10-Q 1 a69269e10-q.txt FORM 10-Q PERIOD ENDED DECEMBER 31,2000 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended December 31, 2000 Commission File No. 001-10887 JENNY CRAIG, INC. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 33-0366188 ------------------------------------------------------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 11355 NORTH TORREY PINES ROAD, LA JOLLA, CA 92037 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (858) 812-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of common stock, $.000000005 par value, outstanding as of the close of business on February 9, 2001 - 20,688,971. ================================================================================ 2 ITEM 1. FINANCIAL STATEMENTS JENNY CRAIG, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands)

See accompanying notes to unaudited consolidated financial statements. -2- 3 JENNY CRAIG, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS ($ in thousands, except per share amounts)

See accompanying notes to unaudited consolidated financial statements. -3- 4 JENNY CRAIG, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)

See accompanying notes to unaudited consolidated financial statements. -4- 5 JENNY CRAIG, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 1. The accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for any interim period are not necessarily indicative of the results for any other interim period or for the full year. These statements should be read in conjunction with the June 30, 2000 consolidated financial statements. The following Significant Accounting Policies are provided to clarify/supplement the Summary of Significant Accounting Policies contained in Note 1 of Notes to Consolidated Financial Statements accompanying the Company's June 30, 2000 consolidated financial statements: Impairment of Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Reacquired area franchise rights are evaluated for recoverability on an individual area franchise basis. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Revenue Recognition Revenue from product sales, which is substantially comprised of food products, whether sold to participants at Company-owned centres or sold to franchisees, is recognized upon receipt of the product by the customer. Product sales are non-returnable. Certain weight loss programs enable the customer to receive a refund of a portion of the service fee if certain criteria are met. The Company provides a liability at the time of sale for the estimated portion of the service fee to be refunded based upon historical experience. Stock-Based Compensation Under SFAS 123, options issued to non-employees in exchange for goods or services received are recorded at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. 2. During the quarter ended December 31, 2000, the Company concluded that the deferred tax asset valuation allowance should be increased due to the uncertainty of realizing certain tax loss carryforwards and other deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Accordingly, the Company recorded a non-cash charge of $17,721,000 to provide a full valuation allowance for the balance of the U.S. net deferred tax asset. Management's assessment was based principally on the losses experienced by the Company -5- 6 JENNY CRAIG, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) in the U.S. for the first six months of fiscal 2001, together with less than expected operating results in January 2001, following two consecutive profitable quarters ended March 31, 2000 and June 30, 2000. 3. In November 1999, the Company implemented a restructuring plan to reduce annual operating expenses. The plan included the closure of 86 underperforming Company-owned centres in the United States, which represented 16% of the total United States Company-owned centres, and a staff reduction of approximately 15% at the Company's corporate headquarters. A charge of $7,512,000 was recorded in the quarter ended December 31, 1999 in connection with this restructuring. In June 2000, the Company reversed $602,000 of the originally estimated $7,512,000 restructuring charge because actual costs were less than the costs projected when the restructuring was implemented. The revised charge of $6,910,000 was comprised of $3,593,000 for lease termination costs, $1,544,000 for severance payments to 110 terminated employees, $1,144,000 for the write-off of fixed assets, $109,000 for refunds to program participants and $520,000 for other closure costs. None of the fixed assets subject to the write-off remained in use after the November 1999 centre closures. Of the revised charge of $6,910,000, approximately $5,766,000 requires cash payments and $1,144,000 represents the non-cash write-off of fixed assets. As of December 31, 2000, the Company had made cash payments of $3,000,000 for lease termination costs, $1,432,000 for severance to terminated employees, $112,000 for refunds to program participants, and $697,000 for other closure costs. The Company estimates that the remaining cash payments of approximately $525,000 will be substantially incurred by June 30, 2001. 4. The weighted average number of shares used to calculate basic net loss per share was 20,688,971 for all periods presented. The calculation of diluted net loss per share for the three and six month periods ended December 31, 1999 and 2000 excluded the effect of 2,938,500 and 2,285,100 stock options, respectively, as their effect would be antidilutive. 5. Comprehensive loss for the three and six month periods ended December 31, 1999 and 2000 presented below includes foreign currency translation items. There was no tax expense or tax benefit associated with the foreign currency items.

