242,908
Service................................................ 13,958 11,062 11,777
-------- ------- -------
302,408 272,152 254,685
-------- ------- -------
Franchise operations:
Product................................................ 19,257 15,761 14,746
Other.................................................. 1,967 2,183 1,208
-------- ------- -------
21,224 17,944 15,954
-------- ------- -------
28,617 30,856 20,346
General and administrative expenses......................... 26,577 25,437 24,861
Litigation judgment......................................... -- 8,203 1,446
Restructuring charge........................................ -- -- 6,910
-------- ------- -------
Operating income (loss)........................... 2,040 (2,784) (12,871)
Other income, net, principally interest..................... 1,374 1,700 1,432
-------- ------- -------
Income (loss) before taxes........................ 3,414 (1,084) (11,439)
Income taxes (benefit)...................................... 1,288 (412) (4,347)
-------- ------- -------
Net income (loss)................................. $ 2,126 (672) (7,092)
======== ======= =======
Basic and diluted per share amounts --
Net income (loss) per share....................... $ 0.10 (0.03) (0.34)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 11
JENNY CRAIG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1999 AND 2000
($ 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, 1997........... -- $71,615 55,053 2,012 (74,762) 53,918
Exercise of stock options.......... -- 7 -- -- -- 7
Comprehensive income:
Net income....................... -- -- 2,126 -- -- 2,126
Translation adjustment........... -- -- -- (265) -- (265)
------- ------- ------ ----- ------- ------
Balance at June 30, 1998........... -- 71,622 57,179 1,747 (74,762) 55,786
Comprehensive income:
Net loss......................... -- -- (672) -- -- (672)
Translation adjustment........... -- -- -- 2,383 -- 2,383
------- ------- ------ ----- ------- ------
Balance at June 30, 1999........... -- 71,622 56,507 4,130 (74,762) 57,497
Comprehensive loss:
Net loss......................... -- -- (7,092) -- -- (7,092)
Translation adjustment........... -- -- -- 1,223 -- 1,223
------- ------- ------ ----- ------- ------
Balance at June 30, 2000........... -- $71,622 49,415 5,353 (74,762) 51,628
======= ======= ====== ===== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 12
JENNY CRAIG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1999 AND 2000
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999 2000
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 2,126 (672) (7,092)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 7,101 5,854 5,769
Provision for (benefit from) deferred income taxes..... 1,416 (5,543) (4,154)
Decrease in other assets -- forgiveness of officer
loan................................................. 1,500 -- --
Provision for doubtful accounts........................ -- 500 85
Provision for centre closures.......................... -- -- 1,144
Loss on disposal of property and equipment............. 1,035 579 178
Loss on write-off of cost of reacquired area franchise
rights............................................... -- -- 94
(Increase) decrease in:
Accounts receivable.................................. 94 (88) (278)
Inventories.......................................... 866 (3,531) 6,293
Prepaid expenses and other assets.................... 2,533 (98) (16)
Increase (decrease) in:
Accounts payable..................................... 318 1,137 (2,920)
Accrued liabilities.................................. 282 (4,289) (1,039)
Accrual for litigation judgment...................... -- 8,203 1,446
Income taxes payable................................. (4,050) -- --
Deferred service revenue............................. (4,280) (203) 100
------- ------ ------
Net cash provided by (used in) operating
activities...................................... 8,941 1,849 (390)
------- ------ ------
Cash flows from investing activities:
Purchase of property and equipment........................ (4,678) (5,073) (4,747)
Purchase of short-term investments........................ (9,008) (7,883) (4,200)
Proceeds from maturity of short-term investments.......... 9,278 5,969 6,425
Payments for acquisition of franchise centres............. (145) (320) (1,923)
------- ------ ------
Net cash used in investing activities............. (4,553) (7,307) (4,445)
------- ------ ------
Cash flows from financing activities:
