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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File No. 001-10887
JENNY CRAIG, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0366188
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
11355 North Torrey Pines Road, La Jolla, California 92037
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (619) 812-7000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Class on which registered
Common Stock, $.000000005 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
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 3, 1996, there were 20,861,251 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 price for the common stock on the New York
Stock Exchange on September 3, 1996) was approximately $73,967,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended June 30, 1996 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, 1996.
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JENNY CRAIG, INC.
1996 FORM 10-K
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ITEM 1. BUSINESS..................................................................................... 1
ITEM 1a. EXECUTIVE OFFICERS OF THE REGISTRANT......................................................... 8
ITEM 2. PROPERTIES................................................................................... 9
ITEM 3. LEGAL PROCEEDINGS............................................................................ 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 10
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.......................................................................... 11
ITEM 6. SELECTED FINANCIAL DATA...................................................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................................... 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................................................... 11
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 12
ITEM 11. EXECUTIVE COMPENSATION....................................................................... 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................................................... 12
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 12
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K..................................................................................... 12
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL BUSINESS DESCRIPTION
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 3, 1996, there were 523 Company-owned and
126 franchised weight loss Centres throughout the United States, and 102
Company-owned and 36 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 3, 1996, there were approximately 103,000 active
participants in the Program in the United States, and 23,000 active participants
in foreign markets.
FORWARD-LOOKING STATEMENTS
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, including
dexfenfluramine, commonly referred to by its trade name Redux, while approved by
the FDA, are not risk-free and side effects and potential health problems for
certain users have been identified. 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. 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
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initiative or on a referral from consumers or others. See "Item 3. Legal
Proceedings" for information regarding the current status of an FTC proceeding
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 these 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. In July 1996, the
Company began test marketing, on a very limited basis, a new weight loss program
incorporating the traditional elements of the Company's program for qualified
clients who choose to utilize weight loss medications.
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 ended December 31 and during the summer months. The
Company may also choose to reduce prices or to increase 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.
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THE PROGRAM
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 assist
participants in achieving their weight loss needs. The Program features
individual counseling and group lifestyle classes 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 low calorie foods to
facilitate weight loss. 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. In July 1996, the Company
began test marketing, on a very limited basis, a new weight loss program
incorporating the traditional elements of the Company's program for qualified
clients who choose to utilize weight loss medications.
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 Counselor to begin the Program and purchase the first week's supply of
Jenny's Cuisine. Other than in connection with the new program currently being
tested which offers weight loss medications to qualified participants, 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 twice a week. One visit is for a private counseling session with a Weight
Loss Counselor during which the participant's progress is discussed, meal plans
are selected and the participant purchases Jenny's Cuisine. At the second
semi-weekly visit participants attend lifestyle classes covering five general
subjects: Nutrition, Physical Activity, Social Situations, Emotional Eating, and
Eating Style. These lifestyle classes, all of which involve proprietary
videotape presentations and discussions led by a lifestyle counselor, are
conducted by Centre personnel. The classes are designed to teach participants
how to develop sound eating habits and weight management strategies.
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. During the
course of the Program a participant loses 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 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. For the year
ended June 30, 1996, the initial service fee in Company-owned Centres ranged
from $10 to $180. As of September 3, 1996, the initial service fee in
Company-owned Centres was $99. In addition, the
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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
$50 and $75 per week for Jenny's Cuisine. A significant number of participants
who enroll in the Program purchase a Success Plus Program for a fixed fee which
was $349 at September 3, 1996. The Success Plus Program includes the initial
service fee, a maintenance program, Program return privileges and lifestyle
video and audio cassette tapes. 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 CRAIG CUISINE
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 believes that its prepackaged frozen meals give it a
strong competitive advantage. 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, Fish Festiva, Chicken Breast Golden
Gate, Chicken Fajitas, Teriyaki Beefsteak, Pasta Primavera, and Chili with
Beans.
Sales of Jenny's Cuisine accounted for 92% of the Company's revenues in
both fiscal 1996 and fiscal 1995. For the year ended June 30, 1996, the
Company's gross revenues from the sale of Jenny's Cuisine were $368,166,000
compared to $348,776,000 for the year ended June 30, 1995.
The Company purchases its food products from various companies which
manufacture the products to specifications approved by the Company. The
Company's major food 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 Nestle Food Company, which supply canned food, and
Natural Alternatives, Inc., which supplies vitamin supplements. The Company
believes that alternative sources for all of its food products are available
without material disruption of its operations.
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HISTORICAL GROWTH
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 growth through September 3, 1996 as
measured by the number of Centres operating is shown in the following table:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------
At
September 3,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company-owned
United States........... 43 65 151 273 326 370 476 502 478 485 523
Foreign................. 72 73 70 84 86 88 103 106 102 103 102
--- --- --- --- --- --- --- --- --- --- ---
115 138 221 357 412 458 579 608 580 588 625
--- --- --- --- --- --- --- --- --- --- ---
Franchise
United States........... 3 10 47 126 186 199 176 159 154 159 126
Foreign................. 42 39 37 29 30 37 39 43 43 36 36
--- --- --- --- --- --- --- --- --- --- ---
45 49 84 155 216 236 215 202 197 195 162
--- --- --- --- --- --- --- --- --- --- ---
Total............ 160 187 305 512 628 694 794 810 777 783 787
=== === === === === === === === === === ===
</TABLE>
The number of franchise Centres owned by affiliates at June 30, 1996
and September 3, 1996 was 16.
During fiscal 1996, the Company opened 10 United States Company-owned
Centres and closed 3 United States Company-owned Centres. Also during fiscal
1996, 9 United States franchise Centres were opened and 4 United States
franchise Centres were closed, while 7 foreign franchised centres in Mexico were
closed. Effective September 2, 1996 the Company acquired 36 centres in the New
York tri-state area and two centres in Hawaii from a franchisee.
MARKETING
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 (800-94JENNY) 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
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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.
FRANCHISE OPERATIONS
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.
As of September 3, 1996, the Company had 162 Centres operating
pursuant to franchise agreements, of which 126 were located throughout the
United States, 16 in Australia, 16 in New Zealand and 4 in Canada.
TRADE NAMES AND TRADEMARKS
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 WEIGHT LOSS CENTRES and JENNY'S CUISINE.
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COMPETITION
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
competitors are national chains such as Nutri/System, Inc. ("Nutri/System"),
Weight Watchers International and Diet Center, Inc. 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, 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. For example, in April 1996 the
United States Food and Drug Administration approved dexfenfluramine, commonly
referred to by its trade name Redux, for use as a doctor-prescribed medication
for the treatment of obesity. The Company believes that the extensive publicity
that accompanied the introduction of Redux heightened the public's interest in
weight loss pharmaceuticals, and appears to be responsible for softened demand
being experienced by the Company for its products and services. See "Management
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated by reference from the Company's 1996 Annual Report to Shareholders
and included in Exhibit 13 to this Report on Form 10-K. 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.
