-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FfBee+00Ijxt5DR3sxA2ajonY+Imnh9ca5+Qbs3FNpytfakIvessVs8r5ImwATSx AVdH0E6bGfiaFdXr9Yi5XQ== 0000936392-98-000243.txt : 19980218 0000936392-98-000243.hdr.sgml : 19980218 ACCESSION NUMBER: 0000936392-98-000243 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980217 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRAIG JENNY INC /DE CENTRAL INDEX KEY: 0000878865 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 330366188 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10887 FILM NUMBER: 98540620 BUSINESS ADDRESS: STREET 1: 445 MARINE VIEW AVE STE 300 CITY: DEL MAR STATE: CA ZIP: 92014 BUSINESS PHONE: 6192597000 MAIL ADDRESS: STREET 1: 445 MARINE VIEW AVENUE STREET 2: SUITE 300 CITY: DEL MAR STATE: CA ZIP: 92014 FORMER COMPANY: FORMER CONFORMED NAME: JCI HOLDINGS INC DATE OF NAME CHANGE: 19600201 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended December 31, 1997 Commission File No. 001-10887 JENNY CRAIG, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 33-0366188 - ------------------------------------------------------------------------------- (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(619) 812-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of common stock, $.000000005 par value, outstanding as of the close of business on February 6, 1998- 20,688,971. -1- 2 JENNY CRAIG, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands)
June 30, December 31, 1997 1997 --------- ---------- (unaudited) ASSETS Cash and cash equivalents ................................ $37,438 19,666 Short-term investments ................................... 1,506 6,225 Accounts receivable, net ................................. 2,967 2,869 Inventories .............................................. 15,285 18,829 Prepaid expenses and other assets ........................ 16,497 14,596 -------- -------- Total current assets ............................ 73,693 62,185 Cost of reacquired area franchise rights, net ............ 9,550 8,954 Property and equipment, net .............................. 27,554 27,311 Other assets ............................................. 1,500 -- -------- -------- $112,297 98,450 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ......................................... 14,938 16,558 Accrued liabilities ...................................... 19,117 18,149 Income taxes payable ..................................... 4,050 -- Deferred service revenues ................................ 14,558 10,550 -------- -------- Total current liabilities ....................... 52,663 45,257 Note payable ............................................. 5,716 5,621 -------- -------- Total liabilities ........................ 58,379 50,878 Stockholders' equity: Common stock $.000000005 par value, 100,000,000 shares authorized; 27,580,260 shares issued; 20,687,771 and 20,688,971 shares outstanding at June 30, 1997 and December 31, 1997, respectively .......................... -- -- Additional paid-in capital ............................... 71,615 71,622 Retained earnings ........................................ 55,053 50,719 Equity adjustment from foreign currency translation ...... 2,012 (7) Treasury stock at cost, 6,888,089 shares at June 30, 1997 and December 31, 1997, respectively .................... (74,762) (74,762) -------- -------- Total stockholders' equity .......................... 53,918 47,572 Commitments and contingencies ............................ -------- -------- $112,297 98,450 ======== =======
See accompanying notes to unaudited consolidated financial statements. -2- 3 JENNY CRAIG, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share amounts)
Three Months Ended Six Months Ended December 31, December 31, ----------------------- ------------------ 1996 1997 1996 1997 ---- ---- ---- ---- Revenues: Company-owned operations: Product sales .............................. $68,786 66,588 143,174 140,167 Service revenues ........................... 6,208 5,053 12,473 10,499 -------- -------- -------- -------- 74,994 71,641 155,647 150,666 -------- -------- -------- -------- Franchise operations: Product sales .............................. 7,014 5,984 15,579 12,656 Royalties .................................. 1,355 1,213 2,964 2,220 Initial franchise fees ..................... 25 5 210 5 -------- -------- -------- -------- 8,394 7,202 18,753 14,881 -------- -------- -------- -------- Total revenues ......................... 83,388 78,843 174,400 165,547 -------- -------- -------- -------- Costs and expenses: Company-owned operations: Product .................................... 66,129 64,389 135,121 140,045 Service .................................... 4,055 3,554 7,911 7,765 -------- -------- -------- -------- 70,184 67,943 143,032 147,810 -------- -------- -------- -------- Franchise operations: Product .................................... 4,900 4,426 11,538 9,415 Other ...................................... 381 385 906 1,029 -------- -------- -------- -------- 5,281 4,811 12,444 10,444 -------- -------- -------- -------- 7,923 6,089 18,924 7,293 General and administrative expenses ............ 7,172 5,929 14,524 15,039 -------- -------- -------- -------- Operating income (loss) ................. 751 160 4,400 (7,746) Other income, net, principally interest ........ 450 297 983 646 -------- -------- -------- -------- Income (loss) before taxes and cumulative effect of accounting change ............ 1201 457 5,383 (7,100) Provision (credit) for income taxes ............ 322 174 2,015 (2,766) -------- -------- -------- -------- Income (loss) before cumulative effect of accounting change ...................... 879 283 3,368 (4,334) Cumulative effect on prior years of change in accounting for service revenue net of $4,498 income tax benefit .................... -- -- (7,509) -- -------- -------- -------- -------- Net income (loss) ................ $ 879 283 (4,141) (4,334) ======== ======== ======== ======== Basic and Diluted per share amounts: Income (loss) before cumulative effect of accounting change ............................ .04 .01 .16 (.21) Cumulative effect of accounting change ......... -- -- (.36) -- -------- -------- -------- -------- Net income (loss) per share ....... $ .04 .01 (.20) (.21) ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements. -3- 4 JENNY CRAIG, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)
Six Months Ended December 31, ------------------------ 1996 1997 ---- ---- Cash flows from operating activities: Net loss .............................................................. $(4,141) (4,334) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......................................... 3,488 3,477 Decrease in other assets - forgiveness of officer loan ................ -- 1,500 Cumulative effect of change in accounting for service revenue ......... 7,509 -- Loss on disposal of property and equipment ............................ -- 664 (Increase) decrease in: Accounts receivable ......................................... (427) (159) Inventories ................................................. (2,356) (3,494) Prepaid expenses and other assets ........................... (1,179) 1,901 Increase (decrease) in: Accounts payable ............................................ (4,352) 1,620 Accrued liabilities ......................................... (1,615) (968) Income taxes payable ........................................ 537 (4,050) Deferred service revenue .................................... (2,620) (4,008) -------- -------- Net cash used in operating activities .............. (5,156) (7,851) -------- -------- Cash flows from investing activities: Purchase of property and equipment ...................................... (13,944) (3,630) Purchase of short-term investments ...................................... (5,975) (8,363) Proceeds from maturity of short-term investments ........................ 6,850 3,644 Payment for acquisition of franchised centres ........................... (1,803) (145) -------- -------- Net cash used in investing activities .............. (14,872) (8,494) -------- -------- Cash flows from financing activities: Purchase of treasury stock ............................................. (1,258) -- Proceeds from note payable ............................................. 5,975 -- Principal payments on note payable ..................................... -- (95) Proceeds from exercise of stock options ................................ 106 7 -------- -------- Net cash provided by (used in) financing activities 4,823 (88) -------- -------- Effect of exchange rate changes on cash and cash equivalents............... (63) (1,340) -------- -------- Net decrease in cash and cash equivalents ................................. (15,268) (17,773) Cash and cash equivalents at beginning of period .......................... 43,535 37,439 -------- -------- Cash and cash equivalents at end of period ................................ $28,267 19,666 ======== ======== Supplemental disclosure of cash flow information: Income taxes paid ...................................................... $1,478 3,863 Acquisition of franchised centres: Cancellation of accounts receivable ................................. $ 732 256 Fair value of assets acquired ....................................... $2,362 401 Liabilities assumed ................................................. $1,630 --
See accompanying notes to unaudited consolidated financial statements -4- 5 JENNY CRAIG, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 1. The accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for any interim period are not necessarily indicative of the results for any other interim period or for the full year. These statements should be read in conjunction with the June 30, 1997 consolidated financial statements. 2. During the quarter ended December 31, 1997 the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share" (Statement 128). As required by Statement 128, all prior period information has been restated to conform to the provisions of Statement 128. The weighted average number of shares used to calculate basic net income per share was 20,794,000 and 20,688,000 for the quarters ended December 31, 1996 and 1997, respectively and 20,822,000 and 20,688,000 for the six months ended December 31, 1996 and 1997, respectively. The impact of outstanding stock options during the periods presented did not create a difference between calculated basic net income per share and diluted net income per share. Stock options had the effect of increasing the number of shares used in the calculation by application of the treasury stock method by 404,000 and 81,000 for the quarters ended December 31, 1996 and 1997, respectively, and by 643,000 for the six month period ended December 31, 1996. The calculation of diluted earnings per share for the six months ended December 31, 1997 and for the cumulative effect of accounting change and net loss for the six months ended December 31, 1996 was not applicable as inclusion of the effect of stock options would be antidilutive. 3. In the fourth quarter of fiscal 1997, the Company changed its method of accounting for service fees received from customers, retroactively effective as of July 1, 1996. The results for the periods ended December 31, 1996 reflect the effect of the change in accounting method as if the change had occurred on July 1, 1996. -5- 6 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS Forward-Looking Statements Information provided in this Report on Form 10-Q may contain, and the Company may from time to time disseminate material and make statements which may contain "forward-looking" information, as that term is defined by the Private Securities Litigation Reform Act of 1995 (the "Act"). These forward-looking statements may relate to anticipated financial performance, business prospects and similar matters. The words "expects", "anticipates", "believes", and similar words generally signify a "forward-looking" statement. These cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefit of "safe-harbor" provisions of the Act. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. Among the factors that could cause actual results to differ materially are: increased competition; technological and scientific developments, including appetite suppressants and other drugs which can be used in weight-loss programs; increases in cost of food or services; lack of market acceptance of additional products and services; legislative and regulatory restrictions or actions; effectiveness of marketing and advertising programs; prevailing domestic and foreign economic conditions; and the risk factors set forth from time to time in the Company's annual reports and other reports and filings with the SEC. In particular, the reader should carefully review the cautionary statements contained under the caption "Forward-Looking Statements" in Item 1 of the Company's Annual Report on Form 10-K for the year ended June 30, 1997. Quarter Ended December 31, 1997 as Compared to Quarter Ended December 31, 1996 The Company has operated in a difficult and dynamic environment since April 1996, when the United States Food and Drug Administration ("FDA") approved dexfenfluramine, commonly referred to by its trade name Redux, for use as a doctor-prescribed medication for the treatment of obesity. The Company believes that the extensive publicity that accompanied the introduction of Redux heightened the public's interest in weight loss pharmaceuticals, including interest in a combination of two other medications (phentermine and fenfluramine) commonly known as "phen-fen", and resulted in significantly reduced demand for the Company's program. In July 1996, the Company began test marketing an adjunct to its traditional weight loss program which incorporated weight loss pharmaceuticals. This program adjunct utilized independently-contracted physicians to examine clients and prescribe Redux only to persons who met the FDA's protocol and phen-fen to persons who met the appropriate medical criteria for this medication. In January 1997, the weight loss medication adjunct was incorporated into virtually all of the Company's centres in the United States. In August 1997, the Company ceased offering a weight loss medication adjunct to its program following reports from the medical community as to possible health risks associated with the use of Redux and phen-fen. In September 1997, Redux and fenfluramine were withdrawn from the United States market at the request of the FDA. Revenues from United States Company-owned operations decreased 5% from $62,704,000 for the quarter ended December 31, 1996 to $59,869,000 for the quarter ended December 31, 1997. At December 31, 1996 there were 526 United States Company-owned Centres in operation compared to 547 at December 31, 1997. The increase in the number of United States Company-owned Centres reflects the Company's acquisition of 17 Centres from franchisees and the net opening of four Centres between the periods. Average revenue per United States Company-owned Centre decreased 9% from $119,000 for the quarter ended December 31, 1996 to $108,000 for the quarter ended December 31, 1997. Service revenues from United States Company-owned operations for the quarter ended December 31, 1997 decreased 19% to $4,302,000 from $5,295,000 for the comparable year earlier -6- 7 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (Continued) period. This decrease in service revenues was principally due to a 17% decrease (22% on an average per centre basis) in the number of new participants enrolled in the Program. Product sales, which consists primarily of food products, from United States Company-owned operations decreased 3% from $57,409,000 for the quarter ended December 31, 1996 to $55,567,000 for the quarter ended December 31, 1997. This decrease was principally due to a 7% decrease in the number of active clients, offset, in part, by an increase in the average food amount purchased per client. Revenues from foreign Company-owned operations decreased 4% from $12,290,000 to $11,772,000 for the quarters ended December 31, 1996 and 1997, respectively, primarily due to a 12% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the periods. There were 104 foreign Company-owned Centres at December 31, 1996 compared to 107 at December 31, 1997. Costs and expenses of United States Company-owned operations decreased 4% from $60,379,000 to $58,153,000 for the quarters ended December 31, 1996 and 1997, respectively. The decrease in costs and expenses for the quarter ended December 31, 1997 reflects the decreased variable costs related to the lower level of operations including reduced compensation expense related to lower staffing levels maintained at the centres. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues increased from 96% to 97% between the periods principally due to the higher proportion of fixed costs when compared to the reduced level of revenues. After including the allocable portion of general and administrative expenses, United States Company-owned operations incurred an operating loss of $2,531,000 for the quarter ended December 31, 1997 compared to an operating loss of $2,821,000 for the quarter ended December 31, 1996. Costs and expenses of foreign Company-owned operations decreased less than one percent from $9,805,000 to $9,790,000 for the quarters ended December 31, 1996 and 1997, respectively. After including the allocable portion of general and administrative expenses, foreign Company-owned operations had operating income of $1,313,000 for the quarter ended December 31, 1997 compared to operating income of $1,887,000 for the quarter ended December 31, 1996. Revenues from franchise operations decreased 14% from $8,394,000 to $7,202,000 for the quarters ended December 31, 1996 and 1997, respectively. This decline was principally due to a 14% decrease in the number of franchise Centres in operation, from 161 at December 31, 1996 to 138 at December 31, 1997. The decrease in the number of franchise Centres reflects the Company's acquisition of 17 Centres from franchisees and the net closure of six franchised centres between the periods. Costs and expenses of franchised operations, which consist primarily of product costs, decreased 9% from $5,281,000 to $4,811,000 for the quarters ended December 31, 1996 and 1997, respectively, principally because of the reduced level of franchise operations. The increase in franchise costs and expenses as a percentage of franchise revenues was principally due to the reduced royalty revenue which has a higher margin than product sales. General and administrative expenses decreased 17% from $7,172,000 to $5,929,000 and decreased from 8.6% to 7.5% of total revenues for the quarters ended December 31, 1996 and 1997, respectively. The decrease was principally due to a decrease in consulting and professional fees. The elements discussed above combined to result in a 79% decrease in operating income from $751,000 for the quarter ended December 31, 1996 to $160,000 for the quarter ended December 31, 1997. -7- 8 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (Continued) Other income, net, principally interest, decreased 34% from $450,000 to $297,000 for the quarters ended December 31, 1996 and 1997, respectively. This decline was principally due to a decrease in the average balance of cash investments between the periods. The Company is in the process of assessing the functionality of its computer applications with respect to the "year 2000" millennium change. Preliminary estimates of the total costs to be incurred prior to 2000 amount to approximately $500,000. Maintenance or modification costs will be expensed as incurred, while the costs of new software will be capitalized and amortized over the software's useful life. The Company and the Federal Trade Commission have entered into a proposed Consent Order settling all contested issues raised in a complaint filed in September 1993 against the Company alleging that the Company violated the Federal Trade Commission Act by the use and content of certain advertisements for the Company's weight loss program featuring testimonials, claims for the program's success and safety, and statements as to the program's costs to participants. The proposed Consent Order does not admit any issue of fact or law or any violation by the Company of any law or regulation, and does not involve payment by the Company of any civil money penalty, damages, or other financial relief. The proposed Consent Order requires certain procedures and disclosures in connection with the Company's advertisements of its products and services. The full Commission accepted the proposed Consent Order and it has been published for public comment. The Company will seek certain modifications to the Consent Order based upon a proposed consent order the FTC staff recently announced with another participant in the weight loss industry. The Company does not believe that compliance with the proposed Consent Order will have a material adverse effect on the Company's consolidated financial position or results of operations or its current advertising and marketing practices. The Company along with other weight loss programs and certain pharmaceutical companies has been named as a defendant in an action filed in the Circuit Court for the Eleventh Judicial Circuit in Pickens County, Alabama (the "Alabama Litigation"). The action was commenced in August 1997 by three plaintiffs who are seeking to maintain the action as a class action on behalf of all persons in the United States and United States Territories who have suffered or may in the future suffer injury due to the administration of phentermine, fenfluramine (commonly known as "phen-fen" when taken together) and/or dexfenfluramine (trade name, "Redux"), which were manufactured or sold by the defendants. The complaint includes claims against the Company and other defendants, acting separately and in concert, for alleged unlawful and tortious acts, including sale of allegedly dangerous and defective products, negligent marketing and distribution, failure to warn of the risks associated with the weight loss medications, breach of warranty, fraud, and negligent misrepresentation. The complaint seeks compensatory and punitive damages in unspecified amounts and equitable relief including the establishment of a medical fund to cover future medical expenses resulting from the use of the weight loss medications, and a requirement that the defendants adequately warn the public of the risks associated with use of the weight loss medications. The Company along with certain pharmaceutical companies has also been named as a defendant in an action filed in the Court of Common Pleas, Philadelphia County, Pennsylvania (the "Pennsylvania Litigation"). The action was commenced in November 1997 by a plaintiff, a participant in the Company's program, who is seeking to maintain the action as a class action on behalf of all persons in the Commonwealth of Pennsylvania who have purchased and used fenfluramine, -8- 9 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (Continued) dexfenfluramine and phentermine, alone or in combination. The complaint includes claims against the Company and the other defendants for alleged false and misleading statements concerning the safety and appropriateness of using fenfluramine, dexfenfluramine, and phentermine and the benefits, uses and ingredients of these drugs, negligence in the distribution, sale and prescribing of these medications and breach of the warranty of merchantability. The complaint seeks compensatory and punitive damages in unspecified amounts and a Court-supervised program funded by the defendants through which class members would undergo periodic medical examination and testing. The Company has tendered the Alabama Litigation and the Pennsylvania Litigation matters to its insurance carriers. The Company and the provider of the independent physicians who prescribed the weight loss medications in the Company's centres have each asserted their rights with respect to these litigations under contractual provisions for indemnification in the agreement between them. The claims have not progressed sufficiently for the Company to estimate a range of possible loss, if any. The Company intends to defend the matters vigorously. -9- 10 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (Continued) Six Months Ended December 31, 1997 as Compared to Six Months Ended December 31, 1996 Revenues from United States Company-owned operations decreased 3% from $130,015,000 for the six months ended December 31, 1996 to $126,086,000 for the six months ended December 31, 1997. At December 31, 1996 there were 526 United States Company-owned Centres in operation compared to 547 at December 31, 1997. The increase in the number of United States Company-owned Centres reflects the Company's acquisition of 17 Centres from franchisees and the net opening of four centres between the periods. Average revenue per United States Company-owned Centre decreased 11% from $256,000 for the six months ended December 31, 1996 to $229,000 for the six months ended December 31, 1997. Service revenues from United States Company-owned operations for the six months ended December 31, 1997 decreased 16% to $8,919,000 from $10,675,000 for the comparable year earlier period. This decrease in service revenues was primarily due to a decrease in the average service fee charged per new participant and is the principal reason for the decrease in deferred service revenue on the accompanying balance sheet. Product sales, which consists primarily of food products, from United States Company-owned operations decreased 2% from $119,340,000 for the six months ended December 31, 1996 to $117,167,000 for the six months ended December 31, 1997. This decrease was principally due to a 6% decrease in the number of active clients, offset, in part, by an increase in the average food amount purchased per client. Revenues from foreign Company-owned operations decreased 4% from $25,632,000 to $24,580,000 for the six months ended December 31, 1996 and 1997, respectively, primarily due to a 9% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the periods. There were 104 foreign Company-owned Centres at December 31, 1996 compared to 107 at December 31, 1997. Costs and expenses of United States Company-owned operations increased 4% from $122,237,000 to $127,509,000 for the six months ended December 31, 1996 and 1997, respectively. The increase in costs and expenses of United States Company-owned operations for the six months ended December 31, 1997 is principally due to $2,437,000 of costs related to the now terminated weight loss medication program adjunct incurred in the quarter ended September 30, 1997, $3,047,000 of additional advertising expenses associated with the launch of the Company's new ABC weight management program in the quarter ended September 30, 1997, and the additional fixed costs associated with the increased number of centres. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues increased from 94% to 101% between the periods principally due to the aforementioned expenses. After including the allocable portion of general and administrative expenses, United States Company-owned operations incurred an operating loss of $12,511,000 for the six months ended December 31, 1997 compared to an operating loss of $2,364,000 for the six months ended December 31, 1996. Costs and expenses of foreign Company-owned operations decreased 2% from $20,795,000 to $20,301,000 for the six month periods ended December 31, 1996 and 1997, respectively, principally because of the 9% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the periods. After including the allocable portion of general and administrative expenses, foreign Company-owned operations had operating income of $2,861,000 for the six months ended December 31, 1997 compared to operating income of $3,628,000 for the six months ended December 31, 1996. Revenues from franchise operations decreased 21% from $18,753,000 to $14,881,000 for the six months ended December 31, 1996 and 1997, respectively. This decline was principally due to a 14% decrease in the number of franchise Centres in operation, from 161 at December 31, 1996 to 138 at December 31, 1997 and a decrease in the number of new participants enrolled in the Program at franchised Centres resulting in reduced product sales and royalties. The decrease in the number of -10- 11 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (Continued) franchise Centres reflects the Company's acquisition of 17 Centres from franchisees and the net closure of six franchised centres between the periods. Costs and expenses of franchised operations, which consist primarily of product costs, decreased 16% from $12,444,000 to $10,444,000 for the six month periods ended December 31, 1996 and 1997, respectively, principally because of the reduced level of franchise operations. The increase in franchise costs and expenses as a percentage of franchise revenues was principally due to the reduced royalty revenue which has a higher margin than product sales. General and administrative expenses increased 4% from $14,524,000 to $15,039,000 and increased from 8.3% to 9.1% of total revenues for the six months ended December 31, 1996 and 1997, respectively. This increase was principally due to expenses totalling $3,500,000 related to the separation of a former senior executive of the Company incurred in the quarter ended September 30, 1997. These expenses include $1,500,000 for the forgiveness of a loan made to the former senior executive in 1995 (which is reflected on the accompanying balance sheet as a decrease in other assets), $1,000,000 for the payment (in semi-monthly installments) of the former senior executive's salary and benefits through December 31, 1998, and $1,000,000 for the cancellation of stock options (payable in five equal annual installments) which were exercisable by the former senior executive. The elements discussed above combined to result in an operating loss of $7,746,000 for the six months ended December 31, 1997 compared to operating income of $4,400,000 for the six months ended December 31, 1996. Other income, net, principally interest, decreased 34% from $983,000 to $646,000 for the six months ended December 31, 1996 and 1997, respectively. This decline was principally due to a decrease in the average balance of cash investments between the periods. -11- 12 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (Continued) Financial Condition At December 31, 1997, the Company had cash, cash equivalents and short-term investments totalling $25,891,000 compared to $38,944,000 at June 30, 1997, reflecting a decrease during the six month period ended December 31, 1997 of $13,053,000. This decrease was principally due to a $3,494,000 increase in inventory associated with the introduction of six new food products and $3,630,000 for the purchase of property and equipment. In addition, $4,008,000 of revenues recognized during the six month period ended December 31, 1997 reflected the amortization of deferred service revenue for which the cash was received in a prior period. The Company believes that its cash, cash equivalents and short-term investments and its cash flow from operations are adequate for its needs in the foreseeable future. -12- 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company along with certain pharmaceutical companies has been named as a defendant in an action filed in the Court of Common Pleas, Philadelphia County, Pennsylvania. The action was commenced in November 1997 by a plaintiff, a participant in the Company's program, who is seeking to maintain the action as a class action on behalf of all persons in the Commonwealth of Pennsylvania who have purchased and used fenfluramine, dexfenfluramine and phentermine, alone or in combination. The complaint includes claims against the Company and the other defendants for alleged false and misleading statements concerning the safety and appropriateness of using fenfluramine, dexfenfluramine, and phentermine and the benefits, uses and ingredients of these drugs, negligence in the distribution, sale and prescribing of these medications and breach of the warranty of merchantability. The complaint seeks compensatory and punitive damages in unspecified amounts and a Court-supervised program funded by the defendants through which class members would undergo periodic medical examination and testing. The Company has tendered this matter to its insurance carriers. The Company and the provider of the independent physicians who prescribed the weight loss medications in the Company's centres have each asserted their rights with repect to this litigation under contractual provisions for indemnification in the agreement between them. The claim has not progressed sufficiently for the Company to estimate a range of possible loss, if any. The Company intends to defend the matter vigorously. Item 4. Submission of Matters to a Vote of Security Holders. The Company's 1997 Annual Meeting of Stockholders was held on November 5, 1997. At the meeting the stockholders of the Company elected the six incumbent directors for terms of one year each and until their successors are duly elected and qualified and ratified the appointment of KPMG Peat Marwick LLP as the independent certified public accountants of the Company and its subsidiaries for the fiscal year ending June 30, 1998. The results of the vote to elect the six directors were as follows:
SHARES VOTED SHARES FOR WHICH NAME FOR AUTHORITY WAS WITHHELD ----------------------- ----------------------------- Sidney Craig 20,145,846 36,825 Jenny Craig 20,146,546 36,125 Scott Bice 20,146,646 36,025 Marvin Sears 20,146,346 36,325 Andrea Van de Kamp 20,152,546 30,125 Robert Wolf 20,152,315 30,356
-13- 14 Item 4. Submission of Matters to a Vote of Security Holders (continued) The results of the vote to ratify the appointment of KPMG Peat Marwick LLP as independent certified public accountants of the Company and its subsidiaries for the fiscal year ending June 30, 1998 were as follows:
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINING - --------------------------- ----------------------------- ---------------------------------------- 20,109,631 4,320 8,720
There were no broker non-votes on any of the matters submitted to a vote of security holders. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.1 Agreement and Release dated as of October 1, 1997 between Jenny Craig, Inc. and C. Joseph LaBonte. 10.2 Stock Option Termination Agreement dated November 4,1997 between Jenny Craig, Inc. and C. Joseph LaBonte. 27. Financial Data Schedule. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. -14- 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JENNY CRAIG, INC. By: /S/ Michael L. Jeub --------------------------------------- Michael L. Jeub Sr. Vice President and Chief Financial Officer Date: February 12, 1998 -15- EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 AGREEMENT AND RELEASE This AGREEMENT AND RELEASE is entered into as of October 1, 1997 between Jenny Craig, Inc., a Delaware corporation ("JCI"), and C. Joseph LaBonte ("LaBonte") with reference to the following facts: A. LaBonte has been employed by JCI and JCI's subsidiaries pursuant to his Employment Agreement with JCI, dated April 11, 1994, as President and Chief Executive Officer. B. LaBonte has submitted his resignation as an officer and director effective as of the date hereof. C. JCI has accepted LaBonte's resignation and the parties have agreed to a severance package as set forth below. NOW, THEREFORE, based upon the foregoing facts and in consideration of the full and faithful performance of the agreements contained herein, the parties agree as follows: 1. Reference herein to "JCI" shall also include JCI's subsidiaries, affiliated corporations and divisions, and their respective officers, directors, shareholders, agents, employees, attorneys, successors and assigns. Reference herein to "LaBonte" shall include his heirs, executors, administrators, agents, successors and assigns. 2. JCI and LaBonte agree to the following payments and accommodations: 2.1 A severance payment of an amount equal to LaBonte's base gross monthly salary under his Employment Agreement, less withholding taxes and any appropriately authorized deductions, to be paid to LaBonte in regular semi-monthly installments through December 31, 1998. 2.2 LaBonte will be entitled to exercise options to acquire 1,000,000 shares (less options previously exercised) of common stock of Jenny Craig, Inc. pursuant to the terms and conditions of his present Stock Option Agreement, dated April 11, 1994, including the "Termination of Options" (Section 3) and the "Acceleration of Exercisability" (Section 4) applicable to termination of his employment by the Company without cause. 2.3 LaBonte will be paid the amount, if any, of Annual Bonus due pursuant to Section 3.3 of his Employment Agreement, for the fiscal year ending June 30, 1998. -1- 2 2.4 LaBonte's medical and dental coverages will continue through December 31, 1998 and LaBonte will then be offered the opportunity to purchase such extended medical COBRA benefits as are mandated. 2.5 LaBonte will be paid, concurrently herewith, for all unused vacation time accrued as of the date hereof. 2.6 LaBonte will be paid a monthly temporary office and secretarial allowance of $2,000 per month for the months of October through December, 1997. 3. Effective January 2, 1998, the obligation evidenced by LaBonte's Promissory Note with respect to the $1.5 million Employee Loan made to LaBonte pursuant to Section 4.2 of his Employment Agreement shall be deemed satisfied in full on the express condition that, between the date hereof and January 2, 1998, LaBonte is not in default under the provisions of Section 4 hereof. The original Promissory Note and Deed of Trust evidencing and securing such Employee Loan, together with a fully executed and notarized Substitution of Trustee and Reconveyance of such Deed of Trust, shall be deposited with William D. Gould, Esq. concurrently with the execution hereof. If the Employee Loan has been satisfied as above set forth, William D. Gould, Esq. is hereby irrevocably authorized and instructed, at any time on or after January 2, 1998, to mark such Promissory Note "Canceled," and to deliver to LaBonte such original Promissory Note and Deed of Trust, together with the original Substitution of Trustee and Reconveyance. 4. Each and all of the provisions of Section 11 of LaBonte's Employment Agreement with respect to confidential and proprietary information, non-solicitation of JCI employees and other matters referred to in said Section 11, are incorporated by reference with the same effect as if fully set forth herein. 5. Except as to the payments, duties and obligations set forth in this AGREEMENT AND RELEASE, and except as to LaBonte's rights to indemnification as provided in Article Ninth of JCI's Restated Certificate of Incorporation, JCI on the one hand, and LaBonte on the other hand, mutually release each other of and from any and all claims, rights, actions, causes of action, liabilities and other obligations of any type, nature or description, whether known or unknown, arising out of or in any way related, directly or indirectly, to LaBonte's employment by JCI or the termination of such employment. Without limiting the generality of the foregoing, LaBonte acknowledges and agrees that this release shall operate as a complete bar to any litigation, charges, complaints, grievances or demands arising under Title VII of the Civil rights Act of 1964, the Age Discrimination in Employment Act, the California Fair Employment and Housing Act, the Employee Retirement Income Security Act, and the Worker Adjustment Restraining and Notification Act. -2- 3 The parties acknowledge that they are each familiar with the provisions of Section 1542 of the California Civil Code, which provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." Being aware of said Code section, each of the parties expressly waives and relinquishes any rights or benefits such party may have thereunder, as well as under any other state or federal statutes or common law principles of similar effect. The parties each represent and warrant that they have not and will not assign any rights or claims released hereunder. 6. Except as and to the extent required by law or compelled by legal process, the parties agree not to publicize or circulate information regarding the existence or the terms and conditions of this AGREEMENT AND RELEASE, and further agree not to make any statement or take any action which will, or may, bring into disrepute, harm, inconvenience, embarrass or otherwise be against the best interests of the other party. 7. The obligations of the parties under this AGREEMENT AND RELEASE shall be binding upon and inure to the benefit of, respectively, LaBonte and his heirs, executors, legal representatives and assigns, and JCI and its successors and assigns. -3- 4 8. This AGREEMENT AND RELEASE represents the entire agreement of the parties and may be amended only by a writing signed by each of them, and shall be governed by and construed in accordance with the laws of the State of California. LABONTE, BY HIS SIGNATURE BELOW, ACKNOWLEDGES THAT HE HAS READ AND THAT HE THOROUGHLY UNDERSTANDS THE TERMS OF THIS AGREEMENT AND RELEASE; AND THAT HE VOLUNTARILY ENTERS INTO IT WITHOUT RESERVATION OF ANY TYPE REGARDING ITS TERMS, PAYMENTS, DUTIES OR OBLIGATIONS AFTER CONSULTATION WITH COUNSEL OF HIS CHOICE. JENNY CRAIG, INC. By: /s/SIDNEY CRAIG, CEO ----------------------------------- /s/C.JOSEPH LABONTE -------------------------------------- C. Joseph LaBonte -4- EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 JENNY CRAIG, INC. 11355 NORTH TORREY PINES ROAD LAJOLLA, CALIFORNIA 92037 STOCK OPTION TERMINATION AGREEMENT Mr. C. Joseph LaBonte November 4, 1997 6150 Via Posada del Norte P.O. Box 9488 Rancho Santa Fe, CA 92067 Dear Mr. LaBonte: 1. Reference is hereby made to the following agreements (collectively, the "Stock Option Agreements") pursuant to which Jenny Craig, Inc. (the "Company") granted you options to purchase shares of Common Stock of the Company (the "Options") under the Jenny Craig, Inc. 1991 Stock Option Plan, as amended (the "Plan"): A. Stock Option Agreement between you and the Company, dated December 14, 1992, pursuant to which you were granted Options to purchase a total of 5,000 shares (of which 5,000 remain unexercised as of the date hereof), at an option price of $18.57 per share; B. Stock Option Agreement between you and the Company, dated December 14, 1992, pursuant to which you were granted Options to purchase a total of 5,000 shares (of which 5,000 remain unexercised as of the date hereof), at an option price of $18.57 per share; C. Stock Option Agreement between you and the Company, dated December 14, 1993, pursuant to which you were granted Options to purchase a total of 500 shares (of which 500 remain unexercised as of the date hereof), at an option price of $14.56 per share; and D. Stock Option Agreement between you and the Company, dated April 11, 1994, pursuant to which you were granted Options to purchase a total of 1,000,000 shares (of which 999,600 remain unexercised as of the date hereof), at an option price of $6.57 per share. The Options granted to you in the Stock Option Agreements which have not been exercised as of the date hereof, of which there are 1,010,100, are hereinafter referred to as the "Unexercised Options." This letter will confirm the agreement between you and the Company to terminate and cancel the Stock Option Agreements and the Unexercised Options. 2 1. The Stock Option Agreements and the Unexercised Options are hereby irrevocably terminated and canceled as of the date hereof, and neither the Stock Option Agreements nor the Unexercised Options shall be of any further force or effect. 2. In consideration of the termination and cancellation of the Stock Option Agreements and the Unexercised Options pursuant to paragraph 1 above, the Company shall pay you the sum of One Million Dollars ($1,000,000), which sum shall be paid as follows: (a) The Company shall pay you the sum of Two Hundred Thousand Dollars ($200,000) on January 2, 1998; (b) The Company shall pay you the sum of Two Hundred Thousand Dollars ($200,000) on November 1, 1998; (c) The Company shall pay you the sum of Two Hundred Thousand Dollars ($200,000) on November 1, 1999; (d) The Company shall pay you the sum of Two Hundred Thousand Dollars ($200,000) on November 1, 2000; and (e) The Company shall pay you the sum of Two Hundred Thousand Dollars ($200,000) on November 1, 2001. The payments referred to above are hereinafter referred to as the "Stock Termination Payments." 3. The sums described in paragraph 2 above shall not bear any interest and any amounts required to be withheld from the Stock Termination Payments under federal, state or local law shall be deducted therefrom. 4. This agreement constitutes the entire agreement between you and the Company with respect to the subject matter hereof and shall supersede all other written or oral agreements with respect thereto. This agreement and any provision hereof may only be amended or waived in a writing signed by the party to be charged. 5. This agreement is binding upon and shall inure to the benefit of each party hereto and their respective heirs, successors, assigns and representatives. 6. This agreement shall be governed by and construed in accordance with the laws of the State of California. Any notices hereunder shall be in writing and sent to the parties at the addresses set forth above. 7. This agreement may be executed in counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same instrument. 3 Mr. C. Joseph LaBonte November 4, 1997 Page 3 Please indicate your agreement by signing and returning the enclosed copy of this letter. Very truly yours, JENNY CRAIG, INC. /s/SIDNEY CRAIG ------------------------------------ By: Sidney Craig Chairman, President and Chief Executive Officer Agreed: /s/C. JOSEPH LABONTE - ---------------------------------- C. Joseph LaBonte Date: November 4, 1997 GUARANTY The undersigned hereby guarantees the full and punctual payment of the Stock Option Termination Payments. /s/SIDNEY CRAIG ---------------------------------- Sidney Craig Date: November 5, 1997 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JUN-30-1998 JUL-01-1997 DEC-31-1997 19,666 6,225 2,869 0 18,829 62,185 27,311 0 98,450 45,257 5,621 0 0 0 47,572 98,450 152,823 165,547 149,460 158,254 0 0 225 (7,100) (2,766) (4,334) 0 0 0 (4,334) (0.21) (0.21) THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF ALLOWANCES AND DEPRECIATION, RESPECTIVELY.
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