-6- 7 JENNY CRAIG, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. The Company operates in the weight management industry. Substantially all revenue results from the sale of weight management products and services, whether the centre is operated by the Company or its franchisees. The Company's reportable segments consist of Company-owned operations and franchise operations, further segmented by geographic area. The following presents information about the respective reportable segments ($ in thousands):

-7- 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Information provided in this Report on Form 10-Q may contain, and the Company may from time to time disseminate material and make statements which may contain "forward-looking" information, as that term is defined by the Private Securities Litigation Reform Act of 1995 (the "Act"). These forward-looking statements may relate to anticipated financial performance, business prospects and similar matters. The words "expects", "anticipates", "believes", and similar words generally signify a "forward-looking" statement. These cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefit of "safe-harbor" provisions of the Act. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. Among the factors that could cause actual results to differ materially are: increased competition; technological and scientific developments, including appetite suppressants and other drugs which can be used in weight-loss programs; increases in cost of food or services; lack of market acceptance of additional products and services; legislative and regulatory restrictions or actions; effectiveness of marketing and advertising programs; prevailing domestic and foreign economic conditions; and the risk factors set forth from time to time in the Company's annual reports and other reports and filings with the SEC. The reader should carefully review the cautionary statements contained under the caption "Forward-Looking Statements" in Item 1 of the Company's Annual Report on Form 10-K for the year ended June 30, 2000. Quarter Ended December 31, 2000 as Compared to Quarter Ended December 31, 1999 The following table presents selected operating results for United States Company-owned and foreign Company-owned operations for the quarters ended December 31, 1999 and 2000 (U.S. $ in thousands):

