<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 1997 Commission File No. 001-10887
JENNY CRAIG, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0366188
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(State of Incorporation) (I.R.S. Employer Identification No.)
11355 NORTH TORREY PINES ROAD, LA JOLLA, CA 92037
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(619) 812-7000
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 [ ]
Number of shares of common stock, $.000000005 par value, outstanding as
of the close of business on February 6, 1998- 20,688,971.
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<PAGE> 2
JENNY CRAIG, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1997
--------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................ $37,438 19,666
Short-term investments ................................... 1,506 6,225
Accounts receivable, net ................................. 2,967 2,869
Inventories .............................................. 15,285 18,829
Prepaid expenses and other assets ........................ 16,497 14,596
-------- --------
Total current assets ............................ 73,693 62,185
Cost of reacquired area franchise rights, net ............ 9,550 8,954
Property and equipment, net .............................. 27,554 27,311
Other assets ............................................. 1,500 --
-------- --------
$112,297 98,450
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ......................................... 14,938 16,558
Accrued liabilities ...................................... 19,117 18,149
Income taxes payable ..................................... 4,050 --
Deferred service revenues ................................ 14,558 10,550
-------- --------
Total current liabilities ....................... 52,663 45,257
Note payable ............................................. 5,716 5,621
-------- --------
Total liabilities ........................ 58,379 50,878
Stockholders' equity:
Common stock $.000000005 par value, 100,000,000 shares
authorized; 27,580,260 shares issued; 20,687,771 and
20,688,971 shares outstanding at June 30, 1997 and
December 31, 1997, respectively .......................... -- --
Additional paid-in capital ............................... 71,615 71,622
Retained earnings ........................................ 55,053 50,719
Equity adjustment from foreign currency translation ...... 2,012 (7)
Treasury stock at cost, 6,888,089 shares at June 30, 1997
and December 31, 1997, respectively .................... (74,762) (74,762)
-------- --------
Total stockholders' equity .......................... 53,918 47,572
Commitments and contingencies ............................
-------- --------
$112,297 98,450
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE> 3
JENNY CRAIG, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Company-owned operations:
Product sales .............................. $68,786 66,588 143,174 140,167
Service revenues ........................... 6,208 5,053 12,473 10,499
-------- -------- -------- --------
74,994 71,641 155,647 150,666
-------- -------- -------- --------
Franchise operations:
Product sales .............................. 7,014 5,984 15,579 12,656
Royalties .................................. 1,355 1,213 2,964 2,220
Initial franchise fees ..................... 25 5 210 5
-------- -------- -------- --------
8,394 7,202 18,753 14,881
-------- -------- -------- --------
Total revenues ......................... 83,388 78,843 174,400 165,547
-------- -------- -------- --------
Costs and expenses:
Company-owned operations:
Product .................................... 66,129 64,389 135,121 140,045
Service .................................... 4,055 3,554 7,911 7,765
-------- -------- -------- --------
70,184 67,943 143,032 147,810
-------- -------- -------- --------
Franchise operations:
Product .................................... 4,900 4,426 11,538 9,415
Other ...................................... 381 385 906 1,029
-------- -------- -------- --------
5,281 4,811 12,444 10,444
-------- -------- -------- --------
7,923 6,089 18,924 7,293
General and administrative expenses ............ 7,172 5,929 14,524 15,039
-------- -------- -------- --------
Operating income (loss) ................. 751 160 4,400 (7,746)
Other income, net, principally interest ........ 450 297 983 646
-------- -------- -------- --------
Income (loss) before taxes and cumulative
effect of accounting change ............ 1201 457 5,383 (7,100)
Provision (credit) for income taxes ............ 322 174 2,015 (2,766)
-------- -------- -------- --------
Income (loss) before cumulative effect of
accounting change ...................... 879 283 3,368 (4,334)
Cumulative effect on prior years of change in
accounting for service revenue net of
$4,498 income tax benefit .................... -- -- (7,509) --
-------- -------- -------- --------
Net income (loss) ................ $ 879 283 (4,141) (4,334)
======== ======== ======== ========
Basic and Diluted per share amounts:
Income (loss) before cumulative effect of
accounting change ............................ .04 .01 .16 (.21)
Cumulative effect of accounting change ......... -- -- (.36) --
-------- -------- -------- --------
Net income (loss) per share ....... $ .04 .01 (.20) (.21)
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE> 4
JENNY CRAIG, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................................. $(4,141) (4,334)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ......................................... 3,488 3,477
Decrease in other assets - forgiveness of officer loan ................ -- 1,500
Cumulative effect of change in accounting for service revenue ......... 7,509 --
Loss on disposal of property and equipment ............................ -- 664
(Increase) decrease in:
Accounts receivable ......................................... (427) (159)
Inventories ................................................. (2,356) (3,494)
Prepaid expenses and other assets ........................... (1,179) 1,901
Increase (decrease) in:
Accounts payable ............................................ (4,352) 1,620
Accrued liabilities ......................................... (1,615) (968)
Income taxes payable ........................................ 537 (4,050)
Deferred service revenue .................................... (2,620) (4,008)
-------- --------
Net cash used in operating activities .............. (5,156) (7,851)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ...................................... (13,944) (3,630)
Purchase of short-term investments ...................................... (5,975) (8,363)
Proceeds from maturity of short-term investments ........................ 6,850 3,644
Payment for acquisition of franchised centres ........................... (1,803) (145)
-------- --------
Net cash used in investing activities .............. (14,872) (8,494)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock ............................................. (1,258) --
Proceeds from note payable ............................................. 5,975 --
Principal payments on note payable ..................................... -- (95)
Proceeds from exercise of stock options ................................ 106 7
-------- --------
Net cash provided by (used in) financing activities 4,823 (88)
-------- --------
Effect of exchange rate changes on cash and cash equivalents............... (63) (1,340)
-------- --------
Net decrease in cash and cash equivalents ................................. (15,268) (17,773)
Cash and cash equivalents at beginning of period .......................... 43,535 37,439
-------- --------
Cash and cash equivalents at end of period ................................ $28,267 19,666
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid ...................................................... $1,478 3,863
Acquisition of franchised centres:
Cancellation of accounts receivable ................................. $ 732 256
Fair value of assets acquired ....................................... $2,362 401
Liabilities assumed ................................................. $1,630 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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<PAGE> 5
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. The accompanying unaudited consolidated financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. Operating results for any
interim period are not necessarily indicative of the results for any other
interim period or for the full year. These statements should be read in
conjunction with the June 30, 1997 consolidated financial statements.
2. During the quarter ended December 31, 1997 the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (Statement 128). As
required by Statement 128, all prior period information has been restated to
conform to the provisions of Statement 128. The weighted average number of
shares used to calculate basic net income per share was 20,794,000 and
20,688,000 for the quarters ended December 31, 1996 and 1997, respectively and
20,822,000 and 20,688,000 for the six months ended December 31, 1996 and 1997,
respectively. The impact of outstanding stock options during the periods
presented did not create a difference between calculated basic net income per
share and diluted net income per share. Stock options had the effect of
increasing the number of shares used in the calculation by application of the
treasury stock method by 404,000 and 81,000 for the quarters ended December 31,
1996 and 1997, respectively, and by 643,000 for the six month period ended
December 31, 1996. The calculation of diluted earnings per share for the six
months ended December 31, 1997 and for the cumulative effect of accounting
change and net loss for the six months ended December 31, 1996 was not
applicable as inclusion of the effect of stock options would be antidilutive.
3. 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. The results for the periods ended December 31, 1996 reflect the
effect of the change in accounting method as if the change had occurred on
July 1, 1996.
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<PAGE> 6
JENNY CRAIG, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS
Forward-Looking Statements
Information provided in this Report on Form 10-Q 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 forward-looking
statements may relate to anticipated financial performance, business prospects
and similar matters. The words "expects", "anticipates", "believes", and similar
words generally signify a "forward-looking" statement. 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 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. Among the factors that could cause actual results to
differ materially are: increased competition; technological and scientific
developments, including appetite suppressants and other drugs which can be used
in weight-loss programs; increases in cost of food or services; lack of market
acceptance of additional products and services; legislative and regulatory
restrictions or actions; effectiveness of marketing and advertising programs;
prevailing domestic and foreign economic conditions; and the risk factors set
forth from time to time in the Company's annual reports and other reports and
filings with the SEC. In particular, the reader should carefully review the
cautionary statements contained under the caption "Forward-Looking Statements"
in Item 1 of the Company's Annual Report on Form 10-K for the year ended June
30, 1997.
Quarter Ended December 31, 1997 as Compared to Quarter Ended December 31, 1996
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, 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 5% from
$62,704,000 for the quarter ended December 31, 1996 to $59,869,000 for the
quarter ended December 31, 1997. At December 31, 1996 there were 526 United
States Company-owned Centres in operation compared to 547 at December 31, 1997.
The increase in the number of United States Company-owned Centres reflects the
Company's acquisition of 17 Centres from franchisees and the net opening of four
Centres between the periods. Average revenue per United States Company-owned
Centre decreased 9% from $119,000 for the quarter ended December 31, 1996 to
$108,000 for the quarter ended December 31, 1997. Service revenues from United
States Company-owned operations for the quarter ended December 31, 1997
decreased 19% to $4,302,000 from $5,295,000 for the comparable year earlier
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<PAGE> 7
JENNY CRAIG, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS
(Continued)
period. This decrease in service revenues was principally due to a 17% decrease
(22% on an average per centre basis) in the number of new participants enrolled
in the Program. Product sales, which consists primarily of food products, from
United States Company-owned operations decreased 3% from $57,409,000 for the
quarter ended December 31, 1996 to $55,567,000 for the quarter ended December
31, 1997. This decrease was principally due to a 7% decrease in the number of
active clients, offset, in part, by an increase in the average food amount
purchased per client. Revenues from foreign Company-owned operations decreased
4% from $12,290,000 to $11,772,000 for the quarters ended December 31, 1996 and
1997, respectively, primarily due to a 12% weighted average decrease in the
Australian and Canadian currencies in relation to the U.S. dollar between the
periods. There were 104 foreign Company-owned Centres at December 31, 1996
compared to 107 at December 31, 1997.
Costs and expenses of United States Company-owned operations decreased
4% from $60,379,000 to $58,153,000 for the quarters ended December 31, 1996 and
1997, respectively. The decrease in costs and expenses for the quarter ended
December 31, 1997 reflects the decreased variable costs related to the lower
level of operations including reduced compensation expense related to lower
staffing levels maintained at the centres. Costs and expenses of United States
Company-owned operations as a percentage of United States Company-owned revenues
increased from 96% to 97% between the periods principally due to the higher
proportion of fixed costs when compared to the reduced level of revenues. After
including the allocable portion of general and administrative expenses, United
States Company-owned operations incurred an operating loss of $2,531,000 for the
quarter ended December 31, 1997 compared to an operating loss of $2,821,000 for
the quarter ended December 31, 1996. Costs and expenses of foreign Company-owned
operations decreased less than one percent from $9,805,000 to $9,790,000 for the
quarters ended December 31, 1996 and 1997, respectively. After including the
allocable portion of general and administrative expenses, foreign Company-owned
operations had operating income of $1,313,000 for the quarter ended December 31,
1997 compared to operating income of $1,887,000 for the quarter ended December
31, 1996.
Revenues from franchise operations decreased 14% from $8,394,000 to
$7,202,000 for the quarters ended December 31, 1996 and 1997, respectively. This
decline was principally due to a 14% decrease in the number of franchise Centres
in operation, from 161 at December 31, 1996 to 138 at December 31, 1997. The
decrease in the number of franchise Centres reflects the Company's acquisition
of 17 Centres from franchisees and the net closure of six franchised centres
between the periods.
Costs and expenses of franchised operations, which consist primarily of
product costs, decreased 9% from $5,281,000 to $4,811,000 for the quarters ended
December 31, 1996 and 1997, respectively, principally because of the reduced
level of franchise operations. The increase in franchise costs and expenses as a
percentage of franchise revenues was principally due to the reduced royalty
revenue which has a higher margin than product sales.
General and administrative expenses decreased 17% from $7,172,000 to
$5,929,000 and decreased from 8.6% to 7.5% of total revenues for the quarters
ended December 31, 1996 and 1997, respectively. The decrease was principally due
to a decrease in consulting and professional fees.
The elements discussed above combined to result in a 79% decrease in
operating income from $751,000 for the quarter ended December 31, 1996 to
$160,000 for the quarter ended December 31, 1997.
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<PAGE> 8
JENNY CRAIG, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS
(Continued)
Other income, net, principally interest, decreased 34% from $450,000 to
$297,000 for the quarters ended December 31, 1996 and 1997, respectively. This
decline was principally due to a decrease in the average balance of cash
investments between the periods.
The Company is in the process of assessing the functionality of its
computer applications with respect to the "year 2000" millennium change.
Preliminary estimates of the total costs to be incurred prior to 2000 amount to
approximately $500,000. Maintenance or modification costs will be expensed as
incurred, while the costs of new software will be capitalized and amortized over
the software's useful life.
The Company and 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.
The full Commission accepted the proposed Consent Order and it has been
published for public comment. The Company will seek certain modifications to the
Consent Order based upon a proposed consent order the FTC staff recently
announced with another participant in the weight loss industry. The Company does
not believe that compliance with the proposed 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"), 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 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,
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<PAGE> 9
JENNY CRAIG, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS
(Continued)
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.
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<PAGE> 10
JENNY CRAIG, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS
(Continued)
Six Months Ended December 31, 1997 as Compared to Six Months Ended December 31,
1996
Revenues from United States Company-owned operations decreased 3% from
$130,015,000 for the six months ended December 31, 1996 to $126,086,000 for the
six months ended December 31, 1997. At December 31, 1996 there were 526 United
States Company-owned Centres in operation compared to 547 at December 31, 1997.
The increase in the number of United States Company-owned Centres reflects the
Company's acquisition of 17 Centres from franchisees and the net opening of four
centres between the periods. Average revenue per United States Company-owned
Centre decreased 11% from $256,000 for the six months ended December 31, 1996 to
$229,000 for the six months ended December 31, 1997. Service revenues from
United States Company-owned operations for the six months ended December 31,
1997 decreased 16% to $8,919,000 from $10,675,000 for the comparable year
earlier period. This decrease in service revenues was primarily due to a
decrease in the average service fee charged per new participant and is the
principal reason for the decrease in deferred service revenue on the
accompanying balance sheet. Product sales, which consists primarily of food
products, from United States Company-owned operations decreased 2% from
$119,340,000 for the six months ended December 31, 1996 to $117,167,000 for the
six months ended December 31, 1997. This decrease was principally due to a 6%
decrease in the number of active clients, offset, in part, by an increase in the
average food amount purchased per client. Revenues from foreign Company-owned
operations decreased 4% from $25,632,000 to $24,580,000 for the six months ended
December 31, 1996 and 1997, respectively, primarily due to a 9% weighted average
decrease in the Australian and Canadian currencies in relation to the U.S.
dollar between the periods. There were 104 foreign Company-owned Centres at
December 31, 1996 compared to 107 at December 31, 1997.
Costs and expenses of United States Company-owned operations increased
4% from $122,237,000 to $127,509,000 for the six months ended December 31, 1996
and 1997, respectively. The increase in costs and expenses of United States
Company-owned operations for the six months ended December 31, 1997 is
principally due to $2,437,000 of costs related to the now terminated weight loss
medication program adjunct incurred in the quarter ended September 30, 1997,
$3,047,000 of additional advertising expenses associated with the launch of the
Company's new ABC weight management program in the quarter ended September 30,
1997, and the additional fixed costs associated with the increased number of
centres. Costs and expenses of United States Company-owned operations as a
percentage of United States Company-owned revenues increased from 94% to 101%
between the periods principally due to the aforementioned expenses. After
including the allocable portion of general and administrative expenses, United
States Company-owned operations incurred an operating loss of $12,511,000 for
the six months ended December 31, 1997 compared to an operating loss of
$2,364,000 for the six months ended December 31, 1996. Costs and expenses of
foreign Company-owned operations decreased 2% from $20,795,000 to $20,301,000
for the six month periods ended December 31, 1996 and 1997, respectively,
principally because of the 9% weighted average decrease in the Australian and
Canadian currencies in relation to the U.S. dollar between the periods. After
including the allocable portion of general and administrative expenses, foreign
Company-owned operations had operating income of $2,861,000 for the six months
ended December 31, 1997 compared to operating income of $3,628,000 for the six
months ended December 31, 1996.
Revenues from franchise operations decreased 21% from $18,753,000 to
$14,881,000 for the six months ended December 31, 1996 and 1997, respectively.
This decline was principally due to a 14% decrease in the number of franchise
Centres in operation, from 161 at December 31, 1996 to 138 at December 31, 1997
and a decrease in the number of new participants enrolled in the Program at
franchised Centres resulting in reduced product sales and royalties. The
decrease in the number of
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<PAGE> 11
JENNY CRAIG, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS
(Continued)
franchise Centres reflects the Company's acquisition of 17 Centres from
franchisees and the net closure of six franchised centres between the periods.
Costs and expenses of franchised operations, which consist primarily of
product costs, decreased 16% from $12,444,000 to $10,444,000 for the six month
periods ended December 31, 1996 and 1997, respectively, principally because of
the reduced level of franchise operations. The increase in franchise costs and
expenses as a percentage of franchise revenues was principally due to the
reduced royalty revenue which has a higher margin than product sales.
General and administrative expenses increased 4% from $14,524,000 to
$15,039,000 and increased from 8.3% to 9.1% of total revenues for the six months
ended December 31, 1996 and 1997, respectively. This increase was principally
due to expenses totalling $3,500,000 related to the separation of a former
senior executive of the Company incurred in the quarter ended September 30,
1997. 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
balance sheet 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) which were exercisable by the former
senior executive.
The elements discussed above combined to result in an operating loss of
$7,746,000 for the six months ended December 31, 1997 compared to operating
income of $4,400,000 for the six months ended December 31, 1996.
Other income, net, principally interest, decreased 34% from $983,000 to
$646,000 for the six months ended December 31, 1996 and 1997, respectively. This
decline was principally due to a decrease in the average balance of cash
investments between the periods.
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<PAGE> 12
JENNY CRAIG, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS
(Continued)
Financial Condition
At December 31, 1997, the Company had cash, cash equivalents and
short-term investments totalling $25,891,000 compared to $38,944,000 at June 30,
1997, reflecting a decrease during the six month period ended December 31, 1997
of $13,053,000. This decrease was principally due to a $3,494,000 increase in
inventory associated with the introduction of six new food products and
$3,630,000 for the purchase of property and equipment. In addition, $4,008,000
of revenues recognized during the six month period ended December 31, 1997
reflected the amortization of deferred service revenue for which the cash was
received in a prior period. 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.
-12-
<PAGE> 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company along with certain pharmaceutical companies has been named
as a defendant in an action filed in the Court of Common Pleas,
Philadelphia County, Pennsylvania. 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 this matter 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 repect to this litigation under
contractual provisions for indemnification in the agreement between
them. The claim has not progressed sufficiently for the Company to
estimate a range of possible loss, if any. The Company intends to
defend the matter vigorously.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's 1997 Annual Meeting of Stockholders was held on November
5, 1997. At the meeting the stockholders of the Company elected the six
incumbent directors for terms of one year each and until their
successors are duly elected and qualified and ratified the appointment
of KPMG Peat Marwick LLP as the independent certified public
accountants of the Company and its subsidiaries for the fiscal year
ending June 30, 1998.
The results of the vote to elect the six directors were as follows:
<TABLE>
<CAPTION>
SHARES VOTED SHARES FOR WHICH
NAME FOR AUTHORITY WAS WITHHELD
----------------------- -----------------------------
<S> <C> <C>
Sidney Craig 20,145,846 36,825
Jenny Craig 20,146,546 36,125
Scott Bice 20,146,646 36,025
Marvin Sears 20,146,346 36,325
Andrea Van de Kamp 20,152,546 30,125
Robert Wolf 20,152,315 30,356
</TABLE>
-13-
<PAGE> 14
Item 4. Submission of Matters to a Vote of Security Holders (continued)
The results of the vote to ratify the appointment of KPMG Peat Marwick
LLP as independent certified public accountants of the Company and its
subsidiaries for the fiscal year ending June 30, 1998 were as follows:
<TABLE>
<CAPTION>
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINING
- --------------------------- ----------------------------- ----------------------------------------
<S> <C> <C>
20,109,631 4,320 8,720
</TABLE>
There were no broker non-votes on any of the matters submitted to a vote of
security holders.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Agreement and Release dated as of October 1, 1997 between
Jenny Craig, Inc. and C. Joseph LaBonte.
10.2 Stock Option Termination Agreement dated November 4,1997
between Jenny Craig, Inc. and C. Joseph LaBonte.
27. Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
-14-
<PAGE> 15
SIGNATURE
Pursuant to the requirements 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.
JENNY CRAIG, INC.
By: /S/ Michael L. Jeub
---------------------------------------
Michael L. Jeub
Sr. Vice President
and Chief Financial Officer
Date: February 12, 1998
-15-
<PAGE> 1
EXHIBIT 10.1
AGREEMENT AND RELEASE
This AGREEMENT AND RELEASE is entered into as of October 1, 1997
between Jenny Craig, Inc., a Delaware corporation ("JCI"), and C. Joseph LaBonte
("LaBonte") with reference to the following facts:
A. LaBonte has been employed by JCI and JCI's subsidiaries pursuant to
his Employment Agreement with JCI, dated April 11, 1994, as President and Chief
Executive Officer.
B. LaBonte has submitted his resignation as an officer and director
effective as of the date hereof.
C. JCI has accepted LaBonte's resignation and the parties have agreed
to a severance package as set forth below.
NOW, THEREFORE, based upon the foregoing facts and in consideration of
the full and faithful performance of the agreements contained herein, the
parties agree as follows:
1. Reference herein to "JCI" shall also include JCI's
subsidiaries, affiliated corporations and divisions, and their respective
officers, directors, shareholders, agents, employees, attorneys, successors and
assigns. Reference herein to "LaBonte" shall include his heirs, executors,
administrators, agents, successors and assigns.
2. JCI and LaBonte agree to the following payments and
accommodations:
2.1 A severance payment of an amount equal to
LaBonte's base gross monthly salary under
his Employment Agreement, less withholding
taxes and any appropriately authorized
deductions, to be paid to LaBonte in regular
semi-monthly installments through December
31, 1998.
2.2 LaBonte will be entitled to exercise options
to acquire 1,000,000 shares (less options
previously exercised) of common stock of
Jenny Craig, Inc. pursuant to the terms and
conditions of his present Stock Option
Agreement, dated April 11, 1994, including
the "Termination of Options" (Section 3) and
the "Acceleration of Exercisability"
(Section 4) applicable to termination of his
employment by the Company without cause.
2.3 LaBonte will be paid the amount, if any, of
Annual Bonus due pursuant to Section 3.3 of
his Employment Agreement, for the fiscal
year ending June 30, 1998.
-1-
<PAGE> 2
2.4 LaBonte's medical and dental coverages will
continue through December 31, 1998 and
LaBonte will then be offered the opportunity
to purchase such extended medical COBRA
benefits as are mandated.
2.5 LaBonte will be paid, concurrently herewith,
for all unused vacation time accrued as of
the date hereof.
2.6 LaBonte will be paid a monthly temporary
office and secretarial allowance of $2,000
per month for the months of October through
December, 1997.
3. Effective January 2, 1998, the obligation evidenced by
LaBonte's Promissory Note with respect to the $1.5 million Employee Loan made to
LaBonte pursuant to Section 4.2 of his Employment Agreement shall be deemed
satisfied in full on the express condition that, between the date hereof and
January 2, 1998, LaBonte is not in default under the provisions of Section 4
hereof. The original Promissory Note and Deed of Trust evidencing and securing
such Employee Loan, together with a fully executed and notarized Substitution of
Trustee and Reconveyance of such Deed of Trust, shall be deposited with William
D. Gould, Esq. concurrently with the execution hereof. If the Employee Loan has
been satisfied as above set forth, William D. Gould, Esq. is hereby irrevocably
authorized and instructed, at any time on or after January 2, 1998, to mark such
Promissory Note "Canceled," and to deliver to LaBonte such original Promissory
Note and Deed of Trust, together with the original Substitution of Trustee and
Reconveyance.
4. Each and all of the provisions of Section 11 of LaBonte's
Employment Agreement with respect to confidential and proprietary information,
non-solicitation of JCI employees and other matters referred to in said Section
11, are incorporated by reference with the same effect as if fully set forth
herein.
5. Except as to the payments, duties and obligations set forth
in this AGREEMENT AND RELEASE, and except as to LaBonte's rights to
indemnification as provided in Article Ninth of JCI's Restated Certificate of
Incorporation, JCI on the one hand, and LaBonte on the other hand, mutually
release each other of and from any and all claims, rights, actions, causes of
action, liabilities and other obligations of any type, nature or description,
whether known or unknown, arising out of or in any way related, directly or
indirectly, to LaBonte's employment by JCI or the termination of such
employment. Without limiting the generality of the foregoing, LaBonte
acknowledges and agrees that this release shall operate as a complete bar to any
litigation, charges, complaints, grievances or demands arising under Title VII
of the Civil rights Act of 1964, the Age Discrimination in Employment Act, the
California Fair Employment and Housing Act, the Employee Retirement Income
Security Act, and the Worker Adjustment Restraining and Notification Act.
-2-
<PAGE> 3
The parties acknowledge that they are each familiar with the
provisions of Section 1542 of the California Civil Code, which provides as
follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE
TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Being aware of said Code section, each of the parties expressly waives and
relinquishes any rights or benefits such party may have thereunder, as well as
under any other state or federal statutes or common law principles of similar
effect.
The parties each represent and warrant that they have not and
will not assign any rights or claims released hereunder.
6. Except as and to the extent required by law or compelled by
legal process, the parties agree not to publicize or circulate information
regarding the existence or the terms and conditions of this AGREEMENT AND
RELEASE, and further agree not to make any statement or take any action which
will, or may, bring into disrepute, harm, inconvenience, embarrass or otherwise
be against the best interests of the other party.
7. The obligations of the parties under this AGREEMENT AND
RELEASE shall be binding upon and inure to the benefit of, respectively, LaBonte
and his heirs, executors, legal representatives and assigns, and JCI and its
successors and assigns.
-3-
<PAGE> 4
8. This AGREEMENT AND RELEASE represents the entire agreement
of the parties and may be amended only by a writing signed by each of them, and
shall be governed by and construed in accordance with the laws of the State of
California.
LABONTE, BY HIS SIGNATURE BELOW, ACKNOWLEDGES THAT HE HAS READ
AND THAT HE THOROUGHLY UNDERSTANDS THE TERMS OF THIS AGREEMENT
AND RELEASE; AND THAT HE VOLUNTARILY ENTERS INTO IT WITHOUT
RESERVATION OF ANY TYPE REGARDING ITS TERMS, PAYMENTS, DUTIES
OR OBLIGATIONS AFTER CONSULTATION WITH COUNSEL OF HIS CHOICE.
JENNY CRAIG, INC.
By: /s/SIDNEY CRAIG, CEO
-----------------------------------
/s/C.JOSEPH LABONTE
--------------------------------------
C. Joseph LaBonte
-4-
<PAGE> 1
EXHIBIT 10.2
JENNY CRAIG, INC.
11355 NORTH TORREY PINES ROAD
LAJOLLA, CALIFORNIA 92037
STOCK OPTION TERMINATION AGREEMENT
Mr. C. Joseph LaBonte November 4, 1997
6150 Via Posada del Norte
P.O. Box 9488
Rancho Santa Fe, CA 92067
Dear Mr. LaBonte:
1. Reference is hereby made to the following agreements (collectively,
the "Stock Option Agreements") pursuant to which Jenny Craig, Inc. (the
"Company") granted you options to purchase shares of Common Stock of the Company
(the "Options") under the Jenny Craig, Inc.
1991 Stock Option Plan, as amended (the "Plan"):
A. Stock Option Agreement between you and the Company, dated
December 14, 1992, pursuant to which you were granted Options to purchase a
total of 5,000 shares (of which 5,000 remain unexercised as of the date hereof),
at an option price of $18.57 per share;
B. Stock Option Agreement between you and the Company, dated
December 14, 1992, pursuant to which you were granted Options to purchase a
total of 5,000 shares (of which 5,000 remain unexercised as of the date hereof),
at an option price of $18.57 per share;
C. Stock Option Agreement between you and the Company, dated
December 14, 1993, pursuant to which you were granted Options to purchase a
total of 500 shares (of which 500 remain unexercised as of the date hereof), at
an option price of $14.56 per share; and
D. Stock Option Agreement between you and the Company, dated
April 11, 1994, pursuant to which you were granted Options to purchase a total
of 1,000,000 shares (of which 999,600 remain unexercised as of the date hereof),
at an option price of $6.57 per share. The Options granted to you in the Stock
Option Agreements which have not been exercised as of the date hereof, of which
there are 1,010,100, are hereinafter referred to as the "Unexercised Options."
This letter will confirm the agreement between you and the Company to
terminate and cancel the Stock Option Agreements and the Unexercised Options.
<PAGE> 2
1. The Stock Option Agreements and the Unexercised Options are hereby
irrevocably terminated and canceled as of the date hereof, and neither the Stock
Option Agreements nor the Unexercised Options shall be of any further force or
effect.
2. In consideration of the termination and cancellation of the Stock
Option Agreements and the Unexercised Options pursuant to paragraph 1 above, the
Company shall pay you the sum of One Million Dollars ($1,000,000), which sum
shall be paid as follows:
(a) The Company shall pay you the sum of Two Hundred
Thousand Dollars ($200,000) on January 2, 1998;
(b) The Company shall pay you the sum of Two Hundred
Thousand Dollars ($200,000) on November 1, 1998;
(c) The Company shall pay you the sum of Two Hundred
Thousand Dollars ($200,000) on November 1, 1999;
(d) The Company shall pay you the sum of Two Hundred
Thousand Dollars ($200,000) on November 1, 2000; and
(e) The Company shall pay you the sum of Two Hundred
Thousand Dollars ($200,000) on November 1, 2001.
The payments referred to above are hereinafter referred to as the
"Stock Termination Payments."
3. The sums described in paragraph 2 above shall not bear any interest
and any amounts required to be withheld from the Stock Termination Payments
under federal, state or local law shall be deducted therefrom.
4. This agreement constitutes the entire agreement between you and the
Company with respect to the subject matter hereof and shall supersede all other
written or oral agreements with respect thereto. This agreement and any
provision hereof may only be amended or waived in a writing signed by the party
to be charged.
5. This agreement is binding upon and shall inure to the benefit of
each party hereto and their respective heirs, successors, assigns and
representatives.
6. This agreement shall be governed by and construed in accordance with
the laws of the State of California. Any notices hereunder shall be in writing
and sent to the parties at the addresses set forth above.
7. This agreement may be executed in counterparts, each of which shall
be deemed an original but all of which taken together shall constitute one and
the same instrument.
<PAGE> 3
Mr. C. Joseph LaBonte
November 4, 1997
Page 3
Please indicate your agreement by signing and returning the enclosed
copy of this letter.
Very truly yours,
JENNY CRAIG, INC.
/s/SIDNEY CRAIG
------------------------------------
By: Sidney Craig
Chairman, President and
Chief Executive Officer
Agreed:
/s/C. JOSEPH LABONTE
- ----------------------------------
C. Joseph LaBonte
Date: November 4, 1997
GUARANTY
The undersigned hereby guarantees the full and punctual payment of the
Stock Option Termination Payments.
/s/SIDNEY CRAIG
----------------------------------
Sidney Craig
Date: November 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOR THE SIX
MONTHS ENDED DECEMBER 31, 1997 INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
QUARTER ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19,666
<SECURITIES> 6,225
<RECEIVABLES> 2,869<F1>
<ALLOWANCES> 0
<INVENTORY> 18,829
<CURRENT-ASSETS> 62,185
<PP&E> 27,311<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 98,450
<CURRENT-LIABILITIES> 45,257
<BONDS> 5,621
0
0
<COMMON> 0
<OTHER-SE> 47,572
<TOTAL-LIABILITY-AND-EQUITY> 98,450
<SALES> 152,823
<TOTAL-REVENUES> 165,547
<CGS> 149,460
<TOTAL-COSTS> 158,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225
<INCOME-PRETAX> (7,100)
<INCOME-TAX> (2,766)
<INCOME-CONTINUING> (4,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,334)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF
ALLOWANCES AND DEPRECIATION, RESPECTIVELY.
</FN>
</TABLE>
