1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
Years ended June 30, all amounts in thousands, except per share data.
1992 1993 1994 1995 1996
- ----------------------------------------------------------------------------------
Revenues $461,153 490,549 403,341 378,093 401,018
Operating income 72,850 59,178 1,021 17,363 35,521
Income before
extraordinary item 43,095 36,760 534 11,772 22,912
Per share amounts:
Income before
extraordinary item 1.64 1.35 .02 .46 .95
Net income 1.40 1.35 .02 .46 .95
Dividends declared .40 .60 .45 -- --
Total assets 115,262 124,243 104,190 115,376 104,401
Shares outstanding 27,500 26,500 26,076 25,196 20,856
[1]
2
Jenny Craig, Inc. and Subsidiaries
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, 1996, 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, 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------
CENTRES OPEN AT END OF YEAR:
Company-owned
United States 370 476 502 478 485
Foreign 88 103 106 102 103
- -----------------------------------------------------------------------------------------------------
458 579 608 580 588
- -----------------------------------------------------------------------------------------------------
Franchise
United States 199 176 159 154 159
Foreign 37 39 43 43 36
- -----------------------------------------------------------------------------------------------------
236 215 202 197 195
- -----------------------------------------------------------------------------------------------------
Total 694 794 810 777 783
- -----------------------------------------------------------------------------------------------------
AVERAGE REVENUE PER CENTRE IN THOUSANDS:
Company-owned
United States $965 859 628 600 642
Foreign 447 387 346 356 407
Franchise
United States 986 937 644 654 659
Foreign 463 437 441 343 328
Average revenue per centre for foreign operations is significantly less than
for United States operations due to fewer program participants and,
accordingly, operating margins for foreign operations are lower than for
United States operations. See Note 13 of Notes to Consolidated Financial
Statements for additional information regarding foreign operations.
[15]
3
Jenny Craig, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The following table presents the range of initial service and maintenance
fees charged by the Company:
Initial Service Maintenance
- -------------------------------------------------------------------------------
Fiscal Year Low High Low High
- -------------------------------------------------------------------------------
1992 $29 79 99 125
1993 19 79 99 129
1994 10 99 99 125
1995 10 99 99 99
1996 10 180 99 181
YEAR ENDED JUNE 30, 1996 AS COMPARED
TO YEAR ENDED JUNE 30, 1995
Revenues from United States Company-owned operations increased 6% from
$291,327,000 in 1995 to $309,415,000 in 1996. There was a 1% increase in the
total number of United States Company-owned centres in operation from 478 in
fiscal 1995 to 485 in fiscal 1996. Average revenue per United States
Company-owned centre increased 7% from $600,000 in 1995 to $642,000 in 1996.
Although there was a 7% decrease in the number of new participants enrolled in
the program between the years, service revenues from United States Company-owned
operations increased 15%, from $18,870,000 in 1995 to $21,769,000 in 1996. This
increase in service revenues was due to an increase in the average service fee
charged per new participant. Product sales, which consists primarily of food
products, from United States Company-owned operations increased 6% from
$272,457,000 in 1995 to $287,646,000 in 1996, principally due to an increase in
the average food purchase per active participant in the program between the
years, and reflected an approximate 5% increase in the retail selling price of
the Company's food products effected in November 1995. Revenues from foreign
Company-owned operations increased 12% from $36,989,000 in 1995 to $41,590,000
in 1996 and average revenue per foreign Company-owned centre increased 14% from
$356,000 in 1995 to $407,000 in 1996 principally due to an increase in the
number of new enrollments in the program. 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 1%
from 102 at June 30, 1995 to 103 at June 30, 1996.
In April 1996, 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(TM) heightened the public's interest in weight loss pharmaceuticals, and
appears to be responsible for softened demand being experienced by the Company
for its products and services. For the months of July and August 1996, leads,
which represent inquiries about the program received at the Company's centres,
were reduced approximately 33%, new program sales were reduced approximately
38%, and active clients and weekly deposits were down approximately 14% and 13%,
respectively, from the same period in the prior year. In July 1996, the Company
began test marketing, on a very limited basis, a new weight loss program
incorporating the traditional elements of the Company's program for qualified
clients who choose to utilize weight loss medications. Preliminary results in
the test markets appear to demonstrate interest in this new program with leads
up in July and August 1996 from the same period in the prior year. New program
sales, weekly deposits, and active clients in the test markets, however, did not
increase and were down approximately the same as the remainder of the Company's
cen-
[16]
4
Jenny Craig, Inc. and Subsidiaries
tres during July and August 1996 compared to the same period in the prior year.
Costs and expenses of United States Company-owned operations increased less
than 1% from $264,549,000 in 1995 to $264,693,000 in 1996. Costs and expenses of
United States Company-owned operations in 1995 included a $2,200,000 provision
to reflect the settlement of certain securities class action litigation against
the Company. Costs and expenses of United States Company-owned operations in
1996 were reduced by a $2,200,000 credit that resulted from the Company's
successful litigation recovery from one of its insurance carriers related to the
1995 settlement. Costs and expenses of United States Company-owned operations as
a percentage of United States Company-owned revenues decreased from 91% to 86%
between the years principally due to the aforementioned credit for the
litigation recovery, the favorable effect of the revenue increase between the
years which reflected, in large part, an increase in the retail selling price of
the Company's products and services without a related increase in costs and
expenses, and the lower proportion of fixed costs when compared to the increased
revenues. Costs and expenses of foreign Company-owned operations increased 12%
from $35,127,000 in 1995 to $39,357,000 in 1996 principally because costs and
expenses of foreign Company-owned operations in 1995 was reduced by $1,843,000
representing the reversal of a portion of a provision originally recorded in
1994 for centre closures and 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 $58,000 for fiscal 1996 as compared to an operating loss of $203,000 for
fiscal 1995.