Principal payments on note payable and capital lease...... (190) (190) (542)
Proceeds from exercise of stock options................... 7 -- --
------- ------ ------
Net cash used in financing activities............. (183) (190) (542)
------- ------ ------
Effect of exchange rate changes on cash and cash
equivalents............................................... 481 2,388 1,223
------- ------ ------
Net increase (decrease) in cash and cash equivalents........ 4,686 (3,260) (4,154)
Cash and cash equivalents at beginning of year.............. 37,438 42,124 38,864
------- ------ ------
Cash and cash equivalents at end of year.................... $42,124 38,864 34,710
======= ====== ======
Supplemental disclosure of cash flow information:
Income taxes paid......................................... $ 5,400 3,972 728
Interest paid............................................. 399 360 538
Supplemental disclosure of noncash investing and financing
activities:
Acquisition of franchise centres:
Fair value of assets acquired.......................... $ 401 600 2,462
Cancellation of accounts receivable.................... (256) (280) (539)
------- ------ ------
Cash paid for acquisitions........................ $ 145 320 1,923
======= ====== ======
Property and equipment acquired through capital lease..... $ -- -- 2,726
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 13
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Company
Jenny Craig, Inc., 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.
(b) Basis of Consolidation
The consolidated financial statements include the accounts of Jenny Craig,
Inc., and its wholly owned subsidiaries (the Company). All material intercompany
accounts and transactions have been eliminated in consolidation.
(c) 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.
(d) Short-Term Investments
Short-term investments consist principally of 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.
(e) 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.
(f) 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.
(g) Reacquired Area Franchise Rights and Other Intangibles
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 $1,051,000, $805,000 and $815,000 for the years ended June 30, 1998,
1999 and 2000, respectively. Accumulated amortization was $6,190,000 and
$6,753,000 at June 30, 1999 and 2000, respectively.
(h) 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
16
<PAGE> 14
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds 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.
(i) Revenue Recognition
Service revenues are derived from the sale of weight loss and maintenance
programs under contracts which entitle the customer to participate in the
program. 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. 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 $1,580,000 and
$1,572,000 at June 30, 1999 and 2000, respectively.
(j) Advertising Costs
Advertising costs are charged to expense as incurred.
(k) 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.
(l) 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.
(m) 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.
(n) 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
17
<PAGE> 15
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
computed using the weighted-average number of shares outstanding during the
period. Diluted net income per share incorporates the incremental shares
issuable upon the assumed exercise of stock options. All prior period net income
per share information is presented in accordance with SFAS 128.
Net income (loss) and weighted-average common shares used to compute net
income (loss) per share, basic and diluted, are presented below ($ in
thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------- ------ ------
<S> <C> <C> <C>
Net income (loss)............................... $ 2,126 (672) (7,092)
======= ====== ======
Common shares, basic............................ 20,689 20,689 20,689
Dilutive effect of stock options................ 264 -- --
------- ------ ------
Common shares, diluted.......................... $20,953 20,689 20,689
======= ====== ======
</TABLE>
For the years ended June 30, 1998, 1999 and 2000, stock options totaling
55,200, 2,167,500 and 2,527,100, respectively, were not included in the
computation of diluted net income (loss) per share because to do so would have
been antidilutive.
(o) Reclassification
Certain prior year balances have been classified to conform with the
current year presentation.
