-----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, B8VeUlORGvCPWBEYnCwLUu9qb7odWvJ3L1ZiZ++Z6T5yCBo1CCGZkO1jD4zdzcA8 tOP+uJ1ZrOPOHcpgsw9qPA== 0001095811-01-001235.txt : 20010223 0001095811-01-001235.hdr.sgml : 20010223 ACCESSION NUMBER: 0001095811-01-001235 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 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: 1539290 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 a69269e10-q.txt FORM 10-Q PERIOD ENDED DECEMBER 31,2000 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, 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, $.000000005 par value, outstanding as of the close of business on February 9, 2001 - 20,688,971. ================================================================================ 2 ITEM 1. FINANCIAL STATEMENTS JENNY CRAIG, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands)
June 30, December 31, 2000 2000 --------- ------------ (unaudited) ASSETS Cash and cash equivalents .............................................. $ 34,710 32,056 Short-term investments ................................................. 925 -- Accounts receivable, net ............................................... 2,271 2,268 Inventories ............................................................ 11,785 10,581 Prepaid expenses and other assets ...................................... 5,625 4,706 Deferred tax assets .................................................... 864 -- --------- --------- Total current assets .......................................... 56,180 49,611 Deferred tax assets .................................................... 16,696 -- Cost of reacquired area franchise rights, net .......................... 8,658 7,982 Property and equipment, net ............................................ 25,797 23,936 Other assets ........................................................... 630 508 --------- --------- $ 107,961 82,037 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ....................................................... $ 13,473 14,308 Accrued liabilities .................................................... 15,515 14,997 Current installments of obligation under capital lease ................. 642 665 Accrual for litigation judgment ........................................ 9,649 10,087 Deferred service revenue ............................................... 10,175 9,610 --------- --------- Total current liabilities ..................................... 49,454 49,667 Note payable, excluding current installments ........................... 5,147 5,052 Obligation under capital lease, excluding current installments ......... 1,732 1,395 --------- --------- Total liabilities ............................................. 56,333 56,114 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, 2000 and December 31, 2000 ................................ -- -- Additional paid-in capital ........................................... 71,622 71,622 Retained earnings .................................................... 49,415 26,068 Accumulated other comprehensive income ............................... 5,353 2,995 Treasury stock, at cost; 6,891,289 shares at June 30, 2000 and December 31, 2000 .............................................. (74,762) (74,762) --------- --------- Total stockholders' equity .................................... 51,628 25,923 --------- --------- Commitments and contingencies .......................................... $ 107,961 82,037 ========= =========
See accompanying notes to unaudited consolidated financial statements. -2- 3 JENNY CRAIG, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS ($ in thousands, except per share amounts)
Three Months Ended Six Months Ended December 31, December 31, ----------------------- ----------------------- 1999 2000 1999 2000 -------- -------- -------- -------- Revenues: Company-owned operations: Product sales ..................................... $ 53,008 51,672 114,509 108,775 Service revenue ................................... 4,123 4,090 8,276 8,343 -------- -------- -------- -------- 57,131 55,762 122,785 117,118 -------- -------- -------- -------- Franchise operations: Product sales ..................................... 4,327 4,259 9,372 8,510 Royalties ......................................... 674 613 1,476 1,324 Initial franchise fees ............................ 25 50 35 125 -------- -------- -------- -------- 5,026 4,922 10,883 9,959 -------- -------- -------- -------- Total revenues ................................ 62,157 60,684 133,668 127,077 -------- -------- -------- -------- Costs and expenses: Company-owned operations: Product ........................................... 53,822 52,074 117,782 108,173 Service ........................................... 3,172 3,094 6,228 6,195 -------- -------- -------- -------- 56,994 55,168 124,010 114,368 -------- -------- -------- -------- Franchise operations: Product ........................................... 3,144 3,307 6,633 6,359 Other ............................................. 361 308 780 564 -------- -------- -------- -------- 3,505 3,615 7,413 6,923 -------- -------- -------- -------- 1,658 1,901 2,245 5,786 General and administrative expenses ................... 6,512 5,653 12,798 11,246 Litigation judgment ................................... 219 219 1,008 438 Restructuring charge .................................. 7,512 -- 7,512 -- -------- -------- -------- -------- Operating loss ................................. (12,585) (3,971) (19,073) (5,898) Other income, net, principally interest ............... 308 412 695 757 -------- -------- -------- -------- Loss before taxes .............................. (12,277) (3,559) (18,378) (5,141) Income taxes (benefit) ................................ (4,667) 18,053 (6,986) 18,207 -------- -------- -------- -------- Net loss ........................................ $ (7,610) (21,612) (11,392) (23,348) ======== ======== ======== ======== Basic and diluted net loss per share ............ $ (.37) (1.04) (.55) (1.13) ======== ======== ======== ========
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, ----------------------- 1999 2000 -------- -------- Cash flows from operating activities: Net loss ......................................................................... $(11,392) (23,348) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ................................................. 2,902 2,740 Non-cash portion of restructuring charge ...................................... 1,303 -- Provision for deferred income taxes (benefit) ................................. (9,810) 17,560 Loss on write-off of cost of reacquired area franchise rights ................. 96 192 Loss (gain) on disposal of property and equipment ............................. 1,349 (63) Changes in assets and liabilities: Accounts receivable ........................................................ (174) 3 Inventories ................................................................ (214) 1,204 Prepaid expenses and other assets .......................................... 2,448 1,041 Accounts payable ........................................................... 2,264 835 Accrued liabilities ........................................................ 4,310 (518) Accrual for litigation judgment ............................................ 1,008 438 Deferred service revenue ................................................... (1,536) (565) -------- -------- Net cash used in operating activities ............................. (7,446) (481) -------- -------- Cash flows from investing activities: Purchase of property and equipment ............................................... (2,957) (557) Purchase of short-term investments ............................................... (3,375) -- Proceeds from maturity of short-term investments ................................. 2,874 925 -------- -------- Net cash used in investing activities ............................. (3,458) 368 -------- -------- Cash flows from financing activities: Principal payments on note payable and capital lease obligation .................. (164) (409) -------- -------- Effect of exchange rate changes on cash and cash equivalents ....................... 976 (2,132) -------- -------- Net decrease in cash and cash equivalents .......................................... (10,092) (2,654) Cash and cash equivalents at beginning of period ................................... 38,864 34,710 -------- -------- Cash and cash equivalents at end of period ......................................... $ 28,772 32,056 ======== ======== Supplemental disclosure of cash flow information: Income taxes paid ................................................................ $ 1,464 854 Interest paid .................................................................... $ 231 285 Supplemental disclosure of non-cash investing and financing activities: Equipment acquired under capital lease ........................................... $ 2,726 --
See accompanying notes to unaudited consolidated financial statements. -4- 5 JENNY CRAIG, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS December 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, 2000 consolidated financial statements. The following Significant Accounting Policies are provided to clarify/supplement the Summary of Significant Accounting Policies contained in Note 1 of Notes to Consolidated Financial Statements accompanying the Company's June 30, 2000 consolidated financial statements: Impairment of Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Reacquired area franchise rights are evaluated for recoverability on an individual area franchise basis. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Revenue Recognition Revenue from product sales, which is substantially comprised of food products, whether sold to participants at Company-owned centres or sold to franchisees, is recognized upon receipt of the product by the customer. Product sales are non-returnable. Certain weight loss programs enable the customer to receive a refund of a portion of the service fee if certain criteria are met. The Company provides a liability at the time of sale for the estimated portion of the service fee to be refunded based upon historical experience. Stock-Based Compensation Under SFAS 123, options issued to non-employees in exchange for goods or services received are recorded at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. 2. During the quarter ended December 31, 2000, the Company concluded that the deferred tax asset valuation allowance should be increased due to the uncertainty of realizing certain tax loss carryforwards and other deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Accordingly, the Company recorded a non-cash charge of $17,721,000 to provide a full valuation allowance for the balance of the U.S. net deferred tax asset. Management's assessment was based principally on the losses experienced by the Company -5- 6 JENNY CRAIG, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) in the U.S. for the first six months of fiscal 2001, together with less than expected operating results in January 2001, following two consecutive profitable quarters ended March 31, 2000 and June 30, 2000. 3. In November 1999, the Company implemented 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. A charge of $7,512,000 was recorded in the quarter ended December 31, 1999 in connection with this restructuring. In June 2000, the Company reversed $602,000 of the originally estimated $7,512,000 restructuring charge because actual costs were less than the costs projected when the restructuring was implemented. The revised charge of $6,910,000 was comprised of $3,593,000 for lease termination costs, $1,544,000 for severance payments to 110 terminated employees, $1,144,000 for the write-off of fixed assets, $109,000 for refunds to program participants and $520,000 for other closure costs. None of the fixed assets subject to the write-off remained in use after the November 1999 centre closures. Of the revised charge of $6,910,000, approximately $5,766,000 requires cash payments and $1,144,000 represents the non-cash write-off of fixed assets. As of December 31, 2000, the Company had made cash payments of $3,000,000 for lease termination costs, $1,432,000 for severance to terminated employees, $112,000 for refunds to program participants, and $697,000 for other closure costs. The Company estimates that the remaining cash payments of approximately $525,000 will be substantially incurred by June 30, 2001. 4. The weighted average number of shares used to calculate basic net loss per share was 20,688,971 for all periods presented. The calculation of diluted net loss per share for the three and six month periods ended December 31, 1999 and 2000 excluded the effect of 2,938,500 and 2,285,100 stock options, respectively, as their effect would be antidilutive. 5. Comprehensive loss for the three and six month periods ended December 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.
Three Months Ended Six Months Ended December 31, December 31, --------------------- --------------------- 1999 2000 1999 2000 ------- ------- ------- ------- Net loss ........................................... $(7,610) (21,612) (11,392) (23,348) Foreign currency translation adjustments ........... 497 273 976 (2,358) ------- ------- ------- ------- Comprehensive loss ............................... $(7,113) (21,339) (10,416) (25,706) ======= ======= ======= =======
-6- 7 JENNY CRAIG, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. The Company operates in the weight management industry. Substantially all revenue results from the sale of weight management products and services, whether the centre is operated by the Company or its franchisees. The Company's reportable segments consist of Company-owned operations and franchise operations, further segmented by geographic area. The following presents information about the respective reportable segments ($ in thousands):
Three Months Six Months Ended December 31, Ended December 31, -------------------------- ------------------------- 1999 2000 1999 2000 ----------- ----------- ----------- ----------- Revenue: Company-owned operations: United States $ 44,702 46,565 96,731 98,298 Foreign 12,429 9,197 26,054 18,820 Franchise operations: United States 2,956 3,184 6,462 6,686 Foreign 2,070 1,738 4,421 3,273 Operating income (loss): Company-owned operations: United States (14,615) (4,801) (24,669) (8,082) Foreign 1,580 413 4,107 894 Franchise operations: United States (233) (111) (45) 299 Foreign 683 528 1,534 991 Identifiable assets: United States 97,132 65,707 97,132 65,707 Foreign 14,977 16,330 14,977 16,330
-7- 8 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. 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, 2000. Quarter Ended December 31, 2000 as Compared to Quarter Ended December 31, 1999 The following table presents selected operating results for United States Company-owned and foreign Company-owned operations for the quarters ended December 31, 1999 and 2000 (U.S. $ in thousands):
U.S. Company Owned Foreign Company Owned Operations Operations Three Months Ended December 31, Three Months Ended December 31, -------------------------------------- --------------------------------- % % 1999 2000 Change 1999 2000 Change -------- -------- ------ -------- -------- ------ Product sales $ 41,631 43,130 4% 11,377 8,542 -25% Service revenue 3,071 3,435 12% 1,052 655 -38% -------- -------- -------- -------- Total 44,702 46,565 4% 12,429 9,197 -26% Costs and expenses 47,005 47,035 0% 9,989 8,133 -19% General and administrative 4,581 4,112 -10% 860 651 -24% Litigation judgment 219 219 -- -- Restructuring charge 7,512 -- -- -- -------- -------- -------- -------- Operating income (loss) $(14,615) (4,801) 1,580 413 -------- -------- -------- -------- Average number of centres 475 433 -9% 111 113 2% -------- -------- -------- --------
-8- 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company has experienced reduced demand, particularly at its centres located in the United States, over the past several years. The Company believes that increased competition from various sources, including prescription and non-prescription pills, best selling diet books, and other "do it yourself" methods have contributed to the Company's downward trend. Many of these competitors claim to provide "quick" and "easy" weight loss or other aggressive claims about the efficacy of their methods, are supported by a high level of advertising, and are less expensive than the Company's program. New customer enrollments in January 2001 decreased in excess of 20% compared to January 2000, but consolidated revenues in January 2001 were down only slightly compared to January 2000 as a result of product purchases by continuing customers and those returning to active customer status after the holidays. The Company cannot predict whether the current trend will continue in the future. Revenues from United States Company-owned operations, which represented 79% of the worldwide Company-owned centres at December 31, 2000, increased 4% for the quarter ended December 31, 2000 compared to the quarter ended December 31, 1999 primarily due to an increase in product sales. Product sales, which consists primarily of food products, increased 4% principally due to an increase in the average amount of products purchased per active participant. The average revenue per United States Company-owned centre increased from $94,000 for the quarter ended December 31, 1999 to $107,000 for the quarter ended December 31, 2000. There was a 9% decrease in the average number of United States Company-owned centres in operation, principally reflecting the closure of 86 centres in November 1999 in connection with a restructuring plan implemented by the Company. Service revenues from United States Company-owned operations increased 12% 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 26% principally due to reduced demand at the Company's Australian centres. The Company believes that the introduction of Xenical, a prescription drug for the treatment of obesity, in May 2000 and a new goods and services tax in the Australian market have contributed to the revenue decline. There was a 12% 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 were essentially the same for the quarter ended December 31, 2000 compared to the same quarter last year. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues decreased from 105% to 101% between the periods principally due to the reduced fixed costs associated with the decrease in the number of centres between the periods and the increase in revenues. After including the allocable portion of general and administrative expenses, United States Company-owned operations had an operating loss of $4,801,000 for the quarter ended December 31, 2000 compared to an operating loss of $14,615,000, which includes a restructuring charge of $7,512,000 described below, for the quarter ended December 31, 1999. Costs and expenses of foreign Company-owned operations decreased 19% for the quarter ended December 31, 2000 compared to the quarter ended December 31, 1999, principally due to the decreased variable costs associated with the reduced level of Australian operations and the 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 $413,000 for the quarter ended December 31, 2000 compared to operating income of $1,580,000 for the quarter