REGULATION
The Federal Trade Commission (the "FTC"), and certain states,
regulates 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. See
"Item 3. Legal Proceedings" for information regarding the current status of an
FTC proceeding relating to the advertising practices of the Company. Proceedings
resulting from these complaints may result in significant defense costs,
settlement payments or judgements and could have a material adverse effect on
the Company.
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
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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.
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.
EMPLOYEES
As of September 3, 1996 the Company had approximately 4,900
employees, of which 4,300 were located in the United States, 450 were located in
Australia, and 150 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.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company:
<TABLE>
<CAPTION>
Name of Executive Officer Age Position(s) Held
------------------------- --- ----------------
<S> <C> <C>
Sidney Craig 64 Chairman of the Board and Director
Jenny Craig 64 Vice-Chairman and Director
C. Joseph LaBonte 57 President, Chief Executive Officer and Director
Michael L. Jeub 53 Senior Vice President, Chief Financial Officer and Treasurer
Janet Rheault 35 Senior Vice President, Operations
Leslie Koll 45 Senior Vice President, Marketing
William K. Dix 40 Vice President, General Counsel
Alan V. Dobies 48 Vice President,Corporate Services
John Woolery 49 Vice President, Chief Information Officer
Marvin Sears 69 Secretary and Director
</TABLE>
Sidney Craig has been Chairman of the Company or its predecessors since
1983 and served as Chief Executive Officer from 1983 through April 1994.
Jenny Craig has served as Vice-Chairman of the Company since September
1991, as President and Chief Operating Officer of the Company or its
predecessors from 1983 to August 1991 and a director of the Company or its
predecessors from 1983 to date. Sidney Craig and Jenny Craig are husband and
wife.
C. Joseph LaBonte became the Company's President and Chief Executive
Officer in April 1994 having served as a director of the Company since December
1992. Mr. LaBonte is the Chairman of The Vantage Group, an investment and
financial advisory firm which he founded in 1983. From 1987 through 1990, Mr.
LaBonte was President, Chief Operating Officer and a Director of Reebok
International Ltd. and from 1979 through 1983 he was the President, Chief
Operating Officer and a Director of 20th Century Fox Film Corporation. Mr.
LaBonte is a director of Celex, Inc. and an investor in and a director of
various privately owned enterprises.
8
<PAGE> 11
Michael L. Jeub has served as Senior Vice President, Chief Financial
Officer and Treasurer since July 1994. From July 1993 to July 1994, Mr. Jeub was
Chief Financial Officer, Executive Vice President and Treasurer of National
Health Laboratories, Inc., a publicly held clinical laboratory chain. From June
1991 to April 1993, Mr. Jeub served as President and Chief Operating Officer of
Medical Imaging Centers of America, Inc., a publicly held chain of high
technology imaging centers. Mr. Jeub was a private investor from 1988 to 1991.
Janet Rheault has served as Senior Vice President, Operations since
April 1996. Ms. Rheault, who joined the Company in 1988, served in various
operating capacities, most recently as Divisional Supervisor, prior to her
current position.
Leslie Koll has served as Senior Vice President, Marketing since
November 1994. From 1991 to 1994 Mr. Koll was managing partner with Pelletier,
Koll and Weil, a marketing and business development firm, which he founded in
1987. Mr. Koll was Vice President, Marketing of Hanna-Barbera Productions, Inc.
from 1989 to 1991.
William K. Dix has served as Vice President, General Counsel since May
1996. From March 1994 to May 1996 Mr. Dix was Counsel for Aetna Health Plans,
Inc. From 1989 through March 1994 Mr. Dix was Corporate Counsel for Science
Applications International Corporation, a high technology research and
development company.
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, and
from 1985 to May 1988 he was Vice President, Operations of Forecast Lighting
Co., a manufacturer of lighting fixtures.
John Woolery has served as Vice President, Chief Information Officer
since September 1994. From August 1990 until September 1994 Mr. Woolery was
Director of Information Services and Telecommunications for Universal Studios
Hollywood, a subsidiary of Music Corporation of America, Inc. (MCA). From
October 1986 to July 1990 Mr. Woolery was Vice President of Product Planning and
Development for Packaged Automated Life/Liability, Inc., a provider of data
processing services to the insurance industry.
Marvin Sears, a director of the Company since July 1989, has served as
the Secretary of the Company since June 1991, and as Assistant Secretary of the
Company from August 1985 to June 1991. Mr. Sears is a practicing attorney in Los
Angeles, California where, since May 1989, he has been a partner in the law firm
of Proskauer Rose Goetz and Mendelsohn LLP, counsel to the Company during fiscal
1996 and currently. From June 1960 until May 1989, Mr. Sears was a senior
partner of the Los Angeles law firm of Pacht, Ross, Warne, Bernhard & Sears,
Inc. and its successor, Shea & Gould. Mr. Sears is a member of the Board of
various privately-owned business enterprises.
Executive officers are elected to serve until their successors are
elected and qualified.
ITEM 2. PROPERTIES
At September 3, 1996, there were 625 Company-owned Centres, all of
which are in leased premises, of which 523 were in the United States, 80 were in
Australia, and 22 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 2000 to 2500 square feet of
space consisting of a reception area, individual counseling rooms, classrooms
and food storage space.
In July 1996 the Company closed escrow on the purchase of a 75,000
square foot office building located in La Jolla, California in which its
executive offices are located. The total purchase price was $8.36 million.
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.
9
<PAGE> 12
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.
ITEM 3. LEGAL PROCEEDINGS
The Company and complaint counsel for the Federal Trade Commission have
entered into a proposed Consent Order 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 proposed 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 proposed Consent Order requires certain procedures and
disclosures in connection with the Company's advertisements of its products and
services. If the full Commission accepts the proposed Consent Order it will be
published for public comment and, unless modified or withdrawn on the basis of
public comments, it thereafter will become effective. The Company does not
believe that compliance with the proposed Consent Order will have a material
adverse effect on the Company's consolidated financial statements or its current
advertising and marketing practices.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Material appearing under the caption "Common Stock Data" on page 35 of
the Annual Report to Shareholders of Jenny Craig, Inc. for the fiscal year ended
June 30, 1996 ("1996 Annual Report") is hereby incorporated by this reference.