-8- 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company has experienced reduced demand, particularly at its centres located in the United States, over the past several years. The Company believes that increased competition from various sources, including prescription and non-prescription pills, best selling diet books, and other "do it yourself" methods have contributed to the Company's downward trend. Many of these competitors claim to provide "quick" and "easy" weight loss or other aggressive claims about the efficacy of their methods, are supported by a high level of advertising, and are less expensive than the Company's program. New customer enrollments in January 2001 decreased in excess of 20% compared to January 2000, but consolidated revenues in January 2001 were down only slightly compared to January 2000 as a result of product purchases by continuing customers and those returning to active customer status after the holidays. The Company cannot predict whether the current trend will continue in the future. Revenues from United States Company-owned operations, which represented 79% of the worldwide Company-owned centres at December 31, 2000, increased 4% for the quarter ended December 31, 2000 compared to the quarter ended December 31, 1999 primarily due to an increase in product sales. Product sales, which consists primarily of food products, increased 4% principally due to an increase in the average amount of products purchased per active participant. The average revenue per United States Company-owned centre increased from $94,000 for the quarter ended December 31, 1999 to $107,000 for the quarter ended December 31, 2000. There was a 9% decrease in the average number of United States Company-owned centres in operation, principally reflecting the closure of 86 centres in November 1999 in connection with a restructuring plan implemented by the Company. Service revenues from United States Company-owned operations increased 12% principally due to an increase in the average service fee charged per new participant. Revenues from foreign Company-owned operations, which is derived from 87 centres in Australia and 26 centres in Canada, decreased 26% principally due to reduced demand at the Company's Australian centres. The Company believes that the introduction of Xenical, a prescription drug for the treatment of obesity, in May 2000 and a new goods and services tax in the Australian market have contributed to the revenue decline. There was a 12% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the periods. Costs and expenses of United States Company-owned operations were essentially the same for the quarter ended December 31, 2000 compared to the same quarter last year. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues decreased from 105% to 101% between the periods principally due to the reduced fixed costs associated with the decrease in the number of centres between the periods and the increase in revenues. After including the allocable portion of general and administrative expenses, United States Company-owned operations had an operating loss of $4,801,000 for the quarter ended December 31, 2000 compared to an operating loss of $14,615,000, which includes a restructuring charge of $7,512,000 described below, for the quarter ended December 31, 1999. Costs and expenses of foreign Company-owned operations decreased 19% for the quarter ended December 31, 2000 compared to the quarter ended December 31, 1999, principally due to the decreased variable costs associated with the reduced level of Australian operations and the 12% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the periods. After including the allocable portion of general and administrative expenses, foreign Company-owned operations had operating income of $413,000 for the quarter ended December 31, 2000 compared to operating income of $1,580,000 for the quarter ended December 31, 1999. -9- 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Revenues from franchise operations decreased 2% from $5,026,000 to $4,922,000 for the quarters ended December 31, 1999 and 2000, respectively. This decline was principally due to a 7% decrease in the average number of franchise centres in operation between the periods. The decrease in the average number of franchise centres reflects the Company's net acquisition of nine centres from franchisees between the periods. As of December 31, 2000 there were 111 franchised centres in operation, of which 73 were in the United States and 38 were in foreign countries, principally Australia and New Zealand. Costs and expenses of franchised operations, which consist primarily of product costs, increased 3% from $3,505,000 to $3,615,000 for the quarters ended December 31, 1999 and 2000, respectively. Franchise costs and expenses as a percentage of franchise revenues remained relatively constant between the periods. In November 1999, the Company implemented a restructuring plan to reduce annual operating expenses. The plan included the closure of 86 underperforming Company-owned centres in the United States, which represented 16% of the total United States Company-owned centres, and a staff reduction of approximately 15% at the Company's corporate headquarters. A charge of $7,512,000 was recorded in the quarter ended December 31, 1999 in connection with this restructuring. In June 2000, the Company reversed $602,000 of the originally estimated $7,512,000 restructuring charge because actual costs were less than the costs projected when the restructuring was implemented. The revised charge of $6,910,000 was comprised of $3,593,000 for lease termination costs, $1,544,000 for severance payments to 110 terminated employees, $1,144,000 for the write-off of fixed assets, $109,000 for refunds to program participants and $520,000 for other closure costs. None of the fixed assets subject to the write-off remained in use after the November 1999 centre closures. Of the revised charge of $6,910,000, approximately $5,766,000 requires cash payments and $1,144,000 represents the non-cash write-off of fixed assets. As of December 31, 2000, the Company had made cash payments of $3,000,000 for lease termination costs, $1,432,000 for severance to terminated employees, $112,000 for refunds to program participants, and $697,000 for other closure costs. The Company estimates that the remaining cash payments of approximately $525,000 will be substantially incurred by June 30, 2001. With respect to the impact of the restructuring on future results of operations, the 86 closed centres had revenues of $4,526,000 and direct operating expenses of $5,339,000 for the quarter ended September 30, 1999, which was the final full quarter of operating results for these 86 centres. The Company estimates that annual pre-tax savings of approximately $4,000,000 will be achieved with the elimination of the infrastructure of the 86 centres together with the reduced corporate staff, of which approximately $2,900,000 will represent cash savings and $1,100,000 will be a reduction of depreciation and amortization expense. General and administrative expenses decreased 13% from $6,512,000 to $5,653,000 and decreased from 10.5% to 9.3% of total revenues for the quarters ended December 31, 1999 and 2000, respectively. The decrease in general and administrative expenses is principally due to reduced compensation and professional expenses. A charge of $219,000 was recorded in the accompanying consolidated statement of operations in the quarters ended December 31, 1999 and 2000 with respect to the previously disclosed litigation judgment arising out of the dispute concerning the lease at the Company's former -10- 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) headquarters location. This charge consists of interest accrued on the judgment pending the appeal which has been filed seeking to overturn the judgment. At December 31, 2000 the total amount accrued for this litigation judgment was $10,087,000. The elements discussed above combined to result in an operating loss of $3,971,000 for the quarter ended December 31, 2000 compared to an operating loss of $12,585,000 for the quarter ended December 31, 1999. Income taxes (benefit) for the quarter ended December 31, 2000 includes income taxes at an effective rate of 37% on the Company's foreign taxable income, but does not reflect any benefit for the net operating loss incurred by the Company's United States operations. During the quarter ended December 31, 2000, the Company concluded that the deferred tax asset valuation allowance should be increased due to the uncertainty of realizing certain tax loss carryforwards and other deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Accordingly, the Company recorded a non-cash charge of $17,721,000 to provide a full valuation allowance for the balance of the U.S. net deferred tax asset. Management's assessment was based principally on the losses experienced by the Company in the U.S. for the first six months of fiscal 2001, together with less than expected operating results in January 2001, following two consecutive profitable quarters ended March 31, 2000 and June 30, 2000. This increase to the deferred tax asset valuation allowance is the reason for the decrease in the deferred tax assets line items on the accompanying consolidated balance sheet at December 31, 2000. Six Months Ended December 31, 2000 as Compared to Six Months Ended December 31, 1999 The following table presents selected operating results for United States Company-owned and foreign Company-owned operations for the six month periods ended December 31, 1999 and 2000 (U.S. $ in thousands):