ended December 31, 1999. -9- 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Revenues from franchise operations decreased 2% from $5,026,000 to $4,922,000 for the quarters ended December 31, 1999 and 2000, respectively. This decline was principally due to a 7% 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 net acquisition of nine centres from franchisees between the periods. As of December 31, 2000 there were 111 franchised centres in operation, of which 73 were in the United States and 38 were in foreign countries, principally Australia and New Zealand. Costs and expenses of franchised operations, which consist primarily of product costs, increased 3% from $3,505,000 to $3,615,000 for the quarters ended December 31, 1999 and 2000, respectively. Franchise costs and expenses as a percentage of franchise revenues remained relatively constant between the periods. In November 1999, the Company implemented 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. A charge of $7,512,000 was recorded in the quarter ended December 31, 1999 in connection with this restructuring. In June 2000, the Company reversed $602,000 of the originally estimated $7,512,000 restructuring charge because actual costs were less than the costs projected when the restructuring was implemented. The revised charge of $6,910,000 was comprised of $3,593,000 for lease termination costs, $1,544,000 for severance payments to 110 terminated employees, $1,144,000 for the write-off of fixed assets, $109,000 for refunds to program participants and $520,000 for other closure costs. None of the fixed assets subject to the write-off remained in use after the November 1999 centre closures. Of the revised charge of $6,910,000, approximately $5,766,000 requires cash payments and $1,144,000 represents the non-cash write-off of fixed assets. As of December 31, 2000, the Company had made cash payments of $3,000,000 for lease termination costs, $1,432,000 for severance to terminated employees, $112,000 for refunds to program participants, and $697,000 for other closure costs. The Company estimates that the remaining cash payments of approximately $525,000 will be substantially incurred by June 30, 2001. With respect to the impact of the restructuring on future results of operations, the 86 closed centres had revenues of $4,526,000 and direct operating expenses of $5,339,000 for the quarter ended September 30, 1999, which was the final full quarter of operating results for these 86 centres. The Company estimates that annual pre-tax savings of approximately $4,000,000 will be achieved with the elimination of the infrastructure of the 86 centres together with the reduced corporate staff, of which approximately $2,900,000 will represent cash savings and $1,100,000 will be a reduction of depreciation and amortization expense. General and administrative expenses decreased 13% from $6,512,000 to $5,653,000 and decreased from 10.5% to 9.3% of total revenues for the quarters ended December 31, 1999 and 2000, respectively. The decrease in general and administrative expenses is principally due to reduced compensation and professional expenses. A charge of $219,000 was recorded in the accompanying consolidated statement of operations in the quarters ended December 31, 1999 and 2000 with respect to the previously disclosed litigation judgment arising out of the dispute concerning the lease at the Company's former -10- 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) headquarters location. This charge consists of interest accrued on the judgment pending the appeal which has been filed seeking to overturn the judgment. At December 31, 2000 the total amount accrued for this litigation judgment was $10,087,000. The elements discussed above combined to result in an operating loss of $3,971,000 for the quarter ended December 31, 2000 compared to an operating loss of $12,585,000 for the quarter ended December 31, 1999. Income taxes (benefit) for the quarter ended December 31, 2000 includes income taxes at an effective rate of 37% on the Company's foreign taxable income, but does not reflect any benefit for the net operating loss incurred by the Company's United States operations. During the quarter ended December 31, 2000, the Company concluded that the deferred tax asset valuation allowance should be increased due to the uncertainty of realizing certain tax loss carryforwards and other deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Accordingly, the Company recorded a non-cash charge of $17,721,000 to provide a full valuation allowance for the balance of the U.S. net deferred tax asset. Management's assessment was based principally on the losses experienced by the Company in the U.S. for the first six months of fiscal 2001, together with less than expected operating results in January 2001, following two consecutive profitable quarters ended March 31, 2000 and June 30, 2000. This increase to the deferred tax asset valuation allowance is the reason for the decrease in the deferred tax assets line items on the accompanying consolidated balance sheet at December 31, 2000. Six Months Ended December 31, 2000 as Compared to Six Months Ended December 31, 1999 The following table presents selected operating results for United States Company-owned and foreign Company-owned operations for the six month periods ended December 31, 1999 and 2000 (U.S. $ in thousands):
U.S. Company Owned Foreign Company Owned Operations Operations Six Months Ended December 31, Six Months Ended December 31, ----------------------------------------- -------------------------------------- % % 1999 2000 Change 1999 2000 Change --------- --------- --------- --------- -------- -------- Product sales $ 90,441 91,386 1% 24,068 17,389 -28% Service revenue 6,290 6,912 10% 1,986 1,431 -28% --------- --------- --------- -------- Total 96,731 98,298 2% 26,054 18,820 -28% Costs and expenses 103,586 97,805 -6% 20,424 16,563 -19% General and administrative 9,294 8,137 -12% 1,523 1,363 -11% Litigation judgment 1,008 438 -- -- Restructuring charge 7,512 -- -- -- --------- --------- --------- -------- Operating income (loss) $ (24,669) (8,082) 4,107 894 --------- --------- --------- -------- Average number of centres 497 434 -13% 111 113 2% --------- --------- --------- --------
-11- 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company has experienced reduced demand, particularly at its centres located in the United States, over the past several years. The Company believes that increased competition from various sources, including prescription and non-prescription pills, best selling diet books, and other "do it yourself" methods have contributed to the Company's downward trend. Many of these competitors claim to provide "quick" and "easy" weight loss or other aggressive claims about the efficacy of their methods, are supported by a high level of advertising, and are less expensive than the Company's program. New customer enrollments in January 2001 decreased in excess of 20% compared to January 2000, but consolidated revenues in January 2001 were down only slightly compared to January 2000 as a result of product purchases by continuing customers and those returning to active customer status after the holidays. The Company cannot predict whether the current trend will continue in the future. Revenues from United States Company-owned operations, which represented 79% of the worldwide Company-owned centres at December 31, 2000, increased 2% for the six months ended December 31, 2000 compared to the six months ended December 31, 1999 primarily due to an increase in product sales. Product sales, which consists primarily of food products, increased 1% principally due to an increase in the average amount of products purchased per active participant. The average revenue per United States Company-owned centre increased from $195,000 for the six months ended December 31, 1999 to $226,000 for the six months ended December 31, 2000. There was a 13% decrease in the average number of United States Company-owned centres in operation, principally reflecting the closure of 86 centres in November 1999 in connection with a restructuring plan implemented by the Company. Service revenues from United States Company-owned operations increased 10% 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 28% principally due to reduced demand at the Company's Australian centres. The Company believes that the introduction of Xenical, a prescription drug for the treatment of obesity, in May 2000 and a new goods and services tax in the Australian market have contributed to the revenue decline. There was a 12% 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 6% for the six months ended December 31, 2000 compared to the same quarter last year. The six months ended December 31, 1999 included a charge of $3,068,000 for obsolete inventory related to the discontinued On-the-Go program. The 6% decrease was principally due to the reduced fixed costs associated with the decrease in the number of United States Company-owned centres in operation, and the absence of the charge of $3,068,000 for obsolete inventory. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues decreased from 107% to 99% between the periods principally due to the reduced fixed costs and the absence of the aforementioned charge for discontinued inventory. In November 1999, the Company implemented 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. A charge of $7,512,000 was recorded in the six months ended December 31, 1999 in connection with this restructuring. In June 2000, the Company reversed $602,000 of the originally estimated $7,512,000 restructuring charge because actual costs were less than the costs projected when the -12- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) restructuring was implemented. The revised charge of $6,910,000 was comprised of $3,593,000 for lease termination costs, $1,544,000 for severance payments to 110 terminated employees, $1,144,000 for the write-off of fixed assets, $109,000 for refunds to program participants and $520,000 for other closure costs. None of the fixed assets subject to the write-off remained in use after the November 1999 centre closures. Of the revised charge of $6,910,000, approximately $5,766,000 requires cash payments and $1,144,000 represents the non-cash write-off of fixed assets. As of December 31, 2000, the Company had made cash payments of $3,000,000 for lease termination costs, $1,432,000 for severance to terminated employees, $112,000 for refunds to program participants, and $697,000 for other closure costs. The Company estimates that the remaining cash payments of approximately $525,000 will be substantially incurred by June 30, 2001. With respect to the impact of the restructuring on future results of operations, the 86 closed centres had revenues of $4,526,000 and direct operating expenses of $5,339,000 for the quarter ended September 30, 1999, which was the final full quarter of operating results for these 86 centres. The Company estimates that annual pre-tax savings of approximately $4,000,000 will be achieved with the elimination of the infrastructure of the 86 centres together with the reduced corporate staff, of which approximately $2,900,000 will represent cash savings and $1,100,000 will be a reduction of depreciation and amortization expense. After including the allocable portion of general and administrative expenses, United States Company-owned operations had an operating loss of $8,082,000 for the six months ended December 31, 2000 compared to an operating loss of $24,669,000, which includes the above described charge of $3,068,000 for obsolete inventory and the $7,512,000 restructuring charge, for the six months ended December 31, 1999. Costs and expenses of foreign Company-owned operations decreased 19% for the six months ended December 31, 2000 compared to the six months ended December 31, 1999, principally due to the decreased variable costs associated with the reduced level of Australian operations and the 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 $894,000 for the six months ended December 31, 2000 compared to operating income of $4,107,000 for the six months ended December 31, 1999. Revenues from franchise operations decreased 8% from $10,883,000 to $9,959,000 for the six months ended December 31, 1999 and 2000, respectively. This decline was principally due to a 7% 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 net acquisition of nine centres from franchisees between the periods. As of December 31, 2000 there were 111 franchised centres in operation, of which 73 were in the United States and 38 were in foreign countries, principally Australia and New Zealand. Costs and expenses of franchised operations, which consist primarily of product costs, decreased 7% from $7,413,000 to $6,923,000 for the six months ended December 31, 1999 and 2000, respectively, principally because of the reduced level of franchise operations. Franchise costs and expenses as a percentage of franchise revenues remained relatively constant between the periods. -13- 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) General and administrative expenses decreased 12% from $12,798,000 to $11,246,000 and decreased from 9.6% to 8.8% of total revenues for the six months ended December 31, 1999 and 2000, respectively. The decrease in general and administrative expenses is principally due to reduced compensation and professional expenses. A charge of $438,000 was recorded in the accompanying consolidated statement of operations in the six months ended December 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 charge consists of interest accrued on the judgment pending the appeal which has been filed seeking to overturn the judgment. In the six month period ended December 31, 1999, $1,008,000, comprised of attorney fees awarded to the plaintiff and interest accrued on the judgment, was expensed related to this matter. At December 31, 2000 the total amount accrued for this litigation judgment was $10,087,000. The elements discussed above combined to result in an operating loss of $5,898,000 for the six months ended December 31, 2000 compared to an operating loss of $19,073,000 for the six months ended December 31, 1999. Income taxes (benefit) for the six months ended December 31, 2000 includes income taxes at an effective rate of 37% on the Company's foreign taxable income, but does not reflect any benefit for the net operating loss incurred by the Company's United States operations. During the six months ended December 31, 2000, the Company concluded that the deferred tax asset valuation allowance should be increased due to the uncertainty of realizing certain tax loss carryforwards and other deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Accordingly, the Company recorded a non-cash charge of $17,721,000 to provide a full valuation allowance for the balance of the U.S. net deferred tax asset. Management's assessment was based principally on the losses experienced by the Company in the U.S. for the first six months of fiscal 2001, together with less than expected operating results in January 2001, following two consecutive profitable quarters ended March 31, 2000 and June 30, 2000. This increase to the deferred tax asset valuation allowance is the reason for the decrease in the deferred tax assets line items on the accompanying consolidated balance sheet at December 31, 2000. -14- 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources The Company has historically financed its operations through cash flow from operations, supplemented by a note payable obtained in 1996 to finance the Company's purchase of its corporate office building and by a capital lease for computer equipment related to Y2K remediation in 2000. At December 31, 2000, the Company had cash, cash equivalents and short-term investments totaling $32,056,000 compared to $35,635,000 at June 30, 2000, reflecting a decrease during the six month period ended December 31, 2000 of $3,579,000. This decrease was principally due to the net cash used in operating activities, including cash payments of $553,000 in connection with the Company's restructuring plan. Additionally, $557,000 was used for the purchase of property and equipment, and $410,000 was used for principal payments on the note payable and capital lease obligation. The Company's principal cash commitments at December 31, 2000 are as follows: - - Operating lease payments on premises from which the Company's centre operations are conducted totaling approximately $32,600,000, of which approximately $16,200,000 is payable in calendar year 2001 and approximately $9,300,000 is payable in calendar 2002. - - The litigation judgment of $10,087,000 which the Company is appealing. - - Debt service on the note payable and capital lease totaling $7,302,000, which includes a balloon payment on the note payable in November 2006 of approximately $4,100,000. - - Remaining payments of approximately $525,000 related to the restructuring implemented in November 1999 described above. - - In the normal course of its business the Company acquires property and equipment, including replacing assets which are no longer useful. This may include moving the location of a centre or remodeling existing centres. The Company believes that its available cash and cash equivalents, together with its cash flow from operations, should be sufficient to fund short-term operating activities. However, the Company's ability to fund long-term operations will depend on the Company's ability to return to profitability, particularly in the United States. Effects of Recent Accounting Pronouncements In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving Stock Compensation- an Interpretation of Accounting Principles Board Opinion No. 25. FIN 44 is effective July 1, 2000. The application of FIN 44 did not have a material impact on the Company's financial position or results of operations. -15- 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to a variety of risks, including changes in interest rates affecting the return on its investments and the cost of its debt, and foreign currency fluctuations. At December 31, 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, at times, 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 December 31, 2000 is comprised of a note payable to a bank, secured by the Company's corporate office building, with a total balance of $5,242,000 and a capital lease agreement covering certain computer hardware with a total balance of $2,060,000. 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 18% of the Company's revenues for the quarter ended December 31, 2000 were generated from foreign operations, located principally in Australia and Canada. In the quarter ended December 31, 2000, the Company was subjected to a 12% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar compared to the quarter ended December 31, 1999. If the exchange rate had remained the same as the quarter ended December 31, 1999, the consolidated statement of operations for the quarter ended December 31, 2000 would have reflected additional revenue of approximately $1,503,000 and the operating loss would have been reduced by approximately $105,000. Currently, the Company does not enter into forward exchange contracts or other financial instruments with respect to foreign currency. -16- 17 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's 2000 Annual Meeting of Stockholders was held on November 9, 2000. At the meeting the stockholders of the Company elected the eight incumbent directors for terms of one year each and until their successors are duly elected and qualified, and ratified the appointment of KPMG LLP as the independent certified public accountants of the Company and its subsidiaries for the fiscal year ending June 30, 2001. The results of the vote to elect the eight directors were as follows:
SHARES VOTED SHARES FOR WHICH NAME FOR AUTHORITY WAS WITHHELD - ---- ------------ ---------------------- Sidney Craig 17,110,935 102,871 Jenny Craig 17,110,935 102,871 Scott Bice 17,117,655 96,151 Patricia Larchet 17,117,655 98,151 Marvin Sears 17,116,885 96,921 Andrea Van de Kamp 17,118,155 95,651 Duayne Weinger 17,117,655 96,151 Robert Wolf 17,117,435 96,371
The results of the vote to ratify the appointment of KPMG LLP as independent certified public accountants of the Company and its subsidiaries for the fiscal year ending June 30, 2001 were as follows:
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINING ---------------- -------------------- ----------------- 17,143,321 19,125 51,360
There were no broker non-votes on any of the matters submitted to a vote of security holders. -17- 18 PART II - OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10 Amendment to Balance Bar Company Trademark License Agreement between Jenny Craig, Inc. and Balance Bar Company. (1)
(b) No reports on Form 8-K have been filed during the quarter for which this report is filed. - -------------- (1) The Company has requested confidential treatment for portions of this agreement. -18- 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: February 12, 2001 -19- EX-10 2 a69269ex10.txt EXHIBIT 10 1 EXHIBIT 10 AMENDMENT TO BALANCE BAR COMPANY TRADEMARK LICENSE AGREEMENT Jenny Craig, Inc. ("JC") and Balance Bar Company ("BBC") hereby amend the Balance Bar Company Trademark License Agreement dated July 30, 1999 (the "Agreement") as follows: 1. Section 2.2 is deleted in its entirety and replaced by the following: 2.2 RIGHT OF FIRST NEGOTIATION AND RIGHT OF FIRST REFUSAL. 2.2.1 RIGHT OF FIRST NEGOTIATION. If, during the term of this Agreement, JC desires to enter into an agreement for the license of any of the Marks to a person or entity for such person or entity's sale of any food or beverage product through any distribution channel other than through the Centres ("Product License"), it shall provide BBC with written notice of the identity of the proposed licensee ("Negotiation Notice"), and immediately thereafter shall negotiate exclusively with BBC with respect to such Product License. If such negotiations with BBC do not result in an agreement between BBC and JC within [ * ] ([ * ]) days after the Negotiation Notice, then JC shall be free during the next [ * ] ([ * ]) months to negotiate with the proposed licensee identified in its Negotiation Notice with respect to the Product License. Provided however, that (a) JC may negotiate only with the specific proposed licensee identified in its Negotiation Notice; (b) JC may enter into such Product License only if its terms are more favorable to JC than the terms last offered by BBC; and (c) If JC does not reach agreement within [ * ] days with the proposed licensee, then the provisions of this Section shall again apply to any subsequent proposed Product License. 2.2.2 RIGHT OF FIRST REFUSAL. Notwithstanding anything to the contrary in Section 2.2.1, JC may not enter into a Product License with [ * ] ("Restricted Licensees") without first providing BBC notice and a copy of the proposed agreement ("First Refusal Notice"). Within sixty (60) days after its receipt of the First Refusal Notice, BBC may elect, by written notice to JC, to require JC to enter into a Product License with BBC rather than the Restricted Licensee on terms identical to the agreement provided to BBC with the First Refusal Notice. If BBC does not so elect, then JC may, within thirty (30) days thereafter, enter into the Product License in the form delivered with the First Refusal Notice. Provided however, that if JC does not enter into the Product License within such thirty-day period, the provisions of this Section shall again apply to any subsequent proposed Product License. 1 2 2. Article 3 (including sections 3.1 and 3.2) is deleted in its entirety and replaced by the following: 3. LICENSED PRODUCTS As used in this Agreement, the term "Licensed Products" shall mean and include only those JC-branded food and beverage products listed on Schedule B to this Agreement (the "Licensed Products"). 3. Subsection 4.3.1 is deleted in its entirety and replaced by the following: 4.3.1 For the calendar years 2001 through 2004, the Minimum Annual Royalty shall be: 2001 [ * ] 2002 [ * ] 2003 [ * ] 2004 [ * ] 4. Section 6.2 is deleted in its entirety and replaced by the following: 6.2 PRODUCT INTRODUCTION. BBC will use commercially reasonable efforts to introduce the Licensed Products. 5. Section 6.4 is amended by the addition of the following sentence at the end thereof: JC agrees that it will sell its Snack Bars only as part of the Jenny Craig diet programs, and not otherwise. 6. Section 6.7 is deleted in its entirety and replaced by the following: 6.7 MINIMUM LICENSED PRODUCT SUPPORT REQUIREMENTS. BBC agrees to use its best efforts to support sales of the Licensed Products, and during each Contract Year to spend not less than [ * ] or [ * ] per cent ([ * ]%) of Gross Sales of Licensed Products for such Contract Year (whichever is greater) for advertising expenditures, trade allowances, market development funding (including coop advertising, store promotions, price discounts, payment terms and co-sponsored events), and marketing (including promotions, couponing, in-store 2 3 displays, free-standing newspaper inserts and so on) with respect to the Licensed Products. 7. Section 6.9 is deleted in its entirety and replaced by the following: 6.9 COOPERATION AND INFORMATION SHARING. The parties agree to cooperate in the development of strategies relating to the introduction and marketing of Licensed Products. Subject to Section 13, the parties will exchange their consumer and market research information relating to Licensed Products and the Centres on a quarterly basis. BBC will refer inquiries regarding Jenny Craig and its programs and products to a JC contact to be identified by JC. In addition, JC will cooperate and provide advice in connection with weight loss matters, including a representative to serve on the BBC advisory board. 8. Section 7.3 is deleted in its entirety and replaced by the following: 7.3. QUALITY STANDARDS. Quality Standards of Licensed Products and Promotional Packaging Material shall be maintained at a level at least as high as the samples approved by JC (based on normal industry standards for quality control procedures and statistical sampling). 9. Article 17 is deleted in its entirety and replaced by the following: 17. ASSIGNMENT. The rights and duties granted in this Agreement are personal to JC and BBC and neither party may assign any of its rights or delegate any of its duties under this Agreement without prior written consent of the other party, which consent will not be unreasonably withheld, provided that such assignee assumes in writing and agrees to pay, perform and discharge all of the assigning party's obligations hereunder. The parties agree that it shall be reasonable for BBC to withhold its consent to any such assignment by JC to any of the following competitors of BBC: [ * ]; and for JC to withhold its consent to any such assignment by BBC to any of the following competitors of JC: [ * ]. The foregoing notwithstanding, either party may assign its rights hereunder to any of its subsidiaries or affiliates without the consent of the other party (it being understood and agreed that no such assignment pursuant to this proviso shall relieve the assigning party of any of its obligations hereunder). In addition, either party may assign its rights and duties hereunder without the consent of the other party to any person or entity that acquires all or 3 4 substantially all of the business of the assigning party whether by asset sale, stock sale or merger or similar means, provided that such person or entity assumes in writing and agrees to pay, perform and discharge all of the assigning party's obligations hereunder. Changes in the securities ownership of a party hereto shall not be deemed to be an assignment of this Agreement. Any attempted assignment or delegation in violation of this provision shall be void. This Agreement shall inure to the benefit of the permitted successors and assigns hereunder. 10. A new Article 19 is added, as follows: 19. DISPUTE RESOLUTION 19.1 DISPUTE RESOLUTION. The parties hereto will attempt to settle any claim or controversy arising out of or relating to this Agreement through consultation and negotiation in good faith and a spirit of mutual cooperation. However, at any time before or during such negotiations, or following any unsuccessful negotiations, either party may by written notice to the other demand that the dispute be submitted to mediation. When such a demand is made, the parties shall within ten (10) days jointly make arrangements for the mediation of the dispute within the State of California with the CPR Institute for Dispute Resolution (CPR), whose Model Procedure for Mediation of Business Disputes in effect on the date of the written demand for mediation shall govern the mediation in all respects, except as modified by agreement of the parties. If the dispute has not been resolved within sixty (60) days of any written demand for mediation, or within a longer time period to which the parties may agree, the dispute shall be submitted to binding arbitration. Such binding arbitration shall be conducted within the State of California, in accordance with the then current CPR Rules for Non-Administered Arbitration of Business Disputes by a single arbitrator selected by mutual agreement of the parties within twenty (20) days after the date of submission of the dispute to binding arbitration, or in the absence of such agreement, such selection to be made by CPR in accordance with the procedures outlined in Section 6 of the CPR Rules. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16 (as may be amended), and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. Nothing in this Agreement will prevent either party from resorting to judicial proceedings for the limited purpose of seeking a preliminary injunction or to avoid the barring of the claim under the applicable statute of limitations. In addition, resort by either party to negotiation, mediation or arbitration pursuant to this Agreement shall not be construed under the doctrine of laches, waiver or estoppel to affect adversely the rights of either party to pursue any such judicial relief; provided, however, that irrespective of the filing of any such request for judicial relief the party shall continue to participate in the dispute resolution proceedings required by this paragraph. Any negotiation or mediation which 4 5 takes place pursuant to this Agreement shall be confidential and shall be treated as a compromise and settlement negotiation for purposes of the Federal Rules of Evidence and State rules of evidence. 11. Schedule B is deleted in its entirety and replaced by the following: SCHEDULE B LICENSED PRODUCTS ------------------------------- PRODUCT ------------------------------- Nutrition Bar ------------------------------- Ready to drink beverage ------------------------------- Powdered drink mix ------------------------------- Nutritional cookie ------------------------------- Nutritional cracker ------------------------------- Condiments, such as mayonnaise, not sold in Jenny Craig Centres ------------------------------- **Notwithstanding the foregoing, BBC shall not introduce (i) the Licensed Products in Canada, (ii) condiments, such as mayonnaise, not sold in Jenny Craig Centres, or (iii) nutritional crackers, until JC has notified BBC that JC's franchisees have consented to the distribution and sale of such products in the franchised territories. JC will use commercially reasonable efforts to obtain consent by its franchisees to the distribution and sale of such products in the franchise territories. 12. All other terms and conditions of the Agreement shall remain in full force and effect. JENNY CRAIG, INC. BALANCE BAR COMPANY By: /s/ SID CRAIG By: /s/ JERI FINARD -------------------------------- --------------------------------- Sid Craig Jeri Finard Chairman and Chief Executive EVP/GM BALANCE BAR Officer ---------------------------- Title 5 -----END PRIVACY-ENHANCED MESSAGE-----