ITEM 6. SELECTED FINANCIAL DATA
Material appearing under the caption "Financial Highlights" on page 1
of the Company's 1996 Annual Report is hereby incorporated by this reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Material appearing under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 15 through
20 of the Company's 1996 Annual Report is hereby incorporated by this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 21 through 33 of the
Company's 1996 Annual Report are hereby incorporated by this reference. Material
appearing under the caption "Selected Quarterly Financial Information" on page
34 of the Company's 1996 Annual Report is hereby incorporated by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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, 1996. Information
regarding executive officers of the Registrant is set forth under the caption
"Executive Officers of the Registrant" in Item 1a hereof.
ITEM 11. EXECUTIVE COMPENSATION
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, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
FINANCIAL STATEMENTS
The following appear in the 1996 Annual Report at the pages indicated
below and are incorporated into Part II by reference:
<TABLE>
<S> <C>
(1) Independent Auditors' Report........................................................................ Page 33
(2) Consolidated Balance Sheets as of June 30, 1995 and 1996............................................ Page 21
(3) Consolidated Statements of Income for the Years Ended June 30, 1994, 1995 and 1996.................. Page 22
(4) Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1994, 1995 and 1996.................................................................. Page 23
(5) Consolidated Statements of Cash Flows for the Years Ended June 30, 1994, 1995 and 1996.............. Page 24
(6) Notes to Consolidated Financial Statements.......................................................... Pages 25
through 32
</TABLE>
12
<PAGE> 15
SCHEDULES
The following financial statement schedule appears on page 18 of this
report:
II. Valuation and Qualifying Accounts
Schedules other than the schedule listed above are omitted because they are
either not required or not applicable.
13
<PAGE> 16
EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of Registrant. (1)
3.4 Restated By-laws of Registrant. (2)
10.1 Jenny Craig, Inc. Management Deferred Bonus Program. (2) (3)
10.2 Executive Employment Agreement between Jenny Craig, Inc. and C.
Joseph LaBonte. (Incorporated herein by reference from Exhibit 10.2
to the Report on Form 10-K of the Company for the fiscal year ended
June 30, 1994.) (4)
10.3 Jenny Craig, Inc. Stock Option Plan, as amended. (Incorporated
herein by reference from Exhibit 10.3 to the Report on Form 10-K of
the Company for the fiscal year ended June 30, 1995.) (3)
10.4 Executive Employment Agreement between Jenny Craig, Inc. and Jenny
Craig. See Exhibit 10.30 for Amendment thereto. (2) (4)
10.5 Executive Employment Agreement between Jenny Craig, Inc. and Sid
Craig. See Exhibit 10.29 for Amendment thereto. (2) (4)
10.6 Employment Agreement between Jenny Craig, Inc. and Michael L. Jeub.
(Incorporated herein by reference from Exhibit 10.6 to the Report
on Form 10-K of the Company for the fiscal year ended June 30,
1994.) (4)
10.7 Settlement Agreement among Class Plaintiffs, Jenny Craig, Inc. and
Jenny Craig International, Inc. (Incorporated herein by reference
from Exhibit 10.7 to the Report on Form 10-K of the Company for the
fiscal year ended June 30, 1994.)
10.9 Standard Form of Franchise Agreement of Jenny Craig International,
Inc. (2)
10.11 Office Building Lease between Jenny Craig Weight Loss Centres, Inc.
and JLRB Associates dated September 15, 1988. (2)
10.11.1 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated. (2)
10.11.2 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated. (2)
10.11.3 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, dated February 21, 1991. (2)
10.11.4 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated. (2)
10.11.5 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated. (Incorporated herein by
reference from Exhibit 10.11.5 to the Report on Form 10-K of the
Company for the fiscal year ended June 30, 1993.)
10.12 Lease between Jenny Craig Distributing Pty. Ltd. and Indalia Pty.
Ltd. dated November 16, 1990. (2)
10.14 Standard Industrial Lease between Jenny Craig Weight Loss Centres,
Inc. and 25 Richmond Partnership L.P. dated June 18, 1991. (2)
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.
(2)
10.17 Shareholders Agreement among Sid Craig, Jenny Craig, W. James
Mallen, New York Life Insurance Company, et al., Security Pacific
National Bank individually and as Agent, Craig Enterprises, Inc.,
SJF Enterprises, Inc. and Jenny Craig, Inc. dated as of June 30,
1989 (amended by Exhibit 10.24). (2)
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. (2)
10.20 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and
Campbell Soup Company, dated June 1, 1991. (2)
14
<PAGE> 17
EXHIBIT DESCRIPTION
- ------- -----------
10.21 Metropolitan Insurance and Annuity Company Key Man Life Insurance
Policy Relating to Jenny Craig. (2)
10.23 Prudential Insurance Company of America Key Man Life Insurance
Policy Relating to Jenny Craig. (2)
10.24 Agreement and Consent dated as of September 20, 1991 among Jenny
Craig, Inc., Jenny Craig Weight Loss Centres, Inc., and the persons
and entities executing and delivering counterparts thereof. (2)
10.25 Approval and Consent Agreement executed by Craig Enterprises, Inc.,
SJF Enterprises, Inc., Sid Craig, Jenny Craig, W. James Mallen, and
Jenny Craig, Inc. (2)
10.26 Form of Election to Exercise (Subordinated Debt Purchaser Warrants)
executed by certain of the Selling Stockholders. (2)
10.27 Transferee's Confirmation (Subordinated Debt Purchaser Warrants)
executed by MDNH Partners, L.P. (2)
10.28 Form of Election to Exercise (Senior Debt Warrants) executed by
certain of the Selling Stockholders. (2)
10.29 Agreement dated as of September 14, 1994 between Sidney Craig and
Jenny Craig, Inc., amending Exhibit 10.5. (Incorporated herein by
reference from Exhibit 10.2 to the Report on Form 10-Q of the
Company for the three month period ended September 30, 1994.) (4)
10.30 Agreement dated as of September 14, 1994 between Jenny Craig and
Jenny Craig, Inc. amending Exhibit 10.4. (Incorporated herein by
reference to Exhibit 10.3 to the Report on Form 10-Q of the Company
for the three month period ended September 30, 1994) (4)
10.31 Agreement dated as of August 10, 1994 between John Woolery and
Jenny Craig, Inc. (Incorporated herein by reference to Exhibit 10.4
to the Report on Form 10-Q of the Company for the three month
period ended September 30, 1994.) (4)
10.32 Agreement dated as of November 10, 1994 between Leslie Alan Koll
and Jenny Craig, Inc. (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, 1994.) (4)
10.33 Settlement Agreement dated March 29, 1995 with respect to the
settlement of a series of class actions collectively entitled In Re
Jenny Craig Securities Litigation. (Incorporated herein by
reference from Exhibit 10.33 to the Report on Form 10-K of the
Company for the fiscal year ended June 30, 1995.)
