10-Q 1 a72568e10-q.txt FORM 10-Q QUARTER ENDED MARCH 31, 2001 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, 2001 Commission File No. 001-10887 JENNY CRAIG, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 33-0366188 -------------------------------------------------------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 11355 NORTH TORREY PINES ROAD, LA JOLLA, CA 92037 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (858) 812-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of common stock, $.000000005 par value, outstanding as of the close of business on May 9, 2001- 20,688,971. -1- 2 ITEM 1. FINANCIAL STATEMENTS JENNY CRAIG, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands)
June 30, March 31, 2000 2001 --------- ---------- (unaudited) ASSETS Cash and cash equivalents ..................................................... $ 34,710 34,286 Short-term investments ........................................................ 925 -- Accounts receivable, net ...................................................... 2,271 2,439 Inventories ................................................................... 11,785 8,775 Prepaid expenses and other assets ............................................. 5,625 4,607 Deferred tax assets ........................................................... 864 -- --------- ------- Total current assets ................................................ 56,180 50,107 Deferred tax assets ........................................................... 16,696 -- Cost of reacquired area franchise rights and other intangibles, net ........... 8,658 7,926 Property and equipment, net ................................................... 25,797 23,172 Other assets .................................................................. 630 510 --------- ------- $ 107,961 81,715 ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable .............................................................. $ 13,473 14,958 Accrued liabilities ........................................................... 15,515 14,765 Current installments of obligation under capital lease ........................ 642 682 Accrual for litigation judgment ............................................... 9,649 10,306 Deferred service revenue ...................................................... 10,175 10,257 --------- ------- Total current liabilities .......................................... 49,454 50,968 Note payable, excluding current installments .................................. 5,147 5,005 Obligation under capital lease, excluding current installments ................ 1,732 1,161 --------- ------- Total liabilities ............................................. 56,333 57,134 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 March 31, 2001 ........................... -- -- Additional paid-in capital .................................................. 71,622 71,622 Retained earnings ........................................................... 49,415 25,590 Accumulated other comprehensive income (loss) ............................... 5,353 2,131 Treasury stock, at cost; 6,891,289 shares at June 30, 2000 and March 31, 2001 ........................................................ (74,762) (74,762) --------- ------- Total stockholders' equity ...................................... 51,628 24,581 Commitments and contingencies ................................................. --------- ------- $ 107,961 81,715 ========= =======
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 Nine Months Ended March 31, March 31, ---------------------- ----------------------- 2000 2001 2000 2001 -------- -------- -------- -------- Revenues: Company-owned operations: Product sales ..................................... $ 69,983 66,815 184,492 175,590 Service revenue ................................... 4,267 4,635 12,543 12,978 -------- -------- -------- -------- 74,250 71,450 197,035 188,568 -------- -------- -------- -------- Franchise operations: Product sales ..................................... 5,566 4,575 14,938 13,085 Royalties ......................................... 961 790 2,437 2,114 Initial franchise fees ............................ -- 25 35 150 -------- -------- -------- -------- 6,527 5,390 17,410 15,349 -------- -------- -------- -------- Total revenues ................................ 80,777 76,840 214,445 203,917 -------- -------- -------- -------- Costs and expenses: Company-owned operations: Product ........................................... 64,420 64,729 182,202 172,902 Service ........................................... 2,756 3,308 8,984 9,503 -------- -------- -------- -------- 67,176 68,037 191,186 182,405 -------- -------- -------- -------- Franchise operations: Product ........................................... 4,514 3,649 11,147 10,008 Other ............................................. 305 368 1,085 932 -------- -------- -------- -------- 4,819 4,017 12,232 10,940 -------- -------- -------- -------- 8,782 4,786 11,027 10,572 General and administrative expenses .................... 6,004 5,498 18,802 16,744 Litigation judgment .................................... 219 219 1,227 657 Restructuring charge ................................... -- -- 7,512 -- -------- -------- -------- -------- Operating income (loss) ......................... 2,559 (931) (16,514) (6,829) Other income, net, principally interest ................ 231 684 926 1,441 -------- -------- -------- -------- Income (loss) before taxes ...................... 2,790 (247) (15,588) (5,388) Income taxes (benefit) ................................. 1,063 230 (5,923) 18,437 -------- -------- -------- -------- Net income (loss) ................................ $ 1,727 (477) (9,665) (23,825) ======== ======== ======== ======== Basic and diluted net income (loss) per share .... $ .08 (.02) (.47) (1.15) ======== ======== ======== ========
