Jenny Craig, Inc. Form 10-K405


	x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

As of September 1, 2001, there were 20,688,971 shares of the registrant’s common stock outstanding, par value $.000000005, which is the only class of common or voting stock of the registrant. As of that date, the aggregate market value of the shares of common stock held by non-affiliates of the registrant (based on the closing bid price for the common stock as reported on the NASD Bulletin Board system on September 1, 2001) was approximately $11,463,000.

Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended June 30, 2001 are incorporated by reference into Part II. The information called for by Part III is incorporated by reference from the definitive Proxy Statement of the Registrant which will be filed with the Securities and Exchange Commission not later than 120 days after June 30, 2001.

Jenny Craig, Inc. (the “Company”) provides a comprehensive weight management program (the “Program”) through a chain of Company-owned and franchised weight loss centres operating under the name JENNY CRAIG WEIGHT LOSS CENTRES (“centres”). As of September 1, 2001, there were 429 Company-owned and 73 franchised weight loss centres throughout the United States, and 115 Company-owned and 38 franchised centres in Australia, New Zealand and Canada. Through these centres the Company sells JENNY CRAIG CUISINE, its portion and calorie controlled food products (“Jenny’s Cuisine”), to participants in the Program. As of September 1, 2001, there were approximately 68,000 active participants in the Program in the United States, and 21,000 active participants in foreign markets.

Information provided herein 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”). The words “expects,” “anticipates,” “believes” and similar words generally signify a “forward-looking” statement. The cautionary statements below are being made pursuant to the provisions of the Act and with the intention of obtaining the benefit of the “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. The discussion below, together with portions of the discussion elsewhere in this Report, highlight some of the more important risks identified by management of the Company but should not be assumed to be the only things that could affect future financial performance of the Company. Certain risk factors may also be identified by the Company from time to time in other filings with the Securities and Exchange Commission, press releases and other communications.

Competition; Technological and Scientific Developments. The weight loss business is highly competitive and the Company competes against a large number of companies of various sizes, some of which may have greater financial resources than the Company. The Company competes against self-administered weight loss regimens, doctors, nutritionists, dietitians, the pharmaceutical industry and certain government agencies and non-profit groups which offer weight control help by means of medication, diets, exercise and weight loss drugs. The Company also competes against food manufacturers and distributors which are developing and marketing low-calorie and diet products to weight-conscious consumers. In addition, new or different products or methods of weight control are continually being introduced. Such competition and any increase in competition, including new pharmaceuticals and other technological and scientific developments in weight control, may have a material adverse impact on the Company.

From time to time, medical and health professionals have identified health risks associated with weight loss. Weight loss pharmaceuticals are not risk-free and side effects and potential health problems for certain users have been identified. In September 1997, the United States Food and Drug Administration requested the withdrawal of fenfluramine (one of the pharmaceuticals used in a combination commonly known as “phen-fen”) and dexfenfluramine, commonly referred to by its trade name Redux, from the U.S. market based upon potential health risks. The manufacturer and distributor of these pharmaceuticals agreed to an immediate recall of these drugs. Medical and scientific developments or public announcements associating a health risk with weight loss could have a material adverse effect on the Company. See “Competition.”

Legislative and Regulatory Restrictions; Litigation. The Company is subject to a number of laws and regulations regarding its advertising, food products, franchise operations and relations with consumers. See “Regulation.” The Federal Trade Commission (“FTC”) and certain states regulate advertising, disclosures to consumers and franchisees, and other consumer matters and the Food and Drug Administration and the United States Department of Agriculture specify quality standards for foods. The Company’s customers may file actions on their own behalf, as a class or otherwise, and may file complaints with the FTC or state or local

consumer affairs offices and these agencies may take action on their own initiative or on a referral from consumers or others. See “Regulation” for information regarding a Consent Order entered into by the Company with the FTC relating to the advertising practices of the Company. Remedies sought in such actions may include the refund of amounts paid by the complaining customer, refunds to an entire class of participants, other damages, as well as changes in the Centres’ method of doing business. A complaint because of a practice at one centre, whether or not that practice is authorized by the Company, could result in an order affecting some or all centres in the particular state, and an order in one state could influence courts or government agencies in other states considering similar matters. Proceedings resulting from complaints may result in significant defense costs, settlement payments or judgments and could have a material adverse effect on the Company.

Future legislation or regulations including, without limitation, legislation or regulations affecting the Company’s marketing and advertising practices, relations with consumers or franchisees or its food products, could have a material adverse impact on the Company.

The Company’s foreign operations and franchises are also generally subject to regulations of the applicable country regarding the offer and sale of franchises, the content of advertising, the labeling and packaging of food, and promotion of diet products and programs. Although the Company is not currently subject to any government-imposed restriction on the withdrawal of funds from any foreign country, if Australia or any foreign country in which the Company operates were to impose currency restrictions, the Company’s business could be materially adversely affected.

Effectiveness of Marketing and Advertising Program. The Company’s business is marketing intensive. Its success depends upon its ability to attract new participants to the program. The effectiveness of the Company’s marketing practices, in particular its advertising campaigns, is important to the Company’s financial performance. If the Company’s marketing and advertising programs do not generate sufficient “leads” and “sales,” the Company’s results of operations will be materially adversely affected.

Market Acceptance of New Products and Services. The Company’s future success will depend on its ability to enhance its existing products and services and to develop and market new products and services on a timely basis that respond to new and evolving customer demands, achieve market acceptance and keep pace with new technological and scientific developments. There can be no assurance that the Company will be successful in developing, introducing on a timely basis and marketing such new products and services, or that any such new products or services will be accepted by the market. The failure of such products and services to be accepted by the market could have a material adverse impact on the Company.

Cost of Food and Services. As a large percentage of the Company’s revenues are derived from sales of the Company’s food products, increases in the cost of food and food services could have a material adverse impact on the Company.

Fluctuations In Quarterly Operating Results; Seasonality. The Company has experienced and expects to continue to experience fluctuations in its quarterly results of operations. The Company’s revenues are affected by a number of factors, including the volume and timing of customer leads, success of marketing and advertising programs, success of introductions of new services and products, activities of competitors and the ability of the Company to penetrate new markets. The Company’s business is seasonal with revenues generally decreasing in the quarter ending December 31 and during the summer months. The Company may also choose to reduce prices or to increase advertising spending in response to competition or to pursue new market opportunities, all or any of which may materially adversely affect the Company’s results of operations.

General Economy. The Company’s future success will depend on the general strength of the economy in the regions where the Company’s centres are located, both within and outside the United States. Any weakness in the general economy of such areas may have a material adverse impact on the Company’s results of operations.

The Program offers a comprehensive, competitively priced approach to the problem of losing and maintaining weight, combining a calorie controlled, nutritionally balanced diet with education and motivation that assists participants in achieving their weight loss needs. The Program features individual counseling to assist participants in identifying and modifying their eating habits to reach and maintain their desired weight. A cornerstone of the Program is the purchase by participants of Jenny’s Cuisine. These food products, which are sold only at centres to participants in the Program, are manufactured by the Company’s suppliers to specifications approved by registered dietitians employed by the Company and are designed to provide nutritionally balanced and good tasting portion and calorie controlled foods to facilitate weight loss. During the fourth quarter of fiscal 2001, the Company introduced its Ultimate Choice program which allows the participant more flexibility in selecting their individual food items. The Program recommends mild exercise to participants, and the Company offers weight maintenance assistance after completion of the Program. The Program is used by men and women, and to a much lesser extent by adolescents, although most participants in the Program are women of all ages and income levels who wish to lose in excess of 30 pounds.

Each prospective participant in the Program meets with a Program Director at the centre, where statistical information regarding height, weight, activity patterns, and related information is obtained. This information is analyzed using standards fixed by the Company to assist the prospective participant in establishing a weight loss goal and the Program Director then explains the Program. After enrollment, the participant is referred to a Weight Loss Consultant to begin the Program and purchase the first week’s supply of Jenny’s Cuisine. The Company does not engage physicians to examine or monitor the progress of participants, nor does it undertake a medical examination of new participants. However, prior to commencing the Program each new participant is asked to complete a health questionnaire to disclose any current medical treatment and medical history in order to determine whether participation in the Program is inadvisable or should be monitored by the participant’s personal physician.

For the first half of the Program, participants are encouraged to eat Jenny’s Cuisine for every meal along with fresh fruits, vegetables and dairy products. During this initial period, participants are expected to visit the centre once a week to attend a private counseling session with a Weight Loss Consultant during which the participant’s progress is discussed, meal plans are selected and the participant purchases Jenny’s Cuisine.

After the initial period of the Program, participants are advised to eat Jenny’s Cuisine five days a week from various menus furnished by the centre, and are given guidelines for their own food preparations two days a week, continuing on this regimen until their weight loss goal is achieved. Throughout the course of the Program participants continue their individual counseling sessions.

Each participant is allowed to utilize the centre’s facilities and personnel until the participant’s weight loss goal has been achieved. The Program is designed to help participants lose an average of 1 to 1.5 pounds per week. While the length of time a participant remains on the weight loss portion of the Program varies with the amount of desired weight loss and how long a participant chooses to continue on the Program, an average participant remains on the Program for approximately three to four months.

Participants in the Program pay a fixed service fee which covers all aspects of the Program other than the purchase of Jenny’s Cuisine. The Company offers a Gold Program which includes a weight loss module and an audio walking program for a fee which was $199 as of September 1, 2001. A significant number of participants who enroll in the Program purchase a Platinum Program for a fixed fee which was $295 at September 1, 2001. The Platinum Program includes a weight loss module, a weight maintenance module, an audio walking program, a Jenny Craig cookbook, Program return privileges, as well as an ability to obtain a refund of a portion of the service fee if certain criteria are met. In addition, the Company may offer special limited introductory programs for a lower fee. During the weight loss portion of the Program, participants pay an average of between $60 and $75 per week for Jenny’s Cuisine. Fees charged for the service portion of the Program are generally paid at commencement. In some states participants have the legal right to withdraw from the Program within specified periods following purchase and to receive a refund of the fees. Even when not so required, the Company’s policy is to refund a pro rata portion of the fees upon request.

Jenny’s Cuisine is portion and calorie controlled and consists of a nutritionally balanced variety of foods. The Company employs registered dietitians to assist it in developing its meal plans and food products.

The Company believes that its healthful, high quality and good tasting food products have contributed in large part to the Company’s success. Currently, the Company supplies its centres with approximately 70 different breakfast, lunch, dinner and snack food items for use in the Program, including prepackaged frozen meals, shelf-stable and canned foods, snacks, and dried products. The Company generally updates its menu once per year. Current food items include such entrees as Blueberry Waffles, French Toast with Berries, Stuffed Shells, Baked Turkey, Rising Crust Pizza, Chicken Fajitas, Teriyaki Beefsteak, Pasta Primavera, and Chili Con Carne.

Product sales, principally comprised of Jenny’s Cuisine, accounted for 93% of the Company’s revenues in both fiscal 2000 and 2001. For the year ended June 30, 2000, the Company’s gross revenues from product sales were $270,781,000 compared to $262,731,000 for the year ended June 30, 2001.

The Company purchases its food products from various companies which manufacture the products to specifications approved by the Company. The Company’s major product suppliers are Overhill Farms and ZB Industries, Inc., which supply frozen foods, Truitt Bros., which supplies shelf-stable food products, Campbell’s Soup Company and International Home Foods, which supply canned food, and Natural Alternatives, Inc., which supplies vitamin supplements. The Company believes that alternative sources for its products are available without material disruption of its operations.

The Company commenced operations in Australia in 1983 and became one of the largest weight loss companies in that country with 69 Company-owned and franchised centres by the end of fiscal 1985. Following its success in the Australian market, and recognizing the opportunities to market the Program successfully in the United States, the Company expanded its operations to the United States by initially opening 13 Company-owned centres in the Los Angeles metropolitan area in February 1985 and six centres in the Chicago metropolitan area in September 1985. The Company’s historical number of centres is shown in the following table:

The number of franchise centres owned by affiliates at June 30, 2001 and September 1, 2001 was 18.

In fiscal 2000, the Company closed 100 United States Company-owned centres, principally comprised of 86 centres closed in November 1999 in connection with a restructuring plan implemented by the Company. Also during fiscal 2000, the Company acquired 17 centres from five franchisees in the United States, and sold four centres to a franchisee in the United States. In addition, one franchise centre was opened and two franchised centres were closed in the United States in fiscal 2000.

In fiscal 1999, the Company acquired six centres from a franchisee in the United States and closed 15 United States Company-owned centres. Also during fiscal 1999, two United States franchise centres were opened and 11 United States franchise centres were closed.

The Company’s business is marketing intensive, because both maintaining its market position and continued growth depend upon the Company’s ability to attract new participants for the Program. The Company conducts ongoing research to better understand the prospective weight loss customer and needs of existing clients. The data obtained is then utilized in the improvement and development of the Company’s products and services and the Company’s marketing activities. The Company also researches each prospective market to determine the appropriate number and distribution of centres for that market. This determination is a significant factor in developing leads, improving client convenience and maximizing return on advertising investment.

The Company’s advertising is designed to make the customer aware of the Company’s and the Program’s attributes. The Company’s advertising presents a company which is caring, supportive, and understanding of the problems of being overweight, and through the person of Jenny Craig, is differentiated from other generic sounding weight loss companies. Testimonial advertising, featuring participants in the Program, demonstrates the success of the Program on a personal level. The Company’s advertising contains a state-of-the-art 800 telephone number that connects the caller directly to the nearest centre in every market in the United States.

The Company presently spends more than 10% of gross revenues on advertising to generate leads, advertising extensively in each local market where it owns and operates centres. The majority of this amount is spent on television advertising, with the balance allocated to print advertising and radio advertisements. The size of the Company’s advertising budget, coupled with the television spot media buying power of its agency enables the Company to advertise on a low cost-per-spot basis. Franchise agreements generally require that franchisees spend the greater of 10% of gross receipts or $1,000 per centre per week for local advertising to promote the Program. Franchisees may elect to use the Company’s advertising, which the Company makes available to franchisees, rather than generate their own advertising. In addition to its consumer endorsements, the Company occasionally uses celebrity endorsements among its other advertising campaigns. As is common in the weight loss industry, the Company regularly utilizes various sales promotion campaigns, including a reduction of the service fee for the Program.

One of the Company’s most valuable assets is the participants who have already joined the Program. Information on participants is maintained in the Company’s data base and is utilized in the Company’s direct marketing programs to existing and former participants. The Company encourages participants in the Program to introduce other individuals to the Program by giving food discounts and other incentives, and the Company believes that such referrals are an important source of revenues.

The Company’s strategy is to have predominantly Company-owned centres. The Company’s general practice concerning franchising, with some exceptions, is to offer franchised centres in smaller markets. However, from time to time franchises have been granted to enable the Company to enter a large market more quickly. Franchising frequently gives the Company the benefit of obtaining franchisees who are more familiar with a local market than the Company, and also enables the Company to expand its business without increasing the number of employees by using franchisee management.

The Company believes that one of the factors contributing to its success has been its strong commitment to franchisee relationships. The Company seeks franchisees who demonstrate the management skills, experience and financial capability to develop multiple centres. In particular, the Company seeks franchisees who demonstrate experience in businesses that are similar to or have characteristics similar to the Company.

Franchised centres are required to adhere to the Company’s policies and procedures with respect to the operation of the centres and the implementation of the Program. Although the franchise agreements do not

require them to do so, present owners of franchises have actively participated in the operation of the centres. Franchisees are required to undergo training at a Company training facility. To date, all franchisees have purchased their food from the Company, although franchisees are not required to do so under the terms of the franchise agreement.

In June 2001, the Company entered into a Master Franchise Agreement covering 12 countries in the Middle East. Under the Agreement, the Master Franchisee is obligated to pay a non-refundable development fee of $500,000 to the Company. It is contemplated that the Master Franchisee will sub-franchise portions of the territory, with 50% of all initial franchise fees and royalties collected by the Master Franchisee payable to the Company.

As of September 1, 2001, the Company had 111 centres operating pursuant to franchise agreements, of which 73 were located throughout the United States, 16 in Australia, 18 in New Zealand and 4 in Canada. During fiscal 2001, the Company acquired one centre from a franchisee in the United States.

The Company believes the names it uses are important to its business and that its business could be harmed if others used the names. JENNY CRAIG WEIGHT LOSS CENTRES is a registered service mark and JENNY’S CUISINE is a registered trademark of the Company under the laws of the United States. The registration of JENNY CRAIG WEIGHT LOSS CENTRES and JENNY’S CUISINE will expire in the United States in October 2006 and in January 2008, respectively, if not renewed by the Company. The Company has obtained registrations or filed applications under applicable trademark and service mark laws in Australia, New Zealand, Canada, Mexico and in various other countries to protect its use of JENNY CRAIG, JENNY CRAIG WEIGHT LOSS CENTRES and JENNY’S CUISINE.

The weight loss business is highly competitive and the Company competes against a number of companies of various sizes, some of which may have greater financial resources than the Company. The Company’s principal direct competition is from the international chain Weight Watchers International, as well as regional and local weight loss businesses, some of which include supervision by or consultation with doctors or nurses. The Company also competes against self-administered weight loss regimens, internet-based weight loss programs, doctors, nutritionists, dietitians, the pharmaceutical industry and certain government agencies and non-profit groups which offer weight control help by means of medication, diets, exercise and weight loss drugs. The Company also competes against food manufacturers and distributors which are developing and marketing low-calorie and diet products to weight-conscious consumers. In addition, new or different products or methods of weight control are continually being introduced. Such competition and any increase in competition, including new pharmaceuticals and other technological and scientific developments in weight control, may have a materially adverse impact on the Company.

The Company believes that it competes on the basis of the effectiveness of the Program, its competitive pricing, the quality of Jenny’s Cuisine, and the marketing and management skills of its management and franchisees.

The Federal Trade Commission (the “FTC”), and certain states, regulate advertising and other consumer matters. The Company’s customers may file actions on their own behalf, as a class or otherwise, and may file complaints with the FTC or state or local consumer affairs offices and these agencies may take action on their own initiative or on a referral from consumers or others. Remedies sought in such actions may include the refund of amounts paid by the complaining consumer, refunds to an entire class of participants, other damages, as well as changes in the centres’ method of doing business. A complaint because of a practice at one centre, whether or not that practice is authorized by the Company, could result in an order affecting some or all centres in the particular state, and an order in one state could influence courts or government agencies in

other states considering similar matters. Proceedings resulting from complaints may result in significant defense costs, settlement payments or judgements and could have a material adverse effect on the Company.

The Company and the Federal Trade Commission entered into a Consent Order effective May 4, 1998 settling all contested issues raised in a complaint filed in September 1993 against the Company alleging that the Company violated the Federal Trade Commission Act by the use and content of certain advertisements for the Company’s weight loss program featuring testimonials, claims for the program’s success and safety, and statements as to the program’s costs to participants. The Consent Order does not admit any issue of fact or law or any violation by the Company of any law or regulation, and does not involve payment by the Company of any civil money penalty, damages, or other financial relief. The Consent Order requires certain procedures and disclosures in connection with the Company’s advertisements of its products and services. The Company does not believe that compliance with the Consent Order will have a material adverse effect on the Company’s consolidated financial position or results of operations or its current advertising and marketing practices.

The Company is subject to certain United States laws and regulations in connection with its food products. The Food, Drug and Cosmetic Act prohibits adulteration and misbranding and provides for penalties and other remedies such as seizure of products. The Food and Drug Administration (“FDA”) enforces the Food, Drug and Cosmetic Act, including specifying quality standards for foods and, as do many states, regulating food labeling.

Those foods which contain 2% or more meat or poultry products, and the plants which manufacture them, are subject to regulation (including labeling requirements) and continuous inspection by the United States Department of Agriculture (“USDA”). Although the FDA and the USDA require the manufacturers of the Company’s food products to obtain appropriate governmental approvals and to comply with applicable regulations, the Company has responsibility for the quality and labeling of food and for compliance with FDA and USDA regulations.

Prior to offering franchises in the United States, the Company, as is generally the case with franchisors, is required under regulations of the Federal Trade Commission to furnish potential franchisees with a disclosure document describing the Company, the franchise agreement and related matters. Some states require their own version of the disclosure document. In addition, state franchise laws may require the Company to furnish a bond, escrow monies, submit annual reports and meet other conditions.

Many states have statutes which may be applicable to the Company and require that a written contract be provided to the participant, and that participants be permitted to cancel their contract within specified periods following purchase and receive a refund of the service fee.

As of September 1, 2001 the Company had approximately 3,510 employees, of which 2,735 were located in the United States, 600 were located in Australia, and 175 were located in Canada. None of the Company’s workers in the United States are represented by a labor union. The Company has never had a strike or lockout and considers its employee relations to be excellent.

The following table sets forth certain information with respect to the executive officers of the Company:

Sidney Craig has been Chairman of the Company or its predecessors since 1983 and served as Chief Executive Officer from 1983 through April 1994. In October 1997, Mr. Craig was elected Chief Executive Officer of the Company.

Jenny Craig has served as Chairman of the Executive Committee since September 2000, as Vice Chairman of the Company from September 1991 to September 2000, as President and Chief Operating Officer of the Company or its predecessors from 1983 to August 1991 and as a director of the Company or its predecessors from 1983 to date. Mrs. Craig served as President of the Company from October 1997 through December 1998. Sidney Craig and Jenny Craig are husband and wife.

Patricia Larchet, a director of the Company since September 2000, has served as President and Chief Operating Officer of the Company since December 1999. Prior to serving as the Company’s President, Ms. Larchet was General Manager of the Australian subsidiary of the Company. Ms. Larchet has worked for the Company since 1985.

Duayne Weinger has served as Chief Administrative Officer since December 1999, and as Vice Chairman of the Company since September 2000. From 1994 until joining the Company, Mr. Weinger was a private investor. From 1987 until 1994, Mr. Weinger owned and operated franchised centres of the Company. Mr. Weinger is the son-in-law of Sidney and Jenny Craig.

Barbara Barry has served as Vice President, Marketing since June 2000. From June 1999 until June 2000, Ms. Barry was Vice President of Sales, Marketing and Merchandising for 3 Day Blinds Inc., a custom manufacturer and retailer of hard window coverings. From June 1997 until June 1999, Ms. Barry was Director of Marketing for Smart and Final, a 220 store retail chain. From April 1994 until June 1997, Ms. Barry was Senior Brand Development Manager for Unocal 76 Products.

James S. Kelly has served as Vice President, Chief Financial Officer and Treasurer since June 1999 after having served as Vice President and Controller since 1993 and as Controller from 1989 through 1993. From January 1983 to January 1989, Mr. Kelly was employed by KPMG LLP, an international accounting firm, most recently as an audit manager.

Alan V. Dobies has served as Vice President, Corporate Services since June 1990. From July 1988 to May 1990, Mr. Dobies was Vice President, Operations of Joico International, a manufacturer of professional hair-care products.

Executive officers are elected to serve until their successors are elected and qualified.

At September 1, 2001, there were 544 Company-owned centres, all of which are in leased premises, of which 429 were in the United States, 87 were in Australia, and 28 were in Canada. A majority of the leases for Company-owned centres were entered into for an initial period of five years. The leases require fixed monthly rental payments which are subject to various adjustments. The centres are generally located in retail shopping areas on major commercial thoroughfares and generally occupy approximately 1,800 to 2,200 square feet of space consisting of a reception area, individual counseling rooms, and food storage space.

In July 2001 the Company sold its 75,000 square foot office building located in La Jolla, California in which its executive offices have been located since 1996. The sales price was $21,000,000. After repayment of the related $5,146,980 promissory note to a bank and other closing costs, the Company realized net cash proceeds of approximately $14,852,000. Concurrent with the close of escrow, the Company entered into a month to month lease with the new owner of the building which allows the Company to occupy the building through June 30, 2002 at a monthly rent of $190,000.

The Company leases a warehouse in Rancho Cucamonga, California for its food and non-food inventory. The Company’s executive offices in Australia are leased and are located in Melbourne, and the Company also owns a warehouse in Sunshine, Australia.

The Company believes that its executive office and warehouse space is adequate for its current needs and that additional space will be available at reasonable costs as needed.

The Company is a defendant in a litigation in the Superior Court of California, Alameda County. The action was commenced in March 2001 by certain named plaintiffs on behalf of themselves and on behalf of the general public. The complaint alleges that the Company’s service contracts used in California with its clients do not comply with the requirements of certain California consumer protection statutes. The plaintiff contends these contracts are misleading and constitute deceptive practices. The complaint requests an order declaring the Company’s practices and conduct with respect to its California service agreements unlawful, refund of membership amounts paid by clients who choose to cancel their service agreement, treble damages and attorney’s fees. The proceeding has not progressed sufficiently for the Company to estimate a range of possible loss. The Company intends to defend the matter vigorously.

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

Material appearing under the caption “Common Stock Data” on page 31 of the Annual Report to Shareholders of Jenny Craig, Inc. for the fiscal year ended June 30, 2001 (“2001 Annual Report”) is hereby incorporated by this reference.

Material appearing under the caption “Selected Financial Data” on the inside front cover of the Company’s 2001 Annual Report is hereby incorporated by this reference.

Material appearing under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 5 through 13 of the Company’s 2001 Annual Report is hereby incorporated by this reference.

Material appearing under the caption “Quantitative and Qualitative Disclosures About Market Risk” on page 12 of the Company’s 2001 Annual Report is hereby incorporated by this reference.

The consolidated financial statements of the Company and subsidiaries, related notes to consolidated financial statements, and material appearing under the caption “Independent Auditors’ Report” on pages 14 through 29 of the Company’s 2001 Annual Report are hereby incorporated by this reference. Material appearing under the caption “Selected Quarterly Financial Information” on page 30 of the Company’s 2001 Annual Report is hereby incorporated by this reference.

Information required by this Item is incorporated by reference from the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 2001. Information regarding executive officers of the Registrant is set forth under the caption “Executive Officers of the Registrant” in Item 1a hereof.

The information required by this Item is incorporated by reference from the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after June 30, 2001.

The following appear in the 2001 Annual Report at the pages indicated below and are incorporated into Part II by reference:

Schedules other than the schedule listed above are omitted because they are either not required or not applicable.

There were no reports on Form 8-K filed by the Company during the last quarter of the period covered by this report.

Under date of August 17, 2001, we reported on the consolidated balance sheets of Jenny Craig, Inc. and subsidiaries as of June 30, 2000 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2001, as contained in the 2001 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year ended June 30, 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in Item 14. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

Pursuant to the requirements of Section 13 or 15(d) 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.


	By:	/s/ SIDNEY CRAIG



	Sidney Craig
	Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

16 EX-10.3 3 a75835ex10-3.txt EXHIBIT 10.3 1 EXHIBIT 10.3 JENNY CRAIG, INC. AMENDED AND RESTATED 1991 STOCK OPTION PLAN 1. Purposes The purposes of the Jenny Craig, Inc. 1991 Stock Option Plan (the "Plan") are to enable Jenny Craig, Inc. ("Jenny Craig") and its subsidiaries to attract, retain and motivate the best qualified personnel and to create a long-term mutuality of interest between the key personnel and the shareholders of Jenny Craig by granting them options to purchase Jenny Craig stock. 2. Definitions Unless the context requires otherwise, the following words as used in the Plan shall have the meanings ascribed to each below, it being understood that masculine, feminine and neuter pronouns are used interchangeably, and that each comprehends the others. (a) "Advisory Board" shall mean the Advisory Board of Jenny Craig. (b) "Board" shall mean the Board of Directors of Jenny Craig. (c) "Committee" shall mean such committee, if any, appointed by the Board to administer the Plan, consisting of such directors as may be appointed by the Board, provided that, with respect to grants of Options to non-employee directors and any action hereunder relating to Options held by non-employee directors, Committee shall mean the Board, and provided further, if the Board does not appoint a committee to administer the Plan, "Committee" shall mean the Board. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) "Common Stock" shall mean the common stock of Jenny Craig, par value $.000000005, any common stock into which such common stock may be changed and any common stock resulting from any reclassification of such common stock. (f) "Company" shall mean Jenny Craig and its subsidiaries any of whose employees are Participants (as hereinafter defined) in this Plan. (g) "Fair Market Value" shall mean the value of a share of Common Stock on a particular date, determined as follows: (i) If the Common Stock is listed or admitted to trading on such date on the New York Stock Exchange, the mean of the high and low sales prices of a Share on such date as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange; or (ii) If the Common Stock is not listed or admitted to trading on the New York Stock Exchange but is listed or admitted to trading on another national exchange, the mean of the high and low sales 2 prices of a Share on such date as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on such national exchange; or (iii) If the Common Stock is not listed or admitted to trading on any national exchange, the mean of the closing bid and asked prices (or, if available, the high and low sales prices) of a Share on such date in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automatic Quotation System, the National Quotation Bureau or such other system then in use with regard to the Common Stock or, if on such date the stock of the Company is publicly traded but not quoted by any such system, the mean of the closing bid and asked prices of a Share on such date as furnished by a professional market maker making a market in the Common Stock; (iv) If in (i), (ii) or (iii) above, as applicable, there were no sales on such date reported as provided above, the respective prices on the most recent prior day on which a sale of a Share took place; or (v) If the Common Stock is not publicly traded, such amount set by the Committee in good faith. (h) "Minimum Exercise Price" shall mean one hundred percent (100%) of the Fair Market Value of a Share at the time of the grant of the Option, or the par value of a Share, whichever is greater. (i) "Option" shall mean the right to purchase one Share at a prescribed purchase price on the terms specified in the Plan. (j) "Participant" shall mean a key employee of the Company (who may be, but need not be, an officer, director and/or member of the Advisory Board of Jenny Craig), a non-employee director, an Advisory Board member or a consultant to the Company, who has been granted Options under the Plan. (k) "Share" shall mean a share of Common Stock. 3. Effective Date The effective date of the Plan shall be October 1, 1991. 4. Administration (a) The Plan shall be administered by the Committee. The Committee shall have full authority to interpret the Plan and all Options granted hereunder; to establish, amend, and rescind rules for carrying out the Plan; to administer the Plan; to select employees, directors, consultants and Advisory Board members to participate in the Plan; to grant Options under the Plan; to determine the terms, exercise price and form of exercise payment for each Option granted under the Plan; to determine whether each Option granted under the Plan shall be intended to qualify as an "incentive stock option" under Section 422A of the Code; and to make all other determinations and to take all such steps in connection with the Plan and the Options as the Committee deems necessary or desirable, all of which shall be in the Committee's sole discretion. The Committee shall not be bound to any standards of uniformity or similarity of action, 2 3 interpretation or conduct in the discharge of its duties hereunder, regardless of the apparent similarity of the matters coming before it. Its determination shall be binding on all parties. (b) Any Participant may hold more than one Option under the Plan and under any other plan pursuant to which stock options, Shares or other incentives may be granted, issued or paid. (c) The Committee may designate the Secretary of Jenny Craig, other employees of Jenny Craig or competent professional advisors to assist the Committee in the administration of the Plan, and may grant authority to such persons to execute agreements or other documents on behalf of the Committee. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan, and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by Jenny Craig. (d) No member or former member of the Committee or of the Board shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. To the maximum extent permitted by applicable law, each member or former member of the Committee or of the Board shall be indemnified and held harmless by Jenny Craig against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of Jenny Craig) arising out of any act or omission to act in connection with the Plan unless arising out of such member's or former member's own fraud or bad faith. Such indemnification shall be in addition to any rights of indemnification the members or former members may have as directors under applicable law or under the certificate of incorporation or by-laws of Jenny Craig. (e) The Committee shall select one of its members as a Chairman and shall adopt such rules and regulations as it shall deem appropriate concerning the holding of its meetings and the transaction of its business. Any member of the Committee may be removed at any time either with or without cause by resolution adopted by the Board, and any vacancy on the Committee may at any time be filled by resolution adopted by the Board. (f) All determinations by the Committee shall be made by the affirmative vote of a majority of its members. Any such determination may be made at a meeting duly called and held at which a majority of the members of the Committee were in attendance in person or through telephonic communication. Any determination set forth in writing and signed by all of the members of the Committee shall be as fully effective as if it had been made by a majority vote of the members at a meeting duly called and held. 5. Shares; Adjustment Upon Certain Events (a) Shares to be issued under the Plan shall be made available, at the discretion of the Board, either from authorized but unissued Shares or from issued Shares reacquired by Jenny Craig. (b) Except as provided in this Section 5, the aggregate number of Shares that may be issued under the Plan shall not exceed 3,000,000 shares. If Options are for any reason cancelled, or expire or terminate unexercised, the Shares covered by such Options shall again be available for the grant of Options, subject to the limit provided by the preceding sentence. 3 4 (c) No fractional Shares will be issued or transferred in the exercise of any Option. In lieu thereof, Jenny Craig shall pay a cash adjustment equal to the same fraction of the Fair Market Value of one Share on the date of exercise. (d) The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the stockholders of Jenny Craig to make or authorize any adjustment, recapitalization, reorganization or other change in Jenny Craig's capital structure or its business, any merger or consolidation of Jenny Craig, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Common Stock, the dissolution or liquidation of Jenny Craig or any sale or transfer of all or part of its assets or business, or any other corporate act or proceeding, in which case the provisions of this Section 5 shall govern outstanding Options. (e) The Shares with respect to which Options may be granted are Shares of Common Stock as presently constituted, but, if and whenever, prior to the expiration of an Option theretofore granted, Jenny Craig shall effect a subdivision, recapitalization or consolidation of Shares or the payment of a stock dividend on Shares without receipt of consideration, the purchase price per Share and the number and class of Shares and/or other securities with respect to which such Option thereafter may be exercised, and the total number and class of Shares and/or other securities that may be issued under this Plan, shall be proportionately adjusted. (f) If Jenny Craig merges or consolidates with one or more corporations, then from and after the effective date of such merger or consolidation, upon exercise of an Option theretofore granted the Participant shall be entitled to purchase under such Option, in lieu of the number of Shares as to which such Option shall then be exercisable but on the same terms and conditions of exercise set forth in such Option, the number and class of Shares and/or other securities or property (including cash) to which the Participant would have been entitled pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, the Participant had been the holder of record of the total number of Shares receivable upon exercise of such Option (whether or not then exercisable) had such merger or consolidation not occurred. (g) If, as a result of any adjustment made pursuant to the preceding paragraphs of this Section 5, any Participant shall become entitled upon exercise of an Option to receive any securities other than Common Stock, then the number and class of securities so receivable thereafter shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock set forth in this Section 5. (h) Except as hereinbefore expressly provided, the issuance by Jenny Craig of shares of stock of any class, or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number and class of Shares and/or other securities or property subject to Options theretofore granted or the purchase price per Share. (i) Notwithstanding any provision of this Section 5 to the contrary, if authorized but previously unissued Shares are issued under the Plan, such Shares shall not be issued for a consideration less than their par value. 4 5 6. Awards and Terms of Options (a) Grant. The Committee may grant Options not intended to be "incentive stock options" within the meaning of section 422A of the Code to key employees, Advisory Board members and consultants to the Company, and may grant "incentive stock options" to key employees. The Board may grant Options not intended to be "incentive stock options" within the meaning of Section 422A of the Code to non-employee directors. Additionally, without further action by the Board, the Committee or the stockholders of Jenny Craig, each non-employee director on the date immediately prior to the effective date of Jenny Craig's initial public offering of its common stock, and each person who becomes a non-employee director thereafter and prior to November 1, 1996 shall automatically receive, (x) a one-time grant, effective on the date immediately prior to the effective date of such public offering or, if later, on the date of such person becoming a director, of Options to purchase 5,000 Shares, and (y) an annual grant, on each anniversary of the initial grant for so long as such person continues to be a director, of Options to purchase 500 Shares. Options shall be evidenced by Option agreements in such form not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (i) Exercise Price. The purchase price per Share deliverable upon the exercise of an Option shall be determined by the Committee, but shall not be less than the Minimum Exercise Price. For Options received by non-employee directors pursuant to the second sentence of Section 6(a), the purchase price per Share deliverable upon the exercise of an Option shall be the Minimum Exercise Price. (ii) Number of Shares. The Option agreement shall specify the number of Options granted to the Participant, as determined by the Committee or as set forth in the second sentence of this Section 6(a) with respect to options granted pursuant to such sentence. The maximum number of Options that may be granted under the Plan during any calendar year to any Participant shall not exceed 500,000 Options, provided however that if the Company grants to any Participant during any calendar year less than 500,000 Options or does not grant any Options during any calendar year to such Participant, then the amount of such shortfall shall be carried forward and added to the maximum number of Options which may be granted in a subsequent year to such Participant. If some of the Options held by a Participant are exercised, any unexercised Options held by such Participant shall remain outstanding and shall be or become exercisable according to their respective terms. (iii) Period of Exercisability. Except as otherwise provided in the Plan or as otherwise determined by the Committee, no Option granted under the Plan shall become exercisable earlier than the expiration of six (6) months after the date of grant and each Option shall be exercisable after the expiration of such period. The Committee may prescribe shorter or longer time periods, periods of partial exercisability and additional requirements or conditions with respect to the exercise of Options in the Option agreement and may provide, either at the time of grant or thereafter, for the acceleration of an Option; provided, however, that no Option shall be exercisable after the expiration of ten (10) years from the date of grant. Except as hereinafter provided, or as provided in the Participant's Option agreement, or as may be determined by the Committee, Options granted to any Participant may be exercised only during the continuance of that Participant's employment by the Company, service on the Board or Advisory Board or service as a consultant to the Company. (b) Procedure for Exercise. A Participant electing to exercise one or more Options shall give written notice to the Chief Financial Officer of Jenny Craig of such election and of the number of Options the 5 6 Participant has elected to exercise. Shares purchased pursuant to the exercise of Options shall be paid for at the time of exercise in cash, by the delivery of unencumbered Shares owned by the Participant (provided that such Shares have been owned by the Participant for such period as is required by applicable accounting standards to avoid a charge to earnings), or on such other terms and conditions as may be acceptable to the Committee and in accordance with Delaware law. Upon receipt of payment, Jenny Craig shall deliver to the Participant as soon as practicable a certificate or certificates for the Shares then purchased. (c) Expiration and Cancellation. If not previously exercised, each Option shall expire upon the tenth (10th) anniversary of the date of the grant thereof or upon the earlier termination of the Participant's employment by the Company, service on the Board or Advisory Board or service as a consultant to the Company, except as otherwise provided by Section 7 of the Plan. 7. Effect of Termination of Employment or Other Service (a) By Reason of the Participant's Death. Except as otherwise provided in the Participant's Option agreement, if the Participant dies while an employee of the Company or while serving as a consultant to the Company, all outstanding Options not exercised by the Participant prior to death shall become immediately exercisable by the Participant's estate or by the person given authority to exercise such Options by the Participant's will or by operation of law. Unless otherwise specified in the Option Agreement, such Options shall remain exercisable for a period of one (1) year from the date of the Participant's death; provided, however, that no Option may be exercised more than ten (10) years from the date of grant. (b) By Reason of the Participant's Retirement or Disability. Except as otherwise provided in the Participant's Option agreement, if a Participant retires at or after age 65 (or, with the consent of the Committee, before age 65), or if a Participant's employment with, or service as a consultant to, the Company terminates due to disability (within the meaning of section 105(d)(4) of the Code), all outstanding Options not exercised by the Participant prior to the termination of his employment or service as a consultant shall immediately become exercisable. Unless otherwise specified in the Option agreement, all such Options shall remain exercisable for a period of one (1) year from the date of termination of the Participant's employment or service as a consultant, except that Options intended to qualify as incentive stock options may be exercised only for a period of three (3) months after termination of employment due to retirement; provided, however, that no Option may be exercised more than ten (10) years after the date of the grant thereof. (c) By Reason of Other Separation from Service. Except as otherwise provided in the Participant's Option agreement, if a Participant's employment or service as a consultant is terminated for cause (as hereinafter defined) or is terminated by the Participant in violation of an agreement between the Participant and the Company, or if it is discovered after his separation from service that he had engaged in conduct that would have justified termination of his employment or service as a consultant for cause, all unexercised and outstanding Options held by the Participant shall immediately be cancelled. Termination shall be deemed to be for "cause" if (i) the Participant shall have committed fraud or any felony in connection with the Participant's duties as an employee of, or consultant to, the Company, or willful misconduct or the commission of any other act which causes or may reasonably be expected to cause substantial economic or reputational injury to the Company, or (ii) such termination is or would be deemed to be for cause under any employment or consulting agreement between the Company and the Participant. Unless otherwise specified in the Option agreement, upon any termination of employment, or service as a consultant, not 6 7 governed by the preceding portion of this Section 7(c) or by Sections 7(a) or 7(b) hereof, all outstanding Options not exercised by the Participant prior to the termination of his employment, or service as a consultant, shall remain exercisable (to the extent exercisable by him immediately before such separation) for a period of three (3) months after such separation; provided, however, that (i) except as otherwise provided in the Participant's Option Agreement, or as otherwise determined by the Committee, no Options that were not exercisable during the period of the Participant's employment, or service as a consultant, shall thereafter become exercisable and (ii) no such Option may be exercised more than ten (10) years after the date of the grant. (d) Termination of Other Service. If a non-employee Participant's service as a member of the Board or the Advisory Board is terminated because of death, retirement, disability or other reason, any outstanding Options not exercised by the Participant prior to such termination shall become immediately exercisable by the Participant (or, in the case of death, by the Participant's estate or by the person given authority to exercise such Options by the Participant's will or by operation of law), and such Options shall remain exercisable for a period of one (1) year from the date of termination of service; provided, however, that no Option may be exercised more than ten (10) years from the date of grant. 8. Nontransferability of Options No Option shall be transferable by the Participant otherwise than by will or under applicable laws of descent and distribution. In addition, no Option shall be assigned, negotiated, pledged, or hypothecated in any way (whether by operation of law or otherwise), and no Option shall be subject to execution, attachment or similar process. Upon any transfer, assignment, negotiation, pledge or hypothecation of any Option, or in the event of any levy upon any Option by reason of any execution, attachment or similar process, contrary to the provisions hereof, such Option shall immediately become null and void. 9. Rights as a Stockholder A Participant (or a permitted transferee of an Option) shall have no rights as a stockholder with respect to any Shares covered by his Option until he shall have become the holder of record of such Share(s), and no adjustments shall be made for dividends in cash or other property or distributions or other rights in respect to any such Shares, except as otherwise specifically provided for in this Plan. 10. Determinations Each determination, interpretation or other action made or taken pursuant to the provisions of this Plan by the Board or Committee shall be final and binding for all purposes and upon all persons, including, without limitation, the Participants, the Company, the directors, officers, employees and members of the Advisory Board of the Company, and their respective heirs, executors, administrators, personal representatives and other successors in interest. 7 8 11. Termination, Amendment and Modification (a) The Plan shall terminate at the close of business on August 28, 2003, unless terminated sooner as hereinafter provided, and no Option shall be granted under the Plan thereafter. The termination of the Plan shall not terminate any outstanding Options which by their terms continue beyond the termination date of the Plan. At any time prior to that date, the Board may terminate the Plan or suspend the Plan in whole or in part, or amend the Plan. Notwithstanding the foregoing, however, no such action may, without the approval of the stockholders of Jenny Craig, increase the total number of Shares which may be acquired upon exercise of Options granted under the Plan; reduce the Minimum Exercise Price at which any Option may be exercised below the Minimum Exercise Price; change the class of persons eligible to be Participants; or, unless no longer required as a condition of compliance with the requirements of Rule 16b-3, change the number of Options to be granted to non-employee directors, or materially increase the benefits accruing to non-employee directors hereunder. (b) Nothing contained in this Section 11 shall be deemed to prevent the Board or the Committee from authorizing amendments of outstanding Options of Participants including, without limitation, the reduction of the exercise price specified therein (or the granting or issuance of new Options at a lower exercise price upon cancellation of outstanding Options), so long as all Options outstanding at any one time shall not call for issuance of more Shares than the remaining number provided for under the Plan and so long as the provisions of any amended Options would have been permissible under the Plan if such Option had been originally granted or issued as of the date of such amendment with such amended terms. Notwithstanding anything to the contrary contained in this Section 11, no termination, amendment, or modification of the Plan may, without the consent of the Participant or the transferee of his Option, alter or impair the rights and obligations arising under any then outstanding Option. 12. Non-Exclusivity Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of Jenny Craig for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting or issuance of Options, Shares and/or other incentives otherwise than under the Plan, and such arrangements may be either generally applicable or limited in application. 13. Use of Proceeds The proceeds of the sale of Shares subject to Options under the Plan are to be added to the general funds of Jenny Craig and used for its general corporate purposes as the Board shall determine. 14. General Provisions (a) The Plan shall not impose any obligations on the Company to continue the employment of, or retain in any other capacity, any Participant, nor shall it impose any obligation on the part of any Participant to remain in the employ of, or in any other capacity with the Company. 8 9 (b) If the Board determines that the law so requires, the holder of an Option granted hereunder shall, upon any exercise or conversion thereof, execute and deliver to Jenny Craig a written statement, in form satisfactory to Jenny Craig, representing and warranting that he is purchasing or accepting the Shares then acquired for his own account and not with a view to the resale or distribution thereof, that any subsequent offer for sale or sale of any such Shares shall be made either pursuant to (i) a Registration Statement on an appropriate form under the Securities Act of 1933, as amended, which Registration Statement shall have become effective and shall be current with respect to the Shares being offered and sold, or (ii) a specific exemption from the registration requirements of said Act, and that in claiming such exemption the holder will, prior to any offer for sale or sale of such Shares, obtain a favorable written opinion from counsel approved by Jenny Craig as to the availability of such exception. (c) Nothing contained in the Plan and no action taken pursuant to the Plan (including, without limitation, the grant of any Option thereunder) shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and any Participant or the executor, administrator or other personal representative, or designated beneficiary of such Participant, or any other persons. If and to the extent that any Participant or his executor, administrator, or other personal representative, as the case may be, acquires a right to receive any payment from the Company pursuant to the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. 15. Issuance of Stock Certificates, Legends and Payment of Expenses (a) Upon any exercise of an Option and payment of the exercise price as provided in such Option, a certificate or certificates for the Shares as to which such Option has been exercised shall be issued by Jenny Craig in the name of the person or persons exercising such Option and shall be delivered to or upon the order of such person or persons. (b) Certificates for Shares issued upon exercise of an Option shall bear such legend or legends as the Board, in its discretion, determines to be necessary or appropriate to prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act of 1933, as amended, or to implement the provisions of any agreements between the Company and the Participant with respect to such Shares. (c) Jenny Craig shall pay all issue or transfer taxes with respect to the issuance or transfer of Shares, as well as all fees and expenses necessarily incurred by Jenny Craig in connection with such issuance or transfer and with the administration of the Plan. 16. Listing of Shares and Related Matters If at any time the Board shall determine in its sole discretion that the listing, registration or qualification of the Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the award or sale of Shares under the Plan, no Shares will be delivered unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board. 9 10 17. Withholding Taxes The Company shall have the right to deduct withholding taxes from any payments made pursuant to the Plan, or to make such other provisions as it deems necessary or appropriate to satisfy its obligations to withhold federal, state or local income or other taxes incurred by reason of the exercise of Options or the issuance of Shares or payments under the Plan, including requiring a Participant exercising an Option granted hereunder to reimburse the Company for any taxes required to be withheld or otherwise deducted and paid by the Company in respect of the Option exercise or the issuance of Shares pursuant thereto. In lieu thereof, the Company shall have the right to withhold the amount of such taxes from any other sums due or to become due from the Company to the Participant upon such terms and conditions as the Company may prescribe. 18. Notices Each Participant shall be responsible for furnishing the Committee with the current and proper address for the mailing to him of notices and the delivery to him of agreements, Shares and payments. Any notices required or permitted to be given shall be deemed given if directed to the person to whom addressed at such address and mailed by regular United States mail, first-class and prepaid. If any item mailed to such address is returned as undeliverable to the addressee, mailing will be suspended until the Participant furnishes the proper address. 19. Severability of Provisions If any provisions of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan shall be construed and enforced as if such provisions had not been included. 20. Payment to Minors and Others, Etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Committee, the Company and their employees, agents and representatives with respect thereto. 21. Headings and Captions The headings and captions herein are provided for reference and convenience only. They shall not be considered part of the Plan and shall not be employed in the construction of the Plan. 22. Controlling Law The Plan shall be construed and enforced according to the laws of the State of California. 10 EX-10.19 4 a75835ex10-19.txt EXHIBIT 10.19 1 EXHIBIT 10.19 AMENDED AND RESTATED AGREEMENT Amended and Restated Agreement made as of the 20th day of August, 1996 between Marvin Sears (the "Director") and Jenny Craig, Inc. (the "Company"). WHEREAS, the Director is a member of the Board of Directors of the Company and the Company desires to reward the Director for his services to the Company by allowing him to participate in accordance with and subject to the terms of this Agreement in an increase in the fair market value per share of the Common Stock of the Company; and WHEREAS, the Director and the Company are parties to that certain Agreement dated as of August 15, 1993, which the parties desire to amend and restate as set forth in this Agreement. NOW, THEREFORE, in consideration of the services rendered and to be rendered by the Director and for other good and valuable consideration, the Company and the Director hereby agree as follows: 1. Definitions. The following terms shall have the following definitions for purposes of this Agreement. A. "Base Price Per Share" shall mean $14.94, the mean of the high and low sales prices of a Share of Common Stock on the New York Stock Exchange on September 15, 1993, as such amount may be adjusted as provided herein. B. "Common Stock" shall mean shares of common stock, $.000000005 par value per share, of the Company, any common stock into which such common stock may be changed and any common stock resulting from a reclassification of such common stock. C. "Director Units" means the 10,000 units granted to the Director pursuant to this Agreement, as such number of units may be adjusted as provided herein. D. "Exercise Payment" shall mean the amount equal to the product of (i) the number of exercised Director Units multiplied by (ii) the amount, if any, by which the Fair Market Value Per Share of Common Stock on the date of exercise exceeds the Base Price Per Share. E. "Fair Market Value Per Share" shall mean the value, on a particular date, of a share of Common Stock determined as follows: (i) If the Common Stock is listed or admitted to trading on such date on the New York Stock Exchange, the mean of the high and low sales prices of 1 2 a Share on such date as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange; or (ii) If the Common Stock is not listed or admitted to trading on the New York Stock Exchange but is listed or admitted to trading on another national exchange, the mean of the high and low sales prices of a Share on such date as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on such national exchange; or (iii) If the Common Stock is not listed or admitted to trading on any national exchange, the mean of the closing bid and asked prices (or, if available, the high and low sales prices) of a Share on such date in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automatic Quotation System, the National Quotation Bureau or such other system then in use with regard to the Common Stock or, if on such date the stock of the Company is publicly traded but not quoted by any such system, the mean of the closing bid and asked prices of a Share on such date as furnished by a professional market maker making a market in the Common Stock; (iv) If in (i), (ii) or (iii) above, as applicable, there were no sales on such date reported as provided above, the respective prices on the most recent prior day on which a sale of a Share took place; or (v) If the Common Stock is not publicly traded, such amount set by the Board of Directors of the Company in good faith. F. "Share" shall mean a share of Common Stock. 2. Exercise and Payment of Director Units. (a) The Director Units granted to the Director herein may be exercised at any time and from time to time during the period beginning on the date hereof and ending on the first anniversary of the date of termination of the Director's status as a member of the Board of Directors of the Company as a result of the Director's death, disability, retirement, resignation, removal or otherwise. The Director (or the permitted transferee of the Director Units under Section 4 hereof) may exercise the Director Units granted herein in whole or in part by written notice requesting the Exercise Payment delivered to the Company which notice shall include the number of Director Units exercised. In the event any Director Unit is exercised by any person who is a permitted transferee 2 3 under Section 4 hereof, the notice of exercise must be accompanied by appropriate proof of the right of such transferee to exercise such Director Unit. (b) Upon any exercise of Director Units granted to the Director herein, the Company shall deliver to the Director, within thirty (30) days after the date of exercise, a check for the Exercise Payment due to the Director pursuant to such exercise. 3. Adjustment. (a) If the Company shall pay to the holders of Shares a dividend payable in Shares of Common Stock or shall subdivide the outstanding Shares of Common Stock into a greater number of Shares or shall combine the outstanding Shares of Common Stock into a smaller number of Shares, the Director Units and the Base Price Per Share shall be proportionately adjusted as follows: (i) If the Company pays a dividend in Shares of Common Stock, the Base Price Per Share in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend shall be reduced by multiplying such Base Price Per Share by a fraction, the numerator of which shall be the number of Shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of Shares and the total number of Shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination; (ii) In case outstanding Shares of Common Stock shall be subdivided into a greater number of Shares of Common Stock, the Base Price Per Share in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding Shares of Common Stock shall each be combined into a smaller number of Shares of Common Stock, the Base Price Per Share in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective; (iii) Upon each adjustment of the Base Price Per Share pursuant to this subparagraph (a), the number of Director Units held by the Director immediately prior to such adjustment shall be adjusted to a number of Director Units equal to the number of Director Units held by the Director immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the Base Price Per Share in effect immediately prior to such adjustment and the denominator of which shall be 3 4 the Base Price Per Share in effect immediately after such adjustment. (b) Except as expressly provided in subparagraph (a) above, the issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the Director Units or Base Price Per Share. 4. Nontransferability. No rights under this Agreement shall be transferable by the Director otherwise than by will or under applicable laws of descent and distribution. No rights hereunder shall be assigned, negotiated, pledged, or hypothecated in any way (whether by operation of law or otherwise), and no rights hereunder shall be subject to execution, attachment or similar process. Upon any transfer, assignment, negotiation, pledge or hypothecation of any rights hereunder, or in the event of any levy upon any rights hereunder by reason of any execution or similar process, contrary to the provisions hereof, all rights hereunder shall immediately become null and void. 5. Notices. Any notice, request, demand or other communication required or permitted hereunder shall be in writing and deemed to be properly given when delivered personally, by commercial courier, the United States mail or by telegraph, fax or telecopier transmission to the parties at the following addresses, or to such other address as a party may designate in accordance with the provisions of this Section 5: If to the Company: Jenny Craig, Inc. 11355 North Torrey Pines Road La Jolla, California 92037 Telecopier No. (619) 812-2700 If to the Director: Marvin Sears Proskauer Rose Goetz & Mendelsohn LLP 2121 Avenue of the Stars, Suite 2700 Los Angeles, California 90067-5010 Telecopier No. (310) 557-2193 6. Benefit of Agreement; No Rights as Stockholder. This Agreement shall inure to the benefit of and be binding upon the parties hereto, the successors and assigns of the Company and the executors, administrators and permitted transferees of the 4 5 Director. Director shall not have any rights as a stockholder as a result of this Agreement. 7. Applicable Law. This Agreement shall be governed by and construed under the laws of the State of California. 8. Headings; Counterparts. The headings used in this Agreement are not a part of this Agreement and shall not be used in construing it. This Agreement may be signed in counterpart copies, all of which taken together shall constitute one original. 9. Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such provision shall be construed and enforced as if it had been more narrowly drawn so as not to be invalid or unenforceable, and such invalidity or unenforceability shall not affect or render invalid or unenforceable any other provision of this Agreement. 10. Entire Agreement. This Agreement sets forth the parties' final and entire agreement, and supersedes any and all prior understandings, with respect to the subject matter hereof. This Agreement may not be modified or amended by oral agreement, but only by an agreement in writing signed by the parties and any waiver of any of the terms hereof must be in writing signed by the party to be charged. Executed as of the day and year first above written. JENNY CRAIG, INC. By: /s/ C. JOSEPH LABONTE -------------------------------------- C. Joseph LaBonte, President and Chief Executive Officer /s/ MARVIN SEARS -------------------------------------- Marvin Sears 5 EX-13 5 a75835ex13.htm EXHIBIT 13 ex13


(1)	Operating results for 1999 include a pre-tax charge of $8,203,000 for a litigation judgment. See Note 8 of Notes to Consolidated Financial Statements.

(2)	Operating results for 2000 include a pre-tax restructuring charge of $6,910,000. See Note 10 of Notes to Consolidated Financial Statements.

(3)	In 2001, the Company recorded a non-cash charge of $18,598,000 to provide a full valuation allowance for the United States deferred tax assets. See Note 5 of Notes to Consolidated Financial Statements.

Information provided in this Annual Report 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 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. The reader should carefully review the cautionary statements contained in the Company’s Annual Report on Form 10-K for the year ended June 30, 2001, which identify important factors that could cause actual results to differ materially from those in the forward-looking statements, as well as the risk factors which may also be identified by the Company from time to time in other filings with the Securities and Exchange Commission, press releases and other communications.

The following table gives certain key statistics regarding the Company during the past five years ended June 30:

The decrease in United States Company-owned centres in 2000 reflects the Company’s closure of 100 centres, principally comprised of the closure of 86 centres in November 1999 in connection with a restructuring plan implemented by the Company. Also during fiscal 2000, the Company acquired 17 centres from five franchisees, and sold four centres to a franchisee in the United States.

The decrease in United States Company-owned centres in 1999 reflects the Company’s acquisition of six centres from a franchisee and the closure of 15 centres. The decrease in United States franchise centres reflects the Company’s acquisition of the six centres from a franchisee and the net closure of nine franchise centres.

The decrease in United States Company-owned centres in 1998 reflects the Company’s acquisition of eight centres from two franchisees and the net closure of 17 centres.

See Note 14 of Notes to Consolidated Financial Statements for additional information regarding United States and foreign operations.

The following table presents selected operating results for United States Company-owned operations and foreign Company-owned operations for fiscal 2001 and fiscal 2000 (U.S. $ in thousands):

Revenues from United States Company-owned operations increased 3% in 2001 compared to 2000 principally due to an increase in product sales at United States Company-owned centres, which represented 79% of the worldwide Company-owned centres at June 30, 2001. There was an 7% decrease in the average number of United States Company-owned centres in operation between the years, principally reflecting the closure of 86 centres in November 1999 in connection with a restructuring plan implemented by the Company. Product sales, which consists primarily of food products, from United States Company-owned operations increased 2%, principally due to an increase in the average dollar amount of food products purchased per participant. The increase in the average dollar amount of food products purchased per participant resulted from the Company’s emphasis on improving participant’s adherence to the program, the implementation of an approximate 3% price increase on food items in May 2001, and the introduction of the Ultimate Choice program, also in May 2001. The Ultimate Choice program allows the participant more flexibility in selecting their individual food items, which the Company believes has resulted in many participants choosing products which they find more appealing and that have higher retail prices. The 13% increase in service revenues from United States Company-owned operations was primarily due to an increase in the average service fee charged per new participant enrolled in the program between the years.

Revenues from foreign Company-owned operations, which is derived from 87 centres in Australia and 28 centres (26 centres in 2000) in Canada, decreased 23% in 2001 compared to 2000, 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 years.

The Company has experienced reduced demand 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. The Company cannot predict whether the current trend will continue in the future.

Costs and expenses of United States Company-owned operations decreased less than 1% in 2001 compared to 2000. Fiscal 2000 included a charge of $3,068,000 for obsolete inventory related to the

discontinued On-the-Go program. The less than 1% decrease was due to the absence of the charge of $3,068,000 for obsolete inventory in the current year. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues decreased from 98% to 96% between the years 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. Of the revised charge of $6,910,000 in connection with this restructuring, approximately $5,766,000 requires cash payments and $1,144,000 represents the non-cash write-off of fixed assets. As of June 30, 2001, the Company had made cash payments of $3,157,000 for lease termination costs, $1,432,000 for severance to 110 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 $368,000 will be substantially incurred by December 31, 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 $6,896,000 in 2001 compared to an operating loss of $22,498,000 in 2000, which includes the above described charge of $3,068,000 for obsolete inventory and the $6,910,000 restructuring charge.

Costs and expenses of foreign Company-owned operations decreased 15% in 2001 compared to 2000 principally due to the decreased variable costs associated with the reduced level of Australian operations and the 12% decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the years. After including the allocable portion of general and administrative expenses, operating income from foreign Company-owned operations, primarily reflecting the Company’s Australian operations, declined 71% from $6,638,000 in 2000 to $1,941,000 in 2001.

The Company’s gross margins were relatively stable between the years, with the gross margin on product sales from Company-owned operations increasing from 3% in 2000 to 4% in 2001, and its gross margin on service revenues decreasing from 30% in 2000 to 29% in 2001. Costs and expenses of Company-owned operations, other than direct product costs, are allocated between product and service based upon the respective percentage of total revenue from Company-owned operations derived from product sales and service revenue. The combined increase in gross margins in 2001 compared to 2000 resulted principally from the absence in the current year of the charge of $3,068,000 for obsolete inventory recorded in 2000.

Revenues from franchise operations decreased 9% from $23,205,000 in 2000 to $21,150,000 in 2001. This decline was principally due to a 5% 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 11 centres from franchisees between the years. As of June 30, 2001 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 franchise operations, which consist primarily of product costs, decreased 5% from $15,954,000 in 2000 to $15,121,000 in 2001 principally because of the reduced level of franchise operations. Franchise costs and expenses as a percentage of franchise revenues remained relatively constant between the years.

General and administrative expenses decreased 11% from $24,861,000 in 2000 to $22,231,000 in 2001 and decreased from 8.5% to 7.8% of total revenues in 2000 and 2001, respectively. The decrease in general and administrative expenses is principally due to reduced corporate compensation and professional expenses.

A charge of $876,000 was recorded in the accompanying consolidated statement of operations for 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 2000, $1,446,000, comprised of attorney fees awarded to the plaintiff and interest accrued on the judgment, was expensed related to this matter. At June 30, 2001 the total amount accrued for this litigation judgment was $10,525,000.

The elements discussed above combined to result in an operating loss of $2,711,000 in 2001 compared to an operating loss of $12,871,000 in 2000.

Other income, net, principally interest, increased 52% from $1,432,000 in 2000 to $2,173,000 in 2001 principally due to licensing royalties which commenced in January 2001. The licensing royalties are pursuant to a trademark license agreement entered into with Balance Bar Company (subsequently acquired by Kraft Foods) and are based upon the retail sales of certain products bearing the Company’s brand.

Income taxes (benefit) for the year ended June 30, 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 2001, 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 $18,598,000 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 on the accompanying consolidated balance sheet at June 30, 2001.

For 2001, the net loss, reflecting the above described non-cash charge of $18,598,000, was $19,345,000, or $.94 per share, compared to a net loss of $7,092,000, or $.34 per share, in 2000.

In May 2001, the Company retained the investment banking firm Koffler & Company to advise the Company on strategic alternatives to maximize shareholder value, including a possible sale of the Company.

The following table presents selected operating results for United States Company-owned operations and foreign Company-owned operations for fiscal 2000 and fiscal 1999 (U.S. $ in thousands):

Revenues from United States Company-owned operations decreased 11% in 2000 compared to 1999, reflecting reduced demand for the Company’s products and services at United States Company-owned centres, which represented 79% of the worldwide Company-owned centres at June 30, 2000. The overall 11% decrease in revenues from United States Company-owned operations was principally the result of an 11% decrease in the average number of United States Company-owned centres in operation. The decrease in the number of United States Company-owned centres reflects the closure of 100 centres between the years, principally comprised of the closure of 86 centres in November 1999 in connection with a restructuring plan implemented by the Company. Product sales, which consists primarily of food products, from United States Company-owned operations decreased 11%, principally due to a 19% decrease in the number of active participants in the program between the years (which reflects the 11% decrease in the average number of centres), offset, in part, by an increase in the average amount of products purchased per active participant. The average amount of products purchased per active participant last year was below historical levels as a result of a program called “On-the-Go” which offered lower priced products and which has since been discontinued. The 1% increase in service revenues from United States Company-owned operations was primarily due to an increase in the average service fee charged per new participant, offset, in part, by a decrease in the number of new participants enrolled in the program between the years.

Revenues from foreign Company-owned operations, which is derived from 87 centres in Australia and 26 centres in Canada, decreased 2% in 2000 compared to 1999, principally due to reduced demand at the Company’s Australian centres. Revenues at the Company’s Australian centres deteriorated during the latter part of fiscal 2000 and have continued at significantly reduced levels for the first two months of fiscal 2001, with revenues down 34% for that two month period compared to the same period last year. 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 1% weighted average increase in the Australian and Canadian currencies in relation to the U.S. dollar between the years.

Costs and expenses of United States Company-owned operations decreased 7% in 2000 compared to 1999, principally due to the reduced variable costs associated with the decreased revenues and the decreased fixed costs associated with the decrease in the number of United States Company-owned centres in operation, offset, in part, by a charge of $3,068,000 for obsolete inventory related to the discontinued On-the-Go program. Costs and expenses of United States Company-owned operations as a percentage of United States

Company-owned revenues increased from 95% to 98% between the years principally due to the charge for obsolete inventory and the higher proportion of fixed costs when compared to the reduced level of revenues.

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. All employees were notified in early November and the centres were closed by November 30, 1999. A charge of $7,512,000 was recorded in the quarter ended December 31, 1999 in connection with this restructuring. The charge was comprised of $3,882,000 for lease termination costs at the 86 centres, $1,563,000 for severance payments to terminated employees, $1,303,000 for the write-off of fixed assets at the closed centres, $291,000 for refunds to program participants at the closed centres, and $473,000 for other closure costs which includes the removal of signs and leasehold improvements. 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 $602,000 reversal was comprised of $289,000 in lease termination costs, $19,000 in severance costs, $159,000 in fixed asset write-offs, and $182,000 in refunds to program participants, offset, in part, by $47,000 of additional other closure costs. Of the total 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 June 30, 2000, the Company had made cash payments of $2,214,000 for lease termination costs, $1,014,000 for severance to terminated employees, $109,000 for refunds to program participants, and $622,000 for other closure costs. The Company estimates that the remaining cash payments of approximately $1,807,000, which is included in accrued liabilities on the accompanying balance sheet at June 30, 2000, will be substantially incurred by December 31, 2000.

Costs and expenses of foreign Company-owned operations decreased 1% in 2000 compared to 1999 principally due to the 2% decrease in revenues between the years.

Operating income from foreign Company-owned operations, primarily reflecting the Company’s Australian operations, declined 10% from $7,403,000 to $6,638,000 in 1999 and 2000, respectively, compared to an operating loss from United States Company-owned operations of $14,013,000 and $22,498,000 in 1999 and 2000, respectively. The Company believes that the favorable results achieved by its Australian operations in 1999 and 2000 compared to its United States operations were attributable principally to a less competitive marketplace for commercial weight loss programs and lower operating costs in Australia. In addition, the Company believes that its advertising more effectively reached its target audience in Australia as a result of the favorable audience demographics of certain magazines and broadcast media in Australia. However, as previously discussed, revenues at the Company’s Australian centres deteriorated during the latter part of fiscal 2000 and have continued at significantly reduced levels for the first two months of fiscal 2001, with the result that Australian operating income was only slightly above breakeven for that two month period.

The Company’s gross margin on product sales from Company-owned operations decreased from 6% in 1999 to 3% in 2000, and its gross margin on service revenues decreased from 31% in 1999 to 30% in 2000. Costs and expenses of Company-owned operations, other than direct product costs, are allocated between product and service based upon the respective percentage of total revenue from Company-owned operations derived from product sales and service revenue. The decrease in gross margins in 2000 compared to 1999 resulted principally from the charge for obsolete inventory and the higher proportion of fixed costs when compared to the reduced level of revenues.

Revenues from franchise operations decreased 11% from $25,950,000 in 1999 to $23,205,000 in 2000. This decline was principally due to an 11% decrease in the average number of franchise centres in operation and a decrease in the number of new participants enrolled in the program at franchise centres, resulting in reduced product sales and royalties. The decrease in the number of franchise centres reflects the Company’s acquisition of 17 centres from five franchisees and the Company’s sale of four centres to a franchisee in the United States.

Costs and expenses of franchise operations, which consist primarily of product costs, decreased 11% from $17,944,000 in 1999 to $15,954,000 in 2000 principally because of the reduced level of franchise operations.

General and administrative expenses decreased 2% from $25,437,000 in 1999 to $24,861,000 in 2000 but increased from 7.9% to 8.5% of total revenues in 1999 and 2000, respectively. The decrease in general and administrative expenses in 2000 was primarily due to reduced compensation expenses resulting from the restructuring plan implemented in November 1999.

In June 1999, a jury of the California Superior Court found that the Company breached the terms of a commercial lease agreement related to its former headquarters location in Del Mar, California. The jury awarded the Company’s former landlord $2,261,000 in compensatory contract and tort damages and $5,942,000 in punitive damages, or $8,203,000 in aggregate, which was recorded as a charge in the accompanying consolidated statement of operations for the year ended June 30, 1999 and is accrued in the accompanying consolidated balance sheet at June 30, 1999 and 2000. An additional $1,446,000 was recorded in the year ended June 30, 2000 for attorney fees awarded to the plaintiff and interest accrued on the judgment, pending the appeal which has been filed seeking to overturn the judgment.

The elements discussed above combined to result in an operating loss of $12,871,000 in 2000 compared to an operating loss of $2,784,000 in 1999.

Other income, net, principally interest, decreased 16% from $1,700,000 in 1999 to $1,432,000 in 2000 principally due to a decrease in the average balance of cash investments between the periods.

For 2000, the net loss was $7,092,000, or $.34 per share, compared to a net loss of $672,000, or $.03 per share, in 1999.

The Company has historically financed its operations through cash flow from operations, supplemented by a note payable obtained in 1996 to partially 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 June 30, 2001, the Company had cash, cash equivalents, and short-term investments of $38,433,000 compared to $35,635,000 at June 30, 2000, reflecting an increase of $2,798,000 during the year ended June 30, 2001. This increase was principally due to the net cash provided by operating activities, offset, in part, by capital expenditures, debt service, and the effect of foreign currency exchange rate changes.


	•	Operating lease payments on premises from which the Company’s centre operations are conducted totaling approximately $29,439,000, of which approximately $15,044,000 is payable in the twelve months ending June 30, 2002 and approximately $8,705,000 is payable in the twelve months ending June 30, 2003. Management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases.

	•	The litigation judgment of $10,525,000 which the Company is appealing.

	•	Debt service with respect to the capital lease totaling $1,882,000. See Note 15 “Subsequent Event” of Notes to Consolidated Financial Statements for information regarding the payoff of the note payable on July 13, 2001 in connection with the sale of the Company’s corporate headquarters building.

	•	Remaining payments of approximately $368,000 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, are adequate for its needs in the foreseeable future.

In July 2001, the Financial Accounting Standards Board issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

The Company is required to adopt the provisions of Statement 141 immediately, and Statement 142 is required for fiscal years beginning after December 15, 2001. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142.

Statement 141 will require, upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s consolidated statement of operations.

Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company’s financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.

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 June 30, 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% 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 June 30, 2001 is comprised of a note payable to a bank, secured by the Company’s corporate office building, with a total balance of $5,147,000 (which was paid in full on July 13, 2001 in connection with the sale of the Company’s corporate headquarters building) and a capital lease agreement covering certain computer hardware with a total balance of $1,732,000. 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 16% of the Company’s revenues for the year ended June 30, 2001 were generated from foreign operations, located principally in Australia and Canada. In fiscal 2001, 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 fiscal 2000. Currently, the Company does not enter into forward exchange contracts or other financial instruments with respect to foreign currency.

Jenny Craig, Inc., through its wholly owned subsidiaries, operates and franchises centres offering weight management programs to the general public in the United States, Australia, New Zealand, Canada and Puerto Rico.

The consolidated financial statements include the accounts of Jenny Craig, Inc. and its wholly owned subsidiaries (the Company). All material intercompany accounts and transactions have been eliminated in consolidation.

Cash equivalents consist principally of money market funds and other highly liquid interest-bearing instruments with original maturities of three months or less.

Short-term investments consist principally of commercial paper. The Company classifies its securities as held-to-maturity. Held-to-maturity securities are those investments in which the Company has the ability and intent to hold the security until maturity. Held-to-maturity securities are recorded at amortized cost, which approximates market value. All investments mature within a 12-month period. Dividend and interest income are recognized in the period earned.

Inventories, which consist primarily of food products held for sale, are stated at the lower of cost (determined using the first-in, first-out method) or market.

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, predominantly five years. Leasehold improvements are amortized over the shorter of their useful life or related lease term, predominantly five years. The Company’s corporate headquarters building, purchased in 1997, is being depreciated using the straight-line method over 30 years.

The Company has acquired, from time to time, centres which were previously owned by franchisees. The excess cost over net assets acquired is being amortized using the straight-line method over the then remaining term of the acquired franchise territorial rights, which averages 13 years. Amortization expense was $805,000, $815,000 and $937,000 for the years ended June 30, 1999, 2000 and 2001, respectively. Accumulated amortization was $6,753,000 and $7,056,000 at June 30, 2000 and 2001, respectively.

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 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.

Service revenues are derived from the sale of weight loss and maintenance programs under contracts which entitle the customer to participate in the program. All service fees collected are deferred and recognized as revenue on a straight-line basis over the 14-month period of expected customer attendance at the centres. Service revenue not recognized in income is recorded as deferred service revenue in the accompanying consolidated balance sheets.

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 records a liability at the time of sale for the estimated portion of the service fee to refunded based upon historical experience.

The Company grants franchises in exchange for an initial franchise fee which is recorded as revenue when substantially all services have been performed and the franchisee commences operations. Costs associated with such sales, substantially all of which are incurred prior to the franchisee commencing operations, are expensed as incurred. Franchise royalties are calculated as a percentage of franchisees’ revenue in accordance with the franchise agreements.

The Company’s allowance for doubtful accounts amounted to $1,572,000 and $1,416,000 at June 30, 2000 and 2001, respectively.

Assets and liabilities of foreign operations where the functional currency is other than the U.S. dollar are translated at fiscal year-end rates of exchange, and the related revenue and expense amounts are translated at the average rates of exchange in effect for the fiscal year. Gains or losses resulting from translating foreign currency financial statements are recorded in accumulated other comprehensive income.

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of those instruments. The carrying amount of the note payable approximates fair value because the interest rate is reset each quarter to reflect current market rates, and the other terms are comparable to those currently available in the marketplace.

The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Accordingly, the Company continues to account for stock-based compensation under APB Opinion No. 25, Accounting for Stock Issued to Employees,

and related interpretations. As such, compensation expense for employee stock option grants is recorded on the date of grant only if the current market price of the Company’s stock exceeds the exercise price. Stock 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.

The consolidated financial statements are presented in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). Basic net income (loss) per common share is computed using the weighted-average number of shares outstanding during the period. Diluted net income per share incorporates the incremental shares issuable upon the assumed exercise of stock options.

Net loss and weighted-average common shares used to compute net loss per share, basic and diluted, are presented below ($ in thousands):

For the years ended June 30, 1999, 2000 and 2001, stock options representing 2,167,500, 2,527,100 and 2,290,100 common shares respectively, were not included in the computation of diluted net loss per share because to do so would have been antidilutive.

Certain prior year balances have been classified to conform with the current year presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Prepaid expenses and other assets at June 30 are summarized as follows ($ in thousands):

See Note 15 “Subsequent Event” for information regarding the sale of the land and building on July 13, 2001.

The Company and its United States subsidiaries file consolidated federal and combined or separate state income tax returns. Jenny Craig Weight Loss Centres, Pty. Ltd. and Jenny Craig Weight Loss Centres (Canada) Company, both wholly owned foreign subsidiaries, are subject to income tax in foreign jurisdictions.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred income taxes result from the temporary differences between the tax basis of an asset or a liability and its reported amount in the consolidated balance sheets. The components that comprise deferred tax assets and liabilities at June 30, 2000 and 2001 are as follows ($ in thousands):

The valuation allowance for deferred tax assets as of July 1, 1999 and 2000 was $700,000. There was no change in the valuation allowance for the year ended June 30, 2000 and there was an increase of $18,598,000 in the valuation allowance for the year ended June 30, 2001. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. During 2001, 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 $18,598,000 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.

Income taxes (benefit) for the years ended June 30, 1999, 2000 and 2001 differed from the amounts expected by applying the U.S. federal income tax rate of 34% to income (loss) before taxes as follows ($ in thousands):

In October 1996, the Company borrowed $6,000,000 from a bank, secured by the Company’s corporate office building. The note bears interest at the London Interbank Offered Rate plus 1% (5.375% at June 30, 2001). The current portion of the note, amounting to $190,000, is included in accrued liabilities at June 30, 2000 and 2001.

See Note 15 “Subsequent Event” for information regarding the repayment in full of the note payable on July 13, 2001.

The Company’s centre operations are conducted from premises leased under noncancelable operating leases, generally for terms of five years with renewal options for like periods. The Company’s rent expense under such noncancelable operating leases amounted to $24,226,000, $23,159,000 and $21,605,000 for the years ended June 30, 1999, 2000 and 2001, respectively. Management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases. A majority of the leases provide for the payment of taxes, maintenance, insurance, and certain other expenses applicable to the leased premises.

The Company is obligated under a capital lease for computer equipment that expires in November 2003. The gross amount of computer equipment and related accumulated amortization recorded under capital leases at June 30 is as follows ($ in thousands):

Amortization of assets held under capital leases is included with depreciation expense.

As of June 30, 2001, the scheduled minimum annual rental payments, excluding renewal provisions under noncancelable operating leases and future minimum capital lease payments are as follows ($ in thousands):

In June 1999, a jury of the California Superior Court found that the Company breached the terms of a commercial lease agreement related to its former headquarters location in Del Mar, California. The jury awarded the Company’s former landlord $2,261,000 in compensatory contract and tort damages and $5,942,000 in punitive damages, or $8,203,000 in aggregate, which was recorded as a charge in the accompanying consolidated statement of operations for the year ended June 30, 1999 and is accrued in the accompanying consolidated balance sheet at June 30, 2000 and 2001. An additional $1,446,000 and $876,000 were recorded as charges in the accompanying consolidated statement of operations for the years ended June 30, 2000 and 2001, respectively, for attorney fees awarded to the plaintiff and interest accrued on the judgment, pending the appeal which has been filed seeking to overturn the judgment.

The beneficial owners of a majority of the outstanding stock of the Company own the franchise operations in New Zealand. The Company’s revenue derived from these operations was $4,174,000, $4,978,000 and $3,733,000 for the years ended June 30, 1999, 2000 and 2001, respectively. A director and officer of the Company is a partner in a law firm which provided certain legal services to the Company. Legal fees incurred with such firm were $568,000, $1,726,000 and $1,486,000 in 1999, 2000 and 2001, respectively.

In March 1999, the Company entered into an agreement, which was subsequently terminated in August 2000, with Denise Altholz, the daughter of Jenny Craig, under which Ms. Altholz appeared in certain of the Company’s commercials and performed related public relations services for the Company. The agreement specified a monthly retainer of $5,000 plus a fee of $5,000 per day while appearing on behalf of the Company. The agreement also provided for travel and expense reimbursement to Ms. Altholz. Payments made to Ms. Altholz in accordance with this agreement totaled $98,000, $70,000 and $10,000 in 1999, 2000 and 2001, respectively.

Since May 1, 2001, Marvin Sears, a director of the Company, has provided consulting services to the Company in addition to his duties as a director. Payments of $20,000 were made to Mr. Sears in 2001 for such consulting services.

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 June 30, 2001, the Company had made cash payments of $3,157,000 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 $368,000 will be substantially incurred by December 31, 2001.

In 1996, the Company adopted a 401(k) Retirement Plan which allows all employees with one or more years of service to participate. The Company currently matches 25% of an employee’s voluntary contribution up to a maximum of 6% of eligible compensation. The Company recorded expense of $348,000, $279,000 and $247,000 in 1999, 2000 and 2001, respectively, in connection with this plan.

In 1991, the Company adopted a management deferred bonus plan covering certain members of the Company’s management group. The bonus pool, which is determined by the Board of Directors following each fiscal year, cannot exceed 1% of operating income for the fiscal year plus a percentage of the increase, if any, in operating income over the prior fiscal year. Participants receive 25% of their allocated portion of the bonus pool approximately 90 days after the end of each fiscal year. Payment of the remaining 75% is deferred for five years and is subject to vesting at the rate of 20% per year. The unvested portion is forfeited if the participant terminates employment for any reason other than retirement after attainment of age 65 and completion of 10 years of participation in the management plan. There were no amounts expensed under this plan in 1999, 2000 or 2001, respectively.

The Company’s Stock Option Plan (the Option Plan) was adopted in October 1991 and provides for the grant of incentive stock options to key employees and of nonqualified stock options to key employees, consultants, directors, and Medical Advisory Board members. A total of 3,000,000 shares of common stock have been reserved for issuance under the Option Plan, of which 630,240 shares remain available for future grant at June 30, 2001. The exercise price of the options may not be less than the fair market value of the common stock on the date of grant. Additionally, no options may be exercisable more than ten years after the date of grant and, with certain exceptions, no option may become exercisable prior to the expiration of six months from the date of grant. The options granted to employees generally become exercisable over three to five years.

The Company applies APB Opinion No. 25 in accounting for the Option Plan and accordingly, no compensation cost has been recognized for stock option grants to employees and directors in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant

date for its stock options under SFAS 123, the Company’s net loss and net loss per share would have been increased to the pro forma amounts as follows ($ in thousands, except per share amounts):

The per share weighted-average fair value of stock options granted during 1999, 2000 and 2001 was $2.64, $0.98 and $1.24 respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected life of four years; expected volatility of 49%, 56% and 83% in 1999, 2000 and 2001, respectively; no dividends; and risk-free interest rate of 5%.

Information with respect to options outstanding and exercisable by exercise price range at June 30, 2001 is as follows:

Because of the nature of its activities, the Company is, at times, subject to pending and threatened legal actions which arise out of the normal course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of such matters will not have a material effect on the consolidated financial statements.

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):

The operating loss for the United States Company-owned operations in 2000 includes a restructuring charge totaling $6,910,000. See Note 10 “Restructuring Charge.”

The operating loss for United States Company-owned operations in 1999 includes a litigation judgment totaling $8,230,000. See Note 8 “Litigation Judgment.”

On July 13, 2001, the Company completed the sale of its corporate headquarters building for $21,000,000. Concurrent with the sale, the note payable totaling $5,147,000 was paid in full. After repayment of the note payable and expenses of the sale, the Company received net cash proceeds of $15,154,000.

We have audited the accompanying consolidated balance sheets of Jenny Craig, Inc. and subsidiaries as of June 30, 2000 and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jenny Craig, Inc. and subsidiaries as of June 30, 2000 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America.

The following is a summary of the unaudited quarterly results of operations ($ in thousands, except per share data):

The quarter ended December 31, 2000 includes a non-cash charge of $17,721,000 to provide a full valuation allowance for the United States deferred tax assets. See Note 5 “Income Taxes”.

The quarter ended December 31, 1999 includes a pretax charge of $7,512,000 for a restructuring charge and the quarter ended June 30, 2000 includes a reversal of $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 net income (loss) per share computed for each quarter and the year are separate calculations.

At September 1, 2001, there were approximately 2,300 holders of the Company’s common stock. On August 16, 2001, the Company’s common stock was de-listed from the New York Stock Exchange (NYSE), where it had been listed under the symbol JC, because the Company was below the NYSE’s continued listing criteria requiring total market capitalization of not less than $50,000,000 and total stockholders’ equity of not less than $50,000,000. Subsequent to August 16, 2001, the Company’s common stock has traded on the NASD Bulletin Board system under the symbol JCGI. The following table reflects the range of high and low sales prices as reported by the NYSE for the indicated periods.

The Company did not pay any cash dividends in 2000 and 2001. The Company currently believes that its stockholders are best served by directing cash resources to the Company’s marketing efforts and improvement of its business.

31 EX-23 6 a75835ex23.txt EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Stockholders and Board of Directors Jenny Craig, Inc.: We consent to incorporation by reference in the registration statements (No. 33-47594 and No. 33-86098) on Form S-8 of Jenny Craig, Inc. of our report dated August 17, 2001, relating to the consolidated balance sheets of Jenny Craig, Inc. and subsidiaries as of June 30, 2000 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 2001, and the related financial statement schedule, which reports appear in the June 30, 2001 annual report on Form 10-K of Jenny Craig, Inc. /s/ KPMG LLP San Diego, California September 27, 2001






Delaware		33-0366188
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

11355 North Torrey Pines Road, La Jolla, California		92037
(Address of principal executive offices)		(Zip Code)






Title of Class		Name of each exchange on which registered

Common Stock, $.000000005		None


PART I
	Item 1.Business
	Item 1a.Executive Officers of the Registrant
	Item 2.Properties
	Item 3.Legal Proceedings
	Item 4.Submission of Matters to a Vote of Security Holders
PART II
	Item 5.Market for Registrant’s Common Stock and Related Stockholder Matters
	Item 6.Selected Financial Data
	Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7a.Quantitative and Qualitative Disclosures About Market Risk
	Item 8.Financial Statements and Supplementary Data
	Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III
PART III
	Item 10.Directors and Executive Officers of the Registrant
	Item 11.Executive Compensation
	Item 12.Security Ownership of Certain Beneficial Owners and Management
	Item 13.Certain Relationships and Related Transactions
PART IV
	Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
EXHIBIT 10.3
EXHIBIT 10.19
EXHIBIT 13
EXHIBIT 23


		Page

Item 1.	Business		1




Item 1a.	Executive Officers of the Registrant		8




Item 2.	Properties		8




Item 3.	Legal Proceedings		9




Item 4.	Submission of Matters to a Vote of Security Holders		9




Item 5.	Market for Registrant’s Common Stock and Related Stockholder Matters		9




Item 6.	Selected Financial Data		9




Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9




Item 7a.	Quantitative and Qualitative Disclosures About Market Risk		9




Item 8.	Financial Statements and Supplementary Data		10




Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		10




Item 10.	Directors and Executive Officers of the Registrant		10




Item 11.	Executive Compensation		10




Item 12.	Security Ownership of Certain Beneficial Owners and Management		10




Item 13.	Certain Relationships and Related Transactions		10




Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		11



			At June 30,																				At
																							September 1,
			1992		1993		1994		1995		1996		1997		1998		1999		2000		2001		2001

Company-owned




	United States			370		476		502		478		485		542		533		524		437		431		429




	Foreign			88		103		106		102		103		106		110		110		113		115		115

				458		579		608		580		588		648		643		634		550		546		544

Franchise




	United States			199		176		159		154		159		113		101		86		72		73		73




	Foreign			37		39		43		43		36		36		37		37		38		38		38

				236		215		202		197		195		149		138		123		110		111		111

		Total		694		794		810		777		783		797		781		757		660		657		657

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


Name of Executive Officer	Age		Position(s) Held

Sidney Craig		69	Chairman of the Board, Chief Executive Officer and Director




Jenny Craig		69	Chairman of the Executive Committee and Director




Patricia Larchet		39	President and Chief Operating Officer and Director




Duayne Weinger		52	Vice Chairman, Chief Administrative Officer and Director




Barbara Barry		50	Vice President, Marketing




James S. Kelly		40	Vice President, Chief Financial Officer and Treasurer




Alan V. Dobies		53	Vice President, Corporate Services


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


Item 9.	*Changes in and Disagreements With Accountants on Accounting and Financial Disclosure*






(1)	Independent Auditors’ Report	Page 29




(2)	Consolidated Balance Sheets as of June 30, 2000 and 2001	Page 14




(3)	Consolidated Statements of Operations for the Years Ended June 30, 1999, 2000 and 2001	Page 15




(4)	Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 1999, 2000 and 2001	Page 16




(5)	Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 2000 and 2001	Page 17




(6)	Notes to Consolidated Financial Statements	Pages 18 to 28


Exhibit		Description

	3.1	Amended and Restated Certificate of Incorporation of Registrant (Incorporated herein by reference to Exhibit 3.1 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1997.)
	3.4	Restated By-laws of Registrant.(1)
	10.1	Jenny Craig, Inc. Management Deferred Bonus Program.(1)(2)
	10.2	Agreement dated as of May 10, 1999 between Jenny Craig, Inc. and James Kelly. (Incorporated herein by reference to Exhibit 10.2 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1999.)(3)
	10.3	Jenny Craig, Inc. Stock Option Plan, as amended.(2)
	10.4	Executive Employment Agreement between Jenny Craig, Inc. and Jenny Craig. See Exhibit 10.8 for Amendment thereto.(1)(3)
	10.5	Executive Employment Agreement between Jenny Craig, Inc. and Sid Craig. See Exhibit 10.10 for Amendment thereto.(1)(3)
	10.6	Agreement dated as of May 10, 1999 between Jenny Craig, Inc. and Alan Dobies. (Incorporated herein by reference to Exhibit 10.6 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1999.)(3)
	10.7	Trademark License Agreement dated July 30, 1999 between Jenny Craig, Inc. and Balance Bar Company. See Exhibit 10.9 for Amendment thereto. (Incorporated herein by reference to Exhibit 10 to the Report on Form 10-Q of the Company for the three month period ended September 30, 1999.)


Exhibit		Description

	10.8	Agreement dated as of September 14, 1994 between Jenny Craig and Jenny Craig, Inc. amending Exhibit 10.4. (Incorporated herein by reference to Exhibit 10.8 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 2000.)(3)
	10.9	Amendment to Balance Bar Company Trademark License Agreement between Jenny Craig, Inc. and Balance Bar Company. (Incorporated herein by reference to Exhibit 10 to the Report on Form 10-Q of the Company for the three month period ended December 31, 2000.)
	10.10	Agreement dated as of September 14, 1994 between Sidney Craig and Jenny Craig, Inc., amending Exhibit 10.5. (Incorporated herein by reference to Exhibit 10.10 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 2000.)(3)
	10.11	Agreement dated as of November 23, 1999 between Jenny Craig, Inc. and Patricia Larchet. (Incorporated herein by reference to Exhibit 10.1 to the Report on Form 10-Q of the Company for the three month period ended December 31, 1999).(3).
	10.12	Purchase and Sale Agreement and Joint Escrow Instructions dated June 12, 2001 by and between Jenny Craig Operations, Inc. and National University. (Incorporated herein by reference to Exhibit 10 to the Report on Form 8-K of the Company filed on September 21, 2001.)
	10.13	Agreement dated as of December 1, 1999 between Jenny Craig, Inc. and Duayne Weinger. (Incorporated herein by reference to Exhibit 10.2 to the Report on Form 10-Q of the Company for the three month period ended December 31, 1999.)(3)
	10.14	Standard Form Lease dated May 14, 1996 between Jenny Craig Products, Inc. and RCDC Associates Limited Partnership (Incorporated herein by reference to Exhibit 10.14 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1997.)
	10.15	Agreement dated as of December 7, 1999 between Jenny Craig, Inc. and Jeanne E. McDougall. (Incorporated herein by reference to Exhibit 10.3 to the Report on Form 10-Q of the Company for the three month period ended December 31, 1999.)(3)
	10.16	Tax Allocation and Indemnity Agreement among New York Life Insurance Company et al, Security Pacific National Bank individually and as Agent, Jenny Craig, Inc., Jenny Craig Weight Loss Centres, Inc., Craig Enterprises, Inc., SJF Enterprises, Inc., Sid Craig and Jenny Craig dated as of June 30, 1989, as amended.(1)
	10.17	Consent Order, effective May 4, 1998, in the matter of Jenny Craig, Inc., a corporation, and Jenny Craig International, Inc., a corporation. (Incorporated herein by reference to Exhibit 10.42 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1998.)
	10.18	Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and IBM Foods, d/b/a Overhill Farms, dated September 22, 1988, with amendments.(1)
	10.19	Amended and Restated Agreement dated as of August 20, 1996 between Marvin Sears and Jenny Craig, Inc.(2)
	10.21	Metropolitan Insurance and Annuity Company Key Man Life Insurance Policy Relating to Jenny Craig.(1)
	10.23	Prudential Insurance Company of America Key Man Life Insurance Policy Relating to Jenny Craig.(1)
	13.	Portions of the Annual Report to Shareholders with respect to the fiscal year ended June 30, 2001 which are incorporated by reference in this Form 10-K.
	18.	Preferability Letter from KPMG LLP with respect to change in accounting method. (Incorporated herein by reference to Exhibit 18 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1997.)


Exhibit		Description

	21.	List of Subsidiaries (Incorporated herein by reference to Exhibit 22 to the Report on Form 10-K of the Company for the fiscal year ended June 30, 1997.)
	23.	Independent Auditors’ Consent.


(1)	Incorporated herein by reference to Registrant’s Registration Statement on Form S-1 filed October 29, 1991, Registration No. 33-42564. Each of the exhibits so incorporated by reference bears the same exhibit number in Registration Statement No. 33-42564.

(2)	Compensatory Plan.

(3)	Management contract.


				Charged								Charged										Charged
		Balance		to		Charged				Balance		to		Charged						Balance		to		Charged						Balance
		at		Costs		to				at		Costs		to						at		Costs		to						at
		June 30,		and		Other		Write		June 30,		and		Other			Write			June 30,		and		Other			Write			June 30,
Description		1998		Expenses		Accounts		Offs		1999		Expenses		Accounts			Offs			2000		Expenses		Accounts			Offs			2001

Allowance for Doubtful Accounts			1,080		500		—		—		1,580		85		—			(93	)		1,572		100		—			(256	)		1,416
Accumulated Amortization —




	Reacquired Area Franchise Rights and Other Intangibles		5,241		805		144		—		6,190		815		(192	)		(60	)		6,753		937		(347	)		(287	)		7,056
Accumulated Amortization —




	Computer Software		1,451		164		—		—		1,615		443		—			(45	)		2,013		642		—			—			2,655


Signature	Title	Date

/s/ SIDNEY CRAIG Sidney Craig	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	September 25, 2001

/s/ JENNY CRAIG Jenny Craig	Chairman of the Executive Committee and Director	September 25, 2001

/s/ JAMES S. KELLY James S. Kelly	Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	September 25, 2001

/s/ PATRICIA LARCHET Patricia Larchet	President and Chief Operating Officer and Director	September 25, 2001

/s/ DUAYNE WEINGER Duayne Weinger	Vice Chairman, Chief Administrative Officer and Director	September 25, 2001

/s/ SCOTT BICE Scott Bice	Director	September 25, 2001

/s/ MARVIN SEARS Marvin Sears	Director	September 25, 2001

/s/ ANDREA VAN DE KAMP Andrea Van de Kamp	Director	September 25, 2001

/s/ ROBERT WOLF Robert Wolf	Director	September 25, 2001


		1997		1998		1999(1)			2000(2)			2001(3)

Revenues		$	365,134	$	352,249	$	320,952		$	290,985		$	283,552




Operating income (loss)			11,840		2,040		(2,784	)		(12,871	)		(2,711	)




Income (loss) before cumulative effect of accounting change			8,332		2,126		(672	)		(7,092	)		(19,345	)




Per share amounts:




	Income (loss) before cumulative effect of accounting change, basic		.40		.10		(.03	)		(.34	)		(.94	)




	Net income (loss), basic		.04		.10		(.03	)		(.34	)		(.94	)




	Income (loss) before cumulative effect of accounting change, diluted		.40		.10		(.03	)		(.34	)		(.94	)




	Net income (loss), diluted		.04		.10		(.03	)		(.34	)		(.94	)



										Foreign Company Owned
	U.S. Company Owned Operations									Operations(1)

	2000			2001			% Change			2000		2001		% Change

Product sales	$	204,864		$	209,024			2	%	$	45,982	$	35,806		-22	%




Service revenue		13,213			14,900			13	%		3,721		2,672		-28	%

Total		218,077			223,924			3	%		49,703		38,478		-23	%




Costs and expenses		214,527			214,071			0	%		40,158		33,964		-15	%




General and administrative		17,692			15,873			-10	%		2,907		2,573		-11	%




Litigation judgment		1,446			876			—			—		—		—




Restructuring charge		6,910			—			—			—		—		—

Operating income (loss)	$	(22,498	)	$	(6,896	)		—		$	6,638	$	1,941		-71	%

Average number of centres		468			433			-7	%		112		114		2	%



										Foreign Company Owned
	U.S. Company Owned Operations									Operations(1)

	1999			2000			% Change			1999		2000		% Change

Product sales	$	231,196			204,864			(11	)%		47,676		45,982		(4	)%




Service revenue		13,107			13,213			1	%		3,023		3,721		23	%

Total		244,303			218,077			(11	)%		50,699		49,703		(2	)%




Costs and expenses		231,621			214,527			(7	)%		40,531		40,158		(1	)%




General and administrative		18,492			17,692			(4	)%		2,765		2,907		5	%




Litigation judgment		8,203			1,446			—			—		—		—




Restructuring charge		—			6,910			—			—		—		—

Operating income (loss)	$	(14,013	)		(22,498	)		(61	)%		7,403		6,638		(10	)%

Average number of centres		528			468			(11	)%		110		112		2	%


			1999		2000		2001

Revenues:




	Company-owned operations:




		Product sales	$	278,872		250,846		244,830




		Service revenue		16,130		16,934		17,572

				295,002		267,780		262,402

	Franchise operations:




		Product sales		22,248		19,935		17,901




		Royalties		3,697		3,235		3,044




		Initial franchise fees		5		35		205

				25,950		23,205		21,150


(1)	Foreign Company-owned operations reflect the Company’s 87 centres in Australia and 28 centres (26 centres in 2000) in Canada, with the Canadian centres generating revenues of $10,478,000 and $11,324,000 in 2000 and 2001, respectively, and an operating loss of $161,000 in 2000 and operating income of $2,600 in 2001.


	*Year Ended June 30, 2000 as Compared to Year Ended June 30, 1999*


			2000			2001

Cash and cash equivalents			$	34,710		$	38,433




Short-term investments				925			—




Accounts receivable, net				2,271			2,076




Inventories				11,785			11,427




Prepaid expenses and other assets				5,625			3,441




Deferred tax assets				864			—

		Total current assets		56,180			55,377




Deferred tax assets				16,696			125




Cost of reacquired area franchise rights and other intangibles, net				8,658			7,460




Property and equipment, net				25,797			22,216




Other assets				630			459

			$	107,961		$	85,637

LIABILITIES AND STOCKHOLDERS’ EQUITY




Accounts payable			$	13,473		$	15,255




Accrued liabilities				15,515			15,420




Current installments of obligation under capital lease				642			684




Accrual for litigation judgment				9,649			10,525




Deferred service revenue				10,175			10,423

		Total current liabilities		49,454			52,307




Note payable, excluding current installments				5,147			4,957




Obligation under capital lease, excluding current installments				1,732			1,048

		Total liabilities		56,333			58,312

Stockholders’ equity:




	Common stock, $.000000005 par value, 100,000,000 shares authorized; issued: 2000 and 2001 — 27,580,260 shares; outstanding: 2000 and 2001 — 20,688,971 shares			—			—




	Additional paid-in capital			71,622			71,622




	Retained earnings			49,415			30,070




	Accumulated other comprehensive income			5,353			395




	Treasury stock, at cost: 2000 and 2001 — 6,891,289 shares			(74,762	)		(74,762	)

		Total stockholders’ equity		51,628			27,325




Commitments and contingencies

			$	107,961		$	85,637


									Accumulated
				Additional					other						Total
		Common		paid-in		Retained			comprehensive			Treasury			stockholders’
		stock		capital		earnings			income			stock			equity

Balance at June 30, 1998			—	$	71,622		57,179			1,747			(74,762	)		55,786




Comprehensive income:




	Net loss		—		—		(672	)		—			—			(672	)




	Translation adjustment		—		—		—			2,383			—			2,383

Balance at June 30, 1999			—		71,622		56,507			4,130			(74,762	)		57,497




Comprehensive loss:




	Net loss		—		—		(7,092	)		—			—			(7,092	)




	Translation adjustment		—		—		—			1,223			—			1,223

Balance at June 30, 2000			—		71,622		49,415			5,353			(74,762	)		51,628




Comprehensive loss:




	Net loss		—		—		(19,345	)		—			—			(19,345	)




	Translation adjustment		—		—		—			(4,958	)		—			(4,958	)

Balance at June 30, 2001			—	$	71,622		30,070			395			(74,762	)		27,325


	2000		2001

Prepaid income taxes	$	3,000		1,584




Other		2,625		1,857

	$	5,625		3,441


	2000			2001

Land	$	2,000			2,000




Building		7,048			7,048




Furniture and equipment		30,682			30,027




Leasehold improvements		21,034			21,402

		60,764			60,477




Less accumulated depreciation and amortization		(34,967	)		(38,261	)

	$	25,797			22,216


	2000		2001

Accrued salaries, wages and benefits	$	8,210		9,690




Restructuring accrual		1,807		368




Deferred tax liability		—		490




Other accruals		5,498		4,872

	$	15,515		15,420


			2000			2001

Deferred tax assets:




	Employee benefits		$	898			812




	Allowance for doubtful accounts			648			501




	Depreciation and amortization			1,674			1,980




	Inventories			216			159




	Deferred service revenue			2,603			2,626




	Net operating losses			6,021			7,365




	Tax credits			1,630			919




	Accrual for litigation judgment			3,497			3,997




	Other accruals			1,876			1,735

		Total gross deferred tax assets		19,063			20,094




	Less valuation allowance			(700	)		(19,298	)

		Net deferred tax assets		18,363			796

Deferred tax liabilities:




	Receivable from foreign subsidiary			(326	)		(331	)




	Foreign operations			(323	)		(365	)




	Other			(154	)		(465	)

		Total deferred tax liabilities		(803	)		(1,161	)

		Net deferred tax asset (liability)	$	17,560			(365	)


	2000			2001

Computer equipment	$	2,726			2,702




Less accumulated amortization		(586	)		(1,209	)

	$	2,140			1,493


	Capital			Operating
	leases			leases

2002	$	783		$	15,044




2003		783			8,705




2004		316			4,247




2005		—			1,147




2006		—			296

Minimum lease payments		1,882		$	29,439

Less amount representing interest (at rates ranging from 6% to 8.5%)		(150	)

Present value of minimum capital lease payments		1,732




Less current installments of obligations under capital lease		(684	)

Obligations under capital lease excluding current installments	$	1,048


							Weighted-
							average
		Number of			Range of		exercise
		options			exercise prices		price

Outstanding at June 30, 1998			1,932,200		$	4.63 to 15.32	$	5.96




	Granted		547,000			2.88 to 6.79		5.98




	Canceled		(311,700	)		5.63 to 15.32		6.54

Outstanding at June 30, 1999			2,167,500			2.88 to 6.79		5.88




	Granted		1,188,000			1.97 to 2.94		2.05




	Canceled		(828,400	)		5.63 to 6.79		6.01

Outstanding at June 30, 2000			2,527,100			1.97 to 6.07		4.04




	Granted		342,000			1.48 to 2.94		1.95




	Canceled		(579,000	)		5.63 to 5.94		5.89

Outstanding at June 30, 2001			2,290,100			1.48 to 6.07		3.26

Exercisable at June 30, 2001			1,029,605			1.69 to 6.07		4.35



	Three-Month Period Ended

	September 30,			December 31,			March 31,			June 30,		Total
Current Year	2000			2000			2001			2001		year

Total revenues	$	66,393			60,684			76,840			79,635		283,552




Operating income (loss)		(1,927	)		(3,971	)		(931	)		4,118		(2,711	)




Net income (loss)		(1,736	)		(21,612	)		(477	)		4,480		(19,345	)




Basic and diluted net income (loss) per share		(.08	)		(1.04	)		(.02	)		.22		(.94	)



	2000				2001

	High		Low		High		Low

First quarter ended September 30		3.375		2.312		3.375		1.630




Second quarter ended December 31		3.875		2.000		2.000		1.250




Third quarter ended March 31		3.750		2.000		1.500		1.010




Fourth quarter ended June 30		3.437		1.437		1.730		1.020