<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, 2000 Commission File No. 001-10887
-------------- ----------
JENNY CRAIG, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0366188
- --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
11355 NORTH TORREY PINES ROAD, LA JOLLA, CA 92037
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 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, $.000000005 par value, outstanding as
of the close of business on May 10, 2000- 20,688,971.
-1-
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
JENNY CRAIG, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1999 2000
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................... $ 38,864 32,445
Short-term investments ...................................... 3,150 1,416
Accounts receivable, net .................................... 1,925 1,324
Inventories ................................................. 18,036 14,454
Prepaid expenses and other assets ........................... 4,795 1,643
--------- ---------
Total current assets ............................... 66,770 51,282
Deferred tax assets ......................................... 13,406 20,912
Cost of reacquired area franchise rights, net ............... 8,078 9,637
Property and equipment, net ................................. 24,360 26,178
--------- ---------
$ 112,614 108,009
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ............................................ $ 16,393 15,193
Accrued liabilities ......................................... 15,110 18,994
Accrual for litigation judgment ............................. 8,203 9,430
Deferred service revenue .................................... 10,075 10,102
--------- ---------
Total current liabilities .......................... 49,781 53,719
Note payable ................................................ 5,336 5,194
Obligation under capital lease .............................. -- 1,836
--------- ---------
Total liabilities .................................. 55,117 60,749
--------- ---------
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, 1999 and March 31, 2000 ......... -- --
Additional paid-in capital ................................ 71,622 71,622
Retained earnings ......................................... 56,507 46,842
Accumulated other comprehensive income .................... 4,130 3,558
Treasury stock, at cost; 6,891,289 shares at June 30, 1999
and March 31, 2000 ...................................... (74,762) (74,762)
--------- ---------
Total stockholders' equity ......................... 57,497 47,260
Commitments and contingencies
--------- ---------
$ 112,614 108,009
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-2-
<PAGE> 3
JENNY CRAIG, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Company-owned operations:
Product sales............................. $ 73,429 69,983 212,614 184,492
Service revenue........................... 4,099 4,267 12,050 12,543
---------- ---------- ---------- ----------
77,528 74,250 224,664 197,035
---------- ---------- ---------- ----------
Franchise operations:
Product sales............................. 6,037 5,566 16,998 14,938
Royalties................................. 994 961 2,771 2,437
Initial franchise fees.................... -- -- 5 35
---------- ---------- ---------- ----------
7,031 6,527 19,774 17,410
---------- ---------- ---------- ----------
Total revenues........................ 84,559 80,777 244,438 214,445
---------- ---------- ---------- ----------
Costs and expenses:
Company-owned operations:
Product................................... 69,100 64,420 200,374 182,202
Service................................... 2,850 2,756 8,376 8,984
---------- ---------- ---------- ----------
71,950 67,176 208,750 191,186
---------- ---------- ---------- ----------
Franchise operations:
Product................................... 4,191 4,514 11,637 11,147
Other..................................... 590 305 1,675 1,085
---------- ---------- ---------- ----------
4,781 4,819 13,312 12,232
---------- ---------- ---------- ----------
7,828 8,782 22,376 11,027
General and administrative expenses........... 6,428 6,004 18,562 18,802
Litigation judgment........................... -- 219 -- 1,227
Restructuring charge ......................... -- -- -- 7,512
---------- ---------- ---------- -----------
Operating income (loss)................ 1,400 2,559 3,814 (16,514)
Other income, net, principally interest....... 317 231 1,248 926
---------- ---------- ---------- ----------
Income (loss) before taxes............. 1,717 2,790 5,062 (15,588)
Income taxes (benefit)........................ 651 1,063 1,923 (5,923)
---------- ---------- ---------- -----------
Net income (loss)....................... $ 1,066 1,727 3,139 (9,665)
========== ========== ========== ===========
Basic and diluted net income (loss) per
share ............................... $ .05 .08 .15 (.47)
========== ========== ========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-3-
<PAGE> 4
JENNY CRAIG, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $ 3,139 (9,665)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization .................................. 4,110 4,392
Non-cash portion of restructuring charge ....................... -- 1,303
Provision for deferred income taxes (benefit) .................. (1,730) (7,506)
Provision for doubtful accounts ................................ -- 300
Loss on write-off of cost of reacquired area franchise rights .. -- 96
Loss on disposal of property and equipment ..................... 209 175
Changes in assets and liabilities:
Accounts receivable ..................................... (438) (384)
Inventories ............................................. (6,065) 3,622
Prepaid expenses and other assets ....................... (345) 3,152
Accounts payable ........................................ 3,302 (1,200)
Accrued liabilities ..................................... (2,844) 3,092
Accrual for litigation judgment ......................... -- 1,227
Deferred service revenue ................................ (121) 27
-------- --------
Net cash used in operating activities .......... (783) (1,369)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ................................. (3,128) (4,012)
Purchase of short-term investments .................................. (6,033) (4,200)
Proceeds from maturity of short-term investments .................... 3,881 5,934
Payment for acquisition of franchised centres ....................... -- (1,847)
-------- --------
Net cash used in investing activities .......... (5,280) (4,125)
-------- --------
Cash flows from financing activities-
Principal payments on note payable and capital lease obligation .... (142) (356)
-------- --------
Effect of exchange rate changes on cash and cash equivalents .......... 491 (569)
-------- --------
Net decrease in cash and cash equivalents ............................. (5,714) (6,419)
Cash and cash equivalents at beginning of period ...................... 42,124 38,864
-------- --------
Cash and cash equivalents at end of period ............................ $ 36,410 32,445
======== ========
Supplemental disclosure of cash flow information-
Income taxes paid .................................................. $ 3,962 600
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Equipment acquired under capital lease ............................. $ -- 2,726
======== ========
Acquisition of franchised centres:
Fair value of assets acquired ................................... -- 2,532
Cancellation of accounts receivable ............................. -- (685)
-------- --------
Cash paid for acquisition ....................................... $ -- 1,847
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE> 5
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
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, 1999 consolidated financial statements.
2. The Company has been advised by the New York Stock Exchange ("NYSE") that the
Company currently falls below newly effective NYSE continued listing standards
requiring total market capitalization of not less than $50,000,000 and total
stockholders' equity of not less than $50,000,000. At the market close on May
10, 2000, the Company's total market capitalization was approximately
$29,740,000. At March 31, 2000, the Company's total stockholders' equity was
approximately $47,260,000. As required by the NYSE, the Company will be
submitting a plan to the Listings and Compliance Committee of the NYSE
demonstrating how the Company plans to comply with the newly effective standards
by the September 2001 deadline set by the NYSE. Based upon internal estimates,
the Company believes it will satisfy the new stockholders' equity standard by
the NYSE deadline. After reviewing the plan, the NYSE will either accept it
(following which the Company will be subject to quarterly monitoring for
compliance with the plan), or not (in which event the Company will be subject to
NYSE trading suspension and delisting). Should the Company's shares cease being
traded on the NYSE, the Company believes that an alternative trading venue will
be available.
3. The weighted average number of shares used to calculate basic net income
(loss) per share was 20,688,971 for all periods presented. 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 diluted net income per share calculation by application of
the treasury stock method by 298 shares and 99,672 shares for the three months
ended March 31, 1999 and March 31, 2000, respectively, and by 772 shares for the
nine months ended March 31, 1999. The effect of 2,635,400 stock options have
been excluded from the calculation of diluted net loss per share for the nine
months ended March 31, 2000, as inclusion of the effect of the stock options
would have been antidilutive.
-5-
<PAGE> 6
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Comprehensive income (loss) for the quarters and nine months ended March 31,
1999 and 2000 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,
------------------------- --------------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 1,066 1,727 3,139 (9,665)
Foreign currency translation
adjustments 475 (1,548) 490 (572)
---------- ----------- ----------- -----------
Comprehensive income (loss) $1,541 179 3,629 (10,237)
========== =========== =========== ===========
</TABLE>
5. In November 1999, the Company announced a restructuring plan to reduce annual
operating expenses. The plan included the closure of 86 underperforming
Company-owned centres in the United States, which represented 16% of the total
United States Company-owned centres, and a staff reduction of approximately 15%
at the Company's corporate headquarters. All employees were notified in early
November and the centres were closed by November 30, 1999. A charge of
$7,512,000 was recorded in the quarter ended December 31, 1999 in connection
with this restructuring. The charge was comprised of $3,882,000 for lease
termination costs at the 86 centres, $1,563,000 for severance payments to
terminated employees, $1,303,000 for the write-off of fixed assets at the closed
centres, $291,000 for refunds to program participants at the closed centres, and
$473,000 for other closure costs which include sign removals and demolition of
leasehold improvements. The Company does not believe that there will be any
material sub-lease income available with respect to the closed centres due to
the relatively short remaining lease terms on the respective centres, nor does
the Company believe that there will be any material salvage value of the fixed
assets, which consist substantially of leasehold improvements. Of the total
charge of $7,512,000, approximately $6,209,000 will require cash payments and
$1,303,000 represents the non-cash write-off of fixed assets. As of March 31,
2000, the Company had made cash payments of $1,728,000 for lease termination
costs, $671,000 for severance to terminated employees, $104,000 for refunds to
program participants, and $546,000 for other closure costs. The Company
estimates that the remaining cash payments of approximately $3,160,000, which is
the principal reason for the increase in accrued liabilities on the accompanying
balance sheet at March 31, 2000, will be substantially incurred by June 30,
2000.
-6-
<PAGE> 7
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. The Company operates in the weight management industry. Substantially all
revenue results from the sale of weight management products and services,
whether the centre is operated by the Company or its franchisees. The Company's
reportable segments consist of Company-owned operations and franchise
operations, further segmented by geographic area. The following presents
information about the respective reportable segments ($ in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
1999 2000 1999 2000
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Company-owned operations:
United States $ 63,566 61,186 187,291 157,917
Foreign 13,962 13,064 37,373 39,118
Franchise operations:
United States 4,953 4,459 14,613 11,059
Foreign 2,078 2,068 5,161 6,351
Operating income (loss):
Company-owned operations:
United States (2,032) 373 (5,027) (24,295)
Foreign 2,262 1,480 5,479 5,588
Franchise operations:
United States 525 55 1,680 136
Foreign 645 651 1,682 2,057
Identifiable assets:
United States 93,973 89,207 93,973 89,207
Foreign 16,096 18,802 16,096 18,802
</TABLE>
7. The Company, along with other weight loss programs and certain pharmaceutical
companies, has been named as a defendant in an action filed in the Second
Judicial District Court, State of Nevada, Washoe County (the "Nevada
Litigation"). The action was commenced in August 1999 by a group of four
plaintiffs, who are seeking to maintain the action as a class action on behalf
of all persons in the State of Nevada who have purchased and used fenfluramine,
dexfenfluramine and phentermine, alone or in combination, and who have not yet
been diagnosed as having pulmonary heart disease or hypertension and/or valvular
heart disease, but who are allegedly at an increased risk of developing such
illnesses. The complaint includes claims against the Company and other
defendants for alleged breach of express and implied warranties concerning the
safety of using fenfluramine, dexfenfluramine and phentermine, and for alleged
negligence in the advertising, warning, marketing and sale of these drugs. The
complaint seeks a Court-supervised program funded by the defendants through
which class members would undergo periodic medical testing, preventative
screening and monitoring, as well as incidental damages not to exceed $75,000
per each class member, and costs of litigation including expert and attorney's
fees.
-7-
<PAGE> 8
JENNY CRAIG, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has tendered the Nevada Litigation to its insurance
carriers. The claims have not progressed sufficiently for the Company to
estimate a range of possible loss, if any. The Company intends to defend the
matter vigorously.
-8-
<PAGE> 9
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 Company has estimated various costs in
connection with the restructuring charge, including the amount necessary to
effect lease terminations, which will be dependent on future events and in some
cases on the Company's ability to negotiate satisfactory termination provisions.
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, 1999.
Quarter Ended March 31, 2000 as Compared to Quarter Ended March 31, 1999
The following table presents selected operating results for United States
Company-owned and foreign Company-owned operations for the quarters ended March
31, 1999 and 2000 (U.S. $ in thousands):
<TABLE>
<CAPTION>
U.S. Company Owned Foreign Company Owned
Operations Operations
Three Months Ended March 31, Three Months Ended March 31,
----------------------------------- -----------------------------------
% %
1999 2000 Change 1999 2000 Change
----------- ------------ -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Product sales $60,225 57,850 -4% 13,204 12,133 -8%
Service revenue 3,341 3,336 0% 758 931 23%
----------- ------------ ------------ -----------
Total 63,566 61,186 -4% 13,962 13,064 -6%
Costs and expenses 60,901 56,288 -8% 11,049 10,888 -1%
General and
administrative 4,697 4,306 -8% 651 696 7%
Litigation judgment - 219 - -
----------- ------------ ------------ -----------
Operating income (loss) $(2,032) 373 2,262 1,480
----------- ------------ ------------ -----------
Average number of
centres 526 432 -18% 110 112 2%
----------- ------------ ------------ -----------
</TABLE>
-9-
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Revenues from United States Company-owned operations decreased 4% for the
quarter ended March 31, 2000 compared to the quarter ended March 31, 1999. This
4% decrease reflected an 18% decrease in the average number of United States
Company-owned centres in operation offset, in part, by a 17% increase in the
average revenue per United States Company-owned centre, from $121,000 for the
quarter ended March 31, 1999 to $142,000 for the quarter ended March 31, 2000.
The decrease in the number of United States Company-owned centres reflects the
net closure of 89 centres between the periods, principally comprised of the
closure of 86 centres in November 1999 in connection with a restructuring plan
announced by the Company. Product sales, which consists primarily of food
products, from United States Company-owned operations also decreased 4%
principally due to a 20% decrease in the number of active participants in the
program between the periods (which reflects the 18% decrease in the average
number of centres), offset, in part, by a 15% increase in the average amount of
products purchased per active participant. The average amount of products
purchased per active participant in last year's quarter was below historical
levels as a result of a program called "On-the-Go" which offered lower priced
products and which has since been discontinued. Although there was an overall
10% decrease in the number of new participants enrolled in the program between
the periods, service revenues from United States Company-owned operations were
essentially unchanged, principally due to an increase in the average service fee
charged per new participant.
Revenues from foreign Company-owned operations, which is derived from 87
centres in Australia and 26 centres in Canada, decreased 6% principally due to
reduced demand at the Company's Australian centres and a 1% weighted average
decrease in the Australian and Canadian currencies in relation to the U.S.
dollar between the periods.
Costs and expenses of United States Company-owned operations decreased
8% for the quarter ended March 31, 2000 compared to the same quarter last year.
The decrease was principally due to the decreased 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 decreased from 96% to 92% between the
periods principally due to reduced occupancy and compensation expenses resulting
from the Company's restructuring plan.
After including the allocable portion of general and administrative
expenses, United States Company-owned operations had operating income of
$373,000 for the quarter ended March 31, 2000 compared to an operating loss of
$2,032,000 for the quarter ended March 31, 1999.
Costs and expenses of foreign Company-owned operations decreased 1% for
the quarter ended March 31, 2000 compared to the quarter ended March 31, 1999,
principally due to the 1% 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 $1,480,000 for the quarter
ended March 31, 2000 compared to operating income of $2,262,000 for the quarter
ended March 31, 1999.
Revenues from franchise operations decreased 7% from $7,031,000 to
$6,527,000 for the quarters ended March 31, 1999 and 2000, respectively. This
decline was principally due to a 12% decrease in the average number of franchise
centres in operation between the periods. The decrease
-10-
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
in the average number of franchise centres reflects the Company's acquisition of
23 centres from six franchisees in the United States between the periods. During
the quarter ended March 31, 2000, the Company acquired 10 franchise centres for
cash payments of $1,847,000 and forgiveness of approximately $685,000 in
receivables from the sellers. The selling franchisees had asserted claims in
connection with the sale by a licensee of certain products in their markets and
the centres were acquired in the context of the resolution of those claims. At
March 31, 2000 there were 112 franchised centres in operation, of which 75 were
in the United States and 37 were in foreign countries, principally Australia and
New Zealand.
Costs and expenses of franchised operations, which consist primarily of
product costs, increased 1% from $4,781,000 to $4,819,000 for the quarters ended
March 31, 1999 and 2000, respectively, notwithstanding the decrease in the
number of franchised centres. The increase in costs and expenses was principally
due to a $300,000 provision for doubtful accounts recorded in the quarter ended
March 31, 2000. Franchise costs and expenses as a percentage of franchise
revenues increased from 68% to 74% for the quarters ended March 31, 1999 and
2000, respectively, principally due to the aforementioned provision in the
quarter ended March 31, 2000.
General and administrative expenses decreased 7% from $6,428,000 to
$6,004,000 and decreased from 7.6% to 7.4% of total revenues for the quarters
ended March 31, 1999 and 2000, respectively. The decrease in general and
administrative expenses is principally due to reduced compensation expenses
resulting from the restructuring plan and reduced external consultant expenses.
An additional $219,000 was expensed in the quarter ended March 31, 2000
with respect to the previously disclosed litigation judgment arising out of the
dispute concerning the lease at the Company's former headquarters location. This
additional charge consists of interest accrued on the judgment pending the
appeal which has been filed seeking to overturn the judgment.
The elements discussed above combined to result in operating income of
$2,559,000 for the quarter ended March 31, 2000 compared to operating income of
$1,400,000 for the quarter ended March 31, 1999.
Other income, net, principally interest, decreased 27% from $317,000 to
$231,000 for the quarters ended March 31, 1999 and 2000, respectively. This
decrease was principally due to a decrease in the average balance of cash
investments between the periods.
Year 2000
The Company did not experience any material disruption of its
information technology ("IT") or non-IT systems with respect to the "year 2000"
millenium change. As previously reported, the Company essentially replaced its
two primary IT systems in connection with its planning with respect to the "year
2000" issue. The total cost of the remediation was approximately $5,644,000,
which was principally comprised of equipment purchases, a portion of which was
financed under a 48 month capital lease agreement with a total balance of
$2,512,000 as of March 31, 2000.
-11-
<PAGE> 12
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, has been named as a defendant in an action filed in
the Second Judicial District Court, State of Nevada, Washoe County (the "Nevada
Litigation"). The action was commenced in August 1999 by a group of four
plaintiffs, who are seeking to maintain the action as a class action on behalf
of all persons in the State of Nevada who have purchased and used fenfluramine,
dexfenfluramine and phentermine, alone or in combination, and who have not yet
been diagnosed as having pulmonary heart disease or hypertension and/or valvular
heart disease, but who are allegedly at an increased risk of developing such
illnesses. The complaint includes claims against the Company and other
defendants for alleged breach of express and implied warranties concerning the
safety of using fenfluramine, dexfenfluramine and phentermine, and for alleged
negligence in the advertising, warning, marketing and sale of these drugs. The
complaint seeks a Court-supervised program funded by the defendants through
which class members would undergo periodic medical testing, preventative
screening and monitoring, as well as incidental damages not to exceed $75,000
per each class member, and costs of litigation including expert and attorney's
fees.
The Company has tendered the Nevada Litigation to its insurance carriers.
The claims have not progressed sufficiently for the Company to estimate a range
of possible loss, if any. The Company intends to defend the matter vigorously.
-12-
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Nine Months Ended March 31, 2000 as Compared to Nine Months Ended March 31, 1999
The following table presents selected operating results for United States
Company-owned and foreign Company-owned operations for the nine month periods
ended March 31, 1999 and 2000 (U.S. $ in thousands):
<TABLE>
<CAPTION>
U.S. Company Owned Foreign Company Owned
Operations Operations
Nine Months Ended March 31, Nine Months Ended March 31,
----------------------------------- -----------------------------------
% %
1999 2000 Change 1999 2000 Change
----------- ------------ -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Product sales $ 177,423 148,291 -16% 35,191 36,201 3%
Service revenue 9,868 9,626 -2% 2,182 2,917 34%
------------ ------------ ------------ -----------
Total 187,291 157,917 -16% 37,373 39,118 5%
Costs and expenses 178,712 159,874 -11% 30,038 31,312 4%
General and
administrative 13,606 13,599 0% 1,856 2,218 20%
Litigation judgment - 1,227 - -
Restructuring charge - 7,512 - -
------------ ------------- ------------ -----------
Operating income (loss) $ (5,027) (24,295) 5,479 5,588
----------- ------------ ------------ -----------
Average number of
centres 528 478 -9% 110 111 1%
----------- ------------ ------------ -----------
</TABLE>
Revenues from United States Company-owned operations decreased 16% for
the nine months ended March 31, 2000 compared to the nine months ended March 31,
1999 reflecting reduced demand for the Company's products and services at United
States Company-owned centres, which represented 79% of the worldwide
Company-owned centres at March 31, 2000. The overall 16% decrease in revenues
from United States Company-owned operations reflected a 7% decrease in the
average revenue per United States Company-owned centre, from $355,000 for the
nine months ended March 31, 1999 to $330,000 for the nine months ended March 31,
2000, and a 9% decrease in the average number of United States Company-owned
centres in operation. The decrease in the number of United States Company-owned
centres reflects the net closure of 89 centres between the periods, principally
comprised of the closure of 86 centres in November 1999 in connection with a
restructuring plan announced by the Company. Product sales, which consists
primarily of food products, from United States Company-owned operations
decreased 16% principally due to a 23% decrease in the number of active
participants in the program between the periods. Although there was a 22%
decrease in the number of new participants enrolled in the program between the
periods, service revenues from United States Company-owned operations decreased
only 2% principally due to an increase in the average service fee charged per
new participant.
Revenues from foreign Company-owned operations, which is derived from 87
centres in Australia and 26 centres in Canada, increased 5% principally due to a
3% weighted average increase in the Australian and Canadian currencies in
relation to the U.S. dollar between the periods.
-13-
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Costs and expenses of United States Company-owned operations decreased
11% for the nine months ended March 31, 2000 compared to the same period last
year. The decrease was principally due to the reduced variable costs associated
with the decreased revenues and the decreased fixed costs associated with the
decrease in the number of United States Company-owned centres in operation,
offset, in part, by a charge of $3,068,000 for obsolete inventory related to the
discontinued On-the-Go program. Costs and expenses of United States
Company-owned operations as a percentage of United States Company-owned revenues
increased from 95% to 101% between the periods principally due to the higher
proportion of fixed costs when compared to the reduced level of revenues and the
aforementioned charge for obsolete inventory.
In November 1999, the Company announced a restructuring plan to reduce
annual operating expenses. The plan included the closure of 86 underperforming
Company-owned centres in the United States, which represented 16% of the total
United States Company-owned centres, and a staff reduction of approximately 15%
at the Company's corporate headquarters. All employees were notified in early
November and the centres were closed by November 30, 1999. A charge of
$7,512,000 was recorded in the six month period ended December 31, 1999 in
connection with this restructuring. The charge was comprised of $3,882,000 for
lease termination costs at the 86 centres, $1,563,000 for severance payments to
terminated employees, $1,303,000 for the write-off of fixed assets at the closed
centres, $291,000 for refunds to program participants at the closed centres, and
$473,000 for other closure costs which include sign removals and demolition of
leasehold improvements. The Company does not believe that there will be any
material sub-lease income available with respect to the closed centres due to
the relatively short remaining lease terms on the respective centres, nor does
the Company believe that there will be any material salvage value of the fixed
assets, which consist substantially of leasehold improvements. Of the total
charge of $7,512,000, approximately $6,209,000 will require cash payments and
$1,303,000 represents the non-cash write-off of fixed assets. As of March 31,
2000, the Company had made cash payments of $1,728,000 for lease termination
costs, $671,000 for severance to terminated employees, $104,000 for refunds to
program participants, and $546,000 for other closure costs. The Company
estimates that the remaining cash payments of approximately $3,160,000, which is
the principal reason for the increase in accrued liabilities on the accompanying
balance sheet at March 31, 2000, will be substantially incurred by June 30,
2000.
After including the allocable portion of general and administrative
expenses and the restructuring charge, United States Company-owned operations
incurred an operating loss of $24,295,000 for the nine months ended March 31,
2000 compared to an operating loss of $5,027,000 for the nine months ended March
31, 1999.
Costs and expenses of foreign Company-owned operations increased 4% for
the nine months ended March 31, 2000 compared to the nine months ended March 31,
1999 principally due to the 3% weighted average increase 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 $5,588,000 for the nine months
ended March 31, 2000 compared to operating income of $5,479,000 for the nine
months ended March 31, 1999.
-14-
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Revenues from franchise operations decreased 12% from $19,774,000 to
$17,410,000 for the nine months ended March 31, 1999 and 2000, respectively.
This decline was principally due to a 12% decrease in the average number of
franchise centres in operation between the periods. The decrease in the average
number of franchise centres reflects the Company's acquisition of 23 centres
from six franchisees between the periods. During the quarter ended March 31,
2000, the Company acquired 10 franchised centres for cash payments of
approximately $1,847,000 and forgiveness of approximately $685,000 in
receivables from the sellers. The selling franchisees had asserted claims in
connection with the sale by a licensee of certain products in their markets and
the centres were acquired in the context of the resolution of those claims. At
March 31, 2000 there were 112 franchised centres in operation, of which 75 were
in the United States and 37 were in foreign countries, principally Australia and
New Zealand. Revenues from United States franchise operations decreased from
$14,613,000 to $11,059,000 for the nine months ended March 31, 1999 and 2000,
respectively, while revenues from foreign franchise operations increased from
$5,161,000 to $6,351,000 for the nine months ended March 31, 1999 and 2000,
respectively. The decrease in revenues from United States franchise operations
reflects the 12% decrease in the average number of franchised centres in
operation and a decrease in the average revenue per centre experienced at United
States franchised centres which resulted in reduced product sales and royalties
for the Company. The increase in revenues from foreign franchise operations
reflects an increase in the average revenue per centre experienced at foreign
franchised centres which resulted in increased product sales and royalties for
the Company.
Costs and expenses of franchised operations, which consist primarily of
product costs, decreased 8% from $13,312,000 to $12,232,000 for the nine months
ended March 31, 1999 and 2000, respectively, principally because of the reduced
level of United States franchise operations. Franchise costs and expenses as a
percentage of franchise revenues increased from 67% to 70% for the nine months
ended March 31, 1999 and 2000, respectively, principally due to the reduced
royalty revenue which has a higher margin than product sales, and a $300,000
provision for doubtful accounts recorded in the nine months ended March 31,
2000.
General and administrative expenses increased 1% from $18,562,000 to
$18,802,000 and increased from 7.6% to 8.8% of total revenues for the nine
months ended March 31, 1999 and 2000, respectively. The increase in general and
administrative expenses is principally due to increased legal fees.
An additional $1,227,000 was expensed in the nine months ended March 31,
2000 with respect to the previously disclosed litigation judgment arising out of
the dispute concerning the lease at the Company's former headquarters location.
This additional charge consists of attorney fees awarded to the plaintiff and
interest accrued on the judgment pending the appeal which has been filed seeking
to overturn the judgment.
The elements discussed above combined to result in an operating loss of
$16,514,000 for the nine months ended March 31, 2000 compared to operating
income of $3,814,000 for the nine months ended March 31, 1999.
Other income, net, principally interest, decreased 26% from $1,248,000
to $926,000 for the nine months ended March 31, 1999 and 2000, respectively.
This decrease was principally due to a decrease in the average balance of cash
investments between the periods.
-15-
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources
At March 31, 2000, the Company had cash, cash equivalents and
short-term investments totaling $33,861,000 compared to $42,014,000 at June 30,
1999, reflecting a decrease during the nine month period ended March 31, 2000 of
$8,153,000. This decrease was principally due to the net cash used in operating
activities, including cash payments of $3,049,000 in connection with the
Company's restructuring plan, $4,012,000 used for the purchase of property and
equipment, and $1,847,000 used to acquire centres from franchisees. 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.
-16-
<PAGE> 17
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, 2000, 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 long-term debt at March 31, 2000 is comprised of a note
payable to a bank, secured by the Company's corporate office building, with a
total balance of $5,384,000 and a capital lease agreement covering certain
computer hardware with a total balance of $2,512,000. The note payable bears
interest at the London Interbank Offered Rate plus one percent, with quarterly
interest rate adjustments, and the capital lease is at a fixed rate. 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, 2000 were generated from foreign operations, located principally in
Australia and Canada. In the quarter ended March 31, 2000, the Company was
subjected to a 1% weighted average decrease in the Australian and Canadian
currencies in relation to the U.S. dollar compared to the quarter ended March
31, 1999. Currently, the Company does not enter into forward exchange contracts
or other financial instruments with respect to foreign currency.
-17-
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) Exhibits
--------
<S> <C> <C>
10.1 Jenny Craig Inc. Stock Option Plan, as amended. (Compensatory Plan)
27. Financial Data Schedule.
</TABLE>
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
-18-
<PAGE> 19
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/ James S. Kelly
---------------------------------
James S. Kelly
Vice President
and Chief Financial Officer
Date: May 12, 2000
-19-
<PAGE> 1
EXHIBIT 10.1
JENNY CRAIG, INC.
AMENDED AND RESTATED 1991 STOCK OPTION PLAN
1. Purposes
The purposes of the Jenny Craig, Inc. 1991 Stock Option Plan (the "Plan")
are to enable Jenny Craig, Inc. ("Jenny Craig") and its subsidiaries to attract,
retain and motivate the best qualified personnel and to create a long-term
mutuality of interest between the key personnel and the shareholders of Jenny
Craig by granting them options to purchase Jenny Craig stock.
2. Definitions
Unless the context requires otherwise, the following words as used in the
Plan shall have the meanings ascribed to each below, it being understood that
masculine, feminine and neuter pronouns are used interchangeably, and that each
comprehends the others.
(a) "Advisory Board" shall mean the Advisory Board of Jenny Craig.
(b) "Board" shall mean the Board of Directors of Jenny Craig.
(c) "Committee" shall mean such committee, if any, appointed by the Board
to administer the Plan, consisting of such directors as may be appointed by the
Board, provided that, with respect to grants of Options to non-employee
directors and any action hereunder relating to Options held by non-employee
directors, Committee shall mean the Board, and provided further, if the Board
does not appoint a committee to administer the Plan, "Committee" shall mean the
Board.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Common Stock" shall mean the common stock of Jenny Craig, par value
$.000000005, any common stock into which such common stock may be changed and
any common stock resulting from any reclassification of such common stock.
(f) "Company" shall mean Jenny Craig and its subsidiaries any of whose
employees are Participants (as hereinafter defined) in this Plan.
(g) "Fair Market Value" shall mean the value of a share of Common Stock on
a particular date, determined as follows:
(i) If the Common Stock is listed or admitted to trading on such date
on the New York Stock Exchange, the mean of the high and low sales prices
of a Share on such date as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted
to trading on the New York Stock Exchange; or
(ii) If the Common Stock is not listed or admitted to trading on the
New York Stock Exchange but is listed or admitted to trading on another
national exchange, the mean of the high and low sales
<PAGE> 2
prices of a Share on such date as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted
to trading on such national exchange; or
(iii) If the Common Stock is not listed or admitted to trading on any
national exchange, the mean of the closing bid and asked prices (or, if
available, the high and low sales prices) of a Share on such date in the
over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automatic Quotation System, the National Quotation
Bureau or such other system then in use with regard to the Common Stock or,
if on such date the stock of the Company is publicly traded but not quoted
by any such system, the mean of the closing bid and asked prices of a Share
on such date as furnished by a professional market maker making a market in
the Common Stock;
(iv) If in (i), (ii) or (iii) above, as applicable, there were no sales
on such date reported as provided above, the respective prices on the most
recent prior day on which a sale of a Share took place; or
(v) If the Common Stock is not publicly traded, such amount set by the
Committee in good faith.
(h) "Minimum Exercise Price" shall mean one hundred percent (100%) of the
Fair Market Value of a Share at the time of the grant of the Option, or the par
value of a Share, whichever is greater.
(i) "Option" shall mean the right to purchase one Share at a prescribed
purchase price on the terms specified in the Plan.
(j) "Participant" shall mean a key employee of the Company (who may be, but
need not be, an officer, director and/or member of the Advisory Board of Jenny
Craig), a non-employee director, an Advisory Board member or a consultant to the
Company, who has been granted Options under the Plan.
(k) "Share" shall mean a share of Common Stock.
3. Effective Date
The effective date of the Plan shall be October 1, 1991.
4. Administration
(a) The Plan shall be administered by the Committee. The Committee shall
have full authority to interpret the Plan and all Options granted hereunder; to
establish, amend, and rescind rules for carrying out the Plan; to administer the
Plan; to select employees, directors, consultants and Advisory Board members to
participate in the Plan; to grant Options under the Plan; to determine the
terms, exercise price and form of exercise payment for each Option granted under
the Plan; to determine whether each Option granted under the Plan shall be
intended to qualify as an "incentive stock option" under Section 422A of the
Code; and to make all other determinations and to take all such steps in
connection with the Plan and the Options as the Committee deems necessary or
desirable, all of which shall be in the Committee's sole discretion. The
Committee shall not be bound to any standards of uniformity or similarity of
action,
2
<PAGE> 3
interpretation or conduct in the discharge of its duties hereunder, regardless
of the apparent similarity of the matters coming before it. Its determination
shall be binding on all parties.
(b) Any Participant may hold more than one Option under the Plan and under
any other plan pursuant to which stock options, Shares or other incentives may
be granted, issued or paid.
(c) The Committee may designate the Secretary of Jenny Craig, other
employees of Jenny Craig or competent professional advisors to assist the
Committee in the administration of the Plan, and may grant authority to such
persons to execute agreements or other documents on behalf of the Committee. The
Committee may employ such legal counsel, consultants and agents as it may deem
desirable for the administration of the Plan, and may rely upon any opinion
received from any such counsel or consultant and any computation received from
any such consultant or agent. Expenses incurred by the Committee in the
engagement of such counsel, consultant or agent shall be paid by Jenny Craig.
(d) No member or former member of the Committee or of the Board shall be
liable for any action or determination made in good faith with respect to the
Plan or any Option granted under it. To the maximum extent permitted by
applicable law, each member or former member of the Committee or of the Board
shall be indemnified and held harmless by Jenny Craig against any cost or
expense (including counsel fees) or liability (including any sum paid in
settlement of a claim with the approval of Jenny Craig) arising out of any act
or omission to act in connection with the Plan unless arising out of such
member's or former member's own fraud or bad faith. Such indemnification shall
be in addition to any rights of indemnification the members or former members
may have as directors under applicable law or under the certificate of
incorporation or by-laws of Jenny Craig.
(e) The Committee shall select one of its members as a Chairman and shall
adopt such rules and regulations as it shall deem appropriate concerning the
holding of its meetings and the transaction of its business. Any member of the
Committee may be removed at any time either with or without cause by resolution
adopted by the Board, and any vacancy on the Committee may at any time be filled
by resolution adopted by the Board.
(f) All determinations by the Committee shall be made by the affirmative
vote of a majority of its members. Any such determination may be made at a
meeting duly called and held at which a majority of the members of the Committee
were in attendance in person or through telephonic communication. Any
determination set forth in writing and signed by all of the members of the
Committee shall be as fully effective as if it had been made by a majority vote
of the members at a meeting duly called and held.
5. Shares; Adjustment Upon Certain Events
(a) Shares to be issued under the Plan shall be made available, at the
discretion of the Board, either from authorized but unissued Shares or from
issued Shares reacquired by Jenny Craig.
(b) Except as provided in this Section 5, the aggregate number of Shares
that may be issued under the Plan shall not exceed 3,000,000 shares. If Options
are for any reason cancelled, or expire or terminate unexercised, the Shares
covered by such Options shall again be available for the grant of Options,
subject to the limit provided by the preceding sentence.
3
<PAGE> 4
(c) No fractional Shares will be issued or transferred in the exercise of
any Option. In lieu thereof, Jenny Craig shall pay a cash adjustment equal to
the same fraction of the Fair Market Value of one Share on the date of exercise.
(d) The existence of the Plan and the Options granted hereunder shall not
affect in any way the right or power of the Board or the stockholders of Jenny
Craig to make or authorize any adjustment, recapitalization, reorganization or
other change in Jenny Craig's capital structure or its business, any merger or
consolidation of Jenny Craig, any issue of bonds, debentures, preferred or prior
preference stocks ahead of or affecting Common Stock, the dissolution or
liquidation of Jenny Craig or any sale or transfer of all or part of its assets
or business, or any other corporate act or proceeding, in which case the
provisions of this Section 5 shall govern outstanding Options.
(e) The Shares with respect to which Options may be granted are Shares of
Common Stock as presently constituted, but, if and whenever, prior to the
expiration of an Option theretofore granted, Jenny Craig shall effect a
subdivision, recapitalization or consolidation of Shares or the payment of a
stock dividend on Shares without receipt of consideration, the purchase price
per Share and the number and class of Shares and/or other securities with
respect to which such Option thereafter may be exercised, and the total number
and class of Shares and/or other securities that may be issued under this Plan,
shall be proportionately adjusted.
(f) If Jenny Craig merges or consolidates with one or more corporations,
then from and after the effective date of such merger or consolidation, upon
exercise of an Option theretofore granted the Participant shall be entitled to
purchase under such Option, in lieu of the number of Shares as to which such
Option shall then be exercisable but on the same terms and conditions of
exercise set forth in such Option, the number and class of Shares and/or other
securities or property (including cash) to which the Participant would have been
entitled pursuant to the terms of the agreement of merger or consolidation if,
immediately prior to such merger or consolidation, the Participant had been the
holder of record of the total number of Shares receivable upon exercise of such
Option (whether or not then exercisable) had such merger or consolidation not
occurred.
(g) If, as a result of any adjustment made pursuant to the preceding
paragraphs of this Section 5, any Participant shall become entitled upon
exercise of an Option to receive any securities other than Common Stock, then
the number and class of securities so receivable thereafter shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock set forth in this
Section 5.
(h) Except as hereinbefore expressly provided, the issuance by Jenny Craig
of shares of stock of any class, or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or other securities, and in any case whether or not for fair value, shall
not affect, and no adjustment by reason thereof shall be made with respect to,
the number and class of Shares and/or other securities or property subject to
Options theretofore granted or the purchase price per Share.
(i) Notwithstanding any provision of this Section 5 to the contrary, if
authorized but previously unissued Shares are issued under the Plan, such Shares
shall not be issued for a consideration less than their par value.
4
<PAGE> 5
6. Awards and Terms of Options
(a) Grant. The Committee may grant Options not intended to be "incentive
stock options" within the meaning of section 422A of the Code to key employees,
Advisory Board members and consultants to the Company, and may grant "incentive
stock options" to key employees. The Board may grant Options not intended to be
"incentive stock options" within the meaning of Section 422A of the Code to
non-employee directors. Additionally, without further action by the Board, the
Committee or the stockholders of Jenny Craig, each non-employee director on the
date immediately prior to the effective date of Jenny Craig's initial public
offering of its common stock, and each person who becomes a non-employee
director thereafter and prior to November 1, 1996 shall automatically receive,
(x) a one-time grant, effective on the date immediately prior to the effective
date of such public offering or, if later, on the date of such person becoming a
director, of Options to purchase 5,000 Shares, and (y) an annual grant, on each
anniversary of the initial grant for so long as such person continues to be a
director, of Options to purchase 500 Shares. Options shall be evidenced by
Option agreements in such form not inconsistent with the Plan as the Committee
shall approve from time to time, which agreements shall contain in substance the
following terms and conditions:
(i) Exercise Price. The purchase price per Share deliverable upon the
exercise of an Option shall be determined by the Committee, but shall not
be less than the Minimum Exercise Price. For Options received by
non-employee directors pursuant to the second sentence of Section 6(a), the
purchase price per Share deliverable upon the exercise of an Option shall
be the Minimum Exercise Price.
(ii) Number of Shares. The Option agreement shall specify the number of
Options granted to the Participant, as determined by the Committee or as
set forth in the second sentence of this Section 6(a) with respect to
options granted pursuant to such sentence. The maximum number of Options
that may be granted under the Plan during any calendar year to any
Participant shall not exceed 500,000 Options, provided however that if the
Company grants to any Participant during any calendar year less than
500,000 Options or does not grant any Options during any calendar year to
such Participant, then the amount of such shortfall shall be carried
forward and added to the maximum number of Options which may be granted in
a subsequent year to such Participant. If some of the Options held by a
Participant are exercised, any unexercised Options held by such Participant
shall remain outstanding and shall be or become exercisable according to
their respective terms.
(iii) Period of Exercisability. Except as otherwise provided in the Plan
or as otherwise determined by the Committee, no Option granted under the
Plan shall become exercisable earlier than the expiration of six (6) months
after the date of grant and each Option shall be exercisable after the
expiration of such period. The Committee may prescribe shorter or longer
time periods, periods of partial exercisability and additional requirements
or conditions with respect to the exercise of Options in the Option
agreement and may provide, either at the time of grant or thereafter, for
the acceleration of an Option; provided, however, that no Option shall be
exercisable after the expiration of ten (10) years from the date of grant.
Except as hereinafter provided, or as provided in the Participant's Option
agreement, or as may be determined by the Committee, Options granted to any
Participant may be exercised only during the continuance of that
Participant's employment by the Company, service on the Board or Advisory
Board or service as a consultant to the Company.
(b) Procedure for Exercise. A Participant electing to exercise one or more
Options shall give written notice to the Chief Financial Officer of Jenny Craig
of such election and of the number of Options the
5
<PAGE> 6
Participant has elected to exercise. Shares purchased pursuant to the exercise
of Options shall be paid for at the time of exercise in cash, by the delivery of
unencumbered Shares owned by the Participant (provided that such Shares have
been owned by the Participant for such period as is required by applicable
accounting standards to avoid a charge to earnings), or on such other terms and
conditions as may be acceptable to the Committee and in accordance with Delaware
law. Upon receipt of payment, Jenny Craig shall deliver to the Participant as
soon as practicable a certificate or certificates for the Shares then purchased.
(c) Expiration and Cancellation. If not previously exercised, each Option
shall expire upon the tenth (10th) anniversary of the date of the grant thereof
or upon the earlier termination of the Participant's employment by the Company,
service on the Board or Advisory Board or service as a consultant to the
Company, except as otherwise provided by Section 7 of the Plan.
7. Effect of Termination of Employment or Other Service
(a) By Reason of the Participant's Death. Except as otherwise provided in
the Participant's Option agreement, if the Participant dies while an employee of
the Company or while serving as a consultant to the Company, all outstanding
Options not exercised by the Participant prior to death shall become immediately
exercisable by the Participant's estate or by the person given authority to
exercise such Options by the Participant's will or by operation of law. Unless
otherwise specified in the Option Agreement, such Options shall remain
exercisable for a period of one (1) year from the date of the Participant's
death; provided, however, that no Option may be exercised more than ten (10)
years from the date of grant.
(b) By Reason of the Participant's Retirement or Disability. Except as
otherwise provided in the Participant's Option agreement, if a Participant
retires at or after age 65 (or, with the consent of the Committee, before age
65), or if a Participant's employment with, or service as a consultant to, the
Company terminates due to disability (within the meaning of section 105(d)(4) of
the Code), all outstanding Options not exercised by the Participant prior to the
termination of his employment or service as a consultant shall immediately
become exercisable. Unless otherwise specified in the Option agreement, all such
Options shall remain exercisable for a period of one (1) year from the date of
termination of the Participant's employment or service as a consultant, except
that Options intended to qualify as incentive stock options may be exercised
only for a period of three (3) months after termination of employment due to
retirement; provided, however, that no Option may be exercised more than ten
(10) years after the date of the grant thereof.
(c) By Reason of Other Separation from Service. Except as otherwise
provided in the Participant's Option agreement, if a Participant's employment or
service as a consultant is terminated for cause (as hereinafter defined) or is
terminated by the Participant in violation of an agreement between the
Participant and the Company, or if it is discovered after his separation from
service that he had engaged in conduct that would have justified termination of
his employment or service as a consultant for cause, all unexercised and
outstanding Options held by the Participant shall immediately be cancelled.
Termination shall be deemed to be for "cause" if (i) the Participant shall have
committed fraud or any felony in connection with the Participant's duties as an
employee of, or consultant to, the Company, or willful misconduct or the
commission of any other act which causes or may reasonably be expected to cause
substantial economic or reputational injury to the Company, or (ii) such
termination is or would be deemed to be for cause under any employment or
consulting agreement between the Company and the Participant. Unless otherwise
specified in the Option agreement, upon any termination of employment, or
service as a consultant, not
6
<PAGE> 7
governed by the preceding portion of this Section 7(c) or by Sections 7(a) or
7(b) hereof, all outstanding Options not exercised by the Participant prior to
the termination of his employment, or service as a consultant, shall remain
exercisable (to the extent exercisable by him immediately before such
separation) for a period of three (3) months after such separation; provided,
however, that (i) except as otherwise provided in the Participant's Option
Agreement, or as otherwise determined by the Committee, no Options that were not
exercisable during the period of the Participant's employment, or service as a
consultant, shall thereafter become exercisable and (ii) no such Option may be
exercised more than ten (10) years after the date of the grant.
(d) Termination of Other Service. If a non-employee Participant's service
as a member of the Board or the Advisory Board is terminated because of death,
retirement, disability or other reason, any outstanding Options not exercised by
the Participant prior to such termination shall become immediately exercisable
by the Participant (or, in the case of death, by the Participant's estate or by
the person given authority to exercise such Options by the Participant's will or
by operation of law), and such Options shall remain exercisable for a period of
one (1) year from the date of termination of service; provided, however, that no
Option may be exercised more than ten (10) years from the date of grant.
8. Nontransferability of Options
No Option shall be transferable by the Participant otherwise than by will
or under applicable laws of descent and distribution. In addition, no Option
shall be assigned, negotiated, pledged, or hypothecated in any way (whether by
operation of law or otherwise), and no Option shall be subject to execution,
attachment or similar process. Upon any transfer, assignment, negotiation,
pledge or hypothecation of any Option, or in the event of any levy upon any
Option by reason of any execution, attachment or similar process, contrary to
the provisions hereof, such Option shall immediately become null and void.
9. Rights as a Stockholder
A Participant (or a permitted transferee of an Option) shall have no rights
as a stockholder with respect to any Shares covered by his Option until he shall
have become the holder of record of such Share(s), and no adjustments shall be
made for dividends in cash or other property or distributions or other rights in
respect to any such Shares, except as otherwise specifically provided for in
this Plan.
10. Determinations
Each determination, interpretation or other action made or taken pursuant
to the provisions of this Plan by the Board or Committee shall be final and
binding for all purposes and upon all persons, including, without limitation,
the Participants, the Company, the directors, officers, employees and members of
the Advisory Board of the Company, and their respective heirs, executors,
administrators, personal representatives and other successors in interest.
7
<PAGE> 8
11. Termination, Amendment and Modification
(a) The Plan shall terminate at the close of business on August 28, 2001,
unless terminated sooner as hereinafter provided, and no Option shall be granted
under the Plan thereafter. The termination of the Plan shall not terminate any
outstanding Options which by their terms continue beyond the termination date of
the Plan. At any time prior to that date, the Board may terminate the Plan or
suspend the Plan in whole or in part, or amend the Plan. Notwithstanding the
foregoing, however, no such action may, without the approval of the stockholders
of Jenny Craig, increase the total number of Shares which may be acquired upon
exercise of Options granted under the Plan; reduce the Minimum Exercise Price at
which any Option may be exercised below the Minimum Exercise Price; change the
class of persons eligible to be Participants; or, unless no longer required as a
condition of compliance with the requirements of Rule 16b-3, change the number
of Options to be granted to non-employee directors, or materially increase the
benefits accruing to non-employee directors hereunder.
(b) Nothing contained in this Section 11 shall be deemed to prevent the
Board or the Committee from authorizing amendments of outstanding Options of
Participants including, without limitation, the reduction of the exercise price
specified therein (or the granting or issuance of new Options at a lower
exercise price upon cancellation of outstanding Options), so long as all Options
outstanding at any one time shall not call for issuance of more Shares than the
remaining number provided for under the Plan and so long as the provisions of
any amended Options would have been permissible under the Plan if such Option
had been originally granted or issued as of the date of such amendment with such
amended terms. Notwithstanding anything to the contrary contained in this
Section 11, no termination, amendment, or modification of the Plan may, without
the consent of the Participant or the transferee of his Option, alter or impair
the rights and obligations arising under any then outstanding Option.
12. Non-Exclusivity
Neither the adoption of the Plan by the Board nor the submission of the
Plan to the stockholders of Jenny Craig for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting or issuance of Options, Shares and/or other incentives otherwise than
under the Plan, and such arrangements may be either generally applicable or
limited in application.
13. Use of Proceeds
The proceeds of the sale of Shares subject to Options under the Plan are to
be added to the general funds of Jenny Craig and used for its general corporate
purposes as the Board shall determine.
14. General Provisions
(a) The Plan shall not impose any obligations on the Company to continue
the employment of, or retain in any other capacity, any Participant, nor shall
it impose any obligation on the part of any Participant to remain in the employ
of, or in any other capacity with the Company.
8
<PAGE> 9
(b) If the Board determines that the law so requires, the holder of an
Option granted hereunder shall, upon any exercise or conversion thereof, execute
and deliver to Jenny Craig a written statement, in form satisfactory to Jenny
Craig, representing and warranting that he is purchasing or accepting the Shares
then acquired for his own account and not with a view to the resale or
distribution thereof, that any subsequent offer for sale or sale of any such
Shares shall be made either pursuant to (i) a Registration Statement on an
appropriate form under the Securities Act of 1933, as amended, which
Registration Statement shall have become effective and shall be current with
respect to the Shares being offered and sold, or (ii) a specific exemption from
the registration requirements of said Act, and that in claiming such exemption
the holder will, prior to any offer for sale or sale of such Shares, obtain a
favorable written opinion from counsel approved by Jenny Craig as to the
availability of such exception.
(c) Nothing contained in the Plan and no action taken pursuant to the Plan
(including, without limitation, the grant of any Option thereunder) shall create
or be construed to create a trust of any kind, or a fiduciary relationship,
between the Company and any Participant or the executor, administrator or other
personal representative, or designated beneficiary of such Participant, or any
other persons. If and to the extent that any Participant or his executor,
administrator, or other personal representative, as the case may be, acquires a
right to receive any payment from the Company pursuant to the Plan, such right
shall be no greater than the right of an unsecured general creditor of the
Company.
15. Issuance of Stock Certificates, Legends and Payment of Expenses
(a) Upon any exercise of an Option and payment of the exercise price as
provided in such Option, a certificate or certificates for the Shares as to
which such Option has been exercised shall be issued by Jenny Craig in the name
of the person or persons exercising such Option and shall be delivered to or
upon the order of such person or persons.
(b) Certificates for Shares issued upon exercise of an Option shall bear
such legend or legends as the Board, in its discretion, determines to be
necessary or appropriate to prevent a violation of, or to perfect an exemption
from, the registration requirements of the Securities Act of 1933, as amended,
or to implement the provisions of any agreements between the Company and the
Participant with respect to such Shares.
(c) Jenny Craig shall pay all issue or transfer taxes with respect to the
issuance or transfer of Shares, as well as all fees and expenses necessarily
incurred by Jenny Craig in connection with such issuance or transfer and with
the administration of the Plan.
16. Listing of Shares and Related Matters
If at any time the Board shall determine in its sole discretion that the
listing, registration or qualification of the Shares covered by the Plan upon
any national securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the award or sale of Shares
under the Plan, no Shares will be delivered unless and until such listing,
registration, qualification, consent or approval shall have been effected or
obtained, or otherwise provided for, free of any conditions not acceptable to
the Board.
9
<PAGE> 10
17. Withholding Taxes
The Company shall have the right to deduct withholding taxes from any
payments made pursuant to the Plan, or to make such other provisions as it deems
necessary or appropriate to satisfy its obligations to withhold federal, state
or local income or other taxes incurred by reason of the exercise of Options or
the issuance of Shares or payments under the Plan, including requiring a
Participant exercising an Option granted hereunder to reimburse the Company for
any taxes required to be withheld or otherwise deducted and paid by the Company
in respect of the Option exercise or the issuance of Shares pursuant thereto. In
lieu thereof, the Company shall have the right to withhold the amount of such
taxes from any other sums due or to become due from the Company to the
Participant upon such terms and conditions as the Company may prescribe.
18. Notices
Each Participant shall be responsible for furnishing the Committee with the
current and proper address for the mailing to him of notices and the delivery to
him of agreements, Shares and payments. Any notices required or permitted to be
given shall be deemed given if directed to the person to whom addressed at such
address and mailed by regular United States mail, first-class and prepaid. If
any item mailed to such address is returned as undeliverable to the addressee,
mailing will be suspended until the Participant furnishes the proper address.
19. Severability of Provisions
If any provisions of the Plan shall be held invalid or unenforceable, such
invalidity or unenforceability shall not affect any other provisions of the
Plan, and the Plan shall be construed and enforced as if such provisions had not
been included.
20. Payment to Minors and Others, Etc.
Any benefit payable to or for the benefit of a minor, an incompetent person
or other person incapable of receipting therefor shall be deemed paid when paid
to such person's guardian or to the party providing or reasonably appearing to
provide for the care of such person, and such payment shall fully discharge the
Committee, the Company and their employees, agents and representatives with
respect thereto.
21. Headings and Captions
The headings and captions herein are provided for reference and convenience
only. They shall not be considered part of the Plan and shall not be employed in
the construction of the Plan.
22. Controlling Law
The Plan shall be construed and enforced according to the laws of the State
of California.
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED MARCH 31, 2000 INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 2000 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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 32,445
<SECURITIES> 1,416
<RECEIVABLES> 1,324
<ALLOWANCES> 0
<INVENTORY> 14,454
<CURRENT-ASSETS> 51,282
<PP&E> 26,178
<DEPRECIATION> 0
<TOTAL-ASSETS> 108,009
<CURRENT-LIABILITIES> 53,719
<BONDS> 7,030
0
0
<COMMON> 0
<OTHER-SE> 47,260
<TOTAL-LIABILITY-AND-EQUITY> 108,009
<SALES> 199,430
<TOTAL-REVENUES> 214,445
<CGS> 193,349
<TOTAL-COSTS> 203,418
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 399
<INCOME-PRETAX> (15,588)
<INCOME-TAX> (5,923)
<INCOME-CONTINUING> (9,665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,665)
<EPS-BASIC> (0.47)
<EPS-DILUTED> (0.47)
<FN>
<F1>
THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF
ALLOWANCES AND DEPRECIATION, RESPECTIVELY.
</FN>
</TABLE>