10.34 Agreement dated as of April 11, 1996 between Janet Rheault and
Jenny Craig, Inc. (Incorporated herein by reference to Exhibit 10.1
to the Report of Form 10-Q of the Company for the three month
period ended March 31, 1996.) (4)
10.35 Agreement dated as of April 26, 1996 between William K. Dix and
Jenny Craig, Inc. (4)
10.36 Form of Amended and Restated Agreement dated as of August 20, 1996
between Marvin Sears and Jenny Craig, Inc. (3)
10.37 Asset Purchase Agreement dated as of August 12, 1996 among Rose
Enterprises, Inc., Rose Enterprises, Inc. NJ, Rose Enterprises of
Connecticut, Inc., Chris Lin Enterprises, Inc. Chris Lin
Enterprises New York, Inc. Audrey Sedita, Bradley Morley and Jenny
Craig Operations, Inc.
10.38 Purchase and Sale Agreement dated as of May 22, 1996 between Jenny
Craig Management, Inc. and M & S Balanced Property Fund, L.P.
13. Portions of the Annual Report to Shareholders with respect to the
fiscal year ended June 30, 1996 which are incorporated by reference
in this Form 10-K.
22. List of Subsidiaries.
23. Independent Auditors' Consent.
27. Financial Data Schedule.
- ------------
(1) Incorporated herein by reference to Exhibit 3.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1992.
(2) 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.
(3) Compensatory Plan.
(4) Management contract.
15
<PAGE> 18
B. REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during the last
quarter of the period covered by this report.
16
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Jenny Craig, Inc.:
Under date of August 16, 1996, we reported on the consolidated balance
sheets of Jenny Craig, Inc. and subsidiaries as of June 30, 1995 and 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1996, as
contained in the 1996 annual report to shareholders. 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, 1996. In connection with
our audits of the aforementioned consolidated financial statements, we also have
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.
KPMG PEAT MARWICK LLP
San Diego, California
August 16, 1996
17
<PAGE> 20
JENNY CRAIG, INC. AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 1994, 1995 and 1996
($ in thousands)
<TABLE>
<CAPTION>
Charged Charged Charged Charged Charged Charged
Balance to Costs to Balance to Costs to Balance to Costs to
at and Other at and Other at and Other
Description 6/30/93 Expenses Accounts Write Offs 6/30/94 Expenses Accounts Write Offs 6/30/95 Expenses Accounts
- ----------- ------- -------- -------- ---------- ------- -------- -------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for
Doubtful
Accounts...... 1,465 4,155(a) -- -- 5,620 -- -- -- 5,620 (900) --
Accumulated
Amortization-
Reacquired
Area
Franchise
Rights....... 1,175 639 85 -- 1,899 842 (33) -- 2,708 837 160
Accumulated
Amortization-
Computer
Software..... 490 257 -- -- 747 266 -- -- 1,013 272 --
</TABLE>
<TABLE>
<CAPTION>
Balance
at
Description Write Offs 6/30/96
- ----------- ---------- -------
<S> <C> <C>
Allowance for
Doubtful
Accounts..... (3,256) 1,464
Accumulated
Amortization-
Reacquired
Area
Franchise
Rights....... -- 3,705
Accumulated
Amortization-
Computer
Software..... -- 1,285
</TABLE>
(a) Includes $3,600 recorded at March 31, 1994 to increase the allowance for
doubtful accounts to reduce aggregate receivables to their net realizable
value.
See accompanying Independent Auditors' Report.
18
<PAGE> 21
SIGNATURES
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.
Date: September 26, 1996 JENNY CRAIG, INC.
By: /s/ SIDNEY CRAIG
----------------------------
Sidney Craig
Chairman of the Board
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ SIDNEY CRAIG Chairman of the Board September 26, 1996
- -------------------------------------
Sidney Craig
/s/ JENNY CRAIG Vice Chairman and Director September 26, 1996
- -------------------------------------
Jenny Craig
/s/ C. JOSEPH LABONTE President, Chief Executive September 26, 1996
- ------------------------------------- Officer and Director
C. Joseph LaBonte (Principal Executive Officer)
/s/ MICHAEL L. JEUB Senior Vice President, September 26, 1996
- ------------------------------------- Chief Financial Officer
Michael L. Jeub and Treasurer
(Principal Financial and
Accounting Officer)
/s/ SCOTT BICE Director September 26, 1996
- -------------------------------------
Scott Bice
/s/ MARVIN SEARS Director September 26, 1996
- -------------------------------------
Marvin Sears
</TABLE>
19
<PAGE> 22
SIGNATURES
(Continued)
<TABLE>
<S> <C> <C>
/s/ ANDREA VAN DE KAMP Director September 26, 1996
- -------------------------------------
Andrea Van de Kamp
/s/ ROBERT WOLF Director September 26, 1996
- -------------------------------------
Robert Wolf
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBITS Sequentially
Numbered
EXHIBIT DESCRIPTION Page
- ------- ----------- ------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of Registrant. (1)......................
3.4 Restated By-laws of Registrant. (2).......................................................
10.1 Jenny Craig, Inc. Management Deferred Bonus Program. (2) (3)..............................
10.2 Executive Employment Agreement between Jenny Craig, Inc. and C. Joseph LaBonte.
(Incorporated herein by reference from Exhibit 10.2 to the Report on Form 10-K of the
Company for the fiscal year ended June 30, 1994.) (4).....................................
10.3 Jenny Craig, Inc. Stock Option Plan, as amended. (Incorporated herein by reference
from Exhibit 10.3 to the Report on Form 10-K of the Company for the fiscal
year ended June 30, 1995.) (3)............................................................
10.4 Executive Employment Agreement between Jenny Craig, Inc. and Jenny Craig. See Exhibit
10.30for Amendment thereto. (2) (4).......................................................
10.5 Executive Employment Agreement between Jenny Craig, Inc. and Sid Craig. See Exhibit
10.29 for Amendment thereto. (2) (4)......................................................
10.6 Employment Agreement between Jenny Craig, Inc. and Michael L. Jeub (Incorporated
herein by reference from Exhibit 10.6 to the Report on Form 10-K of the Company for
the fiscal year ended June 30, 1994.) (4).................................................
10.7 Settlement Agreement among Class Plaintiffs, Jenny Craig, Inc. and Jenny Craig
International, Inc. (Incorporated herein by reference from Exhibit 10.7 to the Report on
Form 10-K of the Company for the fiscal year ended June 30, 1994.)........................
10.9 Standard Form of Franchise Agreement of Jenny Craig International, Inc. (2)...............
10.11 Office Building Lease between Jenny Craig Weight Loss Centres, Inc. and JLRB
Associates dated September 15, 1988. (2)..................................................