The Company's gross margin on product sales from Company-owned operations
increased from 7% in 1995 to 11% in 1996 and its gross margin on service
revenues increased from 35% in 1995 to 39% in 1996. 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
improvement in gross margins in 1996 compared to 1995 results principally from
the increase in the retail selling price of the Company's products and services
without a related increase in costs and expenses, and the $2,200,000 provision
recorded in 1995 compared to the $2,200,000 credit recorded in 1996 pertaining
to the aforementioned litigation.
Revenues from franchise operations increased slightly from $49,777,000 in
1995 to $50,013,000 in 1996 despite a 1% decrease in the number of franchise
centres operating between the years from 197 in 1995 to 195 in 1996.
Costs and expenses of franchise operations, which consist primarily of
product costs, decreased 5% from $34,726,000 in 1995 to $32,985,000 in 1996, and
decreased as a percent of franchise revenues, principally because of a reduction
in the purchase of national television advertising, a portion of which is
allocated to franchise operations, and a $900,000 reversal of a portion of the
Company's allowance for doubtful accounts reflecting improved collectibility of
receivables from franchisees.
General and administrative expenses increased 8% from $26,328,000 in 1995 to
$28,462,000 in 1996 but remained relatively constant at 7.1% of total revenues
in 1996 compared to 7.0% in 1995. The absolute increase was principally due to
increased compensation and consulting expenses as well as a $1,000,000 charge
for the early termination of the Company's corporate office lease, net of
estimated sublease income.
The elements discussed above combined to result in an increase in operating
income from $17,363,000 in 1995 to $35,521,000 in 1996 and an increase in net
income from $11,772,000, or $.46 per share, in 1995 to $22,912,000, or $.95 per
share, in 1996.
The Company and complaint counsel for the Federal Trade Commission have
entered into a proposed Consent
[17]
5
Jenny Craig, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 proposed 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 proposed Consent Order requires certain procedures and disclosures in
connection with the Company's advertisements of its products and services. If
the full Commission accepts the proposed Consent Order it will be published for
public comment and, unless modified or withdrawn on the basis of public
comments, it thereafter will become effective. The Company does not believe that
compliance with the proposed Consent Order will have a material adverse effect
on the Company's consolidated financial statements or its current advertising
and marketing practices.
YEAR ENDED JUNE 30, 1995 AS COMPARED
TO YEAR ENDED JUNE 30, 1994
Revenues from United States Company-owned operations decreased 5% from
$307,925,000 in 1994 to $291,327,000 in 1995. There was a 5% decrease in the
total number of United States Company-owned centres in operation from 502 to
478. Average revenue per United States Company-owned centre declined 4% from
$628,000 in 1994 to $600,000 in 1995. Although there was a 6% increase in the
number of new participants enrolled in the program between the years, service
revenues from United States Company-owned operations declined 11%, from
$21,303,000 in 1994 to $18,870,000 in 1995. This decline in service revenues was
due to a decrease in the average service fee charged per new participant.
Product sales, which consists primarily of food products, from United States
Company-owned operations declined 5% from $286,623,000 in 1994 to $272,457,000
in 1995, principally due to a decrease in the average number of active
participants in the program between the years. Revenues from foreign
Company-owned operations increased 2% from $36,140,000 in 1994 to $36,989,000 in
1995 and average revenue per foreign Company-owned centre increased 3% from
$346,000 in 1994 to $356,000 in 1995 principally as a result of a net 5% average
increase in the Australian and Canadian currencies in relation to the U.S.
dollar between the years. There was a 4% decrease in the number of foreign
Company-owned centres in operation, from 106 at June 30, 1994 to 102 at June 30,
1995.
During fiscal 1994, the Company accrued a provision for loss of $5,029,000 in
connection with the planned closure of 55 Company-owned centres, $2,529,000 of
which was designated for 30 United States centres and $2,500,000 for 25 foreign
centres. With respect to the United States planned closures, 48 centres were
closed as of June 30, 1995. The additional 18 centres which were closed did not
require an addition to the provision for centre closures as these centres were
principally closed on their respective lease termination dates and therefore did
not require material lease termination costs or fixed asset write-offs. Total
cash payments made through June 30, 1995 in connection with the closure of U.S.
centres were $1,155,000 and total non-cash fixed asset write-offs were
$1,120,000. The Company estimates that future cash payments totaling
approximately $250,000 will be made to complete the planned closure of the
United States centres. With respect to the foreign centres, two centres were
closed during the nine months ended March 31, 1995 which reduced the original
accrual by $38,000. The revenues and operating results of most of the remaining
23 foreign centres originally designated for closure improved substantially
during the quarter ended June 30, 1995 (and to a lesser extent during the
quarter ended March 31, 1995), and management determined that 17 of these
centres should not be closed.