-11- 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company has experienced reduced demand, particularly at its centres located in the United States, over the past several years. The Company believes that increased competition from various sources, including prescription and non-prescription pills, best selling diet books, and other "do it yourself" methods have contributed to the Company's downward trend. Many of these competitors claim to provide "quick" and "easy" weight loss or other aggressive claims about the efficacy of their methods, are supported by a high level of advertising, and are less expensive than the Company's program. New customer enrollments in January 2001 decreased in excess of 20% compared to January 2000, but consolidated revenues in January 2001 were down only slightly compared to January 2000 as a result of product purchases by continuing customers and those returning to active customer status after the holidays. The Company cannot predict whether the current trend will continue in the future. Revenues from United States Company-owned operations, which represented 79% of the worldwide Company-owned centres at December 31, 2000, increased 2% for the six months ended December 31, 2000 compared to the six months ended December 31, 1999 primarily due to an increase in product sales. Product sales, which consists primarily of food products, increased 1% principally due to an increase in the average amount of products purchased per active participant. The average revenue per United States Company-owned centre increased from $195,000 for the six months ended December 31, 1999 to $226,000 for the six months ended December 31, 2000. There was a 13% decrease in the average number of United States Company-owned centres in operation, principally reflecting the closure of 86 centres in November 1999 in connection with a restructuring plan implemented by the Company. Service revenues from United States Company-owned operations increased 10% principally due to an increase in the average service fee charged per new participant. Revenues from foreign Company-owned operations, which is derived from 87 centres in Australia and 26 centres in Canada, decreased 28% principally due to reduced demand at the Company's Australian centres. The Company believes that the introduction of Xenical, a prescription drug for the treatment of obesity, in May 2000 and a new goods and services tax in the Australian market have contributed to the revenue decline. There was a 12% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the periods. Costs and expenses of United States Company-owned operations decreased 6% for the six months ended December 31, 2000 compared to the same quarter last year. The six months ended December 31, 1999 included a charge of $3,068,000 for obsolete inventory related to the discontinued On-the-Go program. The 6% decrease was principally due to the reduced fixed costs associated with the decrease in the number of United States Company-owned centres in operation, and the absence of the charge of $3,068,000 for obsolete inventory. Costs and expenses of United States Company-owned operations as a percentage of United States Company-owned revenues decreased from 107% to 99% between the periods principally due to the reduced fixed costs and the absence of the aforementioned charge for discontinued inventory. In November 1999, the Company implemented a restructuring plan to reduce annual operating expenses. The plan included the closure of 86 underperforming Company-owned centres in the United States, which represented 16% of the total United States Company-owned centres, and a staff reduction of approximately 15% at the Company's corporate headquarters. A charge of $7,512,000 was recorded in the six months ended December 31, 1999 in connection with this restructuring. In June 2000, the Company reversed $602,000 of the originally estimated $7,512,000 restructuring charge because actual costs were less than the costs projected when the -12- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) restructuring was implemented. The revised charge of $6,910,000 was comprised of $3,593,000 for lease termination costs, $1,544,000 for severance payments to 110 terminated employees, $1,144,000 for the write-off of fixed assets, $109,000 for refunds to program participants and $520,000 for other closure costs. None of the fixed assets subject to the write-off remained in use after the November 1999 centre closures. Of the revised charge of $6,910,000, approximately $5,766,000 requires cash payments and $1,144,000 represents the non-cash write-off of fixed assets. As of December 31, 2000, the Company had made cash payments of $3,000,000 for lease termination costs, $1,432,000 for severance to terminated employees, $112,000 for refunds to program participants, and $697,000 for other closure costs. The Company estimates that the remaining cash payments of approximately $525,000 will be substantially incurred by June 30, 2001. With respect to the impact of the restructuring on future results of operations, the 86 closed centres had revenues of $4,526,000 and direct operating expenses of $5,339,000 for the quarter ended September 30, 1999, which was the final full quarter of operating results for these 86 centres. The Company estimates that annual pre-tax savings of approximately $4,000,000 will be achieved with the elimination of the infrastructure of the 86 centres together with the reduced corporate staff, of which approximately $2,900,000 will represent cash savings and $1,100,000 will be a reduction of depreciation and amortization expense. After including the allocable portion of general and administrative expenses, United States Company-owned operations had an operating loss of $8,082,000 for the six months ended December 31, 2000 compared to an operating loss of $24,669,000, which includes the above described charge of $3,068,000 for obsolete inventory and the $7,512,000 restructuring charge, for the six months ended December 31, 1999. Costs and expenses of foreign Company-owned operations decreased 19% for the six months ended December 31, 2000 compared to the six months ended December 31, 1999, principally due to the decreased variable costs associated with the reduced level of Australian operations and the 12% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar between the periods. After including the allocable portion of general and administrative expenses, foreign Company-owned operations had operating income of $894,000 for the six months ended December 31, 2000 compared to operating income of $4,107,000 for the six months ended December 31, 1999. Revenues from franchise operations decreased 8% from $10,883,000 to $9,959,000 for the six months ended December 31, 1999 and 2000, respectively. This decline was principally due to a 7% decrease in the average number of franchise centres in operation between the periods. The decrease in the average number of franchise centres reflects the Company's net acquisition of nine centres from franchisees between the periods. As of December 31, 2000 there were 111 franchised centres in operation, of which 73 were in the United States and 38 were in foreign countries, principally Australia and New Zealand. Costs and expenses of franchised operations, which consist primarily of product costs, decreased 7% from $7,413,000 to $6,923,000 for the six months ended December 31, 1999 and 2000, respectively, principally because of the reduced level of franchise operations. Franchise costs and expenses as a percentage of franchise revenues remained relatively constant between the periods. -13- 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) General and administrative expenses decreased 12% from $12,798,000 to $11,246,000 and decreased from 9.6% to 8.8% of total revenues for the six months ended December 31, 1999 and 2000, respectively. The decrease in general and administrative expenses is principally due to reduced compensation and professional expenses. A charge of $438,000 was recorded in the accompanying consolidated statement of operations in the six months ended December 31, 2000 with respect to the previously disclosed litigation judgment arising out of the dispute concerning the lease at the Company's former headquarters location. This charge consists of interest accrued on the judgment pending the appeal which has been filed seeking to overturn the judgment. In the six month period ended December 31, 1999, $1,008,000, comprised of attorney fees awarded to the plaintiff and interest accrued on the judgment, was expensed related to this matter. At December 31, 2000 the total amount accrued for this litigation judgment was $10,087,000. The elements discussed above combined to result in an operating loss of $5,898,000 for the six months ended December 31, 2000 compared to an operating loss of $19,073,000 for the six months ended December 31, 1999. Income taxes (benefit) for the six months ended December 31, 2000 includes income taxes at an effective rate of 37% on the Company's foreign taxable income, but does not reflect any benefit for the net operating loss incurred by the Company's United States operations. During the six months ended December 31, 2000, the Company concluded that the deferred tax asset valuation allowance should be increased due to the uncertainty of realizing certain tax loss carryforwards and other deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Accordingly, the Company recorded a non-cash charge of $17,721,000 to provide a full valuation allowance for the balance of the U.S. net deferred tax asset. Management's assessment was based principally on the losses experienced by the Company in the U.S. for the first six months of fiscal 2001, together with less than expected operating results in January 2001, following two consecutive profitable quarters ended March 31, 2000 and June 30, 2000. This increase to the deferred tax asset valuation allowance is the reason for the decrease in the deferred tax assets line items on the accompanying consolidated balance sheet at December 31, 2000. -14- 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources The Company has historically financed its operations through cash flow from operations, supplemented by a note payable obtained in 1996 to finance the Company's purchase of its corporate office building and by a capital lease for computer equipment related to Y2K remediation in 2000. At December 31, 2000, the Company had cash, cash equivalents and short-term investments totaling $32,056,000 compared to $35,635,000 at June 30, 2000, reflecting a decrease during the six month period ended December 31, 2000 of $3,579,000. This decrease was principally due to the net cash used in operating activities, including cash payments of $553,000 in connection with the Company's restructuring plan. Additionally, $557,000 was used for the purchase of property and equipment, and $410,000 was used for principal payments on the note payable and capital lease