-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FbaPv+7djwLn4DXRHJKXbgTZnzq4E8sSbmMXuyfPXzAGszIqlz3MmLe7swPduutg 5jV+iYFuRLXgLZU0L0YLIw== 0000936392-98-001291.txt : 19980929 0000936392-98-001291.hdr.sgml : 19980929 ACCESSION NUMBER: 0000936392-98-001291 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRAIG JENNY INC /DE CENTRAL INDEX KEY: 0000878865 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 330366188 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10887 FILM NUMBER: 98715825 BUSINESS ADDRESS: STREET 1: 445 MARINE VIEW AVE STE 300 CITY: DEL MAR STATE: CA ZIP: 92014 BUSINESS PHONE: 6192597000 MAIL ADDRESS: STREET 1: 445 MARINE VIEW AVENUE STREET 2: SUITE 300 CITY: DEL MAR STATE: CA ZIP: 92014 FORMER COMPANY: FORMER CONFORMED NAME: JCI HOLDINGS INC DATE OF NAME CHANGE: 19600201 10-K405 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 001-10887 JENNY CRAIG, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0366188 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 11355 NORTH TORREY PINES ROAD, LA JOLLA, CALIFORNIA 92037 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 812-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $.000000005 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of August 28, 1998, there were 20,688,971 shares of the registrant's common stock outstanding, par value $.000000005, which is the only class of common or voting stock of the registrant. As of that date, the aggregate market value of the shares of common stock held by non-affiliates of the registrant (based on the closing price for the common stock on the New York Stock Exchange on August 28, 1998) was approximately $32,787,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1998 are incorporated by reference into Part II. The information called for by Part III is incorporated by reference from the definitive Proxy Statement of the Registrant which will be filed with the Securities and Exchange Commission not later than 120 days after June 30, 1998. ================================================================================ 2 JENNY CRAIG, INC. 1998 FORM 10-K TABLE OF CONTENTS
PAGE ------- ITEM 1. BUSINESS 1 ITEM 1a. EXECUTIVE OFFICERS OF THE REGISTRANT 8 ITEM 2. PROPERTIES 9 ITEM 3. LEGAL PROCEEDINGS 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10 ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 11 ITEM 6. SELECTED FINANCIAL DATA 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 11 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 11 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 12 ITEM 11. EXECUTIVE COMPENSATION 12 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 12 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 12 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 12
i 3 PART I ITEM 1. BUSINESS GENERAL BUSINESS DESCRIPTION Jenny Craig, Inc. (the "Company") provides a comprehensive weight management program (the "Program") through a chain of Company-owned and franchised weight loss Centres operating under the name JENNY CRAIG WEIGHT LOSS CENTRES ("Centres"). As of August 28, 1998, there were 532 Company-owned and 98 franchised weight loss Centres throughout the United States, and 110 Company-owned and 37 franchised Centres in Australia, New Zealand and Canada. Through these Centres the Company sells JENNY CRAIG CUISINE, its portion and calorie controlled food products ("Jenny's Cuisine"), to participants in the Program. As of August 28, 1998, there were approximately 87,000 active participants in the Program in the United States, and 23,000 active participants in foreign markets. FORWARD-LOOKING STATEMENTS Information provided herein may contain, and the Company may from time to time disseminate material and make statements which may contain "forward-looking" information, as that term is defined by the Private Securities Litigation Reform Act of 1996 (the "Act"). The words "expects," "anticipates," "believes" and similar words generally signify a "forward-looking" statement. The cautionary statements below are being made pursuant to the provisions of the Act and with the intention of obtaining the benefit of the "safe harbor" provisions of the Act. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. The discussion below, together with portions of the discussion elsewhere in this Report, highlight some of the more important risks identified by management of the Company but should not be assumed to be the only things that could affect future financial performance of the Company. Certain risk factors may also be identified by the Company from time to time in other filings with the Securities and Exchange Commission, press releases and other communications. Competition; Technological and Scientific Developments. The weight loss business is highly competitive and the Company competes against a large number of companies of various sizes, some of which may have greater financial resources than the Company. The Company competes against self-administered weight loss regimens, doctors, nutritionists, dietitians, the pharmaceutical industry and certain government agencies and non-profit groups which offer weight control help by means of medication, diets, exercise and weight loss drugs. The Company also competes against food manufacturers and distributors which are developing and marketing low-calorie and diet products to weight-conscious consumers. In addition, new or different products or methods of weight control are continually being introduced. Such competition and any increase in competition, including new pharmaceuticals and other technological and scientific developments in weight control, may have a material adverse impact on the Company. From time to time, medical and health professionals have identified health risks associated with weight loss. Weight loss pharmaceuticals are not risk-free and side effects and potential health problems for certain users have been identified. In September 1997, the United States Food and Drug Administration requested the withdrawal of fenfluramine (one of the pharmaceuticals used in a combination commonly known as "phen-fen") and dexfenfluramine, commonly referred to by its trade name Redux, from the U.S. market based upon potential health risks. The manufacturer and distributor of these pharmaceuticals agreed to an immediate recall of these drugs. Medical and scientific developments or public announcements associating a health risk with weight loss could have a material adverse effect on the Company. See "Competition." 1 4 Legislative and Regulatory Restrictions; Litigation. The Company is subject to a number of laws and regulations regarding its advertising, food products, franchise operations and relations with consumers. See "Regulation." The Federal Trade Commission ("FTC") and certain states regulate advertising, disclosures to consumers and franchisees, and other consumer matters and the Food and Drug Administration and the United States Department of Agriculture specify quality standards for foods. The Company's customers may file actions on their own behalf, as a class or otherwise, and may file complaints with the FTC or state or local consumer affairs offices and these agencies may take action on their own initiative or on a referral from consumers or others. See "Item 3. Legal Proceedings" for information regarding a Consent Order entered into by the Company with the FTC relating to the advertising practices of the Company, and certain class action litigation matters commenced against the Company, other weight loss programs, and certain pharmaceutical companies relating to the distribution and sale of weight loss pharmaceuticals Remedies sought in such actions may include the refund of amounts paid by the complaining customer, refunds to an entire class of participants, other damages, as well as changes in the Centres' method of doing business. A complaint because of a practice at one Centre, whether or not that practice is authorized by the Company, could result in an order affecting some or all Centres in the particular state, and an order in one state could influence courts or government agencies in other states considering similar matters. Proceedings resulting from complaints may result in significant defense costs, settlement payments or judgments and could have a material adverse effect on the Company. Future legislation or regulations including, without limitation, legislation or regulations affecting the Company's marketing and advertising practices, relations with consumers or franchisees or its food products, could have a material adverse impact on the Company. The Company's foreign operations and franchises are also generally subject to regulations of the applicable country regarding the offer and sale of franchises, the content of advertising, the labeling and packaging of food, and promotion of diet products and programs. Although the Company is not currently subject to any government-imposed restriction on the withdrawal of funds from any foreign country, if Australia or any foreign country in which the Company operates were to impose currency restrictions, the Company's business could be materially adversely affected. Effectiveness of Marketing and Advertising Program. The Company's business is marketing intensive. Its success depends upon its ability to attract new participants to the program. The effectiveness of the Company's marketing practices, in particular its advertising campaigns, is important to the Company's financial performance. If the Company's marketing and advertising programs do not generate sufficient "leads" and "sales," the Company's results of operations will be materially adversely affected. Market Acceptance of New Products and Services. The Company's future success will depend on its ability to enhance its existing products and services and to develop and market new products and services on a timely basis that respond to new and evolving customer demands, achieve market acceptance and keep pace with new technological and scientific developments. There can be no assurance that the Company will be successful in developing, introducing on a timely basis and marketing such new products and services, or that any such new products or services will be accepted by the market. The failure of such products and services to be accepted by the market could have a material adverse impact on the Company. Cost of Food and Services. As a large percentage of the Company's revenues are derived from sales of the Company's food products, increases in the cost of food and food services could have a material adverse impact on the Company. 2 5 Fluctuations In Quarterly Operating Results; Seasonality. The Company has experienced and expects to continue to experience fluctuations in its quarterly results of operations. The Company's revenues are affected by a number of factors, including the volume and timing of customer leads, success of marketing and advertising programs, success of introductions of new services and products, activities of competitors and the ability of the Company to penetrate new markets. The Company's business is seasonal with revenues generally decreasing in the quarter ended December 31 and during the summer months. The Company may also choose to reduce prices or to increase spending in response to competition or to pursue new market opportunities, all or any of which may materially adversely affect the Company's results of operations. General Economy. The Company's future success will depend on the general strength of the economy in the regions where the Company's Centres are located, both within and outside the United States . Any weakness in the general economy of such areas may have a material adverse impact on the Company's results of operations. THE PROGRAM The Program offers a comprehensive, competitively priced approach to the problem of losing and maintaining weight, combining a calorie controlled, nutritionally balanced diet with education and motivation that assists participants in achieving their weight loss needs. The Program features individual counseling to assist participants in identifying and modifying their eating habits to reach and maintain their desired weight. A cornerstone of the Program is the purchase by participants of Jenny's Cuisine. These food products, which are sold only at Centres to participants in the Program, are manufactured by the Company's suppliers to specifications approved by registered dietitians employed by the Company and are designed to provide nutritionally balanced and good tasting low calorie foods to facilitate weight loss. During fiscal 1998, the Company introduced its ABC program which simplified the overall program content and provided participants with greater flexibility in food choices. The Program recommends mild exercise to participants, and the Company offers weight maintenance assistance after completion of the Program. The Program is used by men and women, and to a much lesser extent by adolescents, although most participants in the Program are women of all ages and income levels who wish to lose in excess of 30 pounds. During fiscal 1997, the Company introduced an adjunct to its traditional weight loss program which incorporated weight loss pharmaceuticals for qualified participants. This program adjunct utilized independently-contracted physicians to examine clients and prescribe Redux (the trade name for dexfenfluramine, a medication for obesity approved by the U.S. Food and Drug Administration in April 1996) and a combination of two other medications commonly known as "phen-fen" to participants who met the appropriate medical criteria for these medications. In August 1997, the Company ceased offering a weight loss medication adjunct to its Program following reports from the medical community as to possible health risks associated with the use of Redux and phen-fen. Each prospective participant in the Program meets with a Program Director at the Centre, where statistical information regarding height, weight, activity patterns, and related information is obtained. This information is analyzed using standards fixed by the Company to assist the prospective participant in establishing a weight loss goal and the Program Director then explains the Program. After enrollment, the participant is referred to a Weight Loss Consultant to begin the Program and purchase the first week's supply of Jenny's Cuisine. Other than in connection with the now terminated program adjunct which offered weight loss medications to qualified participants, the Company does not engage physicians to examine or monitor the progress of participants, nor does it undertake a medical examination of new participants. However, prior to commencing the Program each new participant is asked to complete a health questionnaire to disclose any current medical treatment and medical history in order to determine whether participation in the Program is inadvisable or should be monitored by the participant's personal physician. For the first half of the Program, participants are encouraged to eat Jenny's Cuisine for every meal along with fresh fruits, vegetables and dairy products. During this initial period, participants are expected to visit the Centre once a week to attend a private counseling session with a Weight Loss Consultant during which the participant's progress is discussed, meal plans are selected and the participant purchases Jenny's Cuisine. After the initial period of the Program, participants are advised to eat Jenny's Cuisine five days a week from various menus furnished by the Centre, and are given guidelines for their own food preparations two days a week, continuing on this regimen until their weight loss goal is achieved. Throughout the course of the Program participants continue their individual counseling sessions. 3 6 Each participant is allowed to utilize the Centre's facilities and personnel until the participant's weight loss goal has been achieved. During the course of the Program a participant loses an average of 1 to 1.5 pounds per week. While the length of time a participant remains on the weight loss portion of the Program varies with the amount of desired weight loss and how long a participant chooses to continue on the Program, an average participant remains on the Program for approximately four months. Participants in the Program pay a fixed service fee which covers all aspects of the Program other than the purchase of Jenny's Cuisine (and, while it was being offered, certain fees associated with the weight loss medication program adjunct). For the year ended June 30, 1998, the initial service fee for the basic program in Company-owned Centres ranged from $10 to $197. As of August 28, 1998, the initial service fee in Company-owned Centres was $15. In addition, the Company may offer special limited introductory programs for a lower fee. During the weight loss portion of the Program, participants pay an average of between $50 and $75 per week for Jenny's Cuisine. The Company also offers a Gold Program which includes a weight loss module, lifestyle audio tapes, and a walking program for a fee which was $148 as of August 28, 1998. A significant number of participants who enroll in the Program purchase a Platinum Program for a fixed fee which was $296 at August 28, 1998. The Platinum Program includes a weight loss module, a weight maintenance module, a walking program, exercise video tapes, Program return privileges, lifestyle video and audio cassette tapes, as well as an ability to obtain a refund of a portion of the service fee if certain criteria are met. Fees charged for the service portion of the Program are generally paid at commencement. In some states participants have the legal right to withdraw from the Program within specified periods following purchase and to receive a refund of the fees. Even when not so required, the Company's policy is to refund a pro rata portion of the fees upon request. JENNY CRAIG CUISINE Jenny's Cuisine is portion and calorie controlled and consists of a nutritionally balanced variety of foods. The Company employs registered dietitians to assist it in developing its meal plans and food products. The Company believes that its healthful, high quality and good tasting food products have contributed in large part to the Company's success. Currently, the Company supplies its Centres with approximately 70 different breakfast, lunch, dinner and snack food items for use in the Program, including prepackaged frozen meals, shelf-stable and canned foods, snacks, and dried products. The Company believes that its prepackaged frozen meals give it a strong competitive advantage. The Company generally updates its menu once per year. Current food items include such entrees as Blueberry Waffles, French Toast with Berries, Stuffed Shells, Baked Turkey, Fish Festiva, Chicken Golden Gate, Chicken Fajitas, Teriyaki Beefsteak, Pasta Primavera, and Chili Con Carne. Product sales, principally comprised of Jenny's Cuisine, accounted for 91% and 93% of the Company's revenues in fiscal 1997 and 1998, respectively. For the year ended June 30, 1997, the Company's gross revenues from product sales were $333,917,000 compared to $327,804,000 for the year ended June 30, 1998. The Company purchases its food products from various companies which manufacture the products to specifications approved by the Company. The Company's major food suppliers are Overhill Farms and ZB Industries, Inc., which supply frozen foods, Truitt Bros., which supplies shelf-stable food products, Campbell's Soup Company and Nestle Food Company, which supply canned food, and Natural Alternatives, Inc., which supplies vitamin supplements. The Company believes that alternative sources for all of its food products are available without material disruption of its operations. 4 7 HISTORICAL GROWTH The Company commenced operations in Australia in 1983 and became one of the largest weight loss companies in that country with 69 Company-owned and franchised Centres by the end of fiscal 1985. Following its success in the Australian market, and recognizing the opportunities to market the Program successfully in the United States, the Company expanded its operations to the United States by initially opening 13 Company-owned Centres in the Los Angeles metropolitan area in February 1985 and six Centres in the Chicago metropolitan area in September 1985. The Company's growth through August 28, 1998 as measured by the number of Centres operating is shown in the following table:
AT JUNE 30, AT ---------------------------------------------------------- 8/28 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Company-owned United States 151 273 326 370 476 502 478 485 542 533 532 Foreign 70 84 86 88 103 106 102 103 106 110 110 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 221 357 412 458 579 608 580 588 648 643 642 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Franchise United States 47 126 186 199 176 159 154 159 113 101 98 Foreign 37 29 30 37 39 43 43 36 36 37 37 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 84 155 216 236 215 202 197 195 149 138 135 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total 305 512 628 694 794 810 777 783 797 781 777 ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
The number of franchise Centres owned by affiliates at June 30, 1998 and August 28, 1998 was 17. In fiscal 1998, the Company acquired 8 Centres from two franchisees in the United States, opened 13 United States Company-owned Centres and closed 30 United States Company-owned Centres. Also during fiscal 1998, 2 United States franchise Centres were opened and 6 United States franchise Centres were closed. The increase in United States Company-owned Centres and the decrease in United States franchise Centres in 1997 reflects the Company's acquisition of 51 Centres from three franchisees during fiscal 1997. MARKETING The Company's business is marketing intensive, because both maintaining its market position and continued growth depend upon the Company's ability to attract new participants for the Program. The Company conducts ongoing research to better understand the prospective weight loss customer and needs of existing clients. The data obtained is then utilized in the improvement and development of the Company's products and services and the Company's marketing activities. The Company also researches each prospective market to determine the appropriate number and distribution of Centres for that market. This determination is a significant factor in developing leads, improving client convenience and maximizing return on advertising investment. The Company's advertising is designed to make the customer aware of the Company's and the Program's attributes. The Company's advertising presents a company which is caring, supportive, and understanding of the problems of being overweight, and through the person of Jenny Craig, is differentiated from other generic sounding weight loss companies. Testimonial advertising, featuring participants in the Program, demonstrates the success of the Program on a personal level. The Company's advertising contains a state-of-the-art 800 telephone number (800-98JENNY) that connects the caller directly to the nearest Centre in every market in the United States. 5 8 The Company presently spends more than 10% of gross revenues on advertising to generate leads, advertising extensively in each local market where it owns and operates Centres. The majority of this amount is spent on television advertising, with the balance allocated to print advertising and radio advertisements. The size of the Company's advertising budget, coupled with the television spot media buying power of its agency enables the Company to advertise on a low cost-per-spot basis. Franchise agreements generally require that franchisees spend the greater of 10% of gross receipts or $1,000 per Centre per week for local advertising to promote the Program. Franchisees may elect to use the Company's advertising, which the Company makes available to franchisees, rather than generate their own advertising. In addition to its consumer endorsements, the Company occasionally uses celebrity endorsements among its other advertising campaigns. As is common in the weight loss industry, the Company regularly utilizes various sales promotion campaigns, including a reduction of the service fee for the Program. One of the Company's most valuable assets is the participants who have already joined the Program. Information on participants is maintained in the Company's data base and is utilized in the Company's direct marketing programs to existing and former participants. The Company encourages participants in the Program to introduce other individuals to the Program by giving food discounts and other incentives, and the Company believes that such referrals are an important source of revenues. FRANCHISE OPERATIONS The Company's strategy is to have predominantly Company-owned Centres. The Company's general practice concerning franchising, with some exceptions, is to offer franchised Centres in smaller markets. However, from time to time franchises have been granted to enable the Company to enter a large market more quickly. Franchising frequently gives the Company the benefit of obtaining franchisees who are more familiar with a local market than the Company, and also enables the Company to expand its business without increasing the number of employees by using franchisee management. The Company believes that one of the factors contributing to its success has been its strong commitment to franchisee relationships. The Company seeks franchisees who demonstrate the management skills, experience and financial capability to develop multiple Centres. In particular, the Company seeks franchisees who demonstrate experience in businesses that are similar to or have characteristics similar to the Company. Franchised Centres are required to adhere to the Company's policies and procedures with respect to the operation of the Centres and the implementation of the Program. Although the franchise agreements do not require them to do so, present owners of franchises have actively participated in the operation of the Centres. Franchisees are required to undergo training at a Company training facility. To date, all franchisees have purchased their food from the Company, although franchisees are not required to do so under the terms of the franchise agreement. As of August 28, 1998, the Company had 135 Centres operating pursuant to franchise agreements, of which 98 were located throughout the United States, 16 in Australia, 17 in New Zealand and 4 in Canada. During fiscal 1998, the Company acquired 8 Centres from two franchisees. TRADE NAMES AND TRADEMARKS The Company believes the names it uses are important to its business and that its business could be harmed if others used the names. JENNY CRAIG WEIGHT LOSS CENTRES is a registered service mark and JENNY'S CUISINE is a registered trademark of the Company under the laws of the United States. The registration of JENNY CRAIG WEIGHT LOSS CENTRES and JENNY'S CUISINE will expire in the United States in October 2006 and in January 2008, respectively, if not renewed by the Company. The Company has obtained registrations or filed applications under applicable trademark and service mark laws in Australia, New Zealand, Canada, Mexico and in various other countries to protect its use of JENNY CRAIG WEIGHT LOSS CENTRES and JENNY'S CUISINE. 6 9 COMPETITION The weight loss business is highly competitive and the Company competes against a number of companies of various sizes, some of which may have greater financial resources than the Company. The Company's principal direct competitors are national chains such as Weight Watchers International, Nutri/System, Inc. ("Nutri/System"), and Diet Center, Inc. as well as regional and local weight loss businesses, some of which include supervision by or consultation with doctors or nurses. The Company also competes against self-administered weight loss regimens, doctors, nutritionists, dietitians, the pharmaceutical industry and certain government agencies and non-profit groups which offer weight control help by means of medication, diets, exercise and weight loss drugs. The Company also competes against food manufacturers and distributors which are developing and marketing low-calorie and diet products to weight-conscious consumers. In addition, new or different products or methods of weight control are continually being introduced. Such competition and any increase in competition, including new pharmaceuticals and other technological and scientific developments in weight control, may have a materially adverse impact on the Company. The Company believes that it competes on the basis of the effectiveness of the Program, its competitive pricing, the quality of Jenny's Cuisine, and the marketing and management skills of its management and franchisees. REGULATION The Federal Trade Commission (the "FTC"), and certain states, regulates advertising and other consumer matters. The Company's customers may file actions on their own behalf, as a class or otherwise, and may file complaints with the FTC or state or local consumer affairs offices and these agencies may take action on their own initiative or on a referral from consumers or others. Remedies sought in such actions may include the refund of amounts paid by the complaining consumer, refunds to an entire class of participants, other damages, as well as changes in the Centres' method of doing business. A complaint because of a practice at one Centre, whether or not that practice is authorized by the Company, could result in an order affecting some or all Centres in the particular state, and an order in one state could influence courts or government agencies in other states considering similar matters. See "Item 3. Legal Proceedings" for information regarding a Consent Order entered into by the Company with the FTC relating to the advertising practices of the Company, and certain class action litigation matters commenced against the Company, other weight loss programs, and certain pharmacuetical companies relating to the distribution and sale of weight loss pharmacueticals. Proceedings resulting from complaints may result in significant defense costs, settlement payments or judgements and could have a material adverse effect on the Company. The Company is subject to certain United States laws and regulations in connection with its food products. The Food, Drug and Cosmetic Act prohibits adulteration and misbranding and provides for penalties and other remedies such as seizure of products. The Food and Drug Administration ("FDA") enforces the Food, Drug and Cosmetic Act, including specifying quality standards for foods and, as do many states, regulating food labeling. Those foods which contain 2% or more meat or poultry products, and the plants which manufacture them, are subject to regulation (including labeling requirements) and continuous inspection by the United States Department of Agriculture ("USDA"). Although the FDA and the USDA require the manufacturers of the Company's food products to obtain appropriate governmental approvals and to comply with applicable regulations, the Company has responsibility for the quality and labeling of food and for compliance with FDA and USDA regulations. Prior to offering franchises in the United States, the Company, as is generally the case with franchisors, is required under regulations of the Federal Trade Commission to furnish potential franchisees with a disclosure document describing the Company, the franchise agreement and related matters. Some states require their own version of the disclosure document. In addition, state franchise laws may require the Company to furnish a bond, escrow monies, submit annual reports and meet other conditions. Many states have statutes which may be applicable to the Company and require that a written contract be provided to the participant, and that participants be permitted to cancel their contract within specified periods following purchase and receive a refund of the service fee. 7 10 The Company's foreign operations and franchises are also generally subject to regulations of the applicable country regarding the offer and sale of franchises, the content of advertising, the labeling and packaging of food, and promotion of diet products and programs. EMPLOYEES As of August 28, 1998 the Company had approximately 4,100 employees, of which 3,390 were located in the United States, 570 were located in Australia, and 140 were located in Canada. None of the Company's workers in the United States are represented by a labor union. The Company has never had a strike or lockout and considers its employee relations to be excellent. ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the executive officers of the Company:
NAME OF EXECUTIVE OFFICER AGE POSITION(S) HELD - ------------------------- ------- --------------------------------------- Sidney Craig 66 Chairman of the Board, Chief Executive Officer and Director Jenny Craig 66 Vice-Chairman, President and Director Philip Voluck 56 Executive Vice President and Chief Operating Officer Michael L. Jeub 55 Senior Vice President, Chief Financial Officer and Treasurer Janet Rheault 37 Senior Vice President, Operations Leslie Koll 47 Senior Vice President, Marketing William K. Dix 42 Vice President, General Counsel Alan V. Dobies 50 Vice President, Corporate Services Stuart Gaiber 49 Vice President, Information Services Marvin Sears 71 Secretary and Director
Sidney Craig has been Chairman of the Company or its predecessors since 1983 and served as Chief Executive Officer from 1983 through April 1994. In October 1997, Mr. Craig was elected Chief Executive Officer of the Company. Jenny Craig has served as Vice-Chairman of the Company since September 1991, as President and Chief Operating Officer of the Company or its predecessors from 1983 to August 1991 and as a director of the Company or its predecessors from 1983 to date. Mrs. Craig was elected President of the Company in October 1997. Sidney Craig and Jenny Craig are husband and wife. Philip Voluck has served as Executive Vice President and Chief Operating Officer since July 1998. From March 1997 to August 1997 Mr. Voluck was President of WSI-Miami Inc., a joint venture with Sylvan Learning System, Inc. involved in the teaching of English as a second language. From August 1996 to November 1996 Mr. Voluck served as President of H. Katz Capital Group, a privately held venture capital firm. From January 1994 to August 1996, Mr. Voluck was President and Chief Operating Officer of Nutri/System, L.P. a privately held operator of approximately 700 corporate and franchised weight loss centers. From 1986 to 1993, Mr. Voluck was Managing General Partner of Nutri/System of Florida/Georgia, an operator of approximately 90 weight loss centers. Michael L. Jeub has served as Senior Vice President, Chief Financial Officer and Treasurer since July 1994. From July 1993 to July 1994, Mr. Jeub was Chief Financial Officer, Executive Vice President and Treasurer of National Health Laboratories, Inc., a publicly held clinical laboratory chain. From June 1991 to April 1993, Mr. Jeub served as President and Chief Operating Officer of Medical Imaging Centers of America, Inc., a publicly held chain of high technology imaging centers. Janet Rheault has served as Senior Vice President, Operations since April 1996. Ms. Rheault, who joined the Company in 1988, served in various operating capacities, most recently as Divisional Supervisor, prior to her current position. 8 11 Leslie Koll has served as Senior Vice President, Marketing since November 1994. From 1991 to 1994, Mr. Koll was managing partner with Pelletier, Koll and Weil, a marketing and business development firm, which he founded in 1987. Mr. Koll was Vice President, Marketing of Hanna-Barbera Productions, Inc. from 1989 to 1991. William K. Dix has served as Vice President, General Counsel since May 1996. From March 1994 to May 1996 Mr. Dix was Counsel for Aetna Health Plans, Inc. From 1989 through March 1994 Mr. Dix was Corporate Counsel for Science Applications International Corporation, a high technology research and development company. Stuart Gaiber has served as Vice President, Information Systems since June 1997. From April 1995 to June 1997 Mr. Gaiber was Director of Information Technology for KCET, a public television station in Los Angeles, California. From October 1989 through April 1995, Mr. Gaiber served as Director of MIS for Avery Dennison, an office products company. Alan V. Dobies has served as Vice President, Corporate Services since June 1990. From July 1988 to May 1990, Mr. Dobies was Vice President, Operations of Joico International, a manufacturer of professional hair-care products. Marvin Sears, a director of the Company since July 1989, has served as the Secretary of the Company since June 1991, and as Assistant Secretary of the Company from August 1985 to June 1991. Mr. Sears is a practicing attorney in Los Angeles, California where, since May 1989, he has been a partner in the law firm of Proskauer Rose LLP, counsel to the Company during fiscal 1998 and currently. From June 1960 until May 1989, Mr. Sears was a senior partner of the Los Angeles law firm of Pacht, Ross, Warne, Bernhard & Sears, Inc. and its successor, Shea & Gould. Mr. Sears is a member of the Board of various privately-owned business enterprises. Executive officers are elected to serve until their successors are elected and qualified. ITEM 2. PROPERTIES At August 28, 1998, there were 642 Company-owned Centres, all of which are in leased premises, of which 532 were in the United States, 84 were in Australia, and 26 were in Canada. A majority of the leases for Company-owned Centres were entered into for an initial period of five years. The leases require fixed monthly rental payments which are subject to various adjustments. The Centres are generally located in retail shopping areas on major commercial thoroughfares and generally occupy approximately 2,000 to 2,500 square feet of space consisting of a reception area, individual counseling rooms, and food storage space. In July 1996 the Company purchased a 75,000 square foot office building located in La Jolla, California in which its executive offices are located. The total purchase price was $8.36 million and the building is subject to a promissory note to a bank, secured by a deed of trust, which had a balance owing of $5,716,000 as of June 30, 1998. The Company leases a warehouse in Rancho Cucamonga, California for its food and non-food inventory. The Company's executive offices in Australia are leased and are located in Melbourne, and the Company also owns a warehouse in Sunshine, Australia. The Company believes that its executive office and warehouse space is adequate for its current needs and that additional space will be available at reasonable costs as needed. 