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, ----------------------- 2000 2001 -------- -------- Cash flows from operating activities: Net loss ................................................................... $ (9,665) (23,825) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ........................................... 4,392 4,185 Non-cash portion of restructuring charge ................................ 1,303 -- Provision for deferred income taxes (benefit) ........................... (7,506) 17,560 Provision for doubtful accounts ......................................... 300 -- Loss on write-off of cost of reacquired area franchise rights ........... 96 192 Loss (gain) on disposal and sale of property and equipment .............. 175 (40) Changes in assets and liabilities: Accounts receivable .............................................. (384) (168) Inventories ...................................................... 3,622 3,016 Prepaid expenses and other assets ................................ 3,152 1,138 Accounts payable ................................................. (1,200) 1,485 Accrued liabilities .............................................. 3,092 (749) Accrual for litigation judgment .................................. 1,227 657 Deferred service revenue ......................................... 27 82 -------- -------- Net cash provided by (used in) operating activities ..... (1,369) 3,533 -------- -------- Cash flows from investing activities: Purchase of property and equipment .......................................... (4,012) (1,370) Purchase of short-term investments .......................................... (4,200) -- Proceeds from maturity of short-term investments ............................ 5,934 925 Payment for acquisition of franchised centres ............................... (1,847) (225) -------- -------- Net cash used in investing activities ................... (4,125) (670) -------- -------- Cash flows from financing activities: Principal payments on note payable and capital lease obligation ............. (356) (673) -------- -------- Effect of exchange rate changes on cash and cash equivalents ................... (569) (2,614) -------- -------- Net decrease in cash and cash equivalents ...................................... (6,419) (424) Cash and cash equivalents at beginning of period ............................... 38,864 34,710 -------- -------- Cash and cash equivalents at end of period ..................................... $ 32,445 34,286 ======== ======== Supplemental disclosure of cash flow information: Income taxes paid ........................................................... $ 600 1,178 Interest paid ............................................................... $ 399 421 Supplemental disclosure of non-cash investing and financing activities: Equipment acquired under capital lease ...................................... $ 2,726 -- Acquisition of franchised centres: Fair value of assets acquired .......................................... $ 2,532 332 Cancellation of accounts receivable .................................... (685) (107) -------- -------- Cash paid for acquisition .............................................. $ 1,847 225 ======== ========
See accompanying notes to unaudited consolidated financial statements. -4- 5 JENNY CRAIG, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 1. The accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America 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 assets. 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 -5- 6 JENNY CRAIG, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 March 31, 2001, the Company had made cash payments of $3,079,000 for lease termination costs, $1,432,000 for severance to terminated employees, $112,000 for refunds to program participants, and $698,000 for other closure costs. The Company estimates that the remaining cash payments of approximately $445,000, primarily consisting of lease termination costs, will be substantially incurred by September 30, 2001. 4. The weighted average number of shares used to calculate basic net income (loss) per share was 20,688,971 for all periods presented. The calculation of diluted net loss per share for the three and nine month periods ended March 31, 2001 excluded the effect of 2,300,100 stock options, as their effect would be antidilutive. Stock options had the effect of increasing the number of shares used in the diluted net income per share calculation by application of the treasury stock method by 99,672 shares for the three months ended March 31, 2000. The effect of 2,635,400 stock options have been excluded from the calculation of diluted net loss per share for the nine month period ended March 31, 2000, as inclusion of their effect would be antidilutive. 5. Comprehensive loss for the three and nine month periods ended March 31, 2000 and 2001 presented below includes foreign currency translation items. There was no tax expense or tax benefit associated with the foreign currency items.
Three Months Ended Nine Months Ended March 31, March 31, --------------------- --------------------- 2000 2001 2000 2001 -------- ------ -------- -------- Net income (loss) $ 1,727 (477) (9,665) (23,825) Foreign currency translation adjustments (1,548) (864) (572) (3,222) -------- ------ -------- -------- Comprehensive income (loss) $ 179 (1,341) (10,237) (27,047) ======== ====== ======== ========
-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 Nine Months Ended March 31, Ended March 31, ------------------- -------------------- 2000 2001 2000 2001 -------- -------- -------- -------- Revenue: Company-owned operations: United States $ 61,186 61,372 157,917 159,670 Foreign 13,064 10,078 39,118 28,898 Franchise operations: United States 4,353 3,904 10,815 10,612 Foreign 2,174 1,486 6,595 4,737 Operating income (loss): Company-owned operations: United States 373 (2,071) (24,295) (10,153) Foreign 1,480 696 5,588 1,590 Franchise operations: United States (457) 3 (479) 302 Foreign 1,163 441 2,672 1,432 Identifiable assets: United States 89,340 62,428 89,340 62,428 Foreign 18,669 19,287 18,669 19,287
-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 March 31, 2001 as Compared to Quarter Ended March 31, 2000 The following table presents selected operating results for United States Company-owned and foreign Company-owned operations for the quarters ended March 31, 2000 and 2001 (U.S. $ in thousands):
U.S. Company Owned Foreign Company Owned Operations Operations Three Months Three Months Ended March 31, Ended March 31, ------------------------- ------------------------ % % 2000 2001 Change 2000 2001 Change ------- ------ ------ ------ ------ ------ Product sales $57,850 57,379 -1% 12,133 9,436 -22% Service revenue 3,336 3,993 20% 931 642 -31% ------- ------ ------ ------ Total 61,186 61,372 0% 13,064 10,078 -23% Costs and expenses 56,288 59,224 5% 10,888 8,813 -19% General and administrative 4,306 4,000 -7% 696 569 -18% Litigation judgment 219 219 -- -- ------- ------ ------ ------ Operating income (loss) $373 (2,071) 1,480 696 ======= ======= ====== ====== Average number of centres 432 433 0% 112 114 2% ======= ======= ====== ======
Revenues from United States Company-owned operations, which represented 79% of the worldwide Company-owned centres at March 31, 2001, increased less than 1% for the quarter ended March 31, 2001 compared to the quarter ended March 31, 2000. There were essentially the same number of United States Company-owned centres in operation during the respective quarters and the average revenue per centre was $142,000 for both March end quarters. Service revenues -8- 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) from United States Company-owned operations increased 20% 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 28 centres in Canada, decreased 23% 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 an 11% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the periods. The Company has experienced reduced demand over the past several years, particularly at its centres located in the United States. 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. The Company cannot predict whether the current trend will continue in the future. Costs and expenses of United States Company-owned operations increased 5% for the quarter ended March 31, 2001 compared to the same quarter last year. The increase was principally due to increased advertising and centre compensation expenses. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues increased from 92% to 97% between the periods principally due to the increased advertising and compensation expenses. After including the allocable portion of general and administrative expenses, United States Company-owned operations had an operating loss of $2,071,000 for the quarter ended March 31, 2001 compared to operating income of $373,000 for the quarter ended March 31, 2000. Costs and expenses of foreign Company-owned operations decreased 19% for the quarter ended March 31, 2001 compared to the quarter ended March 31, 2000, principally due to the decreased variable costs associated with the reduced level of Australian operations and the 11% 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 $696,000 for the quarter ended March 31, 2001 compared to operating income of $1,480,000 for the quarter ended March 31, 2000. Revenues from franchise operations decreased 17% from $6,527,000 to $5,390,000 for the quarters ended March 31, 2000 and 2001, respectively. This decline was principally due to a 7% decrease in the average number of franchise centres in operation between the periods and a decrease in the revenues at foreign franchised centres which resulted in reduced product sales and royalties for the Company. The decrease in the average number of franchise centres reflects the Company's net acquisition of ten centres from franchisees between the periods. As of March 31, 2001 there were 109 franchised centres in operation, of which 71 were in the United States and 38 were in foreign countries, principally Australia and New Zealand. -9- 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Costs and expenses of franchise operations, which consist primarily of product costs, decreased 17% from $4,819,000 to $4,017,000 for the quarters ended March 31, 2000 and 2001, 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. General and administrative expenses decreased 8% from $6,004,000 to $5,498,000 and decreased from 7.4% to 7.2% of total revenues for the quarters ended March 31, 2000 and 2001, respectively. The decrease in general and administrative expenses is principally due to reduced professional expenses. A charge of $219,000 was recorded in the accompanying consolidated statement of operations in the quarters ended March 31, 2000 and 2001 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. At March 31, 2001 the total amount accrued for this litigation judgment was $10,306,000. The elements discussed above combined to result in an operating loss of $931,000 for the quarter ended March 31, 2001 compared to operating income of $2,559,000 for the quarter ended March 31, 2000. Income taxes (benefit) for the quarter ended March 31, 2001 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. -10- 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Nine Months Ended March 31, 2001 as Compared to Nine Months Ended March 31, 2000 The following table presents selected operating results for United States Company-owned and foreign Company-owned operations for the nine month periods ended March 31, 2000 and 2001 (U.S. $ in thousands):
U.S. Company Owned Foreign Company Owned Operations Operations Nine Months Ended Nine Months Ended March 31, March 31, ------------------------------ ----------------------- % % 2000 2001 Change 2000 2001 Change -------- -------- ------ ------ ------ ------ Product sales $148,291 148,765 0% 36,201 26,825 -26% Service revenue 9,626 10,905 13% 2,917 2,073 -29% -------- -------- ------ ------ Total 157,917 159,670 1% 39,118 28,898 -26% Costs and expenses 159,874 157,029 -2% 31,312 25,376 -19% General and administrative 13,599 12,137 -11% 2,218 1,932 -13% Litigation judgment 1,227 657 -- -- Restructuring charge 7,512 -- -- -- -------- -------- ------ ------ Operating income (loss) $(24,295) (10,153) 5,588 1,590 ======== ======== ====== ====== Average number of centres 478 434 -9% 111 113 2% ======== ======== ====== ======
Revenues from United States Company-owned operations, which represented 79% of the worldwide Company-owned centres at March 31, 2001, increased 1% for the nine months ended March 31, 2001 compared to the nine months ended March 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. The average revenue per United States Company-owned centre increased from $330,000 for the nine months ended March 31, 2000 to $368,000 for the nine months ended March 31, 2001. Service revenues from United States Company-owned operations increased 13% 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 28 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. The Company has experienced reduced demand over the past several years, particularly at its centres located in the United States. 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 -11- 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. The Company cannot predict whether the current trend will continue in the future. Costs and expenses of United States Company-owned operations decreased 2% for the nine months ended March 31, 2001 compared to the same quarter last year. The nine months ended March 31, 2000 included a charge of $3,068,000 for obsolete inventory related to the discontinued On-the-Go program. The 2% decrease was principally due to the absence of the charge of $3,068,000 for obsolete inventory in the current year period. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues decreased from 101% to 98% between the periods principally due to 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 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 March 31, 2001, the Company had made cash payments of $3,079,000 for lease termination costs, $1,432,000 for severance to terminated employees, $112,000 for refunds to program participants, and $698,000 for other closure costs. The Company estimates that the remaining cash payments of approximately $445,000 will be substantially incurred by September 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 $10,153,000 for the nine months ended March 31, 2001 compared to an operating loss of $24,295,000, which includes the above described charge of $3,068,000 for obsolete inventory and the $7,512,000 restructuring charge, for the nine months ended March 31, 2000. Costs and expenses of foreign Company-owned operations decreased 19% for the nine months ended March 31, 2001 compared to the nine months ended March 31, 2000, principally due to the decreased variable costs associated with the reduced level of Australian operations and the -12- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 $1,590,000 for the nine months ended March 31, 2001 compared to operating income of $5,588,000 for the nine months ended March 31, 2000. Revenues from franchise operations decreased 12% from $17,410,000 to $15,349,000 for the nine months ended March 31, 2000 and 2001, respectively. This decline was principally due to a 7% decrease in the average number of franchise centres in operation between the periods and a decrease in revenues at foreign franchised centres which resulted in reduced product sales and royalties for the Company. The decrease in the average number of franchise centres reflects the Company's net acquisition of ten centres from franchisees between the periods. As of March 31, 2001 there were 109 franchised centres in operation, of which 71 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 11% from $12,232,000 to $10,940,000 for the nine months ended March 31, 2000 and 2001, 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. General and administrative expenses decreased 11% from $18,802,000 to $16,744,000 and decreased from 8.8% to 8.2% of total revenues for the nine months ended March 31, 2000 and 2001, respectively. The decrease in general and administrative expenses is principally due to reduced corporate compensation and professional expenses. A charge of $657,000 was recorded in the accompanying consolidated statement of operations in the nine months ended March 31, 2001 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 nine month period ended March 31, 2000, $1,227,000, comprised of attorney fees awarded to the plaintiff and interest accrued on the judgment, was expensed related to this matter. At March 31, 2001 the total amount accrued for this litigation judgment was $10,306,000. The elements discussed above combined to result in an operating loss of $6,829,000 for the nine months ended March 31, 2001 compared to an operating loss of $16,514,000 for the nine months ended March 31, 2000. Income taxes (benefit) for the nine months ended March 31, 2001 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 20 together with less than expected operating results in -13- 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 on the accompanying consolidated balance sheet at March 31, 2001. -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 March 31, 2001, the Company had cash, cash equivalents and short-term investments totaling $34,286,000 compared to $35,635,000 at June 30, 2000, reflecting a decrease during the nine month period ended March 31, 2001 of $1,349,000. This decrease was principally due to the pre-tax loss for the nine month period ended March 31, 2001, offset, in part, by changes in assets and liabilities, including a decrease in inventories of $3,010,000 and a decrease in prepaid expenses and other assets of $1,138,000. Additionally, cash payments of $1,362,000 were made in connection with the Company's restructuring plan. The Company's principal cash commitments at March 31, 2001 are as follows: - Operating lease payments on premises from which the Company's centre operations are conducted totaling approximately $31,001,000, of which approximately $15,541,000 is payable in the twelve months ending March 31, 2002 and approximately $8,922,000 is payable in the twelve months ending March 31, 2003. - The litigation judgment of $10,306,000 which the Company is appealing. - Debt service on the note payable and capital lease totaling $7,037,000, which includes a balloon payment on the note payable in November 2006 of approximately $4,100,000. - Remaining payments of approximately $445,000 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. -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 March 31, 2001, 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 March 31, 2001 is comprised of a note payable to a bank, secured by the Company's corporate office building, with a total balance of $5,194,000 and a capital lease agreement covering certain computer hardware with a total balance of $1,843,000. 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 15% of the Company's revenues for the quarter ended March 31, 2001 were generated from foreign operations, located principally in Australia and Canada. In the quarter ended March 31, 2001, the Company was subjected to an 11% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar compared to the quarter ended March 31, 2000. If the exchange rate had remained the same as the quarter ended March 31, 2000, the consolidated statement of operations for the quarter ended March 31, 2001 would have reflected additional revenue of approximately $1,411,000 and the operating loss would have been reduced by approximately $134,000. 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 5. OTHER INFORMATION On May 14, 2001, the Company announced that it had retained the investment banking firm of Koffler & Company to advise the Company on stategic alternatives to maximize shareholder value, including a possible sale of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. -17- 18 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JENNY CRAIG, INC. By: /s/ James S. Kelly ------------------------------------ James S. Kelly Vice President and Chief Financial Officer Date: May 14, 2001 -18-