(p) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets at June 30 are summarized as follows ($
in thousands):
<TABLE>
<CAPTION>
1999 2000
------ -----
<S> <C> <C>
Prepaid income taxes........................................ $3,223 3,000
Other....................................................... 779 1,181
------ -----
$4,002 4,181
====== =====
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment at June 30 is summarized as follows ($ in
thousands):
<TABLE>
<CAPTION>
1999 2000
-------- -------
<S> <C> <C>
Land.................................................... $ 2,000 2,000
Building................................................ 7,048 7,048
Furniture and equipment................................. 33,676 30,682
Leasehold improvements.................................. 23,772 21,034
-------- -------
66,496 60,764
Less accumulated depreciation and amortization.......... (42,136) (34,967)
-------- -------
$ 24,360 25,797
======== =======
</TABLE>
18
<PAGE> 16
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACCRUED LIABILITIES
Accrued liabilities at June 30 are summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 2000
------- ------
<S> <C> <C>
Accrued salaries, wages and benefits...................... $ 8,920 8,210
Restructuring accrual..................................... -- 1,807
Other accruals............................................ 6,190 4,054
------- ------
$15,110 14,071
======= ======
</TABLE>
(5) INCOME TAXES
The Company and its United States subsidiaries file consolidated federal
and combined or separate state income tax returns. Jenny Craig Weight Loss
Centres, Pty. Ltd. and Jenny Craig Weight Loss Centres (Canada) Company, both
wholly owned foreign corporations, are subject to income tax in foreign
jurisdictions.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The components of income (loss) before income taxes (benefit) are as
follows ($ in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
United States................................. $(5,030) (11,256) (17,383)
Foreign....................................... 8,444 10,172 5,944
------- ------- -------
$ 3,414 (1,084) (11,439)
======= ======= =======
</TABLE>
The following summarizes income taxes (benefit) ($ in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Current:
Federal..................................... $(1,301) 2,250 (1,060)
State....................................... 61 153 26
Foreign..................................... 1,112 2,728 841
------- ------- -------
Total current (128) 5,131 (193)
------- ------- -------
Deferred:
Federal..................................... 373 (2,775) (5,546)
State....................................... (86) (429) 79
Foreign..................................... 1,129 (2,339) 1,313
------- ------- -------
Total deferred 1,416 (5,543) (4,154)
------- ------- -------
Total income taxes (benefit) $ 1,288 (412) (4,347)
======= ======= =======
</TABLE>
19
<PAGE> 17
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999 and 2000 are as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 2000
------- ------
<S> <C> <C>
Deferred tax assets:
Employee benefits....................................... $ 1,411 898
Allowance for doubtful accounts......................... 620 648
Depreciation and amortization........................... 2,522 1,674
Inventories............................................. 388 216
Foreign operations...................................... 990 --
Deferred service revenue................................ 2,800 2,603
Net operating losses.................................... -- 6,021
Tax credits............................................. 2,073 1,630
Accrual for litigation judgment......................... 3,220 3,497
Other accruals.......................................... 1,941 1,876
------- ------
Total gross deferred tax assets................. 15,965 19,063
Less valuation allowance................................ (700) (700)
------- ------
Net deferred tax assets......................... 15,265 18,363
------- ------
Deferred tax liabilities:
Receivable from foreign subsidiary...................... (1,694) (326)
Foreign operations...................................... -- (323)
Other................................................... (165) (154)
------- ------
Total deferred tax liabilities.................. (1,859) (803)
------- ------
Net deferred tax asset.......................... $13,406 17,560
======= ======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income, management's projections for future taxable income
over the reversing periods and tax planning strategies available to the Company
to realize future tax benefits, management believes it is more likely than not
the Company will realize the benefits of these deductible differences, net of
the existing valuation allowance which has been established to offset a portion
of the deferred tax assets based upon the above factors.
Income taxes for the years ended June 30, 1998, 1999 and 2000 differed from
the amounts expected by applying the U.S. federal income tax rate of 34% to
income (loss) before taxes as follows ($ in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------ ---- ------
<S> <C> <C> <C>
Computed income taxes (benefit).................... $1,161 (369) (3,889)
State taxes, net of federal benefit................ (17) (183) 69
Permanent differences.............................. 65 70 84
Other.............................................. 79 70 (611)
------ ---- ------
$1,288 (412) (4,347)
====== ==== ======
</TABLE>
20
<PAGE> 18
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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% (7.5% at June 30, 2000). 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, 1999 and 2000.
(7) LEASES
The Company's centre operations are conducted from premises leased under
noncancelable operating leases, generally for terms of five years with renewal
options for like periods. The Company's rent expense under such noncancelable
operating leases amounted to $25,227,000, $24,226,000 and $23,159,000 for the
years ended June 30, 1998, 1999 and 2000, respectively. Management expects that
in the normal course of business, leases that expire will be renewed or replaced
by other leases. A majority of the leases provide for the payment of taxes,
maintenance, insurance, and certain other expenses applicable to the leased
premises.
The Company is obligated under a capital lease for computer equipment that
expires in November 2003. The gross amount of computer equipment and related
accumulated amortization recorded under capital leases at June 30, 2000 is as
follows ($ in thousands):
<TABLE>
<S> <C>
Computer equipment.......................... $2,726
Less accumulated amortization............... (586)
------
$2,140
======
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense. There were no capital leases outstanding at June 30, 1999.
As of June 30, 2000, the scheduled minimum annual rental payments,
excluding renewal provisions under noncancelable operating leases and future
minimum capital lease payments are as follows ($ in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2001..................................................... $ 783 $16,609
2002..................................................... 783 10,210
2003..................................................... 783 5,435
2004..................................................... 316 2,537
2005..................................................... -- 708
Thereafter............................................... -- 45
------ -------
Minimum lease payments................................... 2,665 $35,544
=======
Less amount representing interest (at rates ranging from
6% to 8.5%)............................................ (291)
------
Present value of minimum capital lease payments.......... 2,374
Less current installments of obligations under capital
lease.................................................. (642)
------
Obligations under capital lease excluding current
installments........................................... $1,732
======
</TABLE>
(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
21
<PAGE> 19
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 for the year ended June 30, 1999 and is accrued in the accompanying
consolidated balance sheet at June 30, 1999 and 2000. An additional $1,446,000
was recorded in the year ended June 30, 2000 for attorney fees awarded to the
plaintiff and interest accrued on the judgment, pending the appeal which has
been filed seeking to overturn the 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 $5,440,000, $4,174,000 and $4,978,000 for the years ended
June 30, 1998, 1999 and 2000, 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 $616,000, $568,000 and
$1,443,000 in 1998, 1999 and 2000, 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 and $70,000 in
1999 and 2000, respectively.
(10) RESTRUCTURING CHARGE
In November 1999, the Company implemented a restructuring plan to reduce
annual operating expenses. The plan included the closure of 86 underperforming
Company-owned centres in the United States, which represented 16% of the total
United States Company-owned centres, and a staff reduction of approximately 15%
at the Company's corporate headquarters. All employees were notified in early
November and the centres were closed by November 30, 1999. A charge of
$7,512,000 was recorded in the quarter ended December 31, 1999 in connection
with this restructuring. The charge was comprised of $3,882,000 for lease
termination costs at the 86 centres, $1,563,000 for severance payments to
terminated employees, $1,303,000 for the write-off of fixed assets at the closed
centres, $291,000 for refunds to program participants at the closed centres, and
$473,000 for other closure costs which includes the removal of signs and
leasehold improvements. In June 2000, the Company reversed $602,000 of the
originally estimated $7,512,000 restructuring charge because actual costs were
less than the costs projected when the restructuring was implemented. The
$602,000 reversal was comprised of $289,000 in lease termination costs, $19,000
in severance costs, $159,000 in fixed asset write-offs, and $182,000 in refunds
to program participants, offset, in part by $47,000 of additional other closure
costs. Of the total revised charge, $6,910,000, approximately $5,766,000
requires cash payments and $1,144,000 represents the noncash write-off of fixed
assets. As of June 30, 2000, the Company had made cash payments of $2,214,000
for lease termination costs, $1,014,000 for severance to terminated employees,
$109,000 for refunds to program participants, and $622,000 for other closure
costs. The Company estimates that the remaining cash payments of approximately
$1,807,000, which is included in accrued liabilities on the accompanying balance
sheet at June 30, 2000, will be substantially incurred by December 31, 2000.
(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 $264,000, $348,000
and $279,000 in 1998, 1999 and 2000, respectively, in connection with this plan.
22
<PAGE> 20
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
$20,000 in 1998 and zero in 1999 and 2000, respectively.
(12) STOCK OPTION PLAN
The Company's Stock Option Plan (the Option Plan) was adopted in October
1991 and provides for the grant of incentive stock options to key employees and
of nonqualified stock options to key employees, consultants, directors, and
Medical Advisory Board members. A total of 3,000,000 shares of common stock have
been reserved for issuance under the Option Plan, of which 393,240 shares remain
available for future grant at June 30, 2000. The exercise price of the options
may not be less than fair market value on the date of grant. Additionally, no
options may be exercisable more than ten years after the date of grant and, with
certain exceptions, no option may become exercisable prior to the expiration of
six months from the date of grant. The options granted to employees generally
become exercisable over three to five years.
The Company applies APB Opinion No. 25 in accounting for the Option Plan
and accordingly, no compensation cost has been recognized for stock option
grants to employees and directors in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS 123, the Company's net income (loss) and
net income (loss) per share would have been reduced (increased) to the pro forma
amounts as follows ($ in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Net income (loss) -- as reported................. $2,126 (672) (7,092)
Net income (loss) -- pro forma................... 2,003 (1,352) (7,590)
Per share amounts:
Basic and diluted, as reported................. .10 (.03) (.34)
Basic and diluted, pro forma................... .10 (.07) (.37)
</TABLE>
The per share weighted-average fair value of stock options granted during
1998, 1999 and 2000 was $2.37, $2.64 and $0.98 respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected life of four years; expected volatility
of 44%, 49% and 56% in 1998, 1999 and 2000, respectively; no dividends; and
risk-free interest rate of 5.0%.
23
<PAGE> 21
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997......... 1,914,880 $4.63 to 21.00 $7.36
Granted............................ 1,648,100 5.82 to 7.50 5.84
Canceled........................... (1,629,580) 5.63 to 21.00 7.49
Exercised.......................... (1,200) 5.63 to 5.63 5.63
----------
Outstanding at June 30, 1998......... 1,932,200 4.63 to 15.32 5.96
Granted............................ 547,000 2.88 to 6.79 5.98
Canceled........................... (311,700) 5.63 to 15.32 6.54
----------
Outstanding at June 30, 1999......... 2,167,500 2.88 to 6.79 5.88
Granted............................ 1,188,000 1.97 to 2.94 2.05
Canceled........................... (828,400) 5.63 to 6.79 6.01
----------
Outstanding at June 30, 2000......... 2,527,100 1.97 to 6.07 4.04
==========
Exercisable at June 30, 2000......... 735,332 2.13 to 6.07 5.81
==========
</TABLE>
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 cancelation 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 nonemployee directors which were
exercisable immediately upon grant.
Information with respect to options outstanding and exercisable by exercise
price range at June 30, 2000 is as follows:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING WEIGHTED-
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE
--------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$1.97 to 4.63 1,218,000 9.4 $2.08
5.63 to 5.88 1,038,600 7.5 5.84
5.90 to 6.07 270,500 8.5 5.95
---------
1.97 to 6.07 2,527,100 8.6 4.04
=========
</TABLE>
OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
WEIGHTED-
RANGE OF NUMBER AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
--------------- ----------- --------------
<S> <C> <C>
$2.13 to 4.63 12,250 $3.57
5.63 to 5.88 650,082 5.83
5.90 to 6.07 73,000 5.96
-------
2.13 to 6.07 735,332 5.81
=======
</TABLE>
24
<PAGE> 22
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) 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 such matters will not have a material effect on the
consolidated financial statements.
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, 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>
1998 1999 2000
-------- ------- -------
<S> <C> <C> <C>
Revenue:
Company-owned operations:
United States........................... $273,358 244,303 218,077
Foreign................................. 48,329 50,699 49,703
Franchise operations:
United States........................... 22,051 18,237 14,755
Foreign................................. 8,511 7,713 8,450
Operating income (loss):
Company-owned operations:
United States........................... (8,175) (14,013) (22,913)
Foreign................................. 5,409 7,403 6,620
Franchise operations:
United States........................... 2,135 1,436 534
Foreign................................. 2,671 2,390 2,888
Identifiable assets:
United States.............................. 94,450 99,965 91,059
Foreign.................................... 11,795 12,649 15,458
</TABLE>
The operating loss for United States Company-owned operations in 2000
includes a restructuring charge totaling $6,910,000. See Note 10 "Restructuring
Charge."
The operating loss for United States Company-owned operations in 1999
includes a litigation judgment totaling $8,203,000. See Note 8 "Litigation
Judgment."
25
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Jenny Craig, Inc.:
We have audited the accompanying consolidated balance sheets of Jenny
Craig, Inc. and subsidiaries as of June 30, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Jenny Craig,
Inc. and subsidiaries as of June 30, 1999 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States of America.
KPMG LLP
San Diego, California
August 18, 2000
26
<PAGE> 24
JENNY CRAIG, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
($ in thousands, except per share data):
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, TOTAL
CURRENT YEAR 1999 1999 2000 2000 YEAR
------------ ------------- ------------ --------- -------- -------
<S> <C> <C> <C> <C> <C>
Total revenues..................... $71,511 62,157 80,777 76,540 290,985
Operating income (loss)............ (6,488) (12,585) 2,559 3,643 (12,871)
Net income (loss).................. (3,782) (7,610) 1,727 2,573 (7,092)
Basic and diluted net income (loss)
per share........................ (.18) (.37) .08 .12 (.34)
</TABLE>
The quarter ended December 31, 1999 includes a pretax charge of $7,512,000
for a restructuring charge and the quarter ended June 30, 2000 includes a
reversal of $602,000 of the originally estimated $7,512,000 restructuring charge
because actual costs were less than the costs projected when the restructuring
was implemented.
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, TOTAL
PRIOR 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 pretax charge of $8,203,000 for
a litigation judgment.
The net income (loss) per share computed for each quarter and the year are
separate calculations.
27
<PAGE> 25
JENNY CRAIG, INC. AND SUBSIDIARIES
COMMON STOCK DATA
At September 1, 2000, there were approximately 2,500 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>
1999 2000
----------------- ---------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter ended September 30........... $7 4 1/4 3 3/8 2 5/16
Second quarter ended December 31........... 6 15/16 4 5/8 3 7/8 2
Third quarter ended March 31............... 6 7/16 2 5/8 3 3/4 2
Fourth quarter ended June 30............... 3 15/16 2 3/4 3 7/16 1 7/16
</TABLE>
The Company did not pay any cash dividends in 1999 and 2000. 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.
During fiscal 2000, the Company was advised by the New York Stock Exchange
(NYSE) that the Company fell below newly effective NYSE continued listing
standards requiring total market capitalization of not less than $50,000,000 and
total stockholders' equity of not less than $50,000,000. At the market close on
September 1, 2000, the Company's total market capitalization was approximately
$40,085,000. At June 30, 2000, the Company's total stockholders' equity was
slightly in excess of the NYSE standard at $51,628,000. As required by the NYSE,
the Company submitted a plan to the Listings and Compliance Committee of the
NYSE demonstrating how the Company plans to comply with the standards by the
September 2001 deadline set by the NYSE. The Listings and Compliance Committee
will monitor the Company's performance under the plan. Should the Company's
shares cease being traded on the NYSE, the Company believes that an alternative
trading venue will be available.
28