9 12 ITEM 3. LEGAL PROCEEDINGS The Company and the Federal Trade Commission have entered into a Consent Order settling all contested issues raised in a complaint filed in September 1993 against the Company alleging that the Company violated the Federal Trade Commission Act by the use and content of certain advertisements for the Company's weight loss program featuring testimonials, claims for the program's success and safety, and statements as to the program's costs to participants. The Consent Order does not admit any issue of fact or law or any violation by the Company of any law or regulation, and does not involve payment by the Company of any civil money penalty, damages, or other financial relief. The Consent Order requires certain procedures and disclosures in connection with the Company's advertisements of its products and services. The full Commission accepted the Consent Order, and it has been made effective as of May 4, 1998. The Company does not believe that compliance with the Consent Order will have a material adverse effect on the Company's consolidated financial position or results of operations or its current advertising and marketing practices. The Company, along with other weight loss programs and certain pharmaceutical companies, has been named as a defendant in an action filed in the Circuit Court for the Eleventh Judicial Circuit in Pickens County, Alabama (the "Alabama Litigation"). The action was commenced in August, 1997 by three plaintiffs who are seeking to maintain the action as a class action on behalf of all persons in the United States and United States Territories who have suffered or may in the future suffer injury due to the administration of phentermine, fenfluramine (commonly known as "phen-fen" when taken together) and/or dexfenfluramine (tradename "Redux(TM)"), which were manufactured or sold by the defendants. The complaint includes claims against the Company and other defendants, acting separately and in concert, for alleged unlawful and tortious acts, including sale of allegedly dangerous and defective products, negligent marketing and distribution, failure to warn of the risks associated with the weight loss medications, breach of warranty, fraud, and negligent misrepresentation. The complaint seeks compensatory and punitive damages in unspecified amounts and equitable relief including the establishment of a medical fund to cover future medical expenses resulting from the use of the weight loss medications, and a requirement that the defendants adequately warn the public of the risks associated with the use of the weight loss medications. The Company, along with certain pharmaceutical companies, has also been named as a defendant in an action filed in the Court of Common Pleas, Philadelphia County, Pennsylvania (the "Pennsylvania Litigation"). The action was commenced in November 1997 by a plaintiff, a participant in the Company's program, who is seeking to maintain the action as a class action on behalf of all persons in the Commonwealth of Pennsylvania who have purchased and used fenfluramine, dexfenfluramine and phentermine, alone or in combination. The complaint includes claims against the Company and the other defendants for alleged false and misleading statements concerning the safety and appropriateness of using fenfluramine, dexfenfluramine, and phentermine, and the benefits, uses and ingredients of these drugs, negligence in the distribution, sale, and prescribing of these medications, and breach of the warranty of merchantability. The complaint seeks compensatory and punitive damages in unspecified amounts and a Court-supervised program funded by the defendants through which class members would undergo periodic medical examination and testing. The Company has tendered the Alabama Litigation and the Pennsylvania Litigation matters to its insurance carriers. The Company and the provider of the independent physicians who prescribed the weight loss medications in the Company's centres have each asserted their rights with respect to these litigations under contractual provisions for indemnification in the agreement between them. The claims have not progressed sufficiently for the Company to estimate a range of possible loss, if any. The Company intends to defend the matters vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Material appearing under the caption "Common Stock Data" on page 36 of the Annual Report to Shareholders of Jenny Craig, Inc. for the fiscal year ended June 30, 1998 ("1998 Annual Report") is hereby incorporated by this reference. ITEM 6. SELECTED FINANCIAL DATA Material appearing under the caption "Selected Financial Data" on page 8 of the Company's 1998 Annual Report is hereby incorporated by this reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Material appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 18 of the Company's 1998 Annual Report is hereby incorporated by this reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to a variety of risks, including changes in interest rates affecting the return on its investments and the cost of its debt, and foreign currency fluctuations. At June 30, 1998, the Company maintains a portion of its cash and cash equivalents in financial instruments with original maturities of three months or less. The Company also maintains a short-term investment portfolio containing financial instruments with original maturities of greater than three months but less than twelve months. These financial instruments, principally comprised of high quality commercial paper, are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of these financial instruments, an immediate 10 percent increase in interest rates would not have a material effect on the Company's financial condition or results of operations. The Company has not used derivative financial instruments in its investment portfolio. The Company's only long-term debt at June 30, 1998 is comprised of a note payable to a bank, secured by the Company's corporate office building, with a total balance of $5,716,000. The note bears interest at the London Interbank Offered Rate plus one percent, with quarterly interest rate adjustments. Due to the relative immateriality of the note payable, an immediate 10 percent change in interest rates would not have a material effect on the Company's financial condition or results of operations. Approximately 16% of the Company's revenues for the year ended June 30, 1998 were generated from foreign operations, located principally in Australia and Canada. In fiscal 1998, the Company was subjected to a 12% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar compared to fiscal 1997. Currently, the Company does not enter into forward exchange contracts or other financial instruments with respect to foreign currency. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and subsidiaries, related notes to consolidated financial statements, and material appearing under the caption "Independent Auditors' Report" on pages 19 through 34 of the Company's 1998 Annual Report are hereby incorporated by this reference. Material appearing under the caption "Selected Quarterly Financial Information" on page 35 of the Company's 1998 Annual Report is hereby incorporated by this reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item is incorporated by reference from the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 1998. Information regarding executive officers of the Registrant is set forth under the caption "Executive Officers of the Registrant" in Item 1a hereof. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K A. FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS FINANCIAL STATEMENTS The following appear in the 1998 Annual Report at the pages indicated below and are incorporated into Part II by reference: (1) Independent Auditors' Report Page 34 (2) Consolidated Balance Sheets as of June 30, 1997 and 1998 Page 19 (3) Consolidated Statements of Income for the Years Ended Page 20 June 30, 1996, 1997 and 1998 (4) Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1996, 1997 and 1998 Page 21 (5) Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1997 and 1998 Page 22 (6) Notes to Consolidated Financial Statements Pages 23-33
SCHEDULES The following financial statement schedule appears on page 18 of this report: II. Valuation and Qualifying Accounts Schedules other than the schedule listed above are omitted because they are either not required or not applicable. 12 15 EXHIBITS
EXHIBIT DESCRIPTION - ---------- -------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of Registrant (Incorporated herein by reference to Exhibit 3.1 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1997.) 3.4 Restated By-laws of Registrant.(1) 10.1 Jenny Craig, Inc. Management Deferred Bonus Program.(1)(2) 10.2 Executive Employment Agreement between Jenny Craig, Inc. and C. Joseph LaBonte. (Incorporated herein by reference to Exhibit 10.2 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1994.)(3) 10.3 Jenny Craig, Inc. Stock Option Plan, as amended. (Incorporated herein by reference to Exhibit 10.3 to the Report on Form 10-Q of the Company for the three month period ended December 31, 1996.)(2) 10.4 Executive Employment Agreement between Jenny Craig, Inc. and Jenny Craig. See Exhibit 10.30 for Amendment thereto.(1)(3) 10.5 Executive Employment Agreement between Jenny Craig, Inc. and Sid Craig. See Exhibit 10.29 for Amendment thereto.(1)(3) 10.6 Employment Agreement between Jenny Craig, Inc. and Michael L. Jeub. (Incorporated herein by reference to Exhibit 10.6 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1994.)(3) 10.7 Settlement Agreement among Class Plaintiffs, Jenny Craig, Inc. and Jenny Craig International, Inc. (Incorporated herein by reference to Exhibit 10.7 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1994.) 10.8 Agreement dated as of March 27, 1997 between Jenny Craig, Inc. and Sunil Dewan. (Incorporated herein by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the three month period ended March 31, 1997.) (3) 10.9 Standard Form of Franchise Agreement of Jenny Craig International, Inc.(1) 10.10 Agreement dated as of April 21, 1997 between Jenny Craig, Inc. and Stuart Gaiber. (Incorporated herein by reference to Exhibit 10.10 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1997.) (3) 10.11 Office Building Lease between Jenny Craig Weight Loss Centres, Inc. and JLRB Associates dated September 15, 1988.(1) 10.11.1 Amendment to Office Building Lease between Jenny Craig Weight Loss Centres, Inc. and JLRB Associates, undated.(1) 10.11.2 Amendment to Office Building Lease between Jenny Craig Weight Loss Centres, Inc. and JLRB Associates, undated.(1) 10.11.3 Amendment to Office Building Lease between Jenny Craig Weight Loss Centres, Inc. and JLRB Associates, dated February 21, 1991.(1) 10.11.4 Amendment to Office Building Lease between Jenny Craig Weight Loss Centres, Inc. and JLRB Associates, undated.(1) 10.11.5 Amendment to Office Building Lease between Jenny Craig Weight Loss Centres, Inc. and JLRB Associates, undated. (Incorporated herein by reference to Exhibit 10.11.5 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1993.) 10.12 Lease between Jenny Craig Distributing Pty. Ltd. and Indalia Pty. Ltd. dated November 16, 1990.(1) 10.13 Agreement dated as of June 4, 1997 between Jenny Craig, Inc. and Eileen Piersa. (Incorporated herein by reference to Exhibit 10.13 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1997.) (3) 10.14 Standard Form Lease dated May 14, 1996 between Jenny Craig Products, Inc. and RCDC Associates Limited Partnership (Incorporated herein by reference to Exhibit 10.14 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1997.) 10.16 Tax Allocation and Indemnity Agreement among New York Life Insurance Company et al, Security Pacific National Bank individually and as Agent, Jenny Craig, Inc., Jenny Craig Weight Loss Centres, Inc., Craig Enterprises, Inc., SJF Enterprises, Inc., Sid Craig and Jenny Craig dated as of June 30, 1989, as amended.(1)
13 16 10.17 Shareholders Agreement among Sid Craig, Jenny Craig, W. James Mallen, New York Life Insurance Company, et al., Security Pacific National Bank individually and as Agent, Craig Enterprises, Inc., SJF Enterprises, Inc. and Jenny Craig, Inc. dated as of June 30, 1989.(1) 10.18 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and IBM Foods, d/b/a Overhill Farms, dated September 22, 1988, with amendments.(1) 10.20 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and Campbell Soup Company, dated June 1, 1991.(1) 10.21 Metropolitan Insurance and Annuity Company Key Man Life Insurance Policy Relating to Jenny Craig.(1) 10.23 Prudential Insurance Company of America Key Man Life Insurance Policy Relating to Jenny Craig.(1) 10.29 Agreement dated as of September 14, 1994 between Sidney Craig and Jenny Craig, Inc., amending Exhibit 10.5. (Incorporated herein by reference to Exhibit 10.2 to the Report on Form 10-Q of the Company for the three month period ended September 30, 1994.)(3) 10.30 Agreement dated as of September 14, 1994 between Jenny Craig and Jenny Craig, Inc. amending Exhibit 10.4. (Incorporated herein by reference to Exhibit 10.3 to the Report on Form 10-Q of the Company for the three month period ended September 30, 1994)(3) 10.32 Agreement dated as of November 10, 1994 between Leslie Alan Koll and Jenny Craig, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Report on Form 10-Q of the Company for the three month period ended December 31, 1994.)(3) 10.33 Settlement Agreement dated March 29, 1996 with respect to the settlement of a series of class actions collectively entitled In Re Jenny Craig Securities Litigation. (Incorporated herein by reference from Exhibit 10.33 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1995.) 10.34 Agreement dated as of April 11, 1996 between Janet Rheault and Jenny Craig, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Report on Form 10-Q of the Company for the three month period ended March 31, 1996.)(3) 10.35 Agreement dated as of April 26, 1996 between William K. Dix and Jenny Craig, Inc. (Incorporated herein by reference to Exhibit 10.35 to the Company's Report on Form 10-K for the fiscal year ended June 30, 1996.) (3) 10.36 Amended and Restated Agreement dated as of August 20, 1996 between Marvin Sears and Jenny Craig, Inc. (Incorporated herein by reference to Exhibit 10.36 to the Company's Report on Form 10-K for the fiscal year ended June 30, 1996.) (2) 10.37 Asset Purchase Agreement dated as of August 12, 1996 among Rose Enterprises, Inc., Rose Enterprises, Inc. NJ, Rose Enterprises of Connecticut, Inc., Chris Lin Enterprises, Inc. Chris Lin Enterprises New York, Inc. Audrey Sedita, Bradley Morley and Jenny Craig Operations, Inc. (Incorporated herein by reference to Exhibit 10.37 to the Company's Report on Form 10-K for the fiscal year ended June 30, 1996.) 10.38 Purchase and Sale Agreement dated as of May 22, 1997 between Jenny Craig Management, Inc. and M & S Balanced Property Fund, L.P. (Incorporated herein by reference to Exhibit 10.38 to the Company's Report on Form 10-K for the fiscal year ended June 30, 1996.) 10.39 Agreement and Release dated as of October 1, 1997 between Jenny Craig, Inc. and C. Joseph LaBonte (Incorporated herein by reference to Exhibit 10.1 to the Report on Form 10-Q of the Company for the three month period ended December 31, 1997.) 10.40 Stock Option Termination Agreement dated November 4, 1997 between Jenny Craig, Inc. and C. Joseph LaBonte (Incorporated herein by reference to Exhibit 10.2 to the Report on Form 10-Q of the Company for the three month period ended December 31, 1997.) 10.41 Agreement dated as of July 7, 1998 between Jenny Craig, Inc. and Philip Voluck (3). 10.42 Consent Order, effective May 4, 1998, in the matter of Jenny Craig, Inc., a corporation, and Jenny Craig International, Inc., a corporation. 13. Portions of the Annual Report to Shareholders with respect to the fiscal year ended June 30, 1998 which are incorporated by reference in this Form 10-K. 18. Preferability Letter from KPMG Peat Marwick LLP with respect to change in accounting method. (Incorporated herein by reference to Exhibit 18 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1997.) 22. List of Subsidiaries (Incorporated herein by reference to Exhibit 22 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1997.) 23. Independent Auditors' Consent. 27. Financial Data Schedule.
14 17 - ---------- (1) Incorporated herein by reference to Registrant's Registration Statement on Form S-1 filed October 29, 1991, Registration No. 33-42564. Each of the exhibits so incorporated by reference bears the same exhibit number in Registration Statement No. 33-42564. (2) Compensatory Plan. (3) Management contract. 15 18 B. REPORTS ON FORM 8-K There were no reports on Form 8-K filed by the Company during the last quarter of the period covered by this report. 16 19 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors Jenny Craig, Inc.: Under date of August 17, 1998, we reported on the consolidated balance sheets of Jenny Craig, Inc. and subsidiaries as of June 30, 1997 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1998, as contained in the 1998 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year ended June 30, 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP San Diego, California August 17, 1998 17 20 SCHEDULE II JENNY CRAIG, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998 ($ IN THOUSANDS)
CHARGED CHARGED CHARGED TO CHARGED TO CHARGED TO CHARGED BALANCE COSTS TO BALANCE COSTS TO BALANCE COSTS TO BALANCE AT AND OTHER WRITE AT AND OTHER WRITE AT AND OTHER WRITE AT DESCRIPTION 6/30/95 EXPENSES ACCOUNTS OFFS 6/30/96 EXPENSES ACCOUNTS OFFS 6/30/97 EXPENSES ACCOUNTS OFFS 6/30/98 - ------------------- ------- -------- -------- -------- ------- -------- -------- ------- ------- -------- -------- ------- ------- Allowance for Doubtful Accounts 5,620 (900) -- (3,256) 1,464 -- -- (274) 1,190 -- -- (110) 1,080 Accumulated Amortization - Reacquired Area Franchise Rights 2,708 837 160 -- 3,705 1,015 (122) -- 4,598 1,051 (408) -- 5,241 Accumulated Amortization - Computer Software 1,013 272 -- -- 1,285 75 -- -- 1,360 91 -- -- 1,451
- ---------- See accompanying Independent Auditors' Report. 18 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 25, 1998 JENNY CRAIG, INC. By: /s/ SIDNEY CRAIG ------------------------------- Sidney Craig Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------- --------------------------------------- --------------------- /s/ SIDNEY CRAIG Chairman of the Board and September 25, 1998 - ----------------------------- Chief Executive Officer Sidney Craig (Principal Executive Officer) /s/ JENNY CRAIG President, Vice Chairman and Director September 25, 1998 - ----------------------------- Jenny Craig /s/ MICHAEL L. JEUB Senior Vice President, September 25, 1998 - ----------------------------- Chief Financial Officer and Treasurer Michael L. Jeub (Principal Financial and Accounting Officer) /s/ SCOTT BICE Director September 25, 1998 - ----------------------------- Scott Bice /s/ MARVIN SEARS Director September 25, 1998 - ----------------------------- Marvin Sears /s/ ANDREA VAN DE KAMP Director September 25, 1998 - ----------------------------- Andrea Van de Kamp /s/ ROBERT WOLF Director September 25, 1998 - ----------------------------- Robert Wolf
19 EX-10.41 2 EXHIBIT 10.41 1 EXHIBIT 10.41 [JENNY CRAIG LETTERHEAD] July 7, 1998 Mr. Philip Voluck 2704 Bridgewood Circle Boca Raton, FL 33434 Dear Phil: It's been a pleasure to meet with you regarding the opportunities and challenges at Jenny Craig, and this letter will formalize our employment offer to you. While your duties will involve the broad spectrum of Jenny Craig Inc.'s business, the following is an outline of the specific responsibilities you will assume upon your joining the Company: 1. Your position will be Executive Vice President/Chief Operating Officer. 2. The duties for this position shall include, but not be limited to, oversight of day to day operations of all business of the Company as directed by the Chief Executive Officer ("CEO"), assisting in preparation and providing management oversight of marketing and advertising strategies, policies and procedures, managing line and staff functions as directed by the CEO, developing and implementing long and short range business objectives of the Company and carrying out all other business of the Company as necessary or as directed by the CEO. 3. Your annual compensation will be three hundred thousand dollars ($300,000) per year payable on a bi-monthly basis. You will also become eligible to participate in any executive incentive plan which may exist for vice presidents for fiscal year 1999, which begins on July 1, 1998. 4. You will receive an option to purchase one hundred thousand (100,000) shares of common stock of the Company in concert with the Company's Stock Option Plan. The option price will be the average of the high and low price for a share of JCI common stock on the New York Stock Exchange on the day you begin your employment. The vesting period for options will be over a four (4) year period in four annual equal installments of twenty five percent (25%), the first of which will vest on the first anniversary of your employment with the Company. If your employment is terminated by the Company without cause, all options not then exercisable will become exercisable. 2 Mr. Phil Voluck Page 2 5. Upon joining the Company you will be afforded the same fringe benefit opportunities as other senior executives in the Company. 6. It is the intent of the Company to assist you in relocation to San Diego. As a result, the following terms shall apply to your relocation: (a) The Company will pay the expense of moving the reasonable and ordinary household effects and one automobile to the new location including, packing and unpacking, transportation, and insurance. Items such as boats, large equipment and other items that do not fit on the moving van will not be paid for by the Company. If needed, the Company will also reimburse you for storage charges on household furniture until your purchase of a new home in San Diego has been finalized. (b) The Company will pay for coach class air transportation expenses or cash equivalent thereof for you to the new location, including reasonable expenses incurred for meals and lodging en route. (c) The Company will pay the necessary and reasonable expense of temporary residence for you for a period of up to one hundred eighty (180) days for a furnished, two bedroom apartment. 7. This Agreement shall expire on July 6, 1999 unless the Company, in its sole discretion elects to extend the Agreement in writing prior to such date. The Company shall provide written notice to you of its intention regarding the renewal of this Agreement at least thirty (30) days prior to the expiration of this Agreement. Additionally, the Company shall have the right to terminate your employment at any time, with or without cause, by written notice to you. If your employment is terminated by the Company without cause, or by you within ninety (90) days following a change of control of the Company, you will receive a severance payment equal to your then current annual salary payable until the end of this Agreement. In no event, however, shall such severance payment be less than six (6) months in duration or amount. If your employment is terminated, all compensation, benefits, and rights you may have under this agreement will terminate on the date of termination of employment, except your right to receive the severance payment described above and your rights under the Company's Stock Option Plan. For purposes of this agreement, "cause" shall mean your death, disability (the inability to perform services for a period of one hundred twenty (120) days in any consecutive twelve (12) month period), a breach of this agreement or your duty of loyalty to the Company, willful misconduct or negligence in the performance of the duties contemplated hereby, your conviction of a felony, or conduct by you which brings you or the Company into public disrepute, or which could have a substantial adverse effect on the Company or its business. In the event your employment is terminated without cause or due to a change in control of ownership, the Company shall pay the reasonable moving costs associated with relocating you to a new residence within the 48 states. 3 Mr. Phil Voluck Page 3 8. You will assume your responsibilities here at Jenny Craig on July 7, 1998. 9. You agree that at all times, both during and after your employment by the Company, you will not use or disclose to any third party any information, knowledge or data not generally known to the public which you may have learned during your employment by the Company which relates to the operations, business or affairs of the Company. You agree to comply with all procedures which the Company may adopt from time to time to preserve the confidentiality of any information and immediately following termination of your employment to return to the Company all materials created by you or others which relate to the operations, business or affairs of the Company. You agree that for a period of two (2) years following termination of your employment you will not, directly or indirectly (a) employ or engage as an independent contractor or seek to employ, engage or retain any person who, during any portion of the two (2) years prior to the date of termination of your employment was, directly or indirectly, employed as an employee, engaged as an independent contractor or otherwise retained by the Company; or (b) induce any person or entity to leave his employment with the Company, terminate an independent contractor relationship with the Company or terminate or reduce any contractual relationship with the Company. 10. Any controversy or dispute arising out of or relating to this agreement, or the interpretation thereof, shall be settled exclusively by arbitration conducted in San Diego, California before one or more arbitrators in accordance with the commercial arbitration rules of the American Arbitration Association then in effect and with discovery permitted by both parties in accordance with Section 1283.05 of the Code of Civil Procedure of the State of California or any successor thereto, subject to such modification as may be directed by the arbitrator. The award of the arbitrator(s) shall be final and binding and judgment may be entered on the arbitrator's award in any court having jurisdiction. In the event of any such arbitration (or if legal action shall be brought in connection therewith), the party prevailing in such proceeding shall be entitled to recover from the other party the reasonable costs thereof, including reasonable attorney and accounting fees. Phil, we are looking forward to your joining Jenny Craig and the experience and knowledge you will bring in helping us achieve new heights. I personally look forward to working with you and to having your assistance in the many challenges ahead. Warm regards, ACCEPTED AND AGREED: /s/ SIDNEY H. CRAIG /s/ PHILIP VOLUCK 7-15-98 - ---------------------------- ---------------------------------------- Sidney H. Craig Signature Date Chairman & CEO EX-10.42 3 EXHIBIT 10.42 1 EXHIBIT 10.42 B234118 UNITED STATES OF AMERICA BEFORE FEDERAL TRADE COMMISSION COMMISSIONERS: Robert Pitofsky, Chairman Mary L. Azcuenaga Sheila F. Anthony Mozelle W. Thompson Orson Swindle - ------------------------------------ ) In the Matter of ) ) JENNY CRAIG, INC., ) DOCKET NO. 9260 a corporation, and ) ) DECISION AND ORDER JENNY CRAIG INTERNATIONAL, INC., ) a corporation. ) - ------------------------------------) The Commission having heretofore issued its complaint charging the respondents named in the caption hereof with violation of Sections 5 and 12 of the Federal Trade Commission Act, as amended, and the respondents having been served with a copy of that complaint, together with a notice of contemplated relief; and The respondents, their attorneys, and counsel for the Commission having thereafter executed an agreement containing a consent order, an admission by the respondents of all the jurisdictional facts set forth in the complaint, a statement that the signing of said agreement is for settlement purposes only and does not constitute an admission by respondents that the law has been violated as alleged in such complaint, or that the facts as alleged in such complaint, other than jurisdictional facts, are true, and waivers and other provisions as required by the Commission's Rules; and The Secretary of the Commission having thereafter withdrawn this matter from adjudication in accordance with Section 3.25(c) of its Rules; and The Commission having considered the matter and having thereupon accepted the executed consent agreement and placed such agreement on the public record for a period of sixty (60) days, and having duly considered the comments filed thereafter by interested persons 2 pursuant to Section 3.25(f) of its Rules, and having modified the order in several respects, now in further conformity with the procedure prescribed in Section 3.25(f) of its Rules, the Commission hereby makes the following jurisdictional findings and enters the following order: 1. Respondent Jenny Craig, Inc. is a corporation organized, existing, and doing business under and by virtue of the laws of the State of Delaware, with its office and principal place of business located at 445 Marine View Avenue, #300, Del Mar, California, 92014. Respondent Jenny Craig International, Inc. is a corporation organized, existing, and doing business under and by virtue of the laws of the State of California, with its office and principal place of business located at 445 Marine View Avenue, #300, Del Mar, California, 92014. 2. The Federal Trade Commission has jurisdiction of the subject matter of this proceeding and of the respondents, and the proceeding is in the public interest. ORDER DEFINITIONS For the purposes of this order, the following definitions shall apply: A. "Competent and reliable scientific evidence" shall mean those tests, analyses, research studies, surveys or other evidence based on the expertise of professionals in the relevant area, that have been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results. B. "Weight loss program" shall mean any program designed to aid consumers in weight loss or weight maintenance. C. "Broadcast medium" shall mean any radio or television broadcast, cablecast, home video, or theatrical release. D. For any order-required disclosure in a print medium to be made "clearly and prominently" or in a "clear and prominent manner," it must be given both in the same type style and in: (1) twelve point type where the representation that triggers the disclosure is given in twelve point or larger type; or (2) the same type size as the representation that triggers the disclosure where that representation is given in a type size that is smaller than twelve point type. E. For any order-required disclosure given orally in a broadcast medium to be made "clearly and prominently" or in a "clear and prominent manner," the disclosure must be given at the same volume and in the same cadence as the representation that triggers the disclosure. -2- 3 F. For any order-required disclosure given in the video portion of a television or video advertisement to be made "clearly and prominently" or in a "clear and prominent manner," the disclosure must be of a size and shade and must appear on the screen for a duration sufficient for an ordinary consumer to read and comprehend it. G. "Short broadcast advertisement" shall mean any advertisement of thirty seconds or less duration made in a broadcast medium. I. IT IS ORDERED that Jenny Craig, Inc., a corporation, and Jenny Craig International, Inc., a corporation ("respondents"), their successors and assigns, and respondents' officers, representatives, agents, and employees, directly or through any corporation, subsidiary, division, or other device, including franchisees or licensees, in connection with the advertising, promotion, offering for sale, or sale of any weight loss program, in or affecting commerce, as "commerce" is defined in the Federal Trade Commission Act, do forthwith cease and desist from: A. Making any representations, directly or by implication, about the success of participants on any weight loss program in achieving or maintaining weight loss or weight control unless, at the time of making any such representation, respondents possess and rely upon competent and reliable evidence, which when appropriate must be competent and reliable scientific evidence, that substantiates the representation; provided, further, that for any representation that: (1) any weight loss achieved or maintained through the weight loss program is typical or representative of all or any subset of participants of respondents' program, said evidence shall, at a minimum, be based on a representative sample of: (a) all participants who have entered the program, where the representation relates to such persons; provided, however, that the required sample may exclude those participants who dropped out of the program within two weeks of their entrance or who were unable to complete the program due to change of residence or medical reasons, such as pregnancy; or (b) all participants who have completed a particular phase of the program or the entire program, where the representation only relates to such persons; (2) any weight loss is maintained long-term, said evidence shall, at a minimum, be based upon the experience of participants who were followed for a period of at least two years from their completion of the active maintenance phase of respondents' program, or earlier termination, as applicable; and -3- 4 (3) any weight loss is maintained permanently, said evidence shall, at a minimum, be based upon the experience of participants who were followed for a period of time after completing the program that is either: (a) generally recognized by experts in the field of treating obesity as being of sufficient length for predicting that weight loss will be permanent, or (b) demonstrated by competent and reliable survey evidence as being of sufficient duration to permit such a prediction. B. Representing, directly or by implication, except through endorsements or testimonials referred to in paragraph I.E. herein, that participants of any weight loss program have successfully maintained weight loss, unless respondents disclose, clearly and prominently, and in close proximity to such representation, the statement: "For many dieters, weight loss is temporary."; provided, further, that respondents shall not represent, directly or by implication, that the above-quoted statement does not apply to dieters in respondents' weight loss program; provided, however, that a truthful statement that merely describes the existence, design or content of a weight maintenance or weight management program or notes that the program teaches clients about how to manage their weight will not, without more, be considered for purposes of this order a representation regarding weight loss maintenance success; C. Representing, directly or by implication, except through short broadcast advertisements referred to in paragraph I.D. herein, and except through endorsements or testimonials referred to in paragraph I.E. herein, that participants of any weight loss program have successfully maintained weight loss, unless respondents disclose, clearly and prominently, and in close proximity to such representation, the following information: (1) the average percentage of weight loss maintained by those participants, (2) the duration over which the weight loss was maintained, measured from the date that participants ended the active weight loss phase of the program, provided, further, that if any portion of the time period covered includes participation in a maintenance program(s) that follows active weight loss, such fact must also be disclosed, and (3) if the participant population referred to is not representative of the general participant population for respondents' programs: (a) the proportion of the total participant population in respondents' programs that those participants represent, expressed in terms of a percentage or actual numbers of participants, or -4- 5 (b) the statement: "Jenny Craig makes no claim that this [these] result[s] is [are] representative of all participants in the Jenny Craig program."; provided, however, that for representations about weight loss maintenance success that do not use a number or percentage, or descriptive terms that convey a quantitative measure such as "most of our customers maintain their weight loss long-term," respondents may, in lieu of the disclosures required in C.(1)-(3) above, (i) include, clearly and prominently, and in immediate conjunction with such representation, the statement: "Check at our centers for details about our maintenance record."; and (ii) for a period of time beginning with the date of the first dissemination or broadcast of any such advertisement and ending no sooner than thirty (30) days after the last dissemination or broadcast of such advertisement, give to each potential client, upon the first presentation of any form asking for information from the potential client, but in any event before such person has entered into any agreement with respondents, a separate document entitled "Maintenance Information," which shall include all the information required by paragraph I.B. and subparagraphs I.C.(1)-(3) of this order, formatted in the exact type size and style as the example form described in paragraph I.D.(2)(a) and set out below; provided, further, that compliance with the obligations of this paragraph I.C. in no way relieves respondents of the requirement under paragraph I.A. of this order to substantiate any representation about the success of participants on any weight loss program in maintaining weight loss. D. Representing, directly or by implication, in short broadcast advertisements, that participants of any weight loss program have successfully maintained weight loss, unless respondents: (1) include, clearly and prominently, and in immediate conjunction with such representation, the statement: "Check at our centers for details about our maintenance record."; (2) for a period of time beginning with the date of the first broadcast of any such advertisement and ending no sooner than thirty days after the last broadcast of such advertisement, comply with the following procedures upon the first presentation of any form asking for information from a potential client, but in any event before such person has entered into any agreement with respondents: (a) give to each potential client a separate document entitled "Maintenance Information," which shall include all the information required by paragraph I.B. and subparagraphs I.C.(1)-(3) of this order and shall be formatted in the exact type size and style as the example form below, and shall include the heading (Helvetica -5- 6 14 pt. bold), lead-in (Times Roman 12 pt.), disclosures (Helvetica 14 pt. bold), acknowledgment language (Times Roman 12 pt.) and signature block therein; provided, further, that no information in addition to that required to be included in the document required by this subparagraph I.D.(2) shall be included therein; -6- 7 MAINTENANCE INFORMATION You may have seen our recent ad about maintenance success. Here's some additional information about our maintenance record. [DISCLOSURE OF MAINTENANCE STATISTICS GOES HERE XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXX] FOR MANY DIETERS, WEIGHT LOSS IS TEMPORARY. I have read this notice. __________________________________ _____________ (Client Signature) (Date) -7- 8 (b) require each potential client to sign such document; and (c) give each client a copy of such document; and (3) retain in each client file a copy of the signed maintenance notice required by this paragraph; provided, further, that: (1) compliance with the obligations of this paragraph I.D. in no way relieves respondents of the requirement under paragraph I.A. of this order to substantiate any representation about the success of participants on any weight loss program in maintaining weight loss; and (2) respondents must comply with both paragraph I.D. and paragraph I.C. of this order if respondents include in any such short broadcast advertisement a representation about maintenance success that states a number or percentage, or uses descriptive terms that convey a quantitative measure such as "most of our customers maintain their weight loss long-term"; provided, however, that the provisions of paragraph I.D. shall not apply to endorsements or testimonials referred to in paragraph I.E. herein. E. Using any advertisement containing an endorsement or testimonial about weight loss success or weight loss maintenance success by a participant or participants of respondents' weight loss program if the weight loss success or weight loss maintenance success depicted in the advertisement is not representative of what participants of respondents' weight loss programs generally achieve, unless respondents disclose, clearly and prominently, and in close proximity to the endorser's statement of his or her weight loss success or weight loss maintenance success: (1) What the generally expected success would be for Jenny Craig customers in losing weight or maintaining achieved weight loss; provided, however, that in determining the generally expected success for Jenny Craig customers, respondents may exclude those customers who dropped out of the program within two weeks of their entrance or who were unable to complete the program due to change of residence or medical reasons, such as pregnancy; and that for endorsements or testimonials about weight loss success, respondents can satisfy the requirements of this subparagraph by accurately disclosing: (a) the generally expected success for Jenny Craig customers in the following phrase: "Weight loss averages (number) lbs. over ___ weeks;" or (b) the average number of pounds lost by Jenny Craig customers, using the following phrase: "Average weight loss (number) lbs. More details at centers;" and, for a period of time beginning with the date of the first dissemination of any such advertisement and ending no sooner than thirty days after the last dissemination of such advertisement, making in any on- -8- 9 site video promotion the preceding disclosure orally and complying with the following procedures upon the first presentation of any form asking for information from a potential client, but in any event before such person has entered into any agreement with respondents: (i) give to each potential client a separate one-page document with an appropriate title that alerts customers that important information follows, which shall disclose, clearly and prominently, what the generally expected success would be for Jenny Craig customers in losing weight, expressed in terms of both average number of pounds lost and average duration of participation in the Jenny Craig program; such document shall be formatted in the following type size and style: heading (Helvetica 14 pt. bold), disclosures (Helvetica 14 pt. bold), signature block (Times Roman 12 pt.), and any other language (no larger than 14 pt.); provided, further, that no information that contradicts this information shall be included in the document required by this subparagraph; (ii) ask each potential client to sign such document; (iii) give each client a copy of such document; and (iv) retain in each client file a copy of the notice provided to clients under the requirements of this subparagraph; or (2) the limited applicability of the endorser's experience to what consumers may generally expect to achieve; i.e., that consumers should not expect to experience similar results; respondents can satisfy the requirements of this subparagraph by clearly and prominently disclosing in close proximity to the representation one of the following statements: (a) "You should not expect to experience these results." (b) "This result is not typical. You may not do as well." (c) "This result is not typical. You may be less successful." (d) "_____________'s success is not typical. You may not do as well." (e) "_____________'s experience is not typical. You may achieve less." (f) "Results not typical." (g) "Results not typical of program participants." -9- 10 provided, however, that a truthful statement that merely describes the existence, design or content of a weight maintenance or weight management program or notes that the program teaches clients how to manage their weight, or which states either through the endorser or in nearby copy that under the program "weight loss maintenance is possible," or words to that effect, will not, without more, be considered for purposes of this paragraph a representation regarding weight loss maintenance success or trigger the need for separate or additional maintenance disclosures required by other paragraphs of the order; provided, further, that: (i) a representation about maintenance by an endorser that states a number or percentage, or uses descriptive terms that convey a quantitative measure, such as "I have kept of most of my weight loss for 2 years," shall be considered a representation regarding weight loss maintenance success; (ii) if endorsements or testimonials covered by this paragraph are made in a broadcast medium, any disclosure required by this paragraph must be communicated in a clear and prominent manner and in immediate conjunction with the representation that triggers the disclosure. F. Representing, directly or by implication, that the price at which any weight loss program can be purchased is the only cost associated with losing weight on that program, unless such is the case. G. Representing, directly or by implication, the price at which any weight loss program can be purchased, unless respondents disclose, clearly and prominently, either (1) in close proximity to such representation, the existence and amount of all mandatory costs and fees associated with the program offered; or (2) in immediate conjunction with such representation, the following statement: "Plus the cost of [list of products or services that participants must purchase at additional cost]."; provided, further, that in a broadcast medium, if the representation that triggers the disclosure is oral, the required disclosure must also be made orally. H. Failing to disclose over the telephone, for a period of time beginning with the date of any advertisement of the price at which any weight loss program can be purchased and ending no sooner than 180 days after the last dissemination of any such advertisement, to consumers who inquire about the cost of any weight loss program, or are told about the cost of any weight loss program, the existence and amount of any mandatory costs or fees associated with participation in the program. I. Representing, directly or by implication, that prospective participants in respondents' weight loss program will reach a specified weight within a specified time -10- 11 period, unless at the time of making such representation, respondents possess and rely upon competent and reliable scientific evidence substantiating the representation. J. Misrepresenting, directly or by implication, the rate or speed at which any participant in any weight loss program has experienced or will experience weight loss. K. Failing to disclose, clearly and prominently, in writing either: 1) to all participants when they enter the program; or 2) to each participant whose average weekly weight loss exceeds two percent (2%) of his or her initial body weight, or three pounds, whichever is less, for at least two consecutive weeks; that failure to follow the program protocol and eat all of the food recommended may involve the risk of developing serious health complications. L. Misrepresenting, directly or by implication, the performance, efficacy, price, or safety of any weight loss program or weight loss product. M. Representing, directly or by implication, that participants on any weight loss program recommend or endorse the program unless, at the time of making any such representation, respondents possess and rely upon competent and reliable evidence, which when appropriate must be competent and reliable scientific evidence, that substantiates such representation. N. Misrepresenting, directly or by implication, the existence, contents, validity, results, conclusions, or interpretations of any test, study, or survey. II. IT IS FURTHER ORDERED that respondents shall notify the Commission at least thirty (30) days prior to the effective date of any proposed change such as dissolution, assignment, or sale resulting in the emergence of a successor corporation(s), the creation or dissolution of subsidiaries, or any other change in the corporation(s) that may affect compliance obligations arising out of this order. III. IT IS FURTHER ORDERED that for three (3) years after the last date of dissemination of any representation covered by this order, respondents, or their successors and assigns, shall maintain and upon request make available to the Federal Trade Commission for inspection and copying: A. All materials that were relied upon in disseminating such representation; and -11- 12 B. All tests, reports, studies, surveys, demonstrations or other evidence in their possession or control that contradict, qualify, or call into question such representation, or the basis relied upon for such representation, including complaints from consumers. IV. IT IS FURTHER ORDERED that respondents shall distribute a copy of this order to each of their officers, agents, representatives, independent contractors and employees who are involved in the preparation and placement of advertisements or promotional materials or in communication with customers or prospective customers or who have any responsibilities with respect to the subject matter of this order; and, for a period of ten (10) years from the date of entry of this order, distribute same to all future such officers, agents, representatives, independent contractors and employees. V. IT IS FURTHER ORDERED that: A. Respondents shall distribute a copy of this order to each of their franchisees and licensees and shall contractually bind them to comply with the prohibitions and affirmative requirements of this order; respondents may satisfy this contractual requirement by incorporating such order requirements into their current Operations Manual; and B. Respondents shall further make reasonable efforts to monitor their franchisees' and licensees' compliance with the order provisions; respondents may satisfy this requirement by: (1) taking reasonable steps to notify promptly any franchisee or licensee that respondents determine is failing materially or repeatedly to comply with any order provision that such franchisee or licensee is not in compliance with the order provisions and that disciplinary action may result from such noncompliance; and (2) providing the Federal Trade Commission with the name and address of the franchisee or licensee and the nature of the noncompliance if the franchisee or licensee fails to comply promptly with the relevant order provision after being so notified; provided, however, that the requirements of this Part V will not, by themselves, increase the liability of respondents for any acts and practices of their franchisees or licensees that violate this order. VI. IT IS FURTHER ORDERED that this order will terminate on February 19, 2018, or twenty (20) years from the most recent date that the United States or the Federal Trade Commission files a complaint (with or without an accompanying consent decree) in federal court alleging any violation of the order, whichever comes later; provided, however, that the filing of such a complaint will not affect the duration of: A. Any paragraph in this order that terminates in less than twenty (20) years; -12- 13 B. This order's application to any respondent that is not named as a defendant in such complaint; and C. This order if such complaint is filed after the order has terminated pursuant to this paragraph. Provided, further, that if such complaint is dismissed or a federal court rules that the respondent did not violate any provision of the order, and the dismissal or ruling is either not appealed or upheld on appeal, then the order will terminate according to this paragraph as though the complaint was never filed, except that the order will not terminate between the date such complaint is filed and the later of the deadline for appealing such dismissal or ruling and the date such dismissal or ruling is upheld on appeal. VII. IT IS FURTHER ORDERED that respondents shall, within sixty (60) days after the date of service of this order, and one year thereafter, file with the Commission a report, in writing, setting forth in detail the manner and form in which they have complied with this order. By the Commission, Chairman Pitofsky recused and Commissioner Azcuenaga not participating. Donald S. Clark Secretary ISSUED: February 19, 1998 -13- EX-13 4 EXHIBIT 13 1 EXHIBIT 13 Years ended June 30, all amounts in thousands except per share data SELECTED FINANCIAL DATA
1994 1995 1996 1997 1998 ----------- ----------- ----------- ----------- ----------- Revenues $ 403,341 $ 378,093 $ 401,018 $ 365,134 $ 352,249 Operating income 1,021 17,363 35,521 11,840 2,040 Income before cumulative effect of accounting change 534 11,772 22,912 8,332 2,126 Per share amounts: Income before cumulative effect of accounting change, basic .02 .46 .95 .40 .10 Net income, basic .02 .46 .95 .04 .10 Income before cumulative effect of accounting change, diluted .02 .46 .93 .40 .10 Net income, diluted .02 .46 .93 .04 .10 Dividends declared per share .45 -- -- -- -- Total assets 104,190 115,376 104,401 112,297 106,245 Note payable -- -- -- 5,716 5,526 Shares outstanding 26,076 25,196 20,856 20,688 20,689
In 1997, the Company changed its method of accounting for service fees received from customers. See Note 1 of Notes to Consolidated Financial Statements for further information regarding this change. 8 JENNY CRAIG, INC. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Information provided in this Annual Report may contain, and the Company may from time to time disseminate material and make statements which may contain "forward-looking" information, as that term is defined by the Private Securities Litigation Reform Act of 1995 (the "Act"). These cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefit of "safe harbor" provisions of the Act. The reader is cautioned that all forward-looking statements are necessarily speculative. The reader should carefully review the cautionary statements contained in the Company's Annual Report on Form 10-K for the year ended June 30, 1998, which identify important factors that could cause actual results to differ materially from those in the forward-looking statements, as well as the risk factors which may also be identified by the Company from time to time in other filings with the Securities and Exchange Commission, press releases, and other communications. The following table gives certain key statistics regarding the Company during the past five years:
Years ended June 30, 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- CENTRES OPEN AT END OF YEAR: Company-owned United States 502 478 485 542 533 Foreign 106 102 103 106 110 ---- ---- ---- ---- ---- 608 580 588 648 643 ---- ---- ---- ---- ---- Franchise United States 159 154 159 113 101 Foreign 43 43 36 36 37 ---- ---- ---- ---- ---- 202 197 195 149 138 ---- ---- ---- ---- ---- Total 810 777 783 797 781 ==== ==== ==== ==== ==== AVERAGE REVENUE PER CENTRE IN THOUSANDS: Company-owned United States $628 600 642 538 502 Foreign 346 356 407 483 447 Franchise United States 644 654 659 517 510 Foreign 441 343 328 452 475
The decrease in United States Company-owned centres in 1998 reflects the Company's acquisition of 8 centres from two franchisees and the net closure of 17 centres. The increase in United States Company-owned centres and the decrease in United States franchised centres in 1997 reflects the Company's acquisition of 51 centres from three franchisees during 1997. See Note 13 of Notes to Consolidated Financial Statements for additional information regarding United States and foreign operations. JENNY CRAIG, INC. 9 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND continued RESULTS OF OPERATIONS The following table presents the range of service fees charged by the Company:
INITIAL SERVICE MAINTENANCE ----------------- ---------------- FISCAL YEAR LOW HIGH LOW HIGH - ----------- --- ---- --- ---- 1994 $10 99 99 125 1995 10 99 99 99 1996 10 180 99 181 1997 10 149 99 99 1998 10 197 99 99
YEAR ENDED JUNE 30, 1998 AS COMPARED TO YEAR ENDED JUNE 30, 1997 The Company has operated in a difficult and dynamic environment since April 1996 when the United States Food and Drug Administration ("FDA") approved dexfenfluramine, commonly referred to by its trade name Redux(TM), for use as a doctor-prescribed medication for the treatment of obesity. The Company believes that the extensive publicity that accompanied the introduction of Redux heightened the public's interest in weight loss pharmaceuticals, including interest in a combination of two other medications (phentermine and fenfluramine) commonly known as "phen-fen," and resulted in significantly reduced demand for the Company's program. In July 1996, the Company began test marketing an adjunct to its traditional weight loss program which incorporated weight loss pharmaceuticals. This program adjunct utilized independently- contracted physicians to examine clients and prescribe Redux only to persons who met the FDA's protocol and phen-fen to persons who met the appropriate medical criteria for this medication. In January 1997, the weight loss medication adjunct was incorporated into virtually all of the Company's centres in the United States. In August 1997, the Company ceased offering a weight loss medication adjunct to its program following reports from the medical community as to possible health risks associated with the use of Redux and phen-fen. In September 1997, Redux and fenfluramine were withdrawn from the United States market at the request of the FDA. Revenues from United States Company-owned operations decreased 2% from $279,090,000 in 1997 to $273,358,000 in 1998. There was a 5% increase in the average number of United States Company-owned centres in operation during 1998 compared to 1997. Average revenue per United States Company-owned centre decreased 7% from $538,000 in 1997 to $502,000 in 1998. Service revenues from United States Company-owned operations decreased 22% from $21,448,000 in 1997 to $16,820,000 in 1998. This decrease in service revenues was primarily due to a 16% decrease (19% on an average per centre basis) in the number of new participants enrolled in the program between the periods. Product sales, 10 JENNY CRAIG, INC. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND continued RESULTS OF OPERATIONS which consists primarily of food products, from United States Company-owned operations decreased less than 1% from $257,642,000 in 1997 to $256,538,000 in 1998. This decrease was principally due to a 6% decrease in the number of active participants in the program offset, in part, by an increase in the average food amount purchased per active participant. Revenues from foreign Company-owned operations decreased 4% from $50,308,000 in 1997 to $48,329,000 in 1998, and average revenue per foreign Company-owned centre decreased 7% from $483,000 in 1997 to $447,000 in 1998 principally due to a 12% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the years. The number of foreign Company-owned centres in operation increased 4% from 106 at June 30, 1997 to 110 at June 30, 1998. Costs and expenses of United States Company-owned operations increased 1% from $258,458,000 in 1997 to $262,225,000 in 1998. Costs and expenses of United States Company-owned operations in 1997 were reduced by a $3,267,000 net credit that resulted from the Company's successful litigation recovery from one of its insurance carriers. Additionally, costs and expenses of United States Company-owned operations in 1997 included $8,150,000 of costs associated with the weight loss medication program which was terminated in August 1997 compared to $2,437,000 of such costs in 1998. The increase in costs and expenses in 1998 is principally due to $5,265,000 of additional advertising expenses, of which approximately $3,047,000 was associated with the launch of the Company's ABC weight management program in the quarter ended September 30, 1997. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues increased from 93% to 96% between the years principally due to the aforementioned additional advertising expenses. After including the allocable portion of general and administrative expenses, United States Company-owned operations had an operating loss of $8,175,000 in 1998 compared to operating income of $732,000 in 1997. Costs and expenses of foreign Company-owned operations decreased 5% from $42,422,000 in 1997 to $40,183,000 in 1998 principally due to the aforementioned 12% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the years. After including the allocable portion of general and administrative expenses, foreign Company-owned operations, principally as a result of the Australian centres, had operating income of $5,409,000, for fiscal 1998 as compared to operating income of $5,249,000 for fiscal 1997. The Company's gross margin on product sales from Company-owned operations decreased from 7% in 1997 to 4% in 1998, and its gross margin on service revenues decreased from 31% in 1997 to 30% in 1998. Costs and expenses of Company-owned operations, other than direct product costs, are allocated between product and service based upon the respective percentage of total revenue from Company-owned operations derived from product sales and service revenue. The decline in gross margins in 1998 compared to 1997 resulted principally from the increased advertising expenses and the decreased service revenue, which has higher margins than product sales. Revenues from franchise operations decreased 14% from $35,736,000 in 1997 to $30,562,000 in 1998. This decline was principally due to a 7% decrease in the number of franchise centres in operation, from 149 at June 30, 1997 to 138 at June 30, 1998, and a decrease in the number of JENNY CRAIG, INC. 11 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND continued RESULTS OF OPERATIONS new participants enrolled in the program at franchise centres, resulting in reduced product sales and royalties. The decrease in the number of franchise centres reflects the Company's acquisition of 8 centres from franchisees and the net closure of 3 franchise centres in 1998. Costs and expenses of franchise operations, which consist primarily of product costs, decreased 11% from $23,907,000 in 1997 to $21,224,000 in 1998 principally because of the reduced level of franchise operations. Franchise costs and expenses as a percentage of franchise revenues increased from 67% in 1997 to 69% in 1998, principally due to the reduced royalty revenue, which has a higher margin than product sales. General and administrative expenses decreased 7% from $28,507,000 in 1997 to $26,577,000 in 1998 and decreased from 7.8% to 7.5% of total revenues in 1997 and 1998, respectively. The decrease in general and administrative expenses in 1998 was principally due to a decrease in compensation, consulting, and professional fees, offset, in part, by expenses totaling $3,500,000 related to the separation of a former senior executive of the Company. These expenses include $1,500,000 for the forgiveness of a loan made to the former senior executive in 1995 (which is reflected on the accompanying consolidated balance sheets as a decrease in other assets), $1,000,000 for the payment, in semi-monthly installments, of the former senior executive's salary and benefits through December 31, 1998, and $1,000,000 for the cancellation of stock options, payable in five equal annual installments commencing in fiscal 1998, which were exercisable by the former senior executive. The elements discussed above combined to result in a decrease in operating income from $11,840,000 in 1997 to $2,040,000 in 1998 and a decrease in income before the cumulative effect of accounting change from $8,332,000, or $.40 per diluted share, in 1997 to $2,126,000, or $.10 per diluted share, in 1998. The Company is in the process of assessing the functionality of both its information technology ("IT") and non-IT systems with respect to the "year 2000" millennium change. The Company utilizes two primary IT systems: the corporate office system, which includes the general ledger and related applications, and the point-of-sale system, which is used at each of the 559 Company-owned centres in North America to record sales to customers. With respect to the corporate office system, the Company has determined that its current system, implemented in 1991, is not year 2000 compliant. Accordingly, the Company accelerated the planned replacement of this system by purchasing a new corporate office system in the first quarter of fiscal 1999. The implementation process for this new system has begun and the Company expects the implementation to be completed by April 1, 1999. The cost of the new corporate office system software of $189,000 is being capitalized and amortized over the five year estimated useful life of the new software. The cost of new hardware, which will be purchased in the second quarter of fiscal 1999, necessary to install the new corporate office system is estimated to be $200,000 and will be depreciated over the five year estimated useful life of the new hardware. Additional implementation costs, comprised principally of external consultants, are estimated to be $380,000 and will be expensed as incurred in fiscal 1999. With respect to the point-of-sale system, there are two basic components: the software and the hardware. The point-of-sale software continues to be assessed. Estimated costs to modify this software to effect year 2000 compliance totaling approximately $150,000 will be expensed as 12 JENNY CRAIG, INC. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND continued RESULTS OF OPERATIONS incurred in fiscal 1999. The point-of-sale hardware is essentially a personal computer ("PC") network consisting of a file server and three PCs at the Company-owned and franchised centres in North America. The Company is conducting an analysis of the hardware at these centres for year 2000 compliance. This analysis is expected to be completed by November 30, 1998. A preliminary estimate of the cost to both modify certain hardware and replace other hardware is approximately $4,000 per Company-owned centre, or $2,236,000 in aggregate. The Company expects that substantially all of these hardware costs will be incurred prior to the planned completion date of May 31, 1999 and that substantially all of these costs will be capitalized and depreciated over their estimated useful life of five years. With respect to non-IT systems, the Company is assessing its embedded systems contained in the corporate office building and centre locations. This assessment is principally focusing on the Company's telephone system hardware and software. The Company plans to complete the assessment of non-IT systems by December 31, 1998. The final area of significance pertaining to the Company's year 2000 planning relates to third parties with whom the Company transacts business. This includes the Company's food suppliers, banks, advertising agencies, telecommunications suppliers, and utility providers. The Company is sending written questionnaires to significant suppliers and vendors in an effort to assess their year 2000 readiness and the effect these third parties could have on the Company. The Company plans to maintain communication with significant suppliers and vendors with respect to this issue. As detailed above, the Company estimates that approximately $3,155,000 will be disbursed during fiscal 1999 in connection with year 2000 compliance. The Company expects that its cash flow from operations, together with cash, cash equivalents and short-term investments currently on hand, will be sufficient to fund these disbursements. Disbursements made in fiscal 1998, substantially all of which was paid to external consultants, related to year 2000 compliance totaled approximately $75,000 and were expensed as incurred. Although the Company believes that its planning, as detailed above, will enable the Company to be adequately prepared for the year 2000, a contingency plan is also being developed. With respect to the point-of-sale system, the Company has a manual back-up system which is currently used during computer downtimes and was the Company's primary point-of-sale system from the Company's inception in 1983 through 1990. The Company believes that this manual point-of-sale system could be utilized in the event of a delay in the implementation of the plan to have the point-of-sale system year 2000 compliant during 1999. With respect to the corporate office system, the Company believes that a third party provider of data processing services could provide the basic services necessary for the Company to maintain adequate books and records, similar to the methodology utilized by the Company prior to 1991. The Company expects to have the specific third party provider to be utilized as a contingency plan identified by March 31, 1999. The statements set forth above relating to the Company's analysis and plans with respect to the year 2000 issue in many cases constitute forward- looking statements which are necessarily speculative. Actual results may differ materially from those described above. The factors which could cause actual results to differ materially include, without limitation, the following: the Company's assessment of the impact of year 2000 is not complete and further analysis and study, as well as the testing JENNY CRAIG, INC. 13 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND continued RESULTS OF OPERATIONS and implementation of planned solutions, could disclose additional remedial work, with the resultant additional time and expense, necessary to permit the Company's IT and non-IT systems to be year 2000 compliant; third party consultants and software and hardware suppliers could fail to meet timetables and projected cost estimates; third party suppliers of products and services to the Company could make mistakes in their advice to the Company with respect to their year 2000 readiness, and their failure to be year 2000 compliant could have a material adverse effect on the Company; the Company's estimates of the periods of time and costs necessary to complete certain analysis and implementation could be impacted by future events and conditions such as a shortage of personnel, including Company employees and outside consultants, to perform the necessary analysis and remediation work. The Company and the Federal Trade Commission have entered into a Consent Order settling all contested issues raised in a complaint filed in September 1993 against the Company alleging that the Company violated the Federal Trade Commission Act by the use and content of certain advertisements for the Company's weight loss program featuring testimonials, claims for the program's success and safety, and statements as to the program's costs to participants. The Consent Order does not admit any issue of fact or law or any violation by the Company of any law or regulation, and does not involve payment by the Company of any civil money penalty, damages, or other financial relief. The Consent Order requires certain procedures and disclosures in connection with the Company's advertisements of its products and services. The full Commission accepted the Consent Order, and it has been made effective as of May 4, 1998. The Company does not believe that compliance with the Consent Order will have a material adverse effect on the Company's consolidated financial position or results of operations or its current advertising and marketing practices. The Company along with other weight loss programs and certain pharmaceutical companies has been named as a defendant in an action filed in the Circuit Court for the Eleventh Judicial Circuit in Pickens County, Alabama (the "Alabama Litigation"). The action was commenced in August 1997 by three plaintiffs who are seeking to maintain the action as a class action on behalf of all persons in the United States and United States Territories who have suffered or may in the future suffer injury due to the administration of phentermine, fenfluramine (commonly known as "phen-fen" when taken together), and/or dexfenfluramine (trade name Redux(TM)), which were manufactured or sold by the defendants. The complaint includes claims against the Company and other defendants, acting separately and in concert, for alleged unlawful and tortious acts, including sale of allegedly dangerous and defective products, negligent marketing and distribution, failure to warn of the risks associated with the weight loss medications, breach of warranty, fraud, and negligent misrepresentation. The complaint seeks compensatory and punitive damages in unspecified amounts and equitable relief including the establishment of a medical fund to cover future medical expenses resulting from the use of the weight loss medications, and a requirement that the defendants adequately warn the public of the risks associated with use of the weight loss medications. The Company along with certain pharmaceutical companies has also been named as a defendant in an action filed in the Court of Common Pleas, Philadelphia County, Pennsylvania (the "Pennsylvania Litigation"). The action was com- 14 JENNY CRAIG, INC. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND continued RESULTS OF OPERATIONS menced in November 1997 by a plaintiff, a participant in the Company's program, who is seeking to maintain the action as a class action on behalf of all persons in the Commonwealth of Pennsylvania who have purchased and used fenfluramine, dexfenfluramine, and phentermine, alone or in combination. The complaint includes claims against the Company and the other defendants for alleged false and misleading statements concerning the safety and appropriateness of using fenfluramine, dexfenfluramine, and phentermine, and the benefits, uses, and ingredients of these drugs, negligence in the distribution, sale, and prescribing of these medications, and breach of the warranty of merchantability. The complaint seeks compensatory and punitive damages in unspecified amounts and a Court-supervised program funded by the defendants through which class members would undergo periodic medical examination and testing. The Company has tendered the Alabama Litigation and the Pennsylvania Litigation matters to its insurance carriers. The Company and the provider of the independent physicians who prescribed the weight loss medications in the Company's centres have each asserted their rights with respect to these litigations under contractual provisions for indemnification in the agreement between them. The claims have not progressed sufficiently for the Company to estimate a range of possible loss, if any. The Company intends to defend the matters vigorously. YEAR ENDED JUNE 30, 1997 AS COMPARED TO YEAR ENDED JUNE 30, 1996 Revenues from United States Company-owned operations decreased 10% from $309,415,000 in 1996 to $279,090,000 in 1997. There was a 12% increase in the total number of United States Company-owned centres in operation, from 485 at June 30, 1996 to 542 at June 30, 1997. The increase in United States Company- owned centres reflects the Company's acquisition of 51 centres from three franchisees and the net opening of six centres in 1997. Average revenue per United States Company-owned centre decreased 16% from $642,000 in 1996 to $538,000 in 1997. Service revenues from United States Company-owned operations decreased 1% from $21,769,000 in 1996 to $21,448,000 in 1997. This decrease in service revenues was primarily due to an 11% decrease (18% on an average per centre basis) in the number of new participants enrolled in the program between the periods offset, in part, by $804,000 of additional service revenues recognized in 1997 as a result of the Company's change in method of accounting for service fees described below. The decline in new enrollments also resulted in a decline in the number of active participants in the program and led to a 10% decline in product sales, which consists primarily of food products, from United States Company-owned operations from $287,646,000 in 1996 to $257,642,000 in 1997. Revenues from foreign Company-owned operations increased 21% from $41,590,000 in 1996 to $50,308,000 in 1997, and average revenue per foreign Company-owned centre increased 19% from $407,000 in 1996 to $483,000 in 1997 principally due to an increase in the number of new enrollments in the program at the Company's 81 centres in Australia. There was a 2% average increase in the Australian and Canadian currencies in relation to the U.S. dollar between the years. The number of foreign Company-owned centres in operation increased 3% from 103 at June 30, 1996 to 106 at June 30, 1997. JENNY CRAIG, INC. 15 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND continued RESULTS OF OPERATIONS Costs and expenses of United States Company-owned operations decreased 2% from $264,693,000 in 1996 to $258,458,000 in 1997. Costs and expenses of United States Company-owned operations were reduced by a $2,200,000 net credit in 1996 and a $3,267,000 net credit in 1997 that resulted from the Company's successful litigation recoveries from certain of its insurance carriers. The decrease in costs and expenses in 1997 reflects the decreased variable costs, principally product costs, related to the lower level of operations offset, in part, by the additional costs, principally comprised of independently-contracted physicians and related medical professionals totaling $8,150,000 associated with offering the program adjunct utilizing weight loss medications, increased compensation expense associated with the introduction of this program, and increased fixed costs associated with operating the 57 additional Company-owned centres in 1997 compared to 1996. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues increased from 86% to 93% between the years principally due to the higher proportion of fixed costs when compared to the reduced level of revenues, the increased expenses of the program component utilizing weight loss medications, and increased compensation expense related to staffing levels associated with the introduction of this program. After including the allocable portion of general and administrative expenses, United States Company-owned operations had operating income of $732,000 in 1997 compared to operating income of $25,226,000 in 1996. Costs and expenses of foreign Company-owned operations increased 8% from $39,357,000 in 1996 to $42,422,000 in 1997, principally because of the increased variable costs related to the higher level of operations. After including the allocable portion of general and administrative expenses, foreign Company-owned operations had operating income of $5,249,000, or 44% of total operating income, principally as a result of the Australian centres, for fiscal 1997 as compared to operating income of $58,000, or less than 1% of total operating income, for fiscal 1996. The Company's gross margin on product sales from Company-owned operations decreased from 11% in 1996 to 7% in 1997, and its gross margin on service revenues decreased from 39% in 1996 to 31% in 1997. Costs and expenses of Company-owned operations, other than direct product costs, are allocated between product and service based upon the respective percentage of total revenue from Company-owned operations derived from product sales and service revenue. The decline in gross margins in 1997 compared to 1996 results principally from the increased expenses associated with the program adjunct utilizing weight loss medications and the higher proportion of fixed costs, which include the fixed costs associated with operating the 57 additional Company-owned centres in 1997 compared to 1996, when compared to the reduced level of revenues. Revenues from franchise operations decreased 29% from $50,013,000 in 1996 to $35,736,000 in 1997. This decline was principally due to a 24% decrease in the number of franchise centres in operation, from 195 at June 30, 1996 to 149 at June 30, 1997, and a decrease in the number of new participants 16 JENNY CRAIG, INC. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND continued RESULTS OF OPERATIONS enrolled in the program at franchise centres resulting in reduced product sales and royalties. The decrease in the number of franchise centres reflects the Company's acquisition of 51 centres from three franchisees in 1997. Costs and expenses of franchise operations, which consist primarily of product costs, decreased 28% from $32,985,000 in 1996 to $23,907,000 in 1997 principally because of the reduced level of franchise operations. Franchise costs and expenses as a percentage of franchise revenues remained relatively constant at 66% in 1996 compared to 67% in 1997. General and administrative expenses remained relatively constant at $28,462,000 in 1996 compared to $28,507,000 in 1997, but increased from 7.1% to 7.8% of total revenues in 1996 and 1997, respectively. General and administrative expenses in 1996 included a one time $1,000,000 charge for the early termination of the Company's corporate office lease, net of estimated sublease income. After considering this one time charge in the prior year, the increase in general and administrative expenses in 1997 was principally due to an increase in consulting expenses, primarily pertaining to information systems. The elements discussed above combined to result in a decrease in operating income from $35,521,000 in 1996 to $11,840,000 in 1997 and a decrease in income before the cumulative effect of accounting change from $22,912,000, or $.93 per diluted share, in 1996 to $8,332,000, or $.40 per diluted share, in 1997. In June 1997, the Company changed its method of accounting for service fees received from customers, retroactively effective as of July 1, 1996. Previously, the Company recognized $60 as revenue at the time of each new sale and the remaining service revenue was deferred and recognized as revenue using an accelerated method based upon expected customer attendance at the centres. Under the new method, all service fees collected are deferred and recognized as revenue on a straight-line basis over the 14-month period of expected customer attendance at the centres. The Company believes the new method is preferable as it provides a better matching of revenues and expenses because the costs incurred in performing the weight loss consulting services are generally incurred on a level basis. The cumulative effect of this accounting change for periods prior to July 1, 1996 of $7,509,000, or $.36 per diluted share, is shown as a cumulative adjustment on the consolidated statement of income. The effect of this change for the year ended June 30, 1997 was to increase income before cumulative effect of accounting change by $525,000, or $.02 per diluted share. The pro forma effect of retroactive application of this new method of accounting would not have materially affected the results of operations for the years ended June 30, 1996 and 1995. The increase in deferred service revenue from $4,506,000 at June 30, 1996 to $14,558,000 at June 30, 1997 results principally from this change in accounting method. JENNY CRAIG, INC. 17 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND continued RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998, the Company had cash, cash equivalents, and short-term investments of $43,360,000 compared to $38,944,000 at June 30, 1997. Sources of cash, cash equivalents, and short-term investments during the year ended June 30, 1998 included $8,941,000 provided by operations, which includes the net receipt of $3,267,000 resulting from the Company's litigation recovery from an insurance carrier. Uses of cash, cash equivalents, and short-term investments during the year ended June 30, 1998 included $4,678,000 for the purchase of property and equipment. The Company believes that its cash, cash equivalents, and short-term investments and its cash flow from operations are adequate for its needs in the foreseeable future. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in the financial statements. SFAS 131 establishes standards for the manner in which public business enterprises report information about operating segments and also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 130 and SFAS 131 are effective for years beginning after December 15, 1997. The Company does not expect that the adoption of SFAS 130 and SFAS 131 will have a material impact on the Company's financial position or results of operations. 18 JENNY CRAIG, INC. 12 CONSOLIDATED June 30, BALANCE 1997 and 1998 ($ in thousands) SHEETS
1997 1998 ------------- ------- ASSETS Cash and cash equivalents $ 37,438 42,124 Short-term investments 1,506 1,236 Accounts receivable, net 2,967 2,617 Inventories 15,285 14,469 Prepaid expenses and other assets 16,497 12,548 ------------- ------- Total current assets 73,693 72,994 Cost of reacquired area franchise rights, net 9,550 8,419 Property and equipment, net 27,554 24,832 Other assets 1,500 -- ------------- ------- $ 112,297 106,245 ============= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable 14,938 15,256 Accrued liabilities 19,117 19,399 Income taxes payable 4,050 -- Deferred service revenue 14,558 10,278 ------------- ------- Total current liabilities 52,663 44,933 Note payable 5,716 5,526 ------------- ------- Total liabilities 58,379 50,459 Stockholders' equity: Common stock $.000000005 par value, 100,000,000 shares authorized; Issued: 1997 - 27,579,060 shares; 1998 - 27,580,260 shares; Outstanding: 1997 - 20,687,771 shares; 1998 - 20,688,971 shares -- -- Additional paid-in capital 71,615 71,622 Retained earnings 55,053 57,179 Equity adjustment from foreign currency translation 2,012 1,747 Treasury stock at cost: 1997 and 1998 - 6,891,289 shares (74,762) (74,762) ------------- ------- Total stockholders' equity 53,918 55,786 Commitments and contingencies ------------- ------- $ 112,297 106,245 ============= =======
See accompanying notes to consolidated financial statements. JENNY CRAIG, INC. 19 13 For the years ended June 30, 1996, 1997, CONSOLIDATED and 1998 ($ in thousands, STATEMENTS OF except per share amounts) INCOME
1996 1997 1998 ------------- ------------- ------------ Revenues: Company-owned operations: Product sales $ 326,107 304,240 301,802 Service revenue 24,898 25,158 19,885 ------------- ------------- ------------ 351,005 329,398 321,687 ------------- ------------- ------------ Franchise operations: Product sales 42,059 29,677 26,002 Royalties 7,719 5,794 4,505 Initial franchise fees 235 265 55 ------------- ------------- ------------ 50,013 35,736 30,562 ------------- ------------- ------------ Total revenues 401,018 365,134 352,249 ------------- ------------- ------------ Costs and expenses: Company-owned operations: Product 288,954 283,643 288,450 Service 15,096 17,237 13,958 ------------- ------------- ------------ 304,050 300,880 302,408 ------------- ------------- ------------ Franchise operations: Product 30,699 22,067 19,257 Other 2,286 1,840 1,967 ------------- ------------- ------------ 32,985 23,907 21,224 ------------- ------------- ------------ 63,983 40,347 28,617 General and administrative expenses 28,462 28,507 26,577 ------------- ------------- ------------ Operating income 35,521 11,840 2,040 Other income, net, principally interest 2,960 1,585 1,374 ------------- ------------- ------------ Income before taxes and cumulative effect of accounting change 38,481 13,425 3,414 Provision for income taxes 15,569 5,093 1,288 ------------- ------------- ------------ Income before cumulative effect of accounting change 22,912 8,332 2,126 Cumulative effect on prior years of change in accounting for service revenue, net of $4,498 income tax benefit -- 7,509 -- ------------- ------------- ------------ Net income $ 22,912 823 2,126 ============= ============= ============ Basic per share amounts: Income before cumulative effect of accounting change $ .95 .40 .10 Cumulative effect of accounting change -- .36 -- ------------- ------------- ------------ Net income per share, basic $ .95 .04 .10 ============= ============= ============ Diluted per share amounts: Income before cumulative effect of accounting change $ .93 .40 .10 Cumulative effect of accounting change -- .36 -- ------------- ------------- ------------ Net income per share, diluted $ .93 .04 .10 ============= ============= ============
See accompanying notes to consolidated financial statements. 20 JENNY CRAIG, INC. 14 CONSOLIDATED For the years STATEMENTS ended June 30, 1996, 1997, OF STOCKHOLDERS' and 1998 ($ in thousands) EQUITY
Equity adjustment from Additional foreign Common paid-in Retained currency Treasury stock capital earnings translation stock Total -------- -------- ---------- ------------ --------- -------- Balance at June 30, 1995 -- $ 71,148 31,318 415 (28,734) 74,147 Net income -- -- 22,912 -- -- 22,912 Purchase of 4,396,689 shares of common stock, at cost -- -- -- -- (44,395) (44,395) Exercise of stock options -- 330 -- -- -- 330 Translation adjustment -- -- -- 1,468 -- 1,468 --------- -------- ---------- ------------ ---------- -------- Balance at June 30, 1996 -- 71,478 54,230 1,883 (73,129) 54,462 Net income -- -- 823 -- -- 823 Purchase of 190,200 shares of common stock, at cost -- -- -- -- (1,633) (1,633) Exercise of stock options -- 137 -- -- -- 137 Translation adjustment -- -- -- 129 -- 129 --------- -------- ---------- ------------ ---------- -------- Balance at June 30, 1997 -- 71,615 55,053 2,012 (74,762) 53,918 Net income -- -- 2,126 -- -- 2,126 Exercise of stock options -- 7 -- -- -- 7 Translation adjustment -- -- -- (265) -- (265) --------- -------- ---------- ------------ ---------- -------- Balance at June 30, 1998 -- $ 71,622 57,179 1,747 (74,762) 55,786 ========= ======== ========== ============ ========== ========
See accompanying notes to consolidated financial statements. JENNY CRAIG, INC. 21 15 CONSOLIDATED STATEMENTS For the years ended June 30, OF CASH 1996, 1997, and 1998 ($ in thousands) FLOWS
1996 1997 1998 ------------- ------------- ------------- Cash flows from operating activities: Net income $ 22,912 823 2,126 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,405 7,461 7,101 Decrease in other assets - forgiveness of officer loan -- -- 1,500 Cumulative effect of change in accounting for service revenue -- 7,509 -- Provision for doubtful accounts (900) -- -- Provision for centre closures -- (400) -- Loss on disposal of property and equipment 167 134 1,035 (Increase) decrease in: Accounts receivable (639) (566) 94 Inventories 275 2,526 866 Prepaid expenses and other assets (461) (3,717) 3,949 Increase (decrease) in: Accounts payable 4,122 (5,977) 318 Accrued liabilities 4,560 (4,717) 282 Income taxes payable (1,209) 1,948 (4,050) Deferred service revenue 1,237 (1,955) (4,280) ------------- ------------- ------------- Net cash provided by operating activities 37,469 3,069 8,941 ------------- ------------- ------------- Cash flows from investing activities: Purchase of property and equipment (3,662) (17,125) (4,678) Purchase of short-term investments (9,877) (16,359) (9,008) Proceeds from maturity of short-term investments 10,791 21,898 9,278 Payments for acquisition of franchise centres -- (2,156) (145) ------------- ------------- ------------- Net cash used in investing activities (2,748) (13,742) (4,553) ------------- ------------- ------------- Cash flows from financing activities: Purchase of treasury stock (44,395) (1,633) -- Proceeds from note payable -- 6,000 -- Principal payments on note payable -- (95) (190) Proceeds from exercise of stock options 330 137 7 ------------- ------------- ------------- Net cash provided by (used in) financing activities (44,065) 4,409 (183) ------------- ------------- ------------- Effect of exchange rate changes on cash 1,060 167 481 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents (8,284) (6,097) 4,686 Cash and cash equivalents at beginning of year 51,819 43,535 37,438 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 43,535 37,438 42,124 ============= ============= ============= Supplemental disclosure of cash flow information: Income taxes paid $ 16,780 2,848 5,400 Interest paid -- 238 399 Supplemental disclosure of noncash investing activities-- acquisition of franchise centres: Fair value of assets acquired $ -- 5,052 401 Liabilities assumed $ -- (1,629) -- Cancellation of accounts receivable $ -- (1,267) (256) ------------- ------------- ------------- Cash paid for acquisitions $ -- 2,156 145 ============= ============= =============
See accompanying notes to consolidated financial statements. 22 JENNY CRAIG, INC. 16 NOTES TO CONSOLIDATED June 30, FINANCIAL 1996, 1997, and 1998 STATEMENTS Jenny Craig, Inc. (the "Company"), through its wholly-owned subsidiaries, operates and franchises centres offering weight management programs to the general public in the United States, Australia, New Zealand, Canada, and Puerto Rico. NOTE 1. Summary of Significant Accounting Policies (A) BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. (B) CASH EQUIVALENTS Cash equivalents consist principally of money market funds and other highly liquid interest-bearing instruments with original maturities of three months or less. (C) SHORT-TERM INVESTMENTS Short-term investments consist principally of U.S. Government securities, tax-exempt municipal obligations, and commercial paper. The Company accounts for its short-term investments in accordance with the provisions of Statement of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115, the Company currently classifies its securities as held-to-maturity. Held-to-maturity securities are those investments in which the Company has the ability and intent to hold the security until maturity. Held-to-maturity securities are recorded at amortized cost, which approximates market value. All investments mature within a 12-month period. Dividend and interest income are recognized in the period earned. (D) INVENTORIES Inventories, which consist primarily of food products held for sale, are stated at the lower of cost (determined using the first-in, first-out method) or market. (E) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, predominantly five years. Leasehold improvements are amortized over the shorter of their useful life or related lease term, predominantly five years. The Company's corporate headquarters building, purchased in 1997, is being depreciated using the straight-line method over 30 years. (F) REACQUIRED AREA FRANCHISE RIGHTS The cost of reacquired area franchise rights is amortized using the straight-line method over the then remaining term of the acquired franchise territorial rights, which averages 13 years. (G) IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for its long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is JENNY CRAIG, INC. 23 17 NOTES TO CONSOLIDATED FINANCIAL continued STATEMENTS measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Reacquired area franchise rights are evaluated for recovery of the carrying amount on an individual area franchise basis. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (H) REVENUE RECOGNITION In June 1997, the Company changed its method of accounting for service fees received from customers, retroactively effective as of July 1, 1996. Previously, the Company recognized $60 as revenue at the time of each new sale and the remaining service revenue was deferred and recognized as revenue based upon expected customer attendance at the centres. Under the new method, all service fees collected are deferred and recognized as revenue on a straight-line basis over the 14-month period of expected customer attendance at the centres. The Company believes the new method is preferable as it provides a better matching of revenues and expenses because the costs incurred in performing the weight loss consulting services are generally incurred on a level basis. The cumulative effect of this accounting change, net of related income tax benefit, for periods prior to July 1, 1996 of $7,509,000, or $.36 per diluted share, is shown as a cumulative effect adjustment on the consolidated statements of income. The effect of this change for the year ended June 30, 1997 was to increase income before cumulative effect of accounting change by $525,000, or $.02 per diluted share. The pro forma effect of retroactive application of this new method of accounting would not have materially affected the results of operations for the year ended June 30, 1996. Service revenue not recognized in income is recorded as deferred service revenue in the accompanying consolidated balance sheets. The Company grants franchises in exchange for an initial franchise fee which is recorded as revenue when substantially all services have been performed and the franchisee commences operations. Costs associated with such sales, substantially all of which are incurred prior to the franchisee commencing operations, are expensed as incurred. Franchise royalties are calculated as a percentage of franchisees' revenue in accordance with the franchise agreements. The Company's allowance for doubtful accounts amounted to $1,190,000 and $1,080,000 at June 30, 1997 and 1998, respectively. (I) ADVERTISING COSTS Advertising costs are charged to expense as incurred. (J) TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS Assets and liabilities of foreign operations where the functional currency is other than the U.S. dollar are translated at fiscal year-end rates of exchange, and the related revenue and expense amounts are translated at the average rates of exchange in effect for the fiscal year. Gains or losses resulting from translating foreign currency financial statements are accumulated in a separate component of stockholders' equity. (K) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued liabilities approximate their fair value because of the short-term nature of those instruments. The carrying amount of the note payable approximates fair value because the interest rate is reset each quarter to reflect current market rates and the other terms are comparable to those currently available in the marketplace. 24 JENNY CRAIG, INC. 18 NOTES TO CONSOLIDATED FINANCIAL continued STATEMENTS (L) STOCK-BASED COMPENSATION The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, the Company continues to account for stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense for employee stock option grants is recorded on the date of grant only if the current market price of the Company's stock exceeds the exercise price. (M) EARNINGS PER SHARE The consolidated financial statements are presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Basic net income per common share is computed using the weighted-average number of shares outstanding during the period. Diluted net income per share incorporates the incremental shares issuable upon the assumed exercise of stock options. All prior period net income per share information is presented in accordance with SFAS 128. Net income and weighted average common shares used to compute net income per share, basic and diluted, are presented below (amounts in thousands):
1996 1997 1998 ------------- ------------- ------------ Net income $ 22,912 823 2,126 ============= ============= =========== Common shares, basic 24,195 20,767 20,688 Dilutive effect of stock options 559 336 265 ------------- ------------- ------------ Common shares, diluted 24,754 21,103 20,953 ============= ============= ===========
(N) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2. Prepaid Expenses and Other Assets Prepaid expenses and other assets at June 30 are summarized as follows ($ in thousands):
1997 1998 ------------- ------------- Net deferred tax asset $ 9,279 7,863 Insurance settlement receivable 4,000 -- Other 3,218 4,685 ------------- ------------- $ 16,497 12,548 ============= =============
The insurance settlement was received by the Company in July 1997. JENNY CRAIG, INC. 25 19 NOTES TO CONSOLIDATED FINANCIAL continued STATEMENTS NOTE 3. Property and Equipment Property and equipment at June 30 is summarized as follows ($ in thousands):
1997 1998 ------------- ------------- Land $ 2,000 2,000 Building 7,128 7,186 Furniture and equipment 43,750 41,738 Leasehold improvements 23,931 23,041 ------------- ------------- 76,809 73,965 Less accumulated depreciation and amortization (49,255) (49,133) ------------- ------------- $ 27,554 24,832 ============= =============
In July 1996, the Company purchased a 75,000-square-foot office building located in LaJolla, California which serves as the Company's corporate headquarters. NOTE 4. Accrued Liabilities Accrued liabilities at June 30 are summarized as follows ($ in thousands):
1997 1998 ------------- ------------- Accrued salaries, wages and benefits $ 12,283 11,708 Other accruals 6,834 7,691 -------------- -------------- $ 19,117 19,399 ============== ==============
NOTE 5. Income Taxes The Company and its United States subsidiaries file consolidated federal and combined or separate state income tax returns. Jenny Craig Weight Loss Centres, Pty. Ltd. and Jenny Craig Weight Loss Centres (Canada), Ltd., both foreign corporations, are subject to income tax in foreign jurisdictions. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The following summarizes income taxes ($ in thousands):
1996 1997 1998 ------------- ------------- ------------- Current: Federal $ 11,459 1,132 (1,301) State 2,494 371 61 Foreign 1,347 3,993 1,112 ------------- ------------- ------------- Total current 15,300 5,496 (128) ------------- ------------- ------------- Deferred: Federal 794 1,112 373 State 215 (153) (86) Foreign (740) (1,362) 1,129 ------------- ------------- ------------- Total deferred 269 (403) 1,416 ------------- ------------- ------------- Total provision for income taxes $ 15,569 5,093 1,288 ============= ============= =============
26 JENNY CRAIG, INC. 20 NOTES TO CONSOLIDATED FINANCIAL continued STATEMENTS Deferred income taxes result from the temporary differences between the tax basis of an asset or a liability and its reported amount in the consolidated balance sheets. The components that comprise deferred tax assets and liabilities at June 30, 1997 and 1998 are as follows ($ in thousands):
1997 1998 ------------- ------------- Deferred tax assets: Employee benefits $ 2,158 1,734 Allowance for doubtful accounts 463 425 Depreciation and amortization 3,294 2,752 Inventories 358 186 Foreign operations 1,500 371 Deferred service revenue 3,853 3,055 Net operating losses -- 84 Tax credits -- 353 Other accruals 1,710 1,463 ------------- ------------- Total gross deferred tax assets 13,336 10,423 Less valuation allowance (700) (700) ------------- ------------- Net deferred tax assets 12,636 9,723 Deferred tax liabilities: Receivable from foreign subsidiary (3,357) (1,727) Other -- (133) ------------- ------------- Total deferred tax liabilities (3,357) (1,860) ------------- ------------- Net deferred tax asset $ 9,279 7,863 ============= =============
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and management's projections for future taxable income over the reversing periods, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance which has been established to offset a portion of the deferred tax assets based upon the above factors. Income taxes for the years ended June 30, 1996, 1997, and 1998 differed from the amounts expected by applying the U.S. federal income tax rate of 35% to income before taxes as follows ($ in thousands):
1996 1997 1998 ------------- ------------- ------------- Computed income taxes $ 13,468 4,699 1,195 State taxes, net of federal benefit 1,761 237 (17) Change in the valuation allowance for deferred tax assets (1,456) -- -- Permanent differences -- -- 65 Other 1,796 157 45 ------------- ------------- ------------- $ 15,569 5,093 1,288 ============= ============= =============
JENNY CRAIG, INC. 27 21 NOTES TO CONSOLIDATED FINANCIAL continued STATEMENTS NOTE 6. Note Payable In October 1996, the Company borrowed $6,000,000 from a bank, secured by the Company's corporate office building. The note bears interest at the London Interbank Offered Rate plus one percent (6.75% at June 30, 1998). Quarterly principal payments of $47,390 are due until the maturity date in November 2006, at which time all remaining unpaid principal is due. The current portion of the note, amounting to $190,000, is included in accrued liabilities at June 30, 1997 and 1998. NOTE 7. Leases The Company's centre operations are conducted from premises leased under noncancellable operating leases, generally for terms of five years with renewal options for like periods. The Company's rent expense under such noncancellable operating leases amounted to $24,217,000, $25,074,000, and $25,227,000 for the years ended June 30, 1996, 1997, and 1998, respectively. As of June 30, 1998, the scheduled minimum annual rental payments, excluding renewal provisions, are as follows ($ in thousands): 1999 $20,142 2000 14,065 2001 8,692 2002 4,181 2003 1,393 Thereafter 195 ------- $48,668 =======
Management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases. A majority of the leases provide for the payment of taxes, maintenance, insurance, and certain other expenses applicable to the leased premises. NOTE 8. Related Party Transactions In March 1996, a corporation controlled by the beneficial owners of a majority of the outstanding stock of the Company sold 2,000,000 shares of the Company's common stock to the Company at a price of $10 per share pursuant to a Dutch Auction self tender offer commenced by the Company in February 1996 and open to all shareholders. The beneficial owners of a majority of the outstanding stock of the Company own the franchise operations in New Zealand. The Company's revenue derived from these operations was $4,143,000, $4,997,000, and $5,440,000 for the years ended June 30, 1996, 1997, and 1998, respectively. 28 JENNY CRAIG, INC. 22 NOTES TO CONSOLIDATED FINANCIAL continued STATEMENTS A director and officer of the Company is a partner in a law firm which provided certain legal services to the Company. Legal fees incurred with such firm were $2,096,000, $1,067,000, and $616,000 in 1996, 1997, and 1998, respectively. In September 1997, the Company recorded expenses totaling $3,500,000 related to the separation of a former senior executive of the Company. These expenses include $1,500,000 for the forgiveness of a loan made to the former senior executive in 1995 (which is reflected on the accompanying consolidated balance sheets as a decrease in other assets), $1,000,000 for the payment of the former senior executive's salary and benefits in semi-monthly installments through December 31, 1998, and $1,000,000 for the cancellation of stock options, payable in five equal annual installments commencing in fiscal 1998, which were exercisable by the former senior executive. NOTE 9. Cost of Reacquired Area Franchise Rights The Company has acquired, from time to time, centres which were previously owned by franchisees. The excess cost over net assets acquired of $13,660,000 at June 30, 1998 is being amortized using the straight-line method over the then remaining term of the acquired franchise territorial rights, which averages 13 years. Amortization expense was $837,000, $1,015,000, and $1,051,000 for the years ended June 30, 1996, 1997, and 1998, respectively. Accumulated amortization was $4,598,000 and $5,241,000 at June 30, 1997 and 1998, respectively. NOTE 10. Employee Benefits In 1996, the Company adopted a 401(k) Retirement Plan which allows all employees with one or more years of service to participate. The Company currently matches 25% of an employee's voluntary contribution up to a maximum of 6% of eligible compensation. The Company recorded expense of $91,000, $191,000, and $264,000 in 1996, 1997, and 1998, respectively, in connection with this plan. In 1991, the Company adopted a management deferred bonus plan covering certain members of the Company's management group. The bonus pool, which is determined by the Board of Directors following each fiscal year, cannot exceed one percent of operating income for the fiscal year plus a percentage of the increase, if any, in operating income over the prior fiscal year. Participants receive 25% of their allocated portion of the bonus pool approximately 90 days after the end of each fiscal year. Payment of the remaining 75% is deferred for five years and is subject to vesting at the rate of 20% per year. The unvested portion is forfeited if the participant terminates employment for any reason other than retirement after attainment of age 65 and completion of 10 years of participation in the management plan. Amounts expensed under this plan were $386,000, $100,000, and $20,000 in 1996, 1997, and 1998, respectively. JENNY CRAIG, INC. 29 23 NOTES TO CONSOLIDATED FINANCIAL continued STATEMENTS NOTE 11. Stock Option Plan The Company's Stock Option Plan (the "Option Plan") was adopted in October 1991 and provides for the grant of incentive stock options to key employees and of nonqualified stock options to key employees, consultants, directors, and Medical Advisory Board members. A total of 2,500,000 shares of common stock have been reserved for issuance under the Option Plan, of which 487,540 shares remain available for future grant at June 30, 1998. The exercise price of the options may not be less than fair market value on the date of grant. Additionally, no options may be exercisable more than 10 years after the date of grant and, with certain exceptions, no option may become exercisable prior to the expiration of six months from the date of grant. The options granted to employees generally become exercisable over three to four years. The Company applies APB Opinion No.25 in accounting for the Option Plan and, accordingly, no compensation cost has been recognized for stock option grants to employees and directors in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's net income and net income per share would have been reduced to the pro forma amounts as follows ($ in thousands, except per share amounts):
1996 1997 1998 ------------- ------------- ------------- Net income - as reported $ 22,912 823 2,126 Net income - pro forma 22,883 574 2,003 Per share amounts: Basic, as reported .95 .04 .10 Basic, pro forma .95 .03 .10 Diluted, as reported .93 .04 .10 Diluted, pro forma .92 .03 .10
The per share weighted-average fair value of stock options granted during 1996, 1997, and 1998 was $4.36, $3.70, and $2.37, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected life of four years, expected volatility of 44%, 47%, and 44% in 1996, 1997, and 1998, respectively, no dividends, and risk-free interest rate of 5.0%. Pro forma net income reflects only options granted in 1996, 1997, and 1998. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of four years, and compensation cost for options granted prior to July 1, 1995 is not considered. The following summarizes the status of the Option Plan:
Weighted- average Number of Range of exercise options exercise prices price - ------------------------------------- -------------- ------------- Outstanding at June 30, 1995 1,677,900 $4.63 to 21.00 $ 6.73 Granted 187,000 9.13 to 16.25 11.68 Cancelled (59,380) 5.63 to 21.00 7.09 Exercised (56,940) 5.63 to 7.32 5.82 - ------------------------------------- -------------- ------------- Outstanding at June 30, 1996 1,748,580 4.63 to 21.00 7.28 Granted 267,000 6.00 to 15.75 8.62 Cancelled (78,980) 5.63 to 16.25 10.14 Exercised (21,720) 5.63 to 7.32 6.31 - ------------------------------------- -------------- ------------- Outstanding at June 30, 1997 1,914,880 4.63 to 21.00 7.36 Granted 1,648,100 5.82 to 7.50 5.84 Cancelled (1,629,580) 5.63 to 21.00 7.49 Exercised (1,200) 5.63 to 5.63 5.63 - ------------------------------------- -------------- ------------- Outstanding at June 30, 1998 1,932,200 $4.63 to 15.32 $ 5.96 ===================================== ============== ============= Exercisable at June 30, 1998 227,360 $4.63 to 15.32 $ 6.21 ===================================== ============== =============
30 JENNY CRAIG, INC. 24 NOTES TO CONSOLIDATED FINANCIAL continued STATEMENTS During fiscal 1998, the compensation committee of the Board of Directors authorized the grant of 543,600 options at an exercise price of $5.88 per share, the fair market value on the date of grant. These grants were conditioned upon the cancellation of an equal number of previously existing options which had exercise prices ranging from $7.07 to $21.00 per share. The new options vest at the rate of 33% per year, commencing on the grant date of the new options, with the exception of 61,500 options granted to non-employee directors which were exercisable immediately upon grant. Information with respect to options outstanding and exercisable by exercise price range at June 30, 1998 is as follows:
Options Outstanding - ------------------------------------------------------------------- Weighted- average Weighted- remaining average Range of Number contractual exercise exercise prices outstanding life (in years) price - ------------------------------------------------------------------- $4.63- 4.63 5,000 6.1 $ 4.63 5.63- 5.88 1,832,000 9.4 5.84 5.89- 9.38 80,200 7.9 7.04 9.39-15.32 15,000 7.9 15.32 - ------------------------------------------------------------------- $4.63-15.32 1,932,200 9.3 $ 5.96 ===================================================================
Options Exercisable - ---------------------------------------------------- Weighted- average Range of Number exercise exercise prices exercisable price - ---------------------------------------------------- $4.63- 4.63 5,000 $ 4.63 5.63- 5.88 186,240 5.82 5.89- 9.38 30,120 7.10 9.39- 15.32 6,000 15.32 - ---------------------------------------------------- $4.63- 15.32 227,360 $ 6.21 ====================================================
At June 30, 1996 and 1997, the number of options exercisable were 671,810 and 1,071,780, respectively, and the weighted-average exercise prices were $6.99 and $7.11, respectively. NOTE 12. Contingencies Because of the nature of its activities, the Company is, at times, subject to pending and threatened legal actions which arise out of the normal course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of all such matters will not have a material effect on the consolidated financial statements. The Company and the Federal Trade Commission have entered into a Consent Order settling all contested issues raised in a complaint filed in September 1993 against the Company alleging that the Company violated the Federal Trade Commission Act by the use and content of certain advertisements for the Company's weight loss program featuring testimonials, claims for the program's success and safety, and statements as to the program's costs to participants. The Consent Order does not admit any issue of fact or law or any violation by the Company of any law or regulation, and does not involve payment by the Company of any civil money penalty, damages, or other financial relief. The Consent Order requires certain procedures and disclosures in connection with the Company's advertisements of its products JENNY CRAIG, INC. 31 25 NOTES TO CONSOLIDATED FINANCIAL continued STATEMENTS and services. The full Commission accepted the Consent Order, and it has been made effective as of May 4, 1998. The Company does not believe that compliance with the Consent Order will have a material adverse effect on the Company's consolidated financial position or results of operations or its current advertising and marketing practices. The Company, along with other weight loss programs and certain pharmaceutical companies, has been named as a defendant in an action filed in the Circuit Court for the Eleventh Judicial Circuit in Pickens County, Alabama (the "Alabama Litigation"). The action was commenced in August 1997 by three plaintiffs who are seeking to maintain the action as a class action on behalf of all persons in the United States and United States Territories who have suffered or may in the future suffer injury due to the administration of phentermine, fenfluramine (commonly known as "phen-fen" when taken together), and/or dexfenfluramine (trade name Redux(TM)), which were manufactured or sold by the defendants. The complaint includes claims against the Company and other defendants, acting separately and in concert, for alleged unlawful and tortious acts, including sale of allegedly dangerous and defective products, negligent marketing and distribution, failure to warn of the risks associated with the weight loss medications, breach of warranty, fraud, and negligent misrepresentation. The complaint seeks compensatory and punitive damages in unspecified amounts and equitable relief including the establishment of a medical fund to cover future medical expenses resulting from the use of the weight loss medications, and a requirement that the defendants adequately warn the public of the risks associated with the use of the weight loss medications. The Company, along with certain pharmaceutical companies, has also been named as a defendant in an action filed in the Court of Common Pleas, Philadelphia County, Pennsylvania (the "Pennsylvania Litigation"). The action was commenced in November 1997 by a plaintiff, a participant in the Company's program, who is seeking to maintain the action as a class action on behalf of all persons in the Commonwealth of Pennsylvania who have purchased and used fenfluramine, dexfenfluramine, and phentermine, alone or in combination. The complaint includes claims against the Company and other defendants for alleged false and misleading statements concerning the safety and appropriateness of using fenfluramine, dexfenfluramine, and phentermine, and the benefits, uses, and ingredients of these drugs, negligence in the distribution, sale, and prescribing of these medications, and breach of the warranty of merchantability. The complaint seeks compensatory and punitive damages in unspecified amounts and a Court-supervised program funded by the defendants through which class members would undergo periodic medical examination and testing. 32 JENNY CRAIG, INC. 26 NOTES TO CONSOLIDATED FINANCIAL continued STATEMENTS The Company has tendered the Alabama Litigation and the Pennsylvania Litigation matters to its insurance carriers. The Company and the provider of the independent physicians who prescribed the weight loss medications in the Company's centres have each asserted their rights with respect to these litigations under contractual provisions for indemnification in the agreement between them. The claims have not progressed sufficiently for the Company to estimate a range of possible loss, if any. The Company intends to defend the matters vigorously. NOTE 13. Business Segments and Geographic Information The Company operates in one industry segment. Substantially all revenue results from the sale of weight management products and services, whether the centre is operated by the Company or its franchisees. The following presents information about operations in different geographic areas ($ in thousands):
1996 1997 1998 ------------- ------------- ------------- Revenue derived from customers: Company-owned operations: Unaffiliated: United States $ 309,415 279,090 273,358 Foreign 41,590 50,308 48,329 Franchise operations: Unaffiliated: United States 43,119 27,525 22,051 Foreign 2,751 3,214 3,071 Affiliated: United States -- -- -- Foreign 4,143 4,997 5,440 Operating income (loss): Company-owned operations: United States 25,226 732 (8,175) Foreign 58 5,249 5,409 Franchise operations: United States 8,818 3,677 2,135 Foreign 1,419 2,182 2,671 Identifiable assets: United States 93,208 100,689 94,450 Foreign 11,193 11,608 11,795
JENNY CRAIG, INC. 33 27 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors Jenny Craig, Inc.: We have audited the accompanying consolidated balance sheets of Jenny Craig, Inc. and subsidiaries as of June 30, 1997 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jenny Craig, Inc. and subsidiaries as of June 30, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP San Diego, California August 17, 1998 34 JENNY CRAIG, INC. 28 SELECTED QUARTERLY FINANCIAL (Unaudited) INFORMATION The following is a summary of the unaudited quarterly results of operations ($ in thousands, except per share data):
Three-Month Period Ended - -------------------------------------------------------------------------------------------------------------------------- September 30, December 31, March 31, June 30, Total Current Year 1997 1997 1998 1998 year - -------------------------------------------------------------------------------------------------------------------------- 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
The quarter ended September 30, 1997 includes a pretax charge of $3,500,000 related to the separation of a former senior executive of the Company.
Three-Month Period Ended - -------------------------------------------------------------------------------------------------------------------------------- September 30, December 31, March 31, June 30, Total Prior Year 1996 1996 1997 1997 year - -------------------------------------------------------------------------------------------------------------------------------- Total revenues $ 91,012 83,388 96,536 94,198 365,134 Operating income 3,649 751 1,170 6,270 11,840 Income before cumulative effect of accounting change 2,489 879 908 4,056 8,332 Cumulative effect of change in accounting for service revenue (7,509) -- -- -- (7,509) Net income (loss) (5,020) 879 908 4,056 823 Basic and diluted per share amounts: Income before cumulative effect of accounting change 0.12 0.04 0.04 0.20 0.40 Cumulative effect of change in accounting for service revenue (0.36) -- -- -- (0.36) - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (0.24) 0.04 0.04 0.20 0.04 ================================================================================================================================
In the fourth quarter of fiscal 1997, the Company changed its method of accounting for service fees received from customers, retroactively effective as of July 1, 1996 (see Note 1 of Notes to Consolidated Financial Statements). The quarterly results of operations for the first three quarters of fiscal 1997 reflect the effect of the change in accounting method as if the change had occurred on July 1, 1996 and do not differ materially from the amounts as originally reported. The quarter ended June 30, 1997 includes a pretax credit of $3,267,000 resulting from the Company's litigation recovery from an insurance carrier. The net income (loss) per share computed for each quarter and the year are separate calculations. JENNY CRAIG, INC. 35 29 COMMON STOCK DATA At August 28, 1998, there were approximately 2,600 holders of the Company's common stock, which is traded on the New York Stock Exchange (NYSE) under the symbol JC. The following table reflects the range of high and low sales prices as reported by the NYSE for the indicated periods.
1997 1998 -------------------------------------------------------- High Low High Low -------------------------------------------------------- First quarter ended September 30 $17 3/4 9 1/8 8 15/16 6 5/16 Second quarter ended December 31 9 7/8 8 1/8 8 12/16 6 15/16 Third quarter ended March 31 10 3/4 6 1/2 7 10/16 5 Fourth quarter ended June 30 7 7/8 5 1/8 6 15/16 5 7/16
In June 1994, the Company suspended payment of its quarterly dividend, subject to quarterly review by the Board of Directors. The Company currently believes that its stockholders are best served by directing cash resources to the Company's marketing efforts and further improvement of its business. 36 JENNY CRAIG, INC. EX-23 5 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Shareholders and Board of Directors Jenny Craig, Inc. We consent to incorporation by reference in the registration statements (No. 33-17591 and No. 33-86098) on Form S-8 of Jenny Craig, Inc. of our reports dated August 17, 1998, relating to the consolidated balance sheets of Jenny Craig, Inc. and subsidiaries as of June 30, 1997 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1998, and the related financial statement schedule, which reports appear in the June 30, 1998 annual report on Form 10-K of Jenny Craig, Inc. /s/ KPMG PEAT MARWICK LLP San Diego, California September 25, 1998 EX-27 6 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1998, INCLUDED IN THE REPORT ON FORM 10-K OF JENNY CRAIG, INC. FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 42,124 1,236 2,617 0 14,469 72,994 24,832 0 106,245 44,933 5,526 0 0 0 55,786 106,245 327,804 352,249 307,707 323,632 0 0 413 3,414 1,288 2,126 0 0 0 2,126 0.10 0.10 THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF ALLOWANCES AND DEPRECIATION, RESPECTIVELY.
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