For franchisees who had survived months of confusion and turmoil, however, the sale was a bombshell. "We'd gone through a battle, and settled our differences," remarks Heinig, "and then, in the blink of a eye, Harold's selling the company." Charm made the rounds, personally talking with and reassuring franchisees. But he sensed their lingering trepidation. "They'd had all this litigation, and nobody had known what the hell was going to come out of it . . . so a lot of them had simply stopped working," he says.
Advised by Salomon Bros., Charm had intended to do a leveraged buyout. But as Nutri/System's returns continued to deteriorate, he found it increasingly difficult to raise the money, and asked for an extension. In October, the company reported lower revenues and net losses for the fourth quarter, as well as for the full fiscal year. "Its rate of earnings decline was faster than anybody had anticipated," says Charm. Everyone had expected that the new food margins and the closing of the Gloria Marshall salons would impact on revenues, but other factors -- the new committee structure, the lame-duck atmosphere, a continuing drop in traffic -- hadn't been plugged into the equation. "There's no question," Katz says, relighting his Veracruz one final time, "that the lame-duck period wasn't good for the franchisor or the franchisee."
Convinced that the company was no longer worth the $9 a share he had bid, Charm attempted to renegotiate the price. For Katz, whose net worth was quickly becoming a hypothetical issue, there was little room left in which to maneuver. Finally, on January 18, 1985, the negotiations broke off; the sale had fallen through. "I'd still buy the company today," says Charm." I think there's a price at which it's a very good company for someone." Whatever that price might be, however, it was not -- and so far is not -- Harold Katz's.
Suddenly, against all odds, Katz once more found himself the ongoing head and principal owner of Nutri/System. "I'm committed to making this thing work," he now declares when asked about the business. He talks about a new enthusiasm, a fresh sense of commitment on the part of employees and franchisees, a growing belief that Nutri/System can once more be everything it was in the past. "We want to get back that old feeling," he explains, "and we're convinced that we can do it." To all appearances, he is putting in long hours at the office again, taking work home, acting -- 13 years after he founded the company -- like a reborn entrepreneur.
Heinig and other franchisees seem equally hopeful. "The transition, since the time of the settlement, has been somewhat rocky," admits Heinig. "We thought that Harold was gone, and began dealing with the new group, but now we're focusing on Harold again. . . . And he's saying, 'I'm getting talent in here, we're going to start running again' -- well, that's music to my ears." Franchisees, Heinig says, now have more access to headquarters, the committee system is functioning better, and the company has signed with a new advertising agency. The lower food margins have also had a major impact: Although two of Heinig's five centers remain unprofitable, business is up at two, and one will be more profitable this year than it ever has been before. "Hell," says Heinig, "Harold has certainly done some amazing things in this business, and there's no reason to believe that he can't do amazing things in the future."
Katz would like to prove Heinig right. "I've never failed in my life, and I'm not about to fail now," Katz says."I'm back to the business that I love." He has cut Nutri/System's corporate staff by 140 employees (to 280), has put its monumental headquarters up for sale, has done away with an expensive pension plan, is considering various profit-sharing options, and has levied sizable pay cuts, "beginning with myself." Katz has also launched a search for a new chief executive officer. "For the benefit of everyone, it's important that we have a new CEO," he says, "some new life, some new thinking, somebody coming in clean." Katz will remain chairman.
Katz's pay cut is not going to land him on the streets of Philadelphia: His annual salary is going from $600,000 to $480,000. And whether his other changes are more than window dressing -- whether they can rebuild an organization that has been so thoroughly demoralized -- is something no one can yet say. The two sides, after reaching the point of divorce, now have to sleep in the same bed, and it is not surprising that both are putting the best face they can on the situation. "This company has taken a beating," Katz concedes, the stub of his Veracruz sitting precariously on an ashtray a few feet from his hand. "I think the suit did tremendous damage . . . but that's behind us now, and both of us -- the franchisor and the franchisee -- have learned from it. . . ."
"I need the guy," echoes Heinig. "If we're going to do well in the future, I've got no choice but to trust in Harold and his abilities."
James Meyer, the analyst, remains skeptical. "The $64,000 question," he says, "is when are we going to see a stabilization of traffic in the Nutri/System centers." A longer-term issue is whether Harold Katz is really in it for the duration.
"If somebody came in today and said, 'Here's cash on the table, $8 a share," Meyer says, "he'd own the company."
