-----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, RngqXwP71dc2Wcc8GulIzr7xoQ+AWS9H7sHoOa27oRE3NptojixF7HmmdbxnKEz+ 966iwYObHsR9nUV5pI/WdA== 0000936392-98-000834.txt : 19980518 0000936392-98-000834.hdr.sgml : 19980518 ACCESSION NUMBER: 0000936392-98-000834 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 98624500 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 March 31, 1998 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, $.000000005 par value, outstanding as of the close of business on May 8, 1998 -- 20,688,971. -1- 2 JENNY CRAIG, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands)
June 30, March 31, 1997 1998 ---------- ----------- (unaudited) ASSETS Cash and cash equivalents .......................................... $ 37,438 34,132 Short-term investments ............................................. 1,506 1,216 Accounts receivable, net ........................................... 2,967 2,752 Inventories ........................................................ 15,285 13,617 Prepaid expenses and other assets .................................. 16,497 14,198 ---------- ----------- Total current assets ..................................... 73,693 65,915 Cost of reacquired area franchise rights, net ...................... 9,550 8,701 Property and equipment, net ........................................ 27,554 26,162 Other assets ....................................................... 1,500 -- ---------- ----------- $ 112,297 100,778 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ................................................... 14,938 14,507 Accrued liabilities ................................................ 19,117 19,633 Income taxes payable ............................................... 4,050 -- Deferred service revenues .......................................... 14,558 11,296 ---------- ----------- Total current liabilities ............................... 52,663 45,436 Note payable ....................................................... 5,716 5,574 ---------- ----------- Total liabilities ....................................... 58,379 51,010 Stockholders' equity: Common stock $.000000005 par value, 100,000,000 shares authorized; 27,579,060 and 27,580,260 shares issued; 20,687,771 and 20,688,971 shares outstanding at June 30, 1997 and March 31, 1998, respectively ..................... -- -- Additional paid-in capital ......................................... 71,615 71,622 Retained earnings .................................................. 55,053 52,761 Equity adjustment from foreign currency translation ................ 2,012 147 Treasury stock at cost, 6,888,089 shares at June 30, 1997 and March 31, 1998, respectively ................................. (74,762) (74,762) ---------- ----------- Total stockholders' equity ................................... 53,918 49,768 Commitments and contingencies ...................................... ---------- ----------- $ 112,297 100,778 ========== ===========
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 Nine Months Ended March 31, March 31, ---------------------- ----------------------- 1997 1998 1997 1998 -------- -------- -------- -------- Revenues: Company-owned operations: Product sales ....................................... $ 81,163 80,386 224,337 220,553 Service revenues .................................... 6,740 4,957 19,213 15,456 -------- -------- -------- -------- 87,903 85,343 243,550 236,009 -------- -------- -------- -------- Franchise operations: Product sales ....................................... 7,151 6,636 22,730 19,292 Royalties ........................................... 1,482 1,128 4,446 3,348 Initial franchise fees .............................. -- 25 210 30 -------- -------- -------- -------- 8,633 7,789 27,386 22,670 -------- -------- -------- -------- Total revenues .................................. 96,536 93,132 270,936 258,679 -------- -------- -------- -------- Costs and expenses: Company-owned operations: Product ............................................. 76,718 75,508 211,839 215,553 Service ............................................. 5,381 3,356 13,292 11,121 -------- -------- -------- -------- 82,099 78,864 225,131 226,674 -------- -------- -------- -------- Franchise operations: Product ............................................. 5,556 4,997 17,094 14,412 Other ............................................... 517 408 1,423 1,437 -------- -------- -------- -------- 6,073 5,405 18,517 15,849 -------- -------- -------- -------- 8,364 8,863 27,288 16,156 General and administrative expenses ...................... 7,194 5,863 21,718 20,902 -------- -------- -------- -------- Operating income (loss) ........................... 1,170 3,000 5,570 (4,746) Other income, net, principally interest .................. 317 229 1,300 875 -------- -------- -------- -------- Income (loss) before taxes and cumulative effect of accounting change ...................... 1,487 3,229 6,870 (3,871) Provision (credit) for income taxes ...................... 579 1,187 2,594 (1,579) -------- -------- -------- -------- Income (loss) before cumulative effect of accounting change ................................ 908 2,042 4,276 (2,292) Cumulative effect on prior years of change in accounting for service revenue net of $4,498 income tax benefit ............................... -- -- (7,509) -- -------- -------- -------- -------- Net income (loss) ......................... $ 908 2,042 (3,233) (2,292) ======== ======== ======== ======== Basic and Diluted per share amounts: Income (loss) before cumulative effect of accounting change ...................................... .04 .10 .21 (.11) Cumulative effect of accounting change ................... -- -- (.36) -- -------- -------- -------- -------- Net income (loss) per share ................ $ .04 .10 (.15) (.11) ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements. - 3 - 4 JENNY CRAIG, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)