obligation. The Company's principal cash commitments at December 31, 2000 are as follows: - Operating lease payments on premises from which the Company's centre operations are conducted totaling approximately $32,600,000, of which approximately $16,200,000 is payable in calendar year 2001 and approximately $9,300,000 is payable in calendar 2002. - The litigation judgment of $10,087,000 which the Company is appealing. - Debt service on the note payable and capital lease totaling $7,302,000, which includes a balloon payment on the note payable in November 2006 of approximately $4,100,000. - Remaining payments of approximately $525,000 related to the restructuring implemented in November 1999 described above. - In the normal course of its business the Company acquires property and equipment, including replacing assets which are no longer useful. This may include moving the location of a centre or remodeling existing centres. The Company believes that its available cash and cash equivalents, together with its cash flow from operations, should be sufficient to fund short-term operating activities. However, the Company's ability to fund long-term operations will depend on the Company's ability to return to profitability, particularly in the United States. Effects of Recent Accounting Pronouncements In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving Stock Compensation- an Interpretation of Accounting Principles Board Opinion No. 25. FIN 44 is effective July 1, 2000. The application of FIN 44 did not have a material impact on the Company's financial position or results of operations. -15- 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to a variety of risks, including changes in interest rates affecting the return on its investments and the cost of its debt, and foreign currency fluctuations. At December 31, 2000, the Company maintains a portion of its cash and cash equivalents in financial instruments with original maturities of three months or less. The Company also, at times, maintains a short-term investment portfolio containing financial instruments with original maturities of greater than three months but less than twelve months. These financial instruments, principally comprised of high quality commercial paper, are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of these financial instruments, an immediate 10 percent increase in interest rates would not have a material effect on the Company's financial condition or results of operations. The Company has not used derivative financial instruments in its investment portfolio. The Company's long-term debt at December 31, 2000 is comprised of a note payable to a bank, secured by the Company's corporate office building, with a total balance of $5,242,000 and a capital lease agreement covering certain computer hardware with a total balance of $2,060,000. The note payable bears interest at the London Interbank Offered Rate plus one percent, with quarterly interest rate adjustments, and the capital lease is at a fixed rate. Due to the relative immateriality of the note payable, an immediate 10 percent change in interest rates would not have a material effect on the Company's financial condition or results of operations. Approximately 18% of the Company's revenues for the quarter ended December 31, 2000 were generated from foreign operations, located principally in Australia and Canada. In the quarter ended December 31, 2000, the Company was subjected to a 12% weighted average decrease in the Australian and Canadian currencies in relation to the U.S. dollar compared to the quarter ended December 31, 1999. If the exchange rate had remained the same as the quarter ended December 31, 1999, the consolidated statement of operations for the quarter ended December 31, 2000 would have reflected additional revenue of approximately $1,503,000 and the operating loss would have been reduced by approximately $105,000. Currently, the Company does not enter into forward exchange contracts or other financial instruments with respect to foreign currency. -16- 17 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's 2000 Annual Meeting of Stockholders was held on November 9, 2000. At the meeting the stockholders of the Company elected the eight incumbent directors for terms of one year each and until their successors are duly elected and qualified, and ratified the appointment of KPMG LLP as the independent certified public accountants of the Company and its subsidiaries for the fiscal year ending June 30, 2001. The results of the vote to elect the eight directors were as follows:

The results of the vote to ratify the appointment of KPMG LLP as independent certified public accountants of the Company and its subsidiaries for the fiscal year ending June 30, 2001 were as follows:

There were no broker non-votes on any of the matters submitted to a vote of security holders. -17- 18 PART II - OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits ~~10 Amendment to Balance Bar Company Trademark License Agreement between Jenny Craig, Inc. and Balance Bar Company. (1)~~

(b) No reports on Form 8-K have been filed during the quarter for which this report is filed. -------------- (1) The Company has requested confidential treatment for portions of this agreement. -18- 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JENNY CRAIG, INC. By: /s/ JAMES S. KELLY ---------------------------------- James S. Kelly Vice President and Chief Financial Officer Date: February 12, 2001 -19-

CRAIG JENNY INC /DE 10-Q