[18]
6
Jenny Craig, Inc. and Subsidiaries
Management's decision to continue to operate these centres was based principally
on the average revenue per centre levels attained by these centres during the
quarter ended June 30, 1995. Average revenue per centre at these centres was
approximately 40% higher in the quarter ended June 30, 1995 compared to the
quarter ended March 31, 1994. As a result, $1,843,000, or $.07 per share, of the
remaining accrued liability of $2,462,000 in connection with the closure of the
foreign centres was reversed and is reflected in fiscal 1995 operating results
in the Company-owned operations section of the "Costs and Expenses" caption of
the Consolidated Statements of Income.
Costs and expenses of United States Company-owned operations decreased 10%
from $294,054,000 in 1994 to $264,549,000 in 1995. Costs and expenses of United
States Company-owned operations in 1994 included provisions for loss totaling
$8,779,000 pertaining to centre closures and certain litigation. Costs and
expenses of United States Company-owned operations in 1995 included a $2,200,000
provision to reflect the settlement of certain securities class action
litigation. This settlement required an aggregate payment of $9,500,000 into a
settlement fund. The Company's primary insurance carrier paid $5,000,000
directly into this fund in connection with the settlement and covered defense
costs and the Company paid $4,500,000 into the fund. The $2,200,000 is the net
provision after taking into account previously accrued legal fees of $2,300,000
in connection with this litigation. The decrease in costs and expenses of United
States Company-owned operations reflects the reduced variable costs related to
the lower level of operations, the reduced fixed costs resulting from the
reduced number of United States Company-owned centres in operation, the
Company's efforts in controlling expenses, particularly advertising which was
approximately $9,400,000 lower in 1995 compared to 1994, and the substantial
difference in the provisions for loss between the years. As a result, costs and
expenses of United States Company-owned operations as a percentage of United
States Company-owned revenues decreased from 95% to 91% between the years. Costs
and expenses of foreign Company-owned operations decreased 12% from $40,071,000
in 1994 to $35,127,000 in 1995 principally because 1994 included the
aforementioned provision for loss of $2,500,000 for centre closures while 1995
included the reversal of $1,843,000 of such provision. After including this
reversal and the allocable portion of general and administrative expenses,
foreign Company-owned operations incurred an operating loss of $203,000 for
fiscal 1995 as compared to an operating loss of $5,905,000 for fiscal 1994.
The Company's gross margin on product sales from Company-owned operations
increased from 1% in 1994 to 7% in 1995 and its gross margin on service revenues
increased from 24% in 1994 to 35% in 1995. 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 improvement in
gross margins in fiscal 1995 compared to fiscal 1994 results principally from
the absence in fiscal 1995 of the provisions for loss pertaining to centre
closures and certain litigation recorded in fiscal 1994.
Revenues from franchise operations decreased 16% from $59,276,000 in 1994 to
$49,777,000 in 1995. This decline is principally due to a 10% decrease in the
average number of franchised centres operating between the years and an
approximate 6% reduction in the price charged to United States franchisees for
food products effective July 1, 1994. The decrease in the average number of
franchised centres is principally due to the Company's acquisition of 31 centres
from affiliated franchisees in April 1994.
Costs and expenses of franchise operations, which consist primarily of
product costs, decreased 21% from $43,686,000 in 1994 to $34,726,000 in 1995
primarily due to the reduced level of franchise operations. In addition,
[19]
7
Jenny Craig, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
costs and expenses of franchise operations in 1994 included bad debt provisions
totaling $4,155,000. The decrease in fiscal 1995 in costs and expenses of
franchise operations as a percentage of franchise revenues was principally due
to the aforementioned bad debt provisions recorded in the prior year offset in
part by the reduction in the price charged to United States franchisees for food
products.
General and administrative expenses increased 7% from $24,509,000 in 1994 to
$26,328,000 in 1995 and from 6.1% to 7.0% of total revenues for the years ended
June 30, 1994 and 1995, respectively. This increase was principally due to
professional fees and an increase in insurance costs.
The elements discussed above combined to result in an increase in operating
income from $1,021,000 in 1994 to $17,363,000 in 1995 and an increase in net
income from $534,000, or $.02 per share, in 1994 to $11,772,000, or $.46 per
share, in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and short-term investments were $50,580,000 at June 30,
1996, a $9,198,000 decrease from 1995. This decrease was principally due to the
Company's purchase of 4,396,689 shares of its common stock at a cost of
$44,395,000, offset in part by net cash provided by operating activities. The
Company believes that its cash flow from operations will be sufficient to fund
its day-to-day operations and capital expenditures.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
requires that the Company review for impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS 121 will be effective for the Company's fiscal year
beginning July 1, 1996. The Company does not expect that the adoption of this
statement will have a material impact on the Company's financial position or
results of operations.
The FASB also issued SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company is required to adopt SFAS 123 for the fiscal year beginning July 1,
1996. This statement establishes accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans. Under SFAS 123 the Company may either adopt the new fair value-based
accounting method or continue the intrinsic value-based method and provide pro
forma disclosures of net income and earnings per share as if the fair value
accounting provisions of this statement had been adopted. The Company plans to
adopt only the disclosure requirements of SFAS 123; therefore such adoption will
have no effect on the Company's financial position or results of operations.