10.11.1 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated. (2)...........................................
10.11.2 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated. (2)...........................................
10.11.3 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, dated February 21, 1991. (2)...........................
10.11.4 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated. (2)...........................................
10.11.5 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated. (Incorporated herein by reference from
Exhibit 10.11.5 to the Report on Form 10-K of the Company for the fiscal year ended
June 30, 1993.)...........................................................................
10.12 Lease between Jenny Craig Distributing Pty. Ltd. and Indalia Pty. Ltd. dated
November 16, 1990. (2)....................................................................
10.14 Standard Industrial Lease between Jenny Craig Weight Loss Centres, Inc. and 25
Richmond Partnership L.P. dated June 18, 1991. (2)........................................
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. (2).....................
10.17 Shareholders Agreement among Sid Craig, Jenny Craig, W. James Mallen,
New York Life Insurance Company, et al., Security Pacific National Bank individually
and as Agent, Craig Enterprises, Inc., SJF Enterprises, Inc. and Jenny Craig, Inc.
dated as of June 30, 1989 (amended by Exhibit 10.24). (2).................................
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. (2)......................
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
Sequentially
Numbered
EXHIBIT DESCRIPTION Page
- ------- ----------- ------------
<S> <C> <C>
10.20 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and Campbell Soup
Company, dated June 1, 1991. (2)..........................................................
10.21 Metropolitan Insurance and Annuity Company Key Man Life Insurance Policy
Relating to Jenny Craig. (2)..............................................................
10.23 Prudential Insurance Company of America Key Man Life Insurance Policy Relating
to Jenny Craig. (2).......................................................................
10.24 Agreement and Consent dated as of September 20, 1991 among Jenny Craig, Inc.,
Jenny Craig Weight Loss Centres, Inc., and the persons and entities executing
and delivering counterparts thereof. (2)..................................................
10.25 Approval and Consent Agreement executed by Craig Enterprises, Inc., SJF Enterprises,
Inc., Sid Craig, Jenny Craig, W. James Mallen, and Jenny Craig, Inc. (2)..................
10.26 Form of Election to Exercise (Subordinated Debt Purchaser Warrants) executed by
certain of the Selling Stockholders. (2)..................................................
10.27 Transferee's Confirmation (Subordinated Debt Purchaser Warrants) executed by
MDNH Partners, L.P. (2)...................................................................
10.28 Form of Election to Exercise (Senior Debt Warrants) executed by certain of
the Selling Stockholders. (2).............................................................
10.29 Agreement dated as of September 14, 1994 between Sidney Craig and
Jenny Craig, Inc.,amending Exhibit 10.5. (Incorporated herein by reference
from Exhibit 10.2 to the Report on Form 10-Q of the Company for the three month period
ended September 30, 1994.) (4)............................................................
10.30 Agreement dated as of September 14, 1994 between Jenny Craig and
Jenny Craig, Inc., amending Exhibit 10.4. (Incorporated herein by reference to
Exhibit 10.3 to the Report on Form 10-Q of the Company for the three month
period ended September 30, 1994.) (4).....................................................
10.31 Agreement dated as of August 10, 1994 between John Woolery and
Jenny Craig, Inc., (Incorporated herein by reference to Exhibit 10.4 to the
Report on Form 10-Q of the Company for the three month period ended
September 30, 1994.) (4)..................................................................
10.32 Agreement dated as of November 10, 1994 between Leslie Alan Koll and
Jenny Craig, Inc. (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, 1994.) (4).............................................................
10.33 Settlement Agreement dated March 29, 1995 with respect to the settlement of a series of
class actions collectively entitled In Re Jenny Craig Securities Litigation. (Incorporated
herein by reference from Exhibit 10.33 to the Report on Form 10-K of the Company for
the fiscal year ended June 30, 1995.).....................................................
10.34 Agreement dated as of April 11, 1996 between Janet Rheault and Jenny Craig, Inc.
(Incorporated herein by reference to Exhibit 10.1 to the Report of Form 10-Q of the
Company for the three month period ended March 31, 1996.) (4).............................
10.35 Agreement dated as of April 26, 1996 between William K. Dix and Jenny Craig, Inc. (4)
10.36 Form of Amended and Restated Agreement dated as of August 20, 1996 between Marvin Sears
and Jenny Craig, Inc. (3).................................................................
10.37 Asset Purchase Agreement dated as of August 12, 1996 among Rose Enterprises, Inc.,
Rose Enterprises, Inc. NJ, Rose Enterprises of Connecticut, Inc., Chris Lin
Enterprises, Inc.,Chris Lin Enterprises New York, Inc. Audrey Sedita,
Bradley Morley and Jenny Craig Operations, Inc............................................
10.38 Purchase and Sale Agreement dated as of May 22, 1996 between Jenny Craig
</TABLE>
<PAGE> 25
<TABLE>
<S> <C> <C>
Management, Inc. and M & S Balanced Property Fund, L.P....................................
13. Portions of the Annual Report to Shareholders with respect to the fiscal year ended
June 30, 1996.............................................................................
which are incorporated by reference in this Form 10-K.....................................
22. List of Subsidiaries......................................................................
23. Independent Auditors' Consent.............................................................
27. Financial Data Schedule...................................................................
</TABLE>
- ------------
(1) Incorporated herein by reference to Exhibit 3.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1992.
(2) 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.
(3) Compensatory Plan.
(4) Management contract.
<PAGE> 1
EXHIBIT 10.35
[JENNY CRAIG LOGO] International Headquarters
445 Marine View Avenue
Suite 300
Del Mar, CA 92014-3950
C. Joseph La Bonte
President
Chief Executive Officer
April 26, 1996
Mr. William K. Dix
6879 Fairway Road
La Jolla, CA 92037
Dear Ken:
It's been a pleasure to meet with you regarding the opportunities and challenges
at Jenny Craig, and this letter will formalize our employment offer to you.
While your duties will involve the broad spectrum of Jenny Craig Inc's business,
the following is an outline of the specific responsibilities you will assume
upon your joining the Company:
1. Your position will be Vice President/General Counsel.
2. The duties of this position involve oversight and responsibility for
the Company's legal affairs and will include coordinating internal
legal counsel assistance and the services of outside counsel. This
position will have dual reporting to the CEO and CFO and will interact
with all levels of management.
3. Your annual compensation will be $140,000 per year payable on a
bi-monthly basis. You will also become eligible to participate in any
executive incentive plan which may exist for vice presidents for fiscal
year 1997, which begins on July 1, 1996.
