<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 March 31, 1999 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, $.000000005 par value, outstanding as
of the close of business on May 7, 1999- 20,688,971.
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<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
JENNY CRAIG, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
---------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................. $ 42,124 36,410
Short-term investments .................................... 1,236 3,388
Accounts receivable, net .................................. 2,617 3,055
Inventories ............................................... 14,469 20,534
Prepaid expenses and other assets ......................... 12,548 14,623
--------- ---------
Total current assets ............................. 72,994 78,010
Cost of reacquired area franchise rights, net ............. 8,419 7,819
Property and equipment, net ............................... 24,832 24,240
--------- ---------
$ 106,245 110,069
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .......................................... 15,256 18,558
Accrued liabilities ....................................... 19,399 16,555
Deferred service revenue .................................. 10,278 10,157
--------- ---------
Total current liabilities .................. 44,933 45,270
Note payable .............................................. 5,526 5,384
--------- ---------
Total liabilities .......................... 50,459 50,654
Stockholders' equity:
Common stock $.000000005 par value, 100,000,000 shares
authorized; 27,580,260 shares issued; 20,688,971 shares
outstanding at June 30, 1998 and March 31,1999 ........ -- --
Additional paid-in capital ................................ 71,622 71,622
Retained earnings ......................................... 57,179 60,318
Accumulated other comprehensive income .................... 1,747 2,237
Treasury stock, at cost: 6,891,289 shares at June 30, 1998
and March 31, 1999 ...................................... (74,762) (74,762)
--------- ---------
Total stockholders' equity ........................... 55,786 59,415
Commitments and contingencies
--------- ---------
$ 106,245 110,069
========= =========
</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 Nine Months Ended
March 31, March 31,
----------------------- ----------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Company-owned operations:
Product sales .......................... $ 80,386 73,429 220,553 212,614
Service revenue ........................ 4,957 4,099 15,456 12,050
-------- -------- -------- --------
85,343 77,528 236,009 224,664
-------- -------- -------- --------
Franchise operations:
Product sales .......................... 6,636 6,037 19,292 16,998
Royalties .............................. 1,128 994 3,348 2,771
Initial franchise fees ................. 25 -- 30 5
-------- -------- -------- --------
7,789 7,031 22,670 19,774
-------- -------- -------- --------
Total revenues ..................... 93,132 84,559 258,679 244,438
-------- -------- -------- --------
Costs and expenses:
Company-owned operations:
Product ................................ 75,508 69,100 215,553 200,374
Service ................................ 3,356 2,850 11,121 8,376
-------- -------- -------- --------
78,864 71,950 226,674 208,750
-------- -------- -------- --------
Franchise operations:
Product ................................ 4,997 4,191 14,412 11,637
Other .................................. 408 590 1,437 1,675
-------- -------- -------- --------
5,405 4,781 15,849 13,312
-------- -------- -------- --------
8,863 7,828 16,156 22,376
General and administrative expenses ........ 5,863 6,428 20,902 18,562
-------- -------- -------- --------
Operating income (loss) ............. 3,000 1,400 (4,746) 3,814
Other income, net, principally interest .... 229 317 875 1,248
-------- -------- -------- --------
Income (loss) before taxes .......... 3,229 1,717 (3,871) 5,062
Provision (credit) for income taxes ........ 1,187 651 (1,579) 1,923
-------- -------- -------- --------
Net income (loss) .................... $ 2,042 1,066 (2,292) 3,139
======== ======== ======== ========
Basic and diluted net income (loss)
per share .......................... $ .10 .05 (.11) .15
======== ======== ======== ========
</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>
Nine Months Ended
March 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................... $ (2,292) 3,139
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................................ 5,270 4,110
Decrease in other assets - forgiveness of officer loan ............... 1,500 --
Loss on disposal of property and equipment ........................... 959 209
(Increase) decrease in:
Accounts receivable ........................................ (42) (438)
Inventories ................................................ 1,718 (6,065)
Prepaid expenses and other assets .......................... 2,299 (2,075)
Increase (decrease) in:
Accounts payable ........................................... (431) 3,302
Accrued liabilities ........................................ 516 (2,844)
Income taxes payable ....................................... (4,050) --
Deferred service revenue ................................... (3,262) (121)
-------- --------
Net cash provided by (used in) operating activities 2,185 (783)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment .................................... (4,442) (3,128)
Purchase of short-term investments ..................................... (8,363) (6,033)
Proceeds from maturity of short-term investments ....................... 8,653 3,881
Payment for acquisition of franchised centres ......................... (145) --
-------- --------
Net cash used in investing activities ............. (4,297) (5,280)
-------- --------
Cash flows from financing activities:
Principal payments on note payable .................................... (142) (142)
Proceeds from exercise of stock options ............................... 7 --
-------- --------
Net cash used in financing activities ............. (135) (142)
-------- --------
Effect of exchange rate changes on cash and cash equivalents ............. (1,059) 491
-------- --------
Net decrease in cash and cash equivalents ................................ (3,306) (5,714)
Cash and cash equivalents at beginning of period ......................... 37,438 42,124
-------- --------
Cash and cash equivalents at end of period ............................... $ 34,132 36,410
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid ..................................................... $ 4,546 3,962
Acquisition of franchised centres:
Cancellation of accounts receivable ................................ $ 256 --
Fair value of assets acquired ...................................... $ 401 --
Liabilities assumed ................................................ $ -- --
</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
March 31, 1999
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, 1998 consolidated financial statements.
2. The weighted average number of shares used to calculate basic net income
(loss) per share was 20,688,971 for the quarters ended March 31, 1998 and 1999,
and 20,688,304 and 20,688,971 for the nine months ended March 31, 1998 and 1999,
respectively. The impact of outstanding stock options during the periods
presented did not create a difference between calculated basic net income (loss)
per share and diluted net income (loss) 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 298 shares and 24,324 shares for the quarters ended
March 31, 1999 and 1998, respectively, and 772 shares for the nine months ended
March 31, 1999. The calculation of diluted net loss per share for the nine
months ended March 31, 1998 was not applicable as inclusion of the effect of
stock options would be antidilutive; however, an additional 134,866 shares would
have been included in the calculation of diluted net income (loss) per share for
the nine months ended March 31, 1998.
3. During the quarter ended September 30, 1998 the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires the disclosure of comprehensive income to reflect
changes in equity that result from transactions and economic events from
non-owner sources. Comprehensive income (loss) for the three and nine months
ended March 31, 1998 and 1999 presented below includes foreign currency
translation items. There was no tax expense or tax benefit associated with the
foreign currency items.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------- --------------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) ...................... $2,042 1,066 (2,292) 3,139
Foreign currency translation adjustments 154 475 (1,865) 490
------ ------ ------ ------
Comprehensive income (loss) ..... $2,196 1,541 (4,157) 3,629
====== ====== ====== ======
</TABLE>
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<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, 1998.
Quarter Ended March 31, 1999 as Compared to Quarter Ended March 31, 1998
Revenues from United States Company-owned operations decreased 13% from
$73,127,000 for the quarter ended March 31, 1998 to $63,566,000 for the quarter
ended March 31, 1999. The average number of United States Company-owned centres
in operation decreased 3% from an average of 541 centres for the quarter ended
March 31, 1998 to an average of 526 for the quarter ended March 31, 1999. The
decrease in the number of United States Company-owned centres reflects the
closure of 12 centres between the periods. At March 31, 1999 there were 524
United States Company-owned centres in operation. Average revenue per United
States Company-owned centre decreased 10% from $135,000 for the quarter ended
March 31, 1998 to $121,000 for the quarter ended March 31, 1999. Service
revenues from United States Company-owned operations for the quarter ended March
31, 1999 decreased 20%, to $3,341,000 from $4,200,000 for the comparable year
earlier period. This decrease in service revenues was principally due to a
decrease in the average service fee collected per new participant, offset, in
part, by a 6% increase in the number of new participants enrolled in the Program
during the quarter ended March 31, 1999 compared to the quarter ended March 31,
1998.
Product sales, which consists primarily of food products, from United
States Company-owned operations decreased 13% from $68,927,000 for the quarter
ended March 31, 1998 to $60,225,000 for the quarter ended March 31, 1999. This
decrease was principally due to a decrease in the average dollar amount of
products purchased per active client as a result of the On-the-Go program,
described below, and a 1% decrease in the number of active clients between the
periods. In January 1999, the Company introduced a new program option entitled
On-the-Go. The On-the-Go program was designed to be a lower cost menu option for
clients compared to the Company's traditional program, as well as a more
convenient, portable option for today's busy consumers. The
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<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
On-the-Go program features meal supplements, consisting principally of
nutritious bars and smoothie-type drinks, to be used by clients primarily for
breakfast and lunch. The client is then able to choose their dinner meal, either
from the Company's traditional entrees or from the supermarket. The Company
expected that there would be a decrease in the average dollar amount of food
products purchased per client, but believed that this decrease would be offset
by an increase in the number of active clients enrolled in the program. Initial
response to the new program was strong, with nearly one-half of the Company's
clients choosing the On-the-Go meal supplements either separately or in
combination with the Company's traditional pre-packaged foods. However, the
Company was unable to increase the number of new program participants to a level
to offset the drop in the average dollar amount of food products purchased per
client. The Company continues to offer the On-the-Go program, however it is not
emphasized in the Company's advertising.
Revenues from foreign Company-owned operations increased 14% from
$12,216,000 for the quarter ended March 31, 1998 to $13,962,000 for the quarter
ended March 31, 1999, despite an 8% weighted average decrease in the Australian
and Canadian currencies in relation to the U.S. dollar between the periods. The
increase in revenues from foreign Company-owned operations was principally due
to an increase in the number of new participants enrolled in the Program in
Australia. There were 107 foreign Company-owned centres at March 31, 1998
compared to 110 at March 31, 1999.
Costs and expenses of United States Company-owned operations decreased
11% from $68,582,000 to $60,901,000 for the quarters ended March 31, 1998 and
1999, respectively. The decrease in costs and expenses for the quarter ended
March 31, 1999 reflects the decreased variable costs related to the lower level
of operations and the decreased fixed costs associated with the decrease in the
number of United States Company-owned centres in operation. Costs and expenses
of United States Company-owned operations as a percentage of United States
Company-owned revenues increased from 94% to 96% 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
$2,032,000 for the quarter ended March 31, 1999 compared to operating income of
$368,000 for the quarter ended March 31, 1998. Costs and expenses of foreign
Company-owned operations increased 7% from $10,282,000 to $11,049,000 for the
quarters ended March 31, 1998 and 1999, respectively, principally due to the
increased variable costs related to the higher level of operations, partially
offset by the 8% 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 $2,262,000 for the quarter
ended March 31, 1999 compared to operating income of $1,260,000 for the quarter
ended March 31, 1998.
Revenues from franchise operations decreased 10% from $7,789,000 to
$7,031,000 for the quarters ended March 31, 1998 and 1999, respectively. This
decline was principally due to a 4% decrease in the average number of franchise
centres in operation between the periods and a decrease in food products sold to
participants enrolled in the program at franchise centres, resulting in reduced
product sales and royalties. The decrease in the average number of franchise
centres reflects the net closure of four franchised centres between the periods.
At March 31, 1999 there were 133 franchised centres in operation.
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<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Costs and expenses of franchised operations, which consist primarily of
product costs, decreased 12% from $5,405,000 to $4,781,000 for the quarters
ended March 31, 1998 and 1999, respectively, principally because of the reduced
level of franchise operations. Franchise costs and expenses as a percentage of
franchise revenues remained relatively constant at 69% and 68% for the quarters
ended March 31, 1998 and 1999, respectively.
General and administrative expenses increased 10% from $5,863,000 to
$6,428,000 and increased from 6.3% to 7.6% of total revenues for the quarters
ended March 31, 1998 and 1999, respectively. This increase was principally due
to increased consulting expenses related to the Company's introduction of a line
of vitamin products and increased compensation expense.
The elements discussed above combined to result in operating income of
$1,400,000 for the quarter ended March 31, 1999 compared to operating income of
$3,000,000 for the quarter ended March 31, 1998.
Other income, net, principally interest, increased 38% from $229,000 to
$317,000 for the quarters ended March 31, 1998 and 1999, respectively. This
increase was principally due to an increase in the average balance of cash
investments between the periods.
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<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Nine Months Ended March 31, 1999 as Compared to Nine Months Ended March 31, 1998
Revenues from United States Company-owned operations decreased 6% from
$199,213,000 for the nine months ended March 31, 1998 to $187,291,000 for the
nine months ended March 31, 1999. The average number of United States
Company-owned centres in operation decreased 3% from an average of 547 centres
for the nine months ended March 31, 1998 to an average of 528 centres for the
nine months ended March 31, 1999. The decrease in the number of United States
Company-owned centres reflects the closure of 12 centres between the periods. At
March 31, 1999 there were 524 United States Company-owned centres in operation.
Average revenue per United States Company-owned centre decreased 2% from
$364,000 for the nine months ended March 31, 1998 to $355,000 for the nine
months ended March 31, 1999. Service revenue from United States Company-owned
operations for the nine months ended March 31, 1999 decreased 25% to $9,868,000
from $13,119,000 for the comparable year earlier period. This decrease in
service revenue was primarily due to a 7% decrease in the number of new
participants enrolled in the Program between the periods and a decrease in the
average service fee collected per new participant. Product sales, which consists
primarily of food products, from United States Company-owned operations
decreased 5% from $186,094,000 for the nine months ended March 31, 1998 to
$177,423,000 for the nine months ended March 31, 1999. This decrease was
principally due to a decrease in the average dollar amount of products purchased
per active client as a result of the On-the-Go program and a 2% decrease in the
number of active clients between the periods. Revenues from foreign
Company-owned operations increased 2% from $36,796,000 to $37,373,000 for the
nine months ended March 31, 1998 and 1999, respectively, despite a 12% weighted
average decrease in the Australian and Canadian currencies in relation to the
U.S. dollar between the periods. The increase in revenues from foreign
Company-owned operations was principally due to an increase in the number of new
participants enrolled in the Program in Australia. There were 107 foreign
Company-owned centres at March 31, 1998 compared to 110 at March 31, 1999.
Costs and expenses of United States Company-owned operations decreased
9% from $196,091,000 to $178,712,000 for the nine months ended March 31, 1998
and 1999, respectively. Costs and expenses of United States Company-owned
operations in the prior year period included $2,437,000 of costs related to the
weight loss medication program which was terminated in August 1997 and
$3,047,000 of additional advertising expenses associated with the launch of the
Company's ABC weight management program. The decrease in costs and expenses of
United States Company-owned operations for the nine months ended March 31, 1999
reflects the absence of these costs and expenses, the reduced variable costs
associated with the lower level of operations, and the reduced fixed costs
associated with the decreased number of centres. Costs and expenses of United
States Company-owned operations as a percentage of United States Company-owned
revenues decreased from 98% to 95% between the periods principally due to the
absence of these costs and expenses. After including the allocable portion of
general and administrative expenses, United States Company-owned operations
incurred an operating loss of $5,027,000 for the nine months ended March 31,
1999 compared to an operating loss of $12,143,000 for the nine months ended
March 31, 1998. Costs and expenses of foreign Company-owned operations decreased
2% from $30,583,000 to $30,038,000 for the nine month periods ended March 31,
1998 and 1999, respectively, principally because of the 12% weighted average
decrease in the Australian and Canadian currencies in relation to the U.S.
dollar between the periods. After including the
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<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
allocable portion of general and administrative expenses, foreign Company-owned
operations had operating income of $5,479,000 for the nine months ended March
31, 1999 compared to operating income of $4,119,000 for the nine months ended
March 31, 1998.
Revenues from franchise operations decreased 13% from $22,670,000 to
$19,774,000 for the nine months ended March 31, 1998 and 1999, respectively.
This decline was principally due to a decrease in the number of new participants
enrolled in the Program at franchised centres resulting in reduced product sales
and royalties and a 4% decrease in the average number of franchise centres in
operation between the periods. The decrease in the average number of franchise
centres reflects the net closure of four franchised centres between the periods.
At March 31, 1999 there were 133 franchised centres in operation.
Costs and expenses of franchised operations, which consist primarily of
product costs, decreased 16% from $15,849,000 to $13,312,000 for the nine month
periods ended March 31, 1998 and 1999, respectively, principally because of the
reduced level of franchise operations. The decrease in franchise costs and
expenses as a percentage of franchise revenues from 70% to 67% for the nine
months ended March 31, 1998 and 1999, respectively, was principally due to a
reduction in national advertising, a portion of which is allocated to franchise
operations.
General and administrative expenses decreased 11% from $20,902,000 to
$18,562,000 and decreased from 8.1% to 7.6% of total revenues for the nine
months ended March 31, 1998 and 1999, respectively. The decrease in general and
administrative expenses is principally due to expenses totalling $3,500,000
included in the prior year period related to the separation of a former senior
executive of the Company. These expenses included $1,500,000 for the forgiveness
of a loan made to the former senior executive in 1995, $1,000,000 for the
payment of the former senior executive's salary and benefits through December
31, 1998, and $1,000,000 for the cancellation of stock options which were
exercisable by the former senior executive.
The elements discussed above combined to result in operating income of
$3,814,000 for the nine months ended March 31, 1999 compared to an operating
loss of $4,746,000 for the nine months ended March 31, 1998.
Other income, net, principally interest, increased 43% from $875,000 to
$1,248,000 for the nine months ended March 31, 1998 and 1999, respectively. This
increase was principally due to an increase in the average balance of cash
investments between the periods.
Approval of Xenical
In April 1999, the United States Food and Drug Administration ("FDA") approved
Xenical, a prescription drug for the treatment of obesity. Unlike other weight
loss drugs (including Redux and fenfluramine which were recalled in September
1997) which are appetite suppressors, Xenical blocks an enzyme in the
gastrointestinal tract which decreases absorption of dietary fat by
approximately 30%. The FDA approved Xenical for use by the seriously obese,
defined by a body mass index (a measure of weight in relation to height) of 30
or more, or 27 or greater by individuals who have related medical conditions,
such as high blood pressure, diabetes, or high cholesterol.
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<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company does not currently plan to incorporate Xenical as a program option
and cannot estimate the effect that Xenical will have on demand for the
Company's products or services; however, prior introductions of weight loss
medications have had a material adverse impact on the Company's operating
results.
Year 2000
The Company is in the process of remediating both its information
technology ("IT") and non-IT systems with respect to the "year 2000" millenium
change. The Company utilizes two primary IT systems: the corporate office
system, which includes the general ledger and related applications, and the
point-of-sale system, which is used at each of the 550 Company-owned centres in
North America to record sales to customers. With respect to the corporate office
system, the Company has determined that its current system, implemented in 1991,
is not year 2000 compliant. Accordingly, the Company accelerated the planned
replacement of this system by purchasing new corporate office system software in
the first quarter of fiscal 1999. The implementation process for this new system
is nearly complete, with a majority of the new software functions having been
placed into service on May 1, 1999, and the Company expects the implementation
to be completed by June 1, 1999. The cost of the new corporate office system
software of $189,000 was capitalized and is being amortized over the five year
estimated useful life of the new software. The cost of new hardware, which was
purchased in January 1999, necessary to install the new corporate office system
is $201,000 and will be depreciated over the five year estimated useful life of
the new hardware. Additional implementation costs, comprised principally of
external consultants, are estimated to be $900,000 and will be capitalized as
incurred in fiscal 1999.
With respect to the point-of-sale system, there are two basic
components: the software and the hardware. The point-of-sale software has been
assessed and estimated costs to modify this software to effect year 2000
compliance totalling approximately $350,000 will be expensed as incurred in
fiscal 1999. The point-of-sale hardware is essentially a personal computer
("PC") network consisting of a file server and four PCs at the Company-owned and
franchised centres in North America. The Company has completed an analysis of
the hardware at these centres and has concluded, based upon a study performed by
an independent consultant engaged by the Company, that substantially all of this
hardware will require replacement. The Company previously believed that a
substantial portion of this hardware could be modified to effect year 2000
compliance at a much lesser cost. The new estimate of the cost to replace and
install this hardware is approximately $9,000 per Company-owned centre, or
$4,950,000 in aggregate. The Company expects that substantially all of these
hardware costs will be incurred prior to the new planned completion date of
November 30, 1999 and that substantially all of these costs will be capitalized
and depreciated over their estimated useful life of five years.
With respect to non-IT systems, the Company is assessing its embedded
systems contained in the corporate office building and centre locations. This
assessment is principally focusing on the Company's telephone system hardware
and software. The Company plans to complete the assessment of non-IT systems by
June 30, 1999.
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<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The final area of significance pertaining to the Company's year 2000
planning relates to third parties with whom the Company transacts business. This
includes the Company's food suppliers, banks, advertising agencies,
telecommunications suppliers, and utility providers. The Company has sent
written questionnaires to significant suppliers and vendors in an effort to
assess their year 2000 readiness and the effect these third parties could have
on the Company. The Company plans to maintain communication with significant
suppliers and vendors with respect to this issue.
As detailed above, the Company estimates that approximately $6,590,000
will be expended in connection with year 2000 compliance. The Company expects
that available financing sources, together with cash, cash equivalents and
short-term investments currently on hand, will be sufficient to fund these
disbursements. Costs incurred through March 31, 1999 related to year 2000
compliance totalled $811,000, of which $232,000 was expended in the quarter
ended March 31, 1999 principally comprised of payments to external consultants.
The Company does not separately track the internal costs, principally
compensation costs for the Information Systems department, incurred with respect
to the year 2000 project.
Although the Company believes that its planning, as detailed above, will
enable the Company to be adequately prepared for the year 2000, a contingency
plan is also being developed. With respect to the point-of-sale system, the
Company has a manual back-up system which was the Company's primary
point-of-sale system from the Company's inception in 1983 through 1990. The
Company believes that this manual point-of-sale system could be utilized in the
event of a delay in the implementation of the plan to have the point-of-sale
system year 2000 compliant during 1999. With respect to the corporate office
system, the Company believes that a third party provider of data processing
services could provide the basic services necessary for the Company to maintain
adequate books and records, similar to the methodology utilized by the Company
prior to 1991. The Company expects to have the specific third party provider to
be utilized as a contingency plan identified by June 30, 1999.
The statements set forth above relating to the Company's analysis and
plans with respect to the year 2000 issue in many cases constitute
forward-looking statements which are necessarily speculative. Actual results may
differ materially from those described above. The factors which could cause
actual results to differ materially include, without limitation, the following:
the Company's assessment of the impact of year 2000 is not complete and further
analysis and study, as well as the testing and implementation of planned
solutions, could disclose additional remedial work, with the resultant
additional time and expense, necessary to permit the Company's IT and non-IT
systems to be year 2000 compliant; third party consultants and software and
hardware suppliers could fail to meet timetables and projected cost estimates;
third party suppliers of products and services to the Company could make
mistakes in their advice to the Company with respect to their year 2000
readiness, and their failure to be year 2000 compliant could have a material
adverse effect on the Company; the Company's estimates of the periods of time
and costs necessary to complete certain analysis and implementation could be
impacted by future events and conditions such as a shortage of personnel,
including Company employees and outside consultants, to perform the necessary
analysis and remediation work.
-12-
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Legal Proceedings
The Company along with other weight loss programs and certain
pharmaceutical companies was 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 were 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 included 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 sought 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 was dismissed from this action in April 1999 without the payment of any
damages.
The Company along with certain pharmacetuical companies has also been
named as a defendant in an action filed in the Court of Common Pleas,
Philadelphia County, Pennsylvania (the "Pennsylvania Litigation"). The action
was commenced in November 1997 by a plaintiff, a participant in the Company's
program, who is seeking to maintain the action as a class action on behalf of
all persons in the Commonwealth of Pennsylvania who have purchased and used
fenfluramine, dexfenfluramine and phentermine, alone or in combination. The
complaint includes claims against the Company and the other defendants for
alleged false and misleading statements concerning the safety and
appropriateness of using fenfluramine, dexfenfluramine, and phentermine and the
benefits, uses and ingredients of these drugs, negligence in the distribution,
sale and prescribing of these medications and breach of the warranty of
merchantability. The complaint seeks compensatory and punitive damages in
unspecified amounts and a Court-supervised program funded by the defendants
through which class members would undergo periodic medical examination and
testing.
The Company 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 Pennsylvania Litigation has not progressed sufficiently for
the Company to estimate a range of possible loss, if any. The Company intends to
defend the Pennsylvania Litigation vigorously.
-13-
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Financial Condition
At March 31, 1999, the Company had cash, cash equivalents and short-term
investments totalling $39,798,000 compared to $43,360,000 at June 30, 1998,
reflecting a decrease during the nine month period ended March 31, 1999 of
$3,562,000. This decrease was principally due to a $6,065,000 increase in
inventory associated, in part, with the January 1999 introduction of the new
On-the-Go program and purchases of property and equipment totalling $3,128,000.
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.
-14-
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including changes in
interest rates affecting the return on its investments and the cost of its debt,
and foreign currency fluctuations.
At March 31, 1999, the Company maintains a portion of its cash and cash
equivalents in financial instruments with original maturities of three months or
less. The Company also maintains a short-term investment portfolio containing
financial instruments with original maturities of greater than three months but
less than twelve months. These financial instruments, principally comprised of
high quality commercial paper, are subject to interest rate risk and will
decline in value if interest rates increase. Due to the short duration of these
financial instruments, an immediate 10 percent increase in interest rates would
not have a material effect on the Company's financial condition or results of
operations. The Company has not used derivative financial instruments in its
investment portfolio.
The Company's only long-term debt at March 31, 1999 is comprised of a
note payable to a bank, secured by the Company's corporate office building, with
a total balance of $5,573,000. The note bears interest at the London Interbank
Offered Rate plus one percent, with quarterly interest rate adjustments. Due to
the relative immateriality of the note payable, an immediate 10 percent change
in interest rates would not have a material effect on the Company's financial
condition or results of operations.
Approximately 19% of the Company's revenues for the quarter ended March
31, 1999 were generated from foreign operations, located principally in
Australia and Canada. In the quarter ended March 31, 1999, the Company was
subjected to an 8% weighted average decrease in the Australian and Canadian
currencies in relation to the U.S. dollar compared to the quarter ended March
31, 1998. In October, 1998 the Company entered into a foreign exchange put
option for Australian dollars at a strike price of $.60 which expires on June
30, 1999. The Company may, from time to time, enter into similar agreements to
protect the Company from foreign currency fluctuations.
-15-
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Agreement dated as of April 1, 1999 between Jenny Craig,
Inc. and Jack O'Conner.
27. Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
-16-
<PAGE> 17
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: May 12, 1999
-17-
<PAGE> 1
EXHIBIT 10.1
[JENNY CRAIG LETTERHEAD]
April 1, 1999
Mr. Jack F. O'Connor
3931 Palomar Drive
Fallbrook, CA 92028
Dear Jack:
It's been a pleasure to meet with you regarding the opportunities and challenges
at Jenny Craig, and this letter will formalize our employment offer to you.
While your duties will involve the broad spectrum of Jenny Craig Inc.'s
business, the following is an outline of the specific responsibilities you will
assume, and the other issues we discussed, upon your joining the Company:
1. Your position will be Vice President, Information Systems reporting directly
to me.
2. The duties for this position involve the oversight and responsibility for
the Company's Information Systems function including developing a corporate
vision and strategic plan which supports the company's business goals. Act
as the chairperson for the Y2K project. Develop company standards and
criteria for hardware and software systems and vendors at both the mainframe
and desktop levels. You will interact with all levels of management to
define and prioritize internal and external customer needs as well as
perform similar and incidental duties as required.
3. Your annual compensation will be one hundred and seventy thousand dollars
($170,000) per year payable on a bi-monthly basis (the 10th and the 25th).
Your reporting date is April 12, 1999. Your performance review will be every
April 12th. You will also be eligible to participate in the Company's
Executive Incentive Compensation Plan for fiscal year 2000, which will begin
on July 1, 1999.
4. You will receive an option to purchase twenty-five thousand (25,000) shares
of common stock of the Company in concert with the Company's Stock Option
Plan. The option price will be the average of the high and low price for a
share of JCI common stock on the New York Stock Exchange on the day you
begin your employment. The vesting period for options will be over a four
(4) year period in four (4) annual equal installments of twenty five percent
(25%), the first of which will vest on the first anniversary of your
employment with the Company. If your employment is terminated by the Company
without cause, all options not then exercisable will become exercisable.
5. Upon joining the Company you will be afforded the same fringe benefit
opportunities as other senior executives in the Company, e.g., group health,
life, disability, 401(k), upon your initial hire date you will begin
accruing PTO at the rate of 8 hours per pay period or 24 days per year to a
maximum of 36
<PAGE> 2
days. The Company may modify these plans as well as the written policies of
the Company from time to time.
6. The Company shall have the right to terminate your employment at any time,
with or without cause, by written notice to you. If your employment is
terminated by the Company without cause, or by you within ninety (90) days
following a change of control of the Company, upon receipt of a general
release signed by you, you will receive a severance payment equal to your
then current annual salary payable in twelve (12) equal monthly
installments. Further, if your employment is terminated, all compensation,
benefits, and rights you may have under this Agreement will terminate on the
date of termination of employment, except your right to receive the
severance payment described above and your rights under the Company's Stock
Option Plan. For purposes of this agreement, "cause" shall mean your death,
disability (the inability to perform services for a period of one hundred
twenty (120) days in any consecutive twelve (12) month period), a breach of
this agreement or your duty of loyalty to the Company, willful misconduct or
negligence in the performance of the duties contemplated hereby, your
conviction of a felony, or conduct by you which brings you or the Company
into public disrepute, or which could have a substantial adverse effect on
the Company or its business.
7. You agree that at all times, both during and after your employment by the
Company, you will not use or disclose to any third party any information,
knowledge or data not generally known to the public which you may have
learned during your employment by the Company which relates to the
operations, business or affairs of the Company. You agree to comply with all
procedures which the Company may adopt from time to time to preserve the
confidentiality of any information and immediately following termination of
your employment to return to the Company all materials created by you or
others which relate to the operations, business or affairs of the Company.
You agree that for a period of two (2) years following termination of your
employment you will not, directly or indirectly (a) employ or engage as an
independent contractor or seek to employ, engage or retain any person, who,
during any portion of the two (2) years prior to the date of termination of
your employment was, directly or indirectly, employed as an employee,
engaged as an independent contractor or to otherwise retained by the
Company; or (b) induce any person or entity to leave his employment with the
Company, terminate an independent contractor relationship with the Company
or terminate or reduce any contractual relationship with the Company.
8. You and the Company agree that if either party alleges a violation of the
terms of this offer letter, or any other disagreements or disputes arise in
connection with this letter or your employment or termination of your
employment, any such disputes shall be settled exclusively by arbitration in
the City of San Diego by one or more experienced labor and employment law
arbitrator(s) licensed to practice law in California and selected in
accordance with the commercial arbitration rules of the American Arbitration
Association. This arbitration agreement includes, but is not limited to, any
claim based on state or federal laws regarding: age, sex, pregnancy, race,
color, national origin, marital status, religion, veteran status,
disability, sexual orientation, medical condition, or other
anti-discrimination or no-retaliation laws, including, without limitation,
Title VII, the Age Discrimination In Employment Act, the Americans With
Disabilities Act, the Equal Pay Act, and the California Fair Employment and
Housing Act, all as amended. You and the Company understand and agree that
they are both waiving any right to a jury trial based on these claims.
<PAGE> 3
The arbitrator(s) cannot have the power to modify any of the provisions of
this offer letter. The arbitrator(s) decision shall be final and binding
upon both you and the Company and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction.
9. Should any provision of this agreement be declared or be determined by an
arbitrator or any court to be illegal or invalid, the validity of the
remaining parts, terms, or provisions shall not be affected thereby and said
illegal or invalid part, term or provision shall be deemed not to be a part
of this agreement.
10. This agreement does not restrict the Company's right to pursue claims and
obtain injunctive relief and/or other equitable relief, including but not
limited to claims for unfair competition and/or the use and/or unauthorized
disclosure of trade secrets or confidential information, as to which the
Company may seek and obtain relief from a court of competent jurisdiction.
Please sign this letter below and fax it to Roberta C. Baade, Vice President,
Human Resources 619-812-2713 prior to 5:00 P.M. on April 5, 1999 at which time
this offer will expire. A copy will be furnished to you when you report to work
on April 12, 1999. If you have any questions or concerns about this offer,
please don't hesitate to call me (619-812-2180) or Roberta (619-812-2130).
Jack, we are looking forward to your joining Jenny Craig and the experience and
knowledge you will bring in helping us achieve new heights. I personally look
forward to working with you and to having your assistance in the many challenges
ahead.
Sincerely,
/s/ MICHAEL L. JEUB
- -------------------------
Michael L. Jeub
Accepted and agreed:
JACK O'CONNOR /s/ JACK O'CONNOR 4/5/99
- -------------------------- ----------------------------------- -----------
Print Name Signature Date
cc: Roberta C. Baade
<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 NINE
MONTHS ENDED MARCH 31, 1999 INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 36,410
<SECURITIES> 3,388
<RECEIVABLES> 3,055<F1>
<ALLOWANCES> 0
<INVENTORY> 20,534
<CURRENT-ASSETS> 78,010
<PP&E> 24,240<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 110,069
<CURRENT-LIABILITIES> 45,270
<BONDS> 5,384
0
0
<COMMON> 0
<OTHER-SE> 59,415
<TOTAL-LIABILITY-AND-EQUITY> 110,069
<SALES> 229,612
<TOTAL-REVENUES> 244,438
<CGS> 212,011
<TOTAL-COSTS> 222,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274
<INCOME-PRETAX> 5,062
<INCOME-TAX> 1,923
<INCOME-CONTINUING> 3,139
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,139
<EPS-PRIMARY> .15<F2>
<EPS-DILUTED> .15
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF ALLOWANCES
AND DEPRECIATION, RESPECTIVELY.
<F2>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
