<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, 1998 Commission File No. 001-10887
JENNY CRAIG, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0366188
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
11355 NORTH TORREY PINES ROAD, LA JOLLA, CA 92037
---------------------------------------------------
(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, $.000000005 par value, outstanding as
of the close of business on February 8, 1999- 20,688,971.
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<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
JENNY CRAIG, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1998
-------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................. $ 42,124 38,302
Short-term investments .................................... 1,236 2,489
Accounts receivable, net .................................. 2,617 2,643
Inventories ............................................... 14,469 17,324
Prepaid expenses and other assets ......................... 12,548 15,086
-------- -------
Total current assets ............................. 72,994 75,844
Cost of reacquired area franchise rights, net ............. 8,419 8,007
Property and equipment, net ............................... 24,832 24,145
-------- -------
$106,245 107,996
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .......................................... 15,256 19,583
Accrued liabilities ....................................... 19,399 16,331
Deferred service revenue .................................. 10,278 8,777
-------- -------
Total current liabilities ........................ 44,933 44,691
Note payable .............................................. 5,526 5,431
-------- -------
Total liabilities ......................... 50,459 50,122
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 December 31,1998 ....... -- --
Additional paid-in capital ................................ 71,622 71,622
Retained earnings ......................................... 57,179 59,252
Accumulated other comprehensive income .................... 1,747 1,762
Treasury stock, at cost: 6,891,289 shares at June 30, 1998
and December 31, 1998 ................................... (74,762) (74,762)
-------- -------
Total stockholders' equity ........................... 55,786 57,874
Commitments and contingencies .............................
-------- -------
$106,245 107,996
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE> 3
JENNY CRAIG, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
1997 1998 1997 1998
---- ---- ------ -----
<S> <C> <C> <C> <C>
Revenues:
Company-owned operations:
Product sales ................................ $ 66,588 64,193 140,167 139,185
Service revenue .............................. 5,053 3,869 10,499 7,951
-------- -------- -------- --------
71,641 68,062 150,666 147,136
-------- -------- -------- --------
Franchise operations:
Product sales ................................ 5,984 5,235 12,656 10,961
Royalties .................................... 1,213 951 2,220 1,777
Initial franchise fees ....................... 5 5 5 5
-------- -------- -------- --------
7,202 6,191 14,881 12,743
-------- -------- -------- --------
Total revenues ........................... 78,843 74,253 165,547 159,879
-------- -------- -------- --------
Costs and expenses:
Company-owned operations:
Product ...................................... 64,389 62,394 140,045 131,274
Service ...................................... 3,554 2,786 7,765 5,526
-------- -------- -------- --------
67,943 65,180 147,810 136,800
-------- -------- -------- --------
Franchise operations:
Product ...................................... 4,426 3,516 9,415 7,446
Other ........................................ 385 534 1,029 1,085
-------- -------- -------- --------
4,811 4,050 10,444 8,531
-------- -------- -------- --------
6,089 5,023 7,293 14,548
General and administrative expenses .............. 5,929 6,176 15,039 12,134
-------- -------- -------- --------
Operating income (loss) ................... 160 (1,153) (7,746) 2,414
Other income, net, principally interest .......... 297 466 646 931
-------- -------- -------- --------
Income (loss) before taxes ................ 457 (687) (7,100) 3,345
Provision (credit) for income taxes .............. 174 (270) (2,766) 1,272
-------- -------- -------- --------
Net income (loss) ......................... $ 283 (417) (4,334) 2,073
======== ======== ======== ========
Basic and diluted net income (loss) per
share ................................... $ .01 (.02) (.21) .10
======== ======== ======== ========
</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,
-----------------------
1997 1998
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................... $ (4,334) 2,073
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization .......................... 3,477 2,701
Decrease in other assets - forgiveness of officer loan . 1,500 --
Loss on disposal of property and equipment ............. 664 203
(Increase) decrease in:
Accounts receivable .......................... (159) (26)
Inventories .................................. (3,494) (2,855)
Prepaid expenses and other assets ............ 1,901 (2,538)
Increase (decrease) in:
Accounts payable ............................. 1,620 4,327
Accrued liabilities .......................... (968) (3,068)
Income taxes payable ......................... (4,050) --
Deferred service revenue ..................... (4,008) (1,501)
-------- --------
Net cash used in operating activities .. (7,851) (684)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ....................... (3,630) (1,805)
Purchase of short-term investments ....................... (8,363) (4,295)
Proceeds from maturity of short-term investments ......... 3,644 3,042
Payment for acquisition of franchised centres ............ (145) --
-------- --------
Net cash used in investing activities .. (8,494) (3,058)
-------- --------
Cash flows from financing activities:
Principal payments on note payable ...................... (95) (95)
Proceeds from exercise of stock options ................. 7 --
-------- --------
Net cash used in financing activities .. (88) (95)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents ........................................... (1,340) 15
-------- --------
Net decrease in cash and cash equivalents ............... (17,773) (3,822)
Cash and cash equivalents at beginning of period ........ 37,439 42,124
-------- --------
Cash and cash equivalents at end of period .............. $ 19,666 38,302
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid ....................................... $ 3,863 --
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
December 31, 1998
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 financial 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 20,688,071 and 20,688,971 for the quarters ended December
31, 1997 and 1998, respectively, and 20,687,942 and 20,688,971 for the six
months ended December 31, 1997 and 1998, 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 of diluted net income per share by application of the treasury
stock method by 81,592 shares for the quarter ended December 31, 1997 and 5,584
shares for the six months ended December 31, 1998. The calculation of diluted
net loss per share for the six months ended December 31, 1997 and the quarter
ended December 31, 1998 was not applicable as inclusion of the effect of stock
options would be antidilutive; however, an additional 64,201 shares and 5,983
shares would have been included in the calculation of diluted net income (loss)
per share for the six months ended December 31, 1997 and the quarter ended
December 31, 1998, respectively.
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 six months
ended December 31, 1997 and 1998 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 Six Months Ended
December 31, December 31,
---------------------- ----------------------
1997 1998 1997 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net income (loss) ...................... $ 283 (417) (4,334) 2,073
Foreign currency translation adjustments (1,473) 512 (2,019) 15
------- ------- ------- ------
Comprehensive income (loss) .......... $(1,190) 95 (6,353) 2,088
======= ======= ======= ======
</TABLE>
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<PAGE> 6
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 December 31, 1998 as Compared to Quarter Ended December 31, 1997
Revenues from United States Company-owned operations decreased 6% from
$59,869,000 for the quarter ended December 31, 1997 to $56,238,000 for the
quarter ended December 31, 1998. The average number of United States
Company-owned centres in operation decreased 5% from an average of 553 centres
for the quarter ended December 31, 1997 to an average of 528 for the quarter
ended December 31, 1998. The decrease in the number of United States
Company-owned Centres reflects the net closure of 26 Centres between the
periods. At December 31, 1998 there were 527 United States Company-owned Centres
in operation. Average revenue per United States Company-owned Centre decreased
1% from $108,000 for the quarter ended December 31, 1997 to $107,000 for the
quarter ended December 31, 1998. Service revenue from United States
Company-owned operations for the quarter ended December 31, 1998 decreased 27%,
from $4,302,000 to $3,134,000 for the quarters ended December 31, 1997 and 1998,
respectively. This decrease in service revenues was principally due to a 16%
decrease in the number of new participants enrolled in the Program during the
quarter ended December 31, 1998 compared to the quarter ended December 31, 1997,
and a decrease in the number of new enrollments in the periods preceding the
December 1998 quarter compared to the December 1997 quarter. Product sales,
which consists primarily of food products, from United States Company-owned
operations decreased 4% from $55,567,000 for the quarter ended December 31, 1997
to $53,104,000 for the quarter ended December 31, 1998. This decrease was
principally due to a 5% decrease in the number of active clients between the
periods. Revenues from foreign Company-owned operations were substantially the
same at $11,772,000 for the quarter ended December 31, 1997 compared to
$11,824,000 for the quarter ended December 31, 1998, despite a 9% weighted
average decrease in the Australian and Canadian currencies in relation to the
U.S. dollar between the periods. There were 107 foreign Company-owned Centres at
December 31, 1997 compared to 110 at December 31, 1998.
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<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Costs and expenses of United States Company-owned operations decreased
4% from $58,153,000 to $55,748,000 for the quarters ended December 31, 1997 and
1998, respectively. The decrease in costs and expenses for the quarter ended
December 31, 1998 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 97% to 99% 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 $4,069,000 for the quarter ended December 31, 1998 compared to
an operating loss of $2,531,000 for the quarter ended December 31, 1997. Costs
and expenses of foreign Company-owned operations decreased 4% from $9,790,000 to
$9,432,000 for the quarters ended December 31, 1997 and 1998, respectively, due
to 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 $1,796,000 for the quarter ended December 31, 1998
compared to operating income of $1,313,000 for the quarter ended December 31,
1997.
Revenues from franchise operations decreased 14% from $7,202,000 to
$6,191,000 for the quarters ended December 31, 1997 and 1998, 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 the number of new
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 Company's acquisition of two centres from a franchisee and
the net closure of four franchised centres between the periods. At December 31,
1998 there were 132 franchised centres in operation.
Costs and expenses of franchised operations, which consist primarily of
product costs, decreased 16% from $4,811,000 to $4,050,000 for the quarters
ended December 31, 1997 and 1998, respectively, principally because of the
reduced level of franchise operations. Franchise costs and expenses as a
percentage of franchise revenues remained relatively constant at 67% and 65% for
the quarters ended December 31, 1997 and 1998, respectively.
General and administrative expenses increased 4% from $5,929,000 to
$6,176,000 and increased from 7.5% to 8.3% of total revenues for the quarters
ended December 31, 1997 and 1998, respectively.
The elements discussed above combined to result in an operating loss of
$1,153,000 for the quarter ended December 31, 1998 compared to operating income
of $160,000 for the quarter ended December 31, 1997.
Other income, net, principally interest, increased 57% from $297,000 to
$466,000 for the quarters ended December 31, 1997 and 1998, respectively. This
increase was principally due to an increase in the average balance of cash
investments between the periods.
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<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Six Months Ended December 31, 1998 as Compared to Six Months Ended December 31,
1997
Revenues from United States Company-owned operations decreased 2% from
$126,086,000 for the six months ended December 31, 1997 to $123,725,000 for the
six months ended December 31, 1998. The average number of United States
Company-owned centres in operation decreased 4% from an average of 551 centres
for the six months ended December 31, 1997 to an average of 529 centres for the
six months ended December 31, 1998. The decrease in the number of United States
Company-owned Centres reflects the net closure of 26 centres between the
periods. At December 31, 1998 there were 527 United States Company-owned Centres
in operation. Average revenue per United States Company-owned Centre increased
2% from $229,000 for the six months ended December 31, 1997 to $234,000 for the
six months ended December 31, 1998. Service revenue from United States
Company-owned operations for the six months ended December 31, 1998 decreased
27%, from $8,919,000 to $6,527,000 for the six months ended December 31, 1997
and 1998, respectively. This decrease in service revenue was primarily due to a
14% decrease in the number of new participants enrolled in the Program during
the six months ended December 31, 1998 compared to the six months ended December
31, 1997 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 remained
relatively constant at $117,167,000 for the six months ended December 31, 1997
compared to $117,198,000 for the six months ended December 31, 1998. Revenues
from foreign Company-owned operations decreased 5% from $24,580,000 to
$23,411,000 for the six months ended December 31, 1997 and 1998, respectively,
due to a 13% weighted average decrease in the Australian and Canadian currencies
in relation to the U.S. dollar between the periods. There were 107 foreign
Company-owned Centres at December 31, 1997 compared to 110 at December 31, 1998.
Costs and expenses of United States Company-owned operations decreased
8% from $127,509,000 to $117,811,000 for the six months ended December 31, 1997
and 1998, 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 six months ended December 31,
1998 reflects the absence of these costs and expenses 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 101% 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 $2,995,000 for the six
months ended December 31, 1998 compared to an operating loss of $12,511,000 for
the six months ended December 31, 1997. Costs and expenses of foreign
Company-owned operations decreased 6% from $20,301,000 to $18,989,000 for the
six month periods ended December 31, 1997 and 1998, respectively, principally
because of the 13% 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 $3,217,000 for the six months
ended December 31, 1998 compared to operating income of $2,861,000 for the six
months ended December 31, 1997.
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<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Revenues from franchise operations decreased 14% from $14,881,000 to
$12,743,000 for the six months ended December 31, 1997 and 1998, 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 the number
of new participants enrolled in the Program at franchised Centres resulting in
reduced product sales and royalties. The decrease in the average number of
franchise Centres reflects the Company's acquisition of two Centres from
franchisees and the net closure of four franchised centres between the periods.
At December 31, 1998 there were 132 franchised centres in operation.
Costs and expenses of franchised operations, which consist primarily of
product costs, decreased 18% from $10,444,000 to $8,531,000 for the six month
periods ended December 31, 1997 and 1998, 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 six
months ended December 31, 1997 and 1998, respectively, was principally due to a
reduction in national advertising, a portion of which is allocated to franchise
operations.
General and administrative expenses decreased 19% from $15,039,000 to
$12,134,000 and decreased from 9.1% to 7.6% of total revenues for the six months
ended December 31, 1997 and 1998, 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
$2,414,000 for the six months ended December 31, 1998 compared to an operating
loss of $7,746,000 for the six months ended December 31, 1997.
Other income, net, principally interest, increased 44% from $646,000 to
$931,000 for the six months ended December 31, 1997 and 1998, respectively. This
increase was principally due to an increase in the average balance of cash
investments between the periods.
Year 2000
The Company is in the process of assessing the functionality of both its
information technology ("IT") and non-IT systems with respect to the "year 2000"
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 553 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 has begun and the Company expects the implementation to be
completed by April 1, 1999. The cost of the new corporate office system software
of $189,000 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
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<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
new hardware. Additional implementation costs, comprised principally of external
consultants, are estimated to be $550,000 and will be expensed as incurred in
fiscal 1999. With respect to the point-of-sale system, there are two basic
components: the software and the hardware. The point-of-sale software has been
assessed and estimated costs to modify this software to effect year 2000
compliance totalling approximately $410,000 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 each of the
Company-owned and franchised centres in North America. The Company has completed
its analysis of the hardware at these centres and has concluded, based on 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 estimated
cost to replace and install this hardware is approximately $15,000 per
Company-owned centre, or $8,295,000 in aggregate compared to the Company's
preliminary estimate of $4,000 per centre, or $2,236,000 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 March 31, 1999. The final area of significance
pertaining to the Company's year 2000 planning relates to third parties with
whom the Company transacts business. This includes the Company's food suppliers,
banks, advertising agencies, telecommunications suppliers, and utility
providers. The Company is sending written questionnaires to significant
suppliers and vendors in an effort to assess their year 2000 readiness and the
effect these third parties could have on the Company. The Company plans to
maintain communication with significant suppliers and vendors with respect to
this issue.
As detailed above, the Company estimates that approximately $9,645,000
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 December 31, 1998 related to year 2000
compliance totalled $579,000, of which $232,000 was expended in the quarter
ended December 31, 1998 principally comprised of 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 March 31, 1999.
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<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
Legal Proceedings
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, 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.
-11-
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
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.
Financial Condition
At December 31, 1998, the Company had cash, cash equivalents and
short-term investments totalling $40,791,000 compared to $43,360,000 at June 30,
1998, reflecting a decrease during the six month period ended December 31, 1998
of $2,569,000. This decrease was principally due to a $2,855,000 increase in
inventory associated with the January 1999 introduction of a new program and
purchases of property and equipment totalling $1,805,000. 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.
-12-
<PAGE> 13
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 December 31, 1998, the Company maintains a portion of its cash and
cash equivalents in financial instruments with original maturities of three
months or less. The Company also maintains a short-term investment portfolio
containing financial instruments with original maturities of greater than three
months but less than twelve months. These financial instruments, principally
comprised of high quality commercial paper, are subject to interest rate risk
and will decline in value if interest rates increase. Due to the short duration
of these financial instruments, an immediate 10 percent increase in interest
rates would not have a material effect on the Company's financial condition or
results of operations. The Company has not used derivative financial instruments
in its investment portfolio.
The Company's only long-term debt at December 31, 1998 is comprised of a
note payable to a bank, secured by the Company's corporate office building, with
a total balance of $5,621,000. 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 18% of the Company's revenues for the quarter ended
December 31, 1998 were generated from foreign operations, located principally in
Australia and Canada. In the quarter ended December 31, 1998, the Company was
subjected to a 9% weighted average decrease in the Australian and Canadian
currencies in relation to the U.S. dollar compared to the quarter ended December
31, 1997. In October, 1998 the Company entered into a foreign exchange put
option for 9,000,000 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.
-13-
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 1998 Annual Meeting of Stockholders was held on November
5, 1998. 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 LLP as the independent certified public accountants of the
Company and its subsidiaries for the fiscal year ending June 30, 1999.
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 20,209,573 23,531
Jenny Craig 20,209,874 23,231
Scott Bice 20,210,174 22,931
Marvin Sears 20,210,174 22,931
Andrea Van de Kamp 20,209,824 23,281
Robert Wolf 20,210,174 22,931
</TABLE>
The results of the vote to ratify the appointment of KPMG LLP as
independent certified public accountants of the Company and its
subsidiaries for the fiscal year ending June 30, 1999 were as follows:
<TABLE>
<CAPTION>
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINING
----------------- -------------------- -----------------
<S> <C> <C>
20,219,029 5,695 8,381
</TABLE>
There were no broker non-votes on any of the matters submitted to a vote of
security holders.
-14-
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Agreement dated as of November 2, 1998 between Jenny
Craig, Inc. and Roberta C. Baade.
10.2 Agreement dated as of December 3, 1998 between Jenny
Craig, Inc. and Philip Voluck.
27. Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
-15-
<PAGE> 16
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 11, 1999
-16-
<PAGE> 1
EXHIBIT 10.1
[JENNY CRAIG LOGO] [JENNY CRAIG LETTERHEAD]
November 2, 1998
Roberta C. Baade, Ph. D
11424 Caminito Garcia
San Diego, CA 92131
Dear Roberta:
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, Human Resources reporting directly
to me.
2. The duties for this position involve the oversight and responsibility
for the Company's Human Resources function including employment,
compensation, employee benefits, employee relations, and the other
traditional human resources areas. You will interact with all levels of
management to define and prioritize organizational and client needs in
order to implement agreed upon programs and budgets.
3. Your annual compensation will be one hundred and thirty thousand dollars
($130,000) per year payable on a bi-monthly basis. You will also be
eligible to participate in the Company's Executive Incentive
Compensation Plan for fiscal year 1999, which began on July 1, 1998.
4. You will receive an option to purchase twenty thousand (20,000) 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.
<PAGE> 2
Ms. Roberta C. Baade
Page 2
5. Upon joining the Company you will be afforded the same fringe benefit
opportunities as other senior executives in the Company, as well as
three weeks of vacation beginning in the first year.
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, you will
receive a severance payment equal to your then current annual salary
payable in twelve (12) equal monthly installments. 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. While we have not yet selected a date upon which you will begin your
duties here at Jenny Craig, you will determine such a date and
communicate it to me on or before November 4, 1998, otherwise this offer
will terminate without further action.
8. You agree that at all times, both during and after your employment by
the Company, you will not use or disclose to any third party any
information, knowledge or data not generally known to the public which
you may have learned during your employment by the Company which relates
to the operations, business or affairs of the Company. You agree to
comply with all procedures which the Company may adopt from time to time
to preserve the confidentiality of any information and immediately
following termination of your employment to return to the Company all
materials created by you or others which relate to the operations,
business or affairs of the Company. You agree that for a period of two
(2) years following termination of your employment you will not,
directly or indirectly (a) employ or engage as an independent contractor
or seek to employ, engage or retain any person who, during any portion
of the two (2) years prior to the date of termination of your employment
was, directly or indirectly, employed as an employee, engaged as an
independent contractor or otherwise retained by the Company; or (b)
induce any person or entity to leave his employment with the Company,
terminate an independent contractor relationship with the Company or
terminate or reduce any contractual relationship with the Company.
9. Any controversy or dispute arising out of or relating to this agreement,
or the interpretation thereof, shall be settled exclusively by
arbitration conducted in San Diego, California before one or more
arbitrators in accordance with the commercial arbitration
<PAGE> 3
Ms. Roberta C. Baade
Page 3
rules of the American Arbitration Association then in effect and with
discovery permitted by both parties in accordance with Section 1283.05
of the Code of Civil Procedure of the State of California or any
successor thereto, subject to such modification as may be directed by
the arbitrator. The award of the arbitrator(s) shall be final and
binding and judgment may be entered on the arbitrator's award in any
court having jurisdiction. In the event of any such arbitration (or if
legal action shall be brought in connection therewith), the party
prevailing in such proceeding shall be entitled to recover from the
other party the reasonable costs thereof, including reasonable attorney
and accounting fees.
Roberta, we are looking forward to your joining Jenny Craig and the experience
and knowledge you will bring in helping us achieve new heights. I personally
look forward to working with you and to having your assistance in the many
challenges ahead.
Warm regards,
/s/ PHILIP VOLUCK
- -----------------------------
Phil Voluck
Executive Vice President
Chief Operating Officer
P.S. Your performance will be evaluated after six (6) months of employment to
review your compensation and certain benefits.
ACCEPTED AND AGREED: ROBERTA C. BAADE
/s/ ROBERTA C. BAADE 11/18/98
- --------------------------------------------
Signature Date
<PAGE> 1
[JENNY CRAIG LETTERHEAD]
EXHIBIT 10.2
December 3, 1998
Philip Voluck
13611 Mercado Drive
Del Mar, CA 92014
Re: Amendment
Dear Phil:
This letter constitutes an amendment to your offer letter of employment dated
July 7, 1998. Except to the extent set forth herein, all terms and conditions
of that July 7 letter remain in full force and effect.
1. Your position will be President and Chief Operating Officer.
2. Your duties for this position will be those outlined in the July 7, 1998
letter and others as set forth from time to time by the Chairman, CEO and
Board of Directors.
3. Your annual compensation will be four hundred thousand dollars ($400,000)
per year payable on a bi-monthly basis.
4. You will receive an additional option to purchase four hundred thousand
(400,000) 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 December 3, 1998. The vesting period for options will be over
a four (4) year period in four annual equal installments of twenty five
percent (25%), the first of which will vest on December 3, 1999. If your
employment is terminated by the Company without cause, all options not
then exercisable will become exercisable.
5. Your employment shall continue unless you resign or are terminated with or
without cause as set forth in the July 7 letter. If your employment is
terminated by the Company without cause, or by you within ninety days
following a change of control of the Company, you will receive a severance
equal to your then current annual salary payable in twelve equal monthly
installments. If your employment is terminated, all compensation, benefits
and rights you may have under this amendment and the July 7
<PAGE> 2
letter 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 amendment, "cause" shall mean
your death, disability (the inability to perform services for a period of 120
days in any consecutive 12 month period), a breach of this amendment or the July
7 letter 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.
If the terms and conditions set forth in this letter are acceptable to you,
please execute the original of this letter and return it to my attention.
Sincerely, Accepted and Agreed:
/s/ SIDNEY H. CRAIG /s/ PHILIP VOLUCK
---------------------
Sidney H. Craig Philip Voluck
Chairman & CEO
Dated: 11-30-98
<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, 1998 INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
QUARTER ENDED DECEMBER 31, 1998 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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 38,302
<SECURITIES> 2,489
<RECEIVABLES> 2,643<F1>
<ALLOWANCES> 0
<INVENTORY> 17,324
<CURRENT-ASSETS> 75,844
<PP&E> 24,145<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 107,996
<CURRENT-LIABILITIES> 44,691
<BONDS> 5,431
0
0
<COMMON> 0
<OTHER-SE> 57,874
<TOTAL-LIABILITY-AND-EQUITY> 107,996
<SALES> 150,146
<TOTAL-REVENUES> 159,879
<CGS> 138,720
<TOTAL-COSTS> 145,331
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 3,345
<INCOME-TAX> 1,272
<INCOME-CONTINUING> 2,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,073
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<FN>
<F1> THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF
ALLOWANCES AND DEPRECIATION, RESPECTIVELY.
</FN>
</TABLE>