4. You will receive an option to purchase 25,000 shares of common stock of
the Company in concert with the Company's Stock Option Plan. The option
price will be the average of the high and low price for a share of JCI
common stock on the New York Stock Exchange on the day you begin your
employment. The vesting period for options will be over a four year
period
[SHAPE-UP AMERICA LOGO]
<PAGE> 2
Mr. William K. Dix
Page Two
in four annual equal installments of 25%, the first of which will vest
on the first anniversary of your employment with the Company. If your
employment is terminated by the Company without cause, all options not
then exercisable will become exercisable.
5. Upon joining the Company you will be afforded the same fringe benefit
opportunities as other senior executives in the Company.
6. The Company shall have the right to terminate your employment at any
time, with or without cause, by written notice to you. If your
employment is terminated by the Company without cause, or by you within
ninety days following a change of control of the Company, you will
receive a severance payment equal to your then current annual salary
payable in 12 equal monthly installments. If your employment is
terminated, all compensation, benefits, and rights you may have under
this agreement will terminate on the date of termination of employment,
except your right to receive the severance payment described above and
your rights under the Company's Stock Option Plan. For purposes of this
agreement, "cause" shall mean your death, disability (the inability to
perform services for a period of 120 days in any consecutive 12 month
period), a breach of this agreement or your duty of loyalty to the
Company, willful misconduct or negligence in the performance of the
duties contemplated hereby, your conviction of a felony, or conduct by
you which brings you or the Company into public disrepute, or which
could have a substantial adverse effect on the Company or its business.
7. You will assume your responsibilities here at Jenny Craig during the
week of May 20, 1996.
8. You agree that at all times, both during and after your employment by
the Company, you will not use or disclose to any third party any
information, knowledge or data not generally known to the public which
you may have learned during your employment by the Company which
relates to the operations, business or affairs of the Company. You
agree to comply with all procedures which the Company may adopt from
time to time to preserve the confidentiality of any information and
immediately following termination of your employment to return to the
Company all materials created by you or others which relate to the
operations, business or affairs
<PAGE> 3
Mr. William K. Dix
Page Three
of the Company. You agree that for a period of two (2) years following
termination of your employment you will not, directly or indirectly (a)
employ or engage as an independent contractor or seek to employ, engage
or retain any person who, during any portion of the two (2) years prior
to the date of termination of your employment was, directly or
indirectly, employed as an employee, engaged as an independent
contractor or otherwise retained by the Company; or (b) induce any
person or entity to leave his employment with the Company, terminate an
independent contractor relationship with the Company or terminate or
reduce any contractual relationship with the Company.
9. Any controversy or dispute arising out of or relating to this
agreement, or the interpretation thereof, shall be settled exclusively
by arbitration conducted in Los Angeles, California before one or more
arbitrators in accordance with the commercial arbitration rules of the
American Arbitration Association then in effect and with discovery
permitted by both parties in accordance with Section 1283.05 of the
Code of Civil Procedure of the State of California or any successor
thereto, subject to such modification as may be directed by the
arbitrator. The award of the arbitrator(s) shall be final and binding
and judgment may be entered on the arbitrator's award in any court
having jurisdiction. In the event of any such arbitration (or if legal
action shall be brought in connection therewith), the party prevailing
in such proceeding shall be entitled to recover from the other party
the reasonable costs thereof, including reasonable attorney and
accounting fees.
Ken, we are looking forward to your joining Jenny Craig and the experience and
knowledge you will bring in helping us achieve new heights. I personally look
forward to working with you and to having your assistance in the many challenges
ahead.
Warm regards,
ACCEPTED AND AGREED:
/s/ William K. Dix
---------------------------
C. Joseph LaBonte Signature Date
President and
Chief Executive
<PAGE> 1
EXHIBIT 10.36
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
--------------------------------------
C. Joseph LaBonte,
President and Chief Executive
Officer
--------------------------------------
Marvin Sears
5
<PAGE> 1
EXHIBIT 10.37
ASSET PURCHASE AGREEMENT
AMONG
ROSE ENTERPRISES, INC.,
ROSE ENTERPRISES, INC. NJ,
ROSE ENTERPRISES OF CONNECTICUT, INC.,
CHRIS LIN ENTERPRISES, INC.,
CHRIS LIN ENTERPRISES NEW YORK, INC.
AUDREY SEDITA
BRADLEY MORLEY
AND
JENNY CRAIG OPERATIONS, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
RECITALS .................................................................................................. 1
1. Purchase and Sale........................................................................ 3
(a) Sale of Assets.................................................................. 3
(b) Purchased Assets................................................................ 4
2. Purchase Price; Liabilities; Termination of
Franchise................................................................................ 5
(a) Purchase Price.................................................................. 5
(b) Liabilities..................................................................... 7
(c) Termination of Franchise Agreements and
Food Agreements................................................................. 7
(d) Payment of Purchase Price....................................................... 7
3. The Closing.............................................................................. 7
4. Deliveries at Closing.................................................................... 8
(a) Sellers' Deliveries to Purchaser................................................ 8
(b) Purchaser's Deliveries to Sellers............................................... 9
5. Representations and Warranties of Seller. .............................................. 10
(a) Ownership and Delivery of Purchased
Assets and Execution and Effect of
Agreement....................................................................... 10
(b) Organization, Good Standing, Authority.......................................... 12
(c) Ownership of Stock.............................................................. 12
(d) Records; Financial Statements................................................... 13
(e) Liabilities..................................................................... 13
(f) No Adverse Change............................................................... 14
(g) Business Conducted Only By Sellers.............................................. 14
(h) Title to Properties; Absence of
Encumbrances.................................................................... 14
(i) The Centres..................................................................... 14
(j) Leases, Contracts and Commitments............................................... 15
(k) Inventory....................................................................... 16
(l) Permits; Compliance with Laws................................................... 16
(m) Employees....................................................................... 16
(n) Litigation...................................................................... 18
(o) Environmental Matters........................................................... 18
(p) Legal Requirements.............................................................. 18
(q) Transactions with Affiliates.................................................... 19
(r) Disclosure...................................................................... 19
6. Representations and Warranties of Purchaser.............................................. 19
(a) Organization and Good Standing.................................................. 20
(b) Execution and Effect of Agreement............................................... 20
7. Covenants of Sellers..................................................................... 20
(a) Access by Purchaser............................................................. 20
(b) Conduct of Business............................................................. 21
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
(c) Notification of Purchaser....................................................... 22