[20]
8
Jenny Craig, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and 1996
($ in thousands)
1995 1996
- ---------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 51,819 43,535
Short-term investments 7,959 7,045
Accounts receivable, net 2,129 3,668
Inventories 17,676 17,401
Prepaid expenses and other assets 7,821 8,282
- ---------------------------------------------------------------------------------------------------
Total current assets 87,404 79,931
Cost of reacquired area franchise rights, net 8,218 7,496
Property and equipment, net 18,254 15,474
Other assets 1,500 1,500
- ---------------------------------------------------------------------------------------------------
$115,376 104,401
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 16,794 20,916
Accrued liabilities 17,855 22,415
Income taxes payable 3,311 2,102
Deferred service revenue 3,269 4,506
- ---------------------------------------------------------------------------------------------------
Total current liabilities 41,229 49,939
Stockholders' equity:
Common stock $.000000005 par value, 100,000,000 shares authorized;
Issued: 1995--27,500,400 shares; 1996--27,557,340 shares
Outstanding: 1995--25,196,000 shares; 1996--20,856,251 shares -- --
Additional paid-in capital 71,148 71,478
Retained earnings 31,318 54,230
Equity adjustment from foreign currency translation 415 1,883
Treasury stock, at cost:
1995--2,304,400 shares; 1996--6,701,089 shares (28,734) (73,129)
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 74,147 54,462
Commitments and contingencies
- ---------------------------------------------------------------------------------------------------
$115,376 104,401
- ---------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
[21]
9
Jenny Craig, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the years ended June 30, 1994, 1995 and 1996
($ in thousands, except per share amounts)
1994 1995 1996
- --------------------------------------------------------------------------------------
Revenues:
Company-owned operations:
Product sales $319,843 306,924 326,107
Service revenue 24,222 21,392 24,898
- --------------------------------------------------------------------------------------
344,065 328,316 351,005
- --------------------------------------------------------------------------------------
Franchise operations:
Product sales 49,782 41,852 42,059
Royalties 8,929 7,740 7,719
Initial franchise fees 565 185 235
- --------------------------------------------------------------------------------------
59,276 49,777 50,013
- --------------------------------------------------------------------------------------
Total revenues 403,341 378,093 401,018
- --------------------------------------------------------------------------------------
Costs and expenses:
Company-owned operations:
Product 315,771 285,700 288,954
Service 18,354 13,976 15,096
- --------------------------------------------------------------------------------------
334,125 299,676 304,050
- --------------------------------------------------------------------------------------
Franchise operations:
Product 39,880 32,520 30,699
Other 3,806 2,206 2,286
- --------------------------------------------------------------------------------------
43,686 34,726 32,985
- --------------------------------------------------------------------------------------
25,530 43,691 63,983
General and administrative expenses 24,509 26,328 28,462
- --------------------------------------------------------------------------------------
Operating income 1,021 17,363 35,521
Other income, principally interest 1,589 2,403 2,960
- --------------------------------------------------------------------------------------
Income before taxes 2,610 19,766 38,481
Provision for income taxes 2,076 7,994 15,569
- --------------------------------------------------------------------------------------
Net income $ 534 11,772 22,912
- --------------------------------------------------------------------------------------
Net income per share $ .02 .46 .95
- --------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
[22]
10
Jenny Craig, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 1994, 1995 and 1996
($ in thousands)
Equity
adjustment
from
Additional foreign
Common paid-in Retained currency Treasury
stock capital earnings translation stock Total
- ---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 -- $71,145 30,745 (870) (16,477) 84,543
Net income -- -- 534 -- -- 534
Dividends on common stock ($.45 per share) -- -- (11,733) -- -- (11,733)
Purchase of 424,300 shares
of common stock, at cost -- -- -- -- (6,330) (6,330)
Translation adjustment -- -- -- 1,334 -- 1,334
- ---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 -- 71,145 19,546 464 (22,807) 68,348
Net income -- -- 11,772 -- -- 11,772
Purchase of 880,500 shares
of common stock, at cost -- -- -- -- (5,927) (5,927)
Exercise of stock options -- 3 -- -- -- 3
Translation adjustment -- -- -- (49) -- (49)
- ---------------------------------------------------------------------------------------------------------------------
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 -- $71,478 54,230 1,883 (73,129) 54,462
- ---------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
[23]
11
Jenny Craig, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 1994, 1995
and 1996 ($ in thousands)
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 534 11,772 22,912
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,544 8,540 7,405
Provision for doubtful accounts 4,155 -- (900)
Provision for centre closures 5,029 (1,843) --
Loss on disposal of property and equipment 1,074 694 167
(Increase) decrease in:
Accounts receivable (2,432) 1,092 (639)
Inventories (483) (1,969) 275
Prepaid expenses and other assets (7,784) 4,035 (461)
Increase (decrease) in:
Accounts payable 2,934 2,912 4,122
Accrued liabilities (3,439) 322 4,560
Income taxes payable (3,573) 3,311 (1,209)
Deferred service revenue (1,357) 682 1,237
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,202 29,548 37,469
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (6,649) (1,931) (3,662)
Purchase of short-term investments (32,621) (8,294) (9,877)
Proceeds from maturity of short-term investments 46,141 23,932 10,791
Payments for acquisition of franchised centres (239) -- --
Increase in other assets -- (1,500) --
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 6,632 12,207 (2,748)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (6,330) (5,927) (44,395)
Dividends on common stock (15,710) -- --
Proceeds from exercise of stock options -- 3 330
- -----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (22,040) (5,924) (44,065)
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1,083 -- 1,060
Net increase (decrease) in cash and cash equivalents (10,123) 35,831 (8,284)
Cash and cash equivalents at beginning of year 26,111 15,988 51,819
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 15,988 51,819 43,535
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Income taxes paid $ 11,482 3,652 16,780
Supplemental disclosure of noncash investing
activities--acquisition of franchised centres:
Cancellation of accounts receivable $ 1,777 -- --
Fair value of assets acquired $ 2,302 -- --
Liabilities assumed $ 525 -- --
See accompanying Notes to Consolidated Financial Statements.
[24]
12
Jenny Craig, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994, 1995 and 1996
Jenny Craig, Inc. (the "Company"), through its wholly-owned subsidiaries,
operates and franchises centres offering weight loss programs to the general
public in the United States, Australia, New Zealand, Canada and Puerto Rico.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
SHORT-TERM INVESTMENTS Short-term investments consist principally of U.S.
Government securities and tax exempt municipal obligations. The Company adopted
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115)
effective July 1, 1994. The adoption of SFAS 115 did not have a material effect
on the Company's consolidated financial statements. 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.
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.
PROPERTY AND EQUIPMENT Property and equipment is 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.
REACQUIRED AREA FRANCHISE RIGHTS The cost of reacquired area franchise rights is
amortized using the straight-line method over their estimated useful lives of
approximately 17 years. The Company evaluates the recoverability of the carrying
amount of reacquired area franchise rights when events or circumstances indicate
that the carrying amount may not be recovered. The Company would recognize an
impairment charge if the evaluation indicated that the expected future net cash
flows on an undiscounted basis were less than the carrying amount of reacquired
area franchise rights.
REVENUE RECOGNITION Service revenue is derived from the sale of weight
management and maintenance programs under contracts which entitle the customer
to participate in the program. The Company recognizes $60 as revenue at the time
of sale to match the costs incurred in establishing individual programs for new
participants. The remaining service revenue is deferred and recognized as
revenue based upon expected customer attendance at the centres. Service revenue
not recognized in income is recorded as deferred service revenue in the
accompanying consolidated balance sheets.
The Company grants franchises in exchange for an initial franchise fee which
is recorded as revenue when substantially all services have been performed and
the franchisee commences operations. Costs associated with such sales,
substantially all of which are incurred prior to the franchisee commencing
operations, are expensed as incurred. Franchise royalties are calculated as a
percentage of franchisees' revenue in accordance with the franchise agreements.
[25]
13
Jenny Craig, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company's allowance for doubtful accounts amounted to $5,620,000 and
$1,464,000 at June 30, 1995 and 1996, respectively.
ADVERTISING COSTS Advertising costs are charged to expense as incurred.
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 income 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.
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.
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.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards
Board (FASB) has issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
requires that the Company review for impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS 121 will be effective for the Company's fiscal year
beginning July 1, 1996. The Company does not expect that the adoption of this
statement will have a material impact on the Company's financial position or
results of operations.
The FASB also issued SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company is required to adopt SFAS 123 for the fiscal year beginning July 1,
1996. This statement establishes accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans. Under SFAS 123, the Company may either adopt the new fair value-based
accounting method or continue the intrinsic value-based method and provide pro
forma disclosures of net income and earnings per share as if the fair value
accounting provisions of this statement had been adopted. The Company plans to
adopt only the disclosure requirements of SFAS 123; therefore such adoption will
have no effect on the Company's financial position or results of operations.
RECLASSIFICATION Certain prior year balances have been reclassified to conform
with the current year's presentation.
2. PROPERTY AND EQUIPMENT Property and equipment at June 30 is summarized as
follows ($ in thousands):
1995 1996
- ---------------------------------------------------------
Furniture and equipment $37,218 39,421
Leasehold improvements 19,033 20,155
- ---------------------------------------------------------
56,251 59,576
Less accumulated depreciation
and amortization (37,997) (44,102)
- ---------------------------------------------------------
$18,254 15,474
- ---------------------------------------------------------
[26]
14
Jenny Craig, Inc. and Subsidiaries
3. ACCRUED LIABILITIES
Accrued liabilities at June 30 are summarized as follows
($ in thousands):
1995 1996
- ---------------------------------------------------------
Accrued salaries, wages and benefits $12,478 14,267
Other accruals 5,377 8,148
- ---------------------------------------------------------
$17,855 22,415
- ---------------------------------------------------------
4. INCOME TAXES
The Company and its United States subsidiaries file consolidated federal and
combined 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 Company's income before taxes results substantially from United States
operations. For the years ended June 30, 1994, 1995, and 1996, income before
taxes from United States operations was $5,808,000, $17,788,000 and $36,693,000,
respectively.
The following summarizes income taxes
($ in thousands):
1994 1995 1996
- ---------------------------------------------------------
Current:
Federal $5,169 5,670 11,459
State 1,425 1,393 2,494
Foreign -- 253 1,347
- ---------------------------------------------------------
Total current 6,594 7,316 15,300
- ---------------------------------------------------------
Deferred:
Federal (3,242) 814 794
State (798) 78 215
Foreign (478) (214) (740)
- ---------------------------------------------------------
Total deferred (4,518) 678 269
- ---------------------------------------------------------
Total provision for
income taxes $2,076 7,994 15,569
- ---------------------------------------------------------
Deferred income taxes result from the temporary differences between the tax
basis of an asset or a liability and its reported amount in the consolidated
balance sheets. The components that comprise deferred tax assets and liabilities
at June 30, 1995 and 1996 are as follows ($ in thousands):
1995 1996
- ---------------------------------------------------------
Deferred tax assets:
Employee benefits $2,384 2,745
Allowance for doubtful accounts 1,921 545
Depreciation and amortization 1,808 3,534
State income taxes 509 350
Inventories 298 354
Other accruals 818 1,470
- ---------------------------------------------------------
Total gross deferred tax assets 7,738 8,998
Less valuation allowance (2,156) (700)
- ---------------------------------------------------------
Net deferred tax assets 5,582 8,298
Deferred tax liabilities:
Receivable from foreign subsidiary -- (3,725)
Deferred service revenue (935) (195)
- ---------------------------------------------------------
Total deferred tax liabilities (935) (3,920)
- ---------------------------------------------------------
Net deferred tax asset $4,647 4,378
- ---------------------------------------------------------
[27]
15
Jenny Craig, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the
uncertainty of the recoverability of such deferred tax assets. Based upon the
Company's history of taxable income and its projection of future earnings,
management believes that it is more likely than not that sufficient taxable
income will be generated in the foreseeable future to realize the net
deferred tax asset.
Income taxes for the years ended June 30, 1994, 1995 and 1996 differed
from the amounts expected by applying the U.S. federal income tax rate of 34%
for 1994 and 35% for 1995 and 1996 to income before taxes as follows ($ in
thousands):
1994 1995 1996
- ------------------------------------------------------------
Computed income taxes $ 887 6,918 13,468
State taxes, net of
federal benefit 414 956 1,761
Change in the valuation
allowance for deferred
tax assets 622 (50) (1,456)
Other 153 170 1,796
- ------------------------------------------------------------
$2,076 7,994 15,569
- ------------------------------------------------------------
5. PROVISIONS FOR LOSS
During the year ended June 30, 1994, the Company recorded the following
provisions for loss:
Centre closures $ 5,029,000
Allowance for doubtful accounts 3,600,000
Litigation settlement 6,250,000
- ------------------------------------------------------------
$14,879,000
- ------------------------------------------------------------
The $5,029,000 provision for loss pertaining to centre closures was based upon
management's plan to close 55 underperforming Company-owned centres,
representing 9% of the total Company-owned centres operating as of June 30,
1994, with projected closure dates through the end of fiscal 1995. The provision
was comprised of $2,418,000 estimated for lease termination costs, $417,000 for
customer refunds, $402,000 for severance pay to employees and $1,792,000 for the
write-off of fixed assets and leasehold improvements. The $5,029,000 provision
for loss is reflected in the Company-owned operations section of the
Consolidated Statements of Income for the year ended June 30, 1994. In 1995, the
operating results of 17 of the centres originally designated for closure
improved substantially and management determined that these centres should not
be closed. As a result, $1,843,000 of the original accrual was reversed at June
30, 1995 and is reflected in operating results.
During the quarter ended March 31, 1994, the allowance for doubtful accounts
was increased by $3,600,000 in order to reduce aggregate receivables to their
estimated net realizable value. This provision resulted from the fact that
certain franchisees experienced unfavorable operating results during 1994 and
thus were unable to meet their obligations to the Company when due. The
$3,600,000 charge is reflected in the Franchise operations section of the "Costs
and Expenses" caption of the Consolidated Statements of Income for the year
ended June 30, 1994. In fiscal l996, receivables totaling $3,256,000 were
written-off against the allowance for doubtful accounts with respect to this
matter.
In April 1994, the Company agreed to settle a consumer class action
litigation entitled Ellen Schenk v. Jenny Craig, Inc. The settlement required
the Company to make a payment of $4,000,000 into a settlement fund administered
by the plaintiff's counsel and to pay certain administrative costs; it required
the Company's insurance carriers to pay an aggregate of $6,000,000 directly into
the settlement fund. As a result, the Company accrued $4,250,000 at March 31,
1994, which was included in the Company-owned operations section of the "Costs
and Expenses" caption of the Consolidated Statements of Income for fiscal 1994.
In June 1994, a dispute with the excess insurance carrier arose whereby the
carrier refused to pay its $2,000,000 agreed portion of the settlement. The
Company paid this additional amount in order to complete the settlement and,
accordingly, the additional $2,000,000 was expensed by the Company in the
quarter ended June 30,
[28]
16
Jenny Craig, Inc. and Subsidiaries
1994. All disbursements were made prior to June 30, 1994 and thus there were no
accrued liabilities remaining with respect to this matter at June 30, 1994. The
Company has commenced litigation against the excess carrier for its failure to
pay the $2,000,000 agreed portion of the settlement.
In March 1995, the Company agreed to settle the securities class action
entitled In re Jenny Craig Securities Litigation. The settlement required an
aggregate payment of $9,500,000 into a settlement fund. The Company's primary
insurance carrier paid $5,000,000 directly into this fund. The Company's excess
insurer, which also issued a $5,000,000 policy, refused to contribute any
meaningful amount to the settlement. In order to complete the settlement, the
Company paid $4,500,000 into the settlement fund and commenced litigation
against the excess insurer to recover under the policy. The Company accrued a
provision of $2,200,000 at March 31, 1995 after taking into account previously
accrued legal fees of $2,300,000 in connection with this litigation. The
$2,200,000 provision is reflected in the Company-owned operations section of the
"Costs and Expenses" caption of the 1995 Consolidated Statements of Income. All
disbursements were made prior to June 30, 1995 and thus, there were no accrued
liabilities remaining with respect to this matter at June 30, 1995. In March
1996, the Company was successful in its litigation efforts against the excess
insurer and, accordingly, received a net cash payment of $2,200,000. This amount
is reflected as a reduction in the Company-owned operations section of the
"Costs and Expenses" caption of the 1996 Consolidated Statements of Income.
6. COMMON STOCK AND NET INCOME PER SHARE
In August 1994, the Board of Directors authorized the purchase of up to
2,000,000 shares of the Company's outstanding common stock. The purchases may be
made from time to time, depending upon the current market, economic and
corporate circumstances, in the open market, through block trading, or in
privately negotiated transactions. As of June 30, 1996, a total of 1,813,000
shares had been purchased pursuant to the August 1994 authorization.
In March 1996, the Company purchased 3,464,189 shares of its common stock via
a tender offer, in the form of a Dutch Auction, at a purchase price of $10 per
share. The shares purchased pursuant to this transaction represented
approximately 14.3% of the common stock outstanding immediately prior to the
offer.
The computation of net income per share is based on the weighted average
number of outstanding common shares during each year and the assumed exercise of
dilutive stock options using the treasury stock method. The weighted average
number of common and common equivalent shares outstanding for the years ended
June 30, 1994, 1995 and 1996 were 26,147,000, 25,534,000 and 24,195,000,
respectively.
7. LEASES
The Company's operations are conducted from premises leased under noncancellable
operating leases, generally for terms of five years with renewal options for
like periods. The Company's rent expense under such noncancellable operating
leases amounted to $25,019,000, $25,108,000 and $24,217,000 for the years ended
June 30, 1994, 1995 and 1996, respectively.
As of June 30, 1996, the scheduled minimum annual rent payments, excluding
renewal provisions, are as follows ($ in thousands):
1997 $20,437
1998 12,257
1999 5,808
2000 2,520
2001 1,187
Thereafter 49
- ------------------------------------------------------------
$42,258
- ------------------------------------------------------------
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.
[29]
17
Jenny Craig, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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. See Note 6.
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 $3,647,000, $3,251,000 and $4,143,000 for the years ended
June 30, 1994, 1995 and 1996, respectively.
A director and officer of the Company is a partner in a law firm which
provided certain legal services to the Company. Legal fees incurred with such
firm were $2,027,000, $2,239,000 and $2,096,000 in 1994, 1995 and 1996,
respectively.
In accordance with the employment agreement of an executive of the Company,
the Company made a $1,500,000 loan to such executive in 1995 for the purpose of
purchasing a principal residence. The loan does not bear interest and is secured
by a first trust deed on the principal residence. The loan is due and payable at
the earlier of the sale of the principal residence or one year after termination
of the executive's employment. Craig Enterprises, Inc. ("CEI"), a corporation
controlled by the beneficial owners of a majority of the outstanding stock of
the Company, has agreed with the executive that if the executive's employment is
not terminated for cause, as defined in the executive's employment agreement, as
and when the loan became due CEI would use its best efforts to cause the Company
to forgive the loan or, if the loan was not forgiven, CEI would indemnify the
executive for the amount of the loan. The loan is included in other assets in
the accompanying balance sheet as of June 30, 1995 and 1996.
In accordance with the employment agreement of a previous officer of the
Company, $890,000 was paid to such officer in 1994 representing the amount due
if appreciation in value of certain options granted to the previous officer were
less than $900,000, adjusted to reflect a discount for early payment.
In April l994, the Company completed the purchase of 31 franchised centres
from four privately-held corporations owned by family members of individuals
who, through wholly-owned corporations, are the beneficial owners of a majority
of the outstanding stock of the Company. The purchase price consisted of
$1,641,000 in cancelled trade receivables due to the Company and assumption of
certain current liabilities. The transaction was negotiated and approved by a
committee of independent directors of the Company's Board of Directors who
received a fairness opinion from an independent investment banking firm.
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 $10,758,000 is being
amortized using the straight-line method over the then remaining term of the
acquired franchise territorial rights, which averages 17 years. Amortization
expense was $639,000, $842,000 and $837,000 for the years ended June 30, 1994,
1995 and 1996, respectively. Accumulated amortization was $2,708,000 and
$3,705,000 at June 30, 1995 and 1996, respectively.
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 expensed $91,000 in 1996 with respect to 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
[30]
18
Jenny Craig, Inc. and Subsidiaries
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 $10,000, $174,000 and $386,000 in 1994,
1995 and 1996, respectively.
11. STOCK OPTION PLAN
The Company's Stock Option Plan (the "Option Plan") was adopted in October
1991.
The Option Plan, under which a total of 2,500,000 shares of common stock may
be issued, provides for the grant of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended, to key
employees, and of nonqualified stock options to key employees, consultants,
directors and Medical Advisory Board members.
Except with regard to non-employee directors, who receive options upon
election to the Board and annually thereafter, the Compensation Committee of the
Board of Directors selects the optionees, authorizes the grant of options and
determines the exercise price, term and vesting schedule for options. The
exercise prices 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 generally
become exercisable over four to five years.
The following summarizes the status of the Option Plan:
Number Exercise price
of options per option
- ---------------------------------------------------------------
Outstanding at June 30, 1993 503,476 $14.82 to 24.00
Granted 1,071,500 6.57 to 14.56
Cancelled or expired (304,976) 14.82 to 21.00
- ---------------------------------------------------------------
Outstanding at June 30, 1994 1,270,000 6.57 to 24.00
Granted 676,300 4.63 to 7.44
Cancelled or expired (268,000) 5.63 to 24.00
Exercised (400) 6.57
- ---------------------------------------------------------------
Outstanding at June 30, 1995 1,677,900 4.63 to 21.00
Granted 187,000 9.13 to 16.25
Cancelled or expired (59,380) 5.63 to 21.00
Exercised (56,940) 5.63 to 7.32
- ---------------------------------------------------------------
Outstanding at June 30, 1996 1,748,580 4.63 to 21.00
- ---------------------------------------------------------------
Exercisable at June 30, 1996 671,810 4.63 to 21.00
- ---------------------------------------------------------------
During fiscal 1995, the compensation committee of the Board of Directors
authorized the grant of 226,700 options at an exercise price of $5.63 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 $7.25 to $24.00 per share. The vesting rate of the
new options is the same as the canceled options, commencing on the grant date of
the new options.
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.
[31]
19
Jenny Craig, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company and complaint counsel for the Federal Trade Commission have
entered into a proposed 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 proposed 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 proposed Consent Order requires certain procedures and
disclosures in connection with the Company's advertisements of its products and
services. If the full Commission accepts the proposed Consent Order it will be
published for public comment and, unless modified or withdrawn on the basis of
public comments, it thereafter will become effective. The Company does not
believe that compliance with the proposed Consent Order will have a material
adverse effect on the Company's consolidated financial statements or its current
advertising and marketing practices.
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):
1994 1995 1996
- ------------------------------------------------------------
Revenue derived from
customers:
Company-owned
Operations:
Unaffiliated:
United States $307,925 291,327 309,415
Foreign 36,140 36,989 41,590
Franchise Operations:
Unaffiliated:
United States 43,706 43,087 43,119
Foreign 4,113 3,439 2,751
Affiliated:
United States 7,810 -- --
Foreign 3,647 3,251 4,143
Operating income (loss):
Company-owned
Operations:
United States (2,777) 8,453 25,226
Foreign (5,905) (203) 58
Franchise Operations:
United States 7,312 7,259 8,818
Foreign 2,391 1,854 1,419
Identifiable assets:
United States 95,254 105,960 93,208
Foreign 8,936 9,416 11,193
[32]
20
Jenny Craig, Inc. and Subsidiaries
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, 1995 and 1996, 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, 1996. 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, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Diego, California
August 16, 1996
[33]
21
Jenny Craig, Inc. and Subsidiaries
SELECTED QUARTERLY FINANCIAL INFORMATION
(Unaudited)
The following is a summary of the unaudited quarterly results of operations
($ in thousands, except per share data):
Three-Month Period Ended
- ------------------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, Total
Current Year 1995 1995 1996 1996 Year
- ------------------------------------------------------------------------------------------------------------------------
Total revenues $99,620 89,453 107,304 104,641 401,018
Operating income 6,292 3,987 13,217 12,025 35,521
Net income 4,062 2,771 8,255 7,824 22,912
Net income per share .16 .11 .35 .36 .95
Three-Month Period Ended
- ------------------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, Total
Prior Year 1994 1994 1995 1995 Year
- ------------------------------------------------------------------------------------------------------------------------
Total revenues $95,135 86,527 98,199 98,232 378,093
Operating income 5,488 2,424 1,643 7,808 17,363
Net income 3,392 1,570 1,217 5,593 11,772
Net income per share .13 .06 .05 .22 .46
The quarter ended March 31, 1995 includes a $2,200,000 pre-tax provision to
reflect the settlement of certain securities class action litigation against the
Company, while the quarter ended March 31, 1996 includes a pre-tax credit of
$2,200,000 that resulted from the Company's successful litigation recovery from
one of its insurance carriers related to the March 1995 settlement. The quarter
ended June 30, 1995 includes a credit of $1,843,000 representing the reversal of
a portion of the accrual for centre closures originally recorded at March 31,
1994. See Note 5.
The net income per share computed for each quarter and the year are separate
calculations.
[34]
22
Jenny Craig, Inc. and Subsidiaries
COMMON STOCK DATA
(Unaudited)
At August 31, 1996, there were approximately 3,500 holders of the Company's
common stock, which is traded on the New York Stock Exchange (NYSE) under the
symbol JC. The following table reflects the range of high and low sales prices
as reported by the NYSE for the indicated periods.
1995 1996
---------------- -----------------
High Low High Low
- ----------------------------------------------------------------------------------------------
First quarter ended September 30 $6 3/4 4 1/2 10 1/2 7 3/8
Second quarter ended December 31 8 5 1/2 10 5/8 8 1/8
Third quarter ended March 31 8 5/8 6 1/2 10 1/8 8 7/8
Fourth quarter ended June 30 8 1/4 6 5/8 18 8 7/8
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, as well as
periodic purchases of shares of the Company's common stock as circumstances
warrant.
[35]