Nine Months Ended March 31, ------------------------------- 1997 1998 -------- -------- Cash flows from operating activities: Net loss ................................................................... $ (3,233) (2,292) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization .............................................. 5,448 5,270 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 ................................. -- 959 (Increase) decrease in: Accounts receivable .............................................. (702) (42) Inventories ...................................................... 2,999 1,718 Prepaid expenses and other assets ................................ 575 2,299 Increase (decrease) in: Accounts payable ................................................. (4,983) (431) Accrued liabilities .............................................. (4,290) 516 Income taxes payable ............................................. 931 (4,050) Deferred service revenue ......................................... (1,917) (3,262) -------- -------- Net cash provided by operating activities ............... 2,337 2,185 -------- -------- Cash flows from investing activities: Purchase of property and equipment .......................................... (15,604) (4,442) Purchase of short-term investments .......................................... (16,359) (8,363) Proceeds from maturity of short-term investments ............................ 17,179 8,653 Payment for acquisition of franchised centres ............................... (1,803) (145) -------- -------- Net cash used in investing activities ................... (16,587) (4,297) -------- -------- Cash flows from financing activities: Purchase of treasury stock .................................................. (1,562) -- Proceeds from note payable .................................................. 5,975 -- Principal payments on note payable .......................................... (47) (142) Proceeds from exercise of stock options ..................................... 106 7 -------- -------- Net cash provided by (used in) financing activities ..... 4,472 (135) -------- -------- Effect of exchange rate changes on cash and cash equivalents ................... 23 (1,059) -------- -------- Net decrease in cash and cash equivalents ...................................... (9,755) (3,306) Cash and cash equivalents at beginning of period ............................... 43,535 37,438 -------- -------- Cash and cash equivalents at end of period ..................................... $ 33,780 34,132 ======== ======== Supplemental disclosure of cash flow information: Income taxes paid ........................................................... $ 1,723 4,546 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 March 31, 1998 1. The accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for any interim period are not necessarily indicative of the results for any other interim period or for the full year. These 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 20,721,000 and 20,689,000 for the quarters ended March 31, 1997 and 1998, respectively and 20,791,000 and 20,688,000 for the nine months ended March 31, 1997 and 1998, respectively. The impact of outstanding stock options during the periods presented did not create a difference between calculated basic net income 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 380,000 and 24,000 for the quarters ended March 31, 1997 and 1998, respectively, and by 299,000 for the nine month period ended March 31, 1997. The calculation of diluted earnings per share for the nine months ended March 31, 1998 and for the cumulative effect of accounting change and net loss for the nine months ended March 31, 1997 was not applicable as inclusion of the effect of stock options would be antidilutive; however, an additional 135,000 shares would have been included in the calculation of diluted earnings per share for the nine months ended March 31, 1997. 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 March 31, 1997 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 (Continued) 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 March 31, 1998 as Compared to Quarter Ended March 31, 1997 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 3% from $75,608,000 for the quarter ended March 31, 1997 to $73,127,000 for the quarter ended March 31, 1998. At March 31, 1997 there were 527 United States Company-owned Centres in operation compared to 536 at March 31, 1998. The increase in the number of United States Company-owned Centres reflects the Company's acquisition of 17 Centres from franchisees and the net closure of eight Centres between the periods. Average revenue per United States Company-owned Centre decreased 6% from $144,000 for the quarter ended March 31, 1997 to $135,000 for the quarter - 6 - 7 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (Continued) ended March 31, 1998. Service revenues from United States Company-owned operations for the quarter ended March 31, 1998 decreased 27% to $4,200,000 from $5,791,000 for the comparable year earlier period. This decrease in service revenues was principally due to a 29% decrease (31% 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 1% from $69,817,000 for the quarter ended March 31, 1997 to $68,927,000 for the quarter ended March 31, 1998. 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 1% from $12,295,000 to $12,216,000 for the quarters ended March 31, 1997 and 1998, respectively, 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 105 foreign Company-owned Centres at March 31, 1997 compared to 107 at March 31, 1998. Costs and expenses of United States Company-owned operations decreased 4% from $71,358,000 to $68,582,000 for the quarters ended March 31, 1997 and 1998, respectively. The decrease in costs and expenses for the quarter ended March 31, 1998 reflects the absence of costs in the quarter ended March 31, 1998 related to the weight loss medication program adjunct which was terminated in August 1997. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues remained constant at 94% between the periods. After including the allocable portion of general and administrative expenses, United States Company-owned operations had operating income of $368,000 for the quarter ended March 31, 1998 compared to an operating loss of $782,000 for the quarter ended March 31, 1997. Costs and expenses of foreign Company-owned operations decreased 4% from $10,741,000 to $10,282,000 for the quarters ended March 31, 1997 and 1998, respectively, due to the aforementioned 12% 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 $1,260,000 for the quarter ended March 31, 1998 compared to operating income of $883,000 for the quarter ended March 31, 1997. Revenues from franchise operations decreased 10% from $8,633,000 to $7,789,000 for the quarters ended March 31, 1997 and 1998, respectively. This decline was principally due to a 15% decrease in the number of franchise Centres in operation, from 161 at March 31, 1997 to 137 at March 31, 1998. The decrease in the number of franchise Centres reflects the Company's acquisition of 17 Centres from franchisees and the net closure of seven franchised centres between the periods. Costs and expenses of franchised operations, which consist primarily of product costs, decreased 9% from $6,073,000 to $5,405,000 for the quarters ended March 31, 1997 and 1998, respectively, principally because of the reduced level of franchise operations. Franchise costs and expenses as a percentage of franchise revenues was relatively constant between the periods. General and administrative expenses decreased 19% from $7,194,000 to $5,863,000 and decreased from 7.5% to 6.3% of total revenues for the quarters ended March 31, 1997 and 1998, respectively. The decrease was principally due to a decrease in compensation, consulting and professional fees. - 7 - 8 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (Continued) The elements discussed above combined to result in a 156% increase in operating income from $1,170,000 for the quarter ended March 31, 1997 to $3,000,000 for the quarter ended March 31, 1998. Other income, net, principally interest, decreased 28% from $317,000 to $229,000 for the quarters ended March 31, 1997 and 1998, 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 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 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 Consent Order requires certain procedures and disclosures in connection with the Company's advertisements of its products and services. The full Commission accepted the Consent Order and it has been made effective as of May 4, 1998, after having been published for an additional period of public comment. The Company does not believe that compliance with the 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. - 8 - 9 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (Continued) The Company along with certain pharmacetuical companies has also been named as a defendant in an action filed in the Court of Common Pleas, Philadelphia County, Pennsylvania (the "Pennsylvania Litigation"). The action was commenced in November 1997 by a plaintiff, a participant in the Company's program, who is seeking to maintain the action as a class action on behalf of all persons in the Commonwealth of Pennsylvania who have purchased and used fenfluramine, dexfenfluramine and phentermine, alone or in combination. The complaint includes claims against the Company and the other defendants for alleged false and misleading statements concerning the safety and appropriateness of using fenfluramine, dexfenfluramine, and phentermine and the benefits, uses and ingredients of these drugs, negligence in the distribution, sale and prescribing of these medications and breach of the warranty of merchantability. The complaint seeks compensatory and punitive damages in unspecified amounts and a Court-supervised program funded by the defendants through which class members would undergo periodic medical examination and testing. The Company 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) Nine Months Ended March 31, 1998 as Compared to Nine Months Ended March 31, 1997 Revenues from United States Company-owned operations decreased 3% from $205,623,000 for the nine months ended March 31, 1997 to $199,213,000 for the nine months ended March 31, 1998. At March 31, 1997 there were 527 United States Company-owned Centres in operation compared to 536 at March 31, 1998. The increase in the number of United States Company-owned Centres reflects the Company's acquisition of 17 Centres from franchisees and the net closure of eight centres between the periods. Average revenue per United States Company-owned Centre decreased 9% from $401,000 for the nine months ended March 31, 1997 to $364,000 for the nine months ended March 31, 1998. Service revenues from United States Company-owned operations for the nine months ended March 31, 1998 decreased 20% to $13,119,000 from $16,466,000 for the comparable year earlier period. This decrease in service revenues was primarily due to a 12% decrease in the number of new participants enrolled in the Program and 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 $189,157,000 for the nine months ended March 31, 1997 to $186,094,000 for the nine months ended March 31, 1998. 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 3% from $37,927,000 to $36,796,000 for the nine months ended March 31, 1997 and 1998, respectively, due to a 10% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the periods. There were 105 foreign Company-owned Centres at March 31, 1997 compared to 107 at March 31, 1998. Costs and expenses of United States Company-owned operations increased 1% from $193,595,000 to $196,091,000 for the nine months ended March 31, 1997 and 1998, respectively. The increase in costs and expenses of United States Company-owned operations for the nine months ended March 31, 1998 is principally due to $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 98% 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 $12,143,000 for the nine months ended March 31, 1998 compared to an operating loss of $3,143,000 for the nine months ended March 31, 1997. Costs and expenses of foreign Company-owned operations decreased 3% from $31,536,000 to $30,583,000 for the nine month periods ended March 31, 1997 and 1998, respectively, due to the aforementioned 10% 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 $4,119,000 for the nine months ended March 31, 1998 compared to operating income of $4,507,000 for the nine months ended March 31, 1997. - 10 - 11 JENNY CRAIG, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (Continued) Revenues from franchise operations decreased 17% from $27,386,000 to $22,670,000 for the nine months ended March 31, 1997 and 1998, respectively. This decline was principally due to a 15% decrease in the number of franchise Centres in operation, from 161 at March 31, 1997 to 137 at March 31, 1998 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 franchise Centres reflects the Company's acquisition of 17 Centres from franchisees and the net closure of seven franchised centres between the periods. Costs and expenses of franchised operations, which consist primarily of product costs, decreased 14% from $18,517,000 to $15,849,000 for the nine month periods ended March 31, 1997 and 1998, 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 4% from $21,718,000 to $20,902,000 and remained constant at 8% of total revenues for the nine months ended March 31, 1997 and 1998, respectively. The absolute decrease was due to a decrease in compensation, consulting and professional fees, offset, in part, by 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 $4,746,000 for the nine months ended March 31, 1998 compared to operating income of $5,570,000 for the nine months ended March 31, 1997. Other income, net, principally interest, decreased 33% from $1,300,000 to $875,000 for the nine months ended March 31, 1997 and 1998, 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 March 31, 1998, the Company had cash, cash equivalents and short-term investments totalling $35,348,000 compared to $38,944,000 at June 30, 1997, reflecting a decrease during the nine month period ended March 31, 1998 of $3,596,000. This decrease was principally due to the purchase of property and equipment totalling $4,442,000. The Company believes that its cash, cash equivalents and short-term investments and its cash flow from operations are adequate for its needs in the foreseeable future. - 12 - 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27. Financial Data Schedule. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. - 13 - 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JENNY CRAIG, INC. By: /s/ Michael L. Jeub ------------------------------------- Michael L. Jeub Sr. Vice President and Chief Financial Officer Date: May 12, 1998 - 14 - EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31, 1998 INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUN-30-1998 JUL-01-1997 MAR-31-1998 34,132 1,216 2,752 0 13,617 65,915 26,162 0 100,778 45,436 5,574 0 0 0 49,768 100,778 239,845 258,679 229,965 242,523 0 0 330 (3,871) (1,579) (2,292) 0 0 0 (2,292) (0.11) (0.11) THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF ALLOWANCES AND DEPRECIATION, RESPECTIVELY.
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