(d) Lockbox......................................................................... 23
(e) Bulk Sale....................................................................... 24
(f) Taxes........................................................................... 25
(g) Termination of Employees........................................................ 25
(h) Reinstatement of Rose-Conn...................................................... 25
8. Covenants of Purchaser................................................................... 26
(a) Representations and Warranties.................................................. 26
(b) Inventory Purchases............................................................. 26
9. Conditions Precedent to Obligations of
Purchaser................................................................................ 26
(a) Representations and Warranties.................................................. 26
(b) Performance of Sellers.......................................................... 27
(c) Deliveries...................................................................... 27
(d) Litigation...................................................................... 27
(e) Due Diligence................................................................... 27
(f) Bulk Sale Compliance............................................................ 28
(g) Creditor Claims................................................................. 28
(h) Leases.......................................................................... 29
10. Conditions Precedent to Obligations of
Sellers.................................................................................. 30
(a) Representations and Warranties.................................................. 30
(b) Performance by Purchaser........................................................ 30
(c) Deliveries...................................................................... 31
11. Escrowed Funds........................................................................... 31
12. Brokers and Finders...................................................................... 32
13. Indemnification by Sellers............................................................... 33
14. Indemnification By Purchaser............................................................. 34
15. Survival of Representations and Warranties;
Offset................................................................................... 34
(a) Survival........................................................................ 34
(b) Offset.......................................................................... 35
16. Obligations of Sedita and Morley......................................................... 35
(a) Restrictive Covenant............................................................ 35
(b) Guaranty........................................................................ 37
17. JCI Guaranty............................................................................. 38
18. Further Assurances....................................................................... 39
19. Notices.................................................................................. 39
20. Entire Agreement......................................................................... 40
21. Successors............................................................................... 41
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
22. Section Headings......................................................................... 41
23. Severability............................................................................. 41
24. Governing Law............................................................................ 41
25. Attorneys' Fees.......................................................................... 42
26. Counterparts............................................................................. 42
27. Waiver................................................................................... 42
28. Arbitration.............................................................................. 42
29. Cure..................................................................................... 44
30. Consent.................................................................................. 45
31. Sellers.................................................................................. 45
</TABLE>
-iii-
<PAGE> 5
INDEX OF SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
SCHEDULES
<S> <C> <C>
Schedule 1(b) - Excluded Assets
Schedule 1(b)(iii) - Leases
Schedule 1(b)(v) - Amounts on Deposit with Lessors,
Utilities and Municipal Providers of
Services
Schedule 1(b)(vi) - Personal Property
Schedule 1(b)(vii) - Agreements with Suppliers and
Contractors
Schedule 2(b) - Permitted Liabilities
Schedule 2(d) - Allocation of Purchase Price
Schedule 4(d) - Expenses of Seller
Schedule 5(b) - Exceptions to Good Standing
Schedule 5(d) - Financials
Schedule 5(e) - List of Creditors
Schedule 5(f) - Exceptions to No Material Adverse Change
Schedule 5(h) - List of Encumbrances
Schedule 5(j) - Leases, Contracts and Commitments
Schedule 5(l) - Governmental Licenses, Permits, and
Authorizations
Schedule 5(m) - List of Employees
Schedule 5(n) - Litigation
Schedule 5(o) - Environmental Matters
Schedule 5(q) - Transactions with Affiliates
Schedule 7(b) - Insurance Coverage
EXHIBITS
Exhibit A - Purchase Note
Exhibit B-1, B-2 - Franchise/Food Terminations
Exhibit C - Lease Assignments
Exhibit D - Consents and Estoppel Certificates
Exhibit E - Mutual General Release
Exhibit F - Interim Note
Exhibit G - Security Agreement
</TABLE>
-iv-
<PAGE> 6
THIS ASSET PURCHASE AGREEMENT ("Agreement") is dated as of
August 12, 1996 by and among Rose Enterprises, Inc., a New York corporation
("Rose-NY"), Rose Enterprises, Inc. NJ, a New Jersey corporation ("Rose-NJ"),
Rose Enterprises of Connecticut, Inc., a Connecticut corporation ("Rose-Conn"),
Chris Lin Enterprises, Inc., a New Jersey corporation ("Chris Lin"), Chris Lin
Enterprises New York, Inc., a New York corporation ("Chris Lin-NY), Audrey
Sedita ("Sedita") and Bradley Morley ("B. Morley") as successors in interest to
Taylor Enterprises of Hawaii, Inc., a Hawaii corporation ("Taylor") (Rose-Inc.,
Rose- NY, Rose-NJ, Rose-Conn, Chris Lin, Chris Lin-NY, Sedita and B. Morley are
sometimes collectively referred to as "Sellers"), and Jenny Craig Operations,
Inc., a Delaware corporation ("Purchaser").
RECITALS
A. Rose-NY, Rose-NJ and Rose-Conn are the owners and operators of
thirty (30) franchised Jenny Craig Weight Loss Centres (the "New York Area
Centres") in the New York-New Jersey- Connecticut franchise territory and
successors in interest to the franchisee under that certain Master Franchise
Agreement dated March 2, 1989 ("New York Area Franchise Agreement") entered into
between Contempo Women's Workout, Inc., as franchisee, and Jenny Craig
International, Inc., a Delaware corporation ("International"), an affiliate of
Purchaser, as franchisor is the franchisee of the New York-New
Jersey-Connecticut franchise territory. In connection therewith, Rose-NY,
Rose-NJ, Rose-Conn
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<PAGE> 7
also succeeded to the interest of Contempo Women's Workout under that certain
Food Products Purchase Agreement dated March 2, 1989 between Jenny Craig Weight
Loss Centres, Inc., a Delaware corporation ("JCWLC") and Contempo Women's
Workout, Inc. ("New York Area Food Agreement"). References herein to JCWLC and
International herein shall include their respective predecessors, successors and
assigns.
B. Chris Lin and Chris Lin-NY are the owners and operators of six (6)
of the New York Area Centres (three (3) located in New Jersey and three (3)
located in New York) (the "Chris Lin Centres") as a subfranchisee of Rose-NY,
Rose-NJ and Rose-Conn under the New York Area Franchise Agreement.
C. Taylor was the owner and operator of two (2) franchised Jenny Craig
Weight Loss Centres (the "Hawaii Centres") in the Hawaii franchise territory as
successor in interest to the franchisee under that certain Master Franchise
Agreement dated September 1, 1988 ("Hawaii Franchise Agreement") entered into
between Bernard Hurtig, as franchisee and International, as franchisor. In
connection therewith, Taylor also succeeded to the interest of Bernard Hurtig
under that certain Food Products Purchase Agreement dated September 1, 1988
between JCWLC and Bernard Hurtig ("Hawaii Food Agreement"). Sedita and B. Morley
as shareholders of Taylor succeeded to the assets of Taylor.
D. The New York Centres, the Chris Lin Centres and the Hawaii Centres
are sometimes collectively referred to herein as the "Centres;" the New York
Area Franchise Agreement and the Hawaii Franchise Agreement are sometimes
collectively referred to
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<PAGE> 8
herein as the "Franchise Agreements;" and the New York Area Food Agreement and
the Hawaii Food Agreement are sometimes collectively referred to herein as the
"Food Agreements."
E. As of the week ending May 10, 1996, Sellers were indebted to JCWLC
and International for purchases of food and other products, royalties, interest
and all other amounts due under the Franchise Agreements, Food Agreements and
all other agreements and undertakings with JCWLC, International or their
affiliates in the total amount of Three Million Thirty-One Thousand Eight
Hundred Dollars ($3,031,800) ("Prior Obligations").
F. Sedita is the sole shareholder of Rose-NY, Rose-NJ, and Rose-Conn.
Robert Morley ("R. Morley") is the sole shareholder of Chris Lin and Chris
Lin-NY and B. Morley and Sedita were the sole shareholders of Taylor.
G. Sellers desire to sell, and Purchaser wishes to acquire, the
business and assets of the Centres.
NOW, THEREFORE, in consideration of the representations,
warranties and agreements of the parties as set forth below and subject to the
terms and conditions set forth in this Agreement, the parties agree as follows:
1. Purchase and Sale.
(a) Sale of Assets. At the Closing (as defined below), Sellers
shall sell, assign, transfer and deliver to Purchaser, and Purchaser shall
purchase from Sellers, all of the Purchased Assets (as defined below in Section
3).
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<PAGE> 9
(b) Purchased Assets. The "Purchased Assets" means all assets
(other than the "Excluded Assets," as listed on Section 1(b)) which are used in
connection with the management and operation of the business at the Centres or
are reasonably necessary for the management and operation of the business at the
Centres including, without limitation, all right, title, and interest in, and to
the following assets:
(i) all inventory of food and other products and
materials held for sale in the Centres whether located at the Centres, in
transit to or between the Centres or at any warehouses or storage facilities
(the "Inventory");
(ii) all customer contracts, files and records
("Customer Files") and all accounts receivable from customers of the Centres
(the "Customer Accounts");
(iii) Sellers' entire interest as lessee under
those certain leases with respect to the Centres set forth on Schedule 1(b)(iii)
(the "Leases"), including all security deposits held by the lessors thereunder
and all Sellers' rights and interest in tenant improvements and fixtures in each
of the premises covered by the Leases;
(iv) all signs, advertising, and promotional
materials used in or in connection with the Centres;
(v) all amounts on deposit with lessors, utilities
and municipal and other providers of utility services with respect to the
Centres as set forth on Schedule 1(b)(v);
(vi) all equipment, machinery, computers,
furniture, trade fixtures, vehicles, supplies and other personal
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<PAGE> 10
property located at or used in connection with the Centres or the management and
operation of the business of the Centres (the "Personal Property"). A
description of the Personal Property is set forth in Schedule 1(b)(vi); and
(vii) all of Sellers' rights and interest under
agreements with suppliers and contractors to which Sellers are subject and which
are applicable to the Centres or the management and operation of the business of
the Centres, as set forth on Schedule 1(b)(vii).
(viii) all trademarks, service marks, trade names,
copyrights, patents, designs and similar rights (including any registrations
thereof and applications therefor), if any, used in connection with the
Centres, other than those owned by Purchaser, JCWLC, International or their
affiliates;
(ix) to the extent transferable, all licenses and
other governmental authorizations used in connection with the Centres; and
(x) any and all goodwill and other general
intangibles arising out of or associated with the management and operation of
the Centres.
2. Purchase Price; Liabilities; Termination of Franchise.
(a) Purchase Price. In consideration and payment for the
Purchased Assets and all of the covenants, conditions, representations, and
warranties of Sellers, Purchaser shall pay to Sellers a total purchase price of
Six Million One Hundred Thousand Dollars ($6,100,000), payable as follows:
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<PAGE> 11
(i) At the Closing, Purchaser shall cause JCWLC and
International to cancel the Prior Obligations. All sums due at Closing to JCWLC
and International from Sellers, in excess of the Prior Obligations, if any, for
purchases of food and other products, royalties, interest and all other amounts
due under the Franchise Agreements, Food Agreements and other agreements and
undertakings with JCWLC, International or their affiliates shall be deducted
from all amounts otherwise payable to Sellers by Purchaser hereunder.
(ii) At the Closing, Purchaser shall pay by wire
transfer to Escrow One Million Eight Hundred Thousand Dollars ($1,800,000) (the
"Creditor Fund") for the sole purpose of satisfying the claims of all creditors
of Sellers (other than JCWLC and International) in connection with the Centres
or the management and operations of the business at the Centres. The Creditor
Fund shall be paid to an Escrow Account established, maintained and disbursed in
accordance with Section 11 hereof.
(iii) Subject to any deductions or setoffs as set
forth in this Agreement, Purchaser shall pay by wire transfer to Sellers Six
Hundred and Thirty-Four Thousand One Hundred Dollars ($634,100) at Closing and
the remainder of the Purchase Price by wire transfer on the first anniversary of
Closing, as evidenced by that certain promissory note in the form of Exhibit A
("Purchaser Note"). Notwithstanding the foregoing, all amounts due under the
Interim Note, as defined in Section 5(d)(i)(A) below, shall be deducted from the
cash due Sellers at Closing.
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(b) Liabilities. Except for the liabilities of Sellers listed
on Schedule 2(b), Purchaser shall not assume and shall not be liable or
obligated in any way for any debts, liabilities, commitments, and/or obligations
of Sellers of any kind or nature whatsoever, whether absolute or contingent,
liquidated or unliquidated, and whether or not accrued, matured, known, or
suspected (the "Retained Liabilities"). Sellers shall indemnify and hold
harmless Purchaser with respect to all of the Retained Liabilities. Purchaser
shall and does hereby indemnify and hold harmless Sellers with respect to all
liabilities listed on Schedule 2(b).
(c) Termination of Franchise Agreements and Food Agreements.
At the Closing, Sellers shall execute and deliver to International and JCWLC
agreements terminating the Franchise Agreements and the Food Agreements in the
forms attached hereto as Exhibits B-1 and B-2 ("Franchise/Food Terminations").
(d) Payment of Purchase Price. The cash purchase price payable
to Sellers pursuant to this Section 2 shall be paid to Sedita on behalf of the
Sellers and all Sellers agree that payment thereof to Sedita on their behalf
constitutes payment to all Sellers, whether or not each Seller ultimately
receives a share of the cash from Sedita.
3. The Closing. The Closing of the transactions pursuant to this
Agreement (the "Closing") shall be held at the offices of Proskauer Rose Goetz &
Mendelsohn, 2121 Avenue of the Stars, Suite 2700, Los Angeles, California on the
date (the "Closing Date") which is the earlier of (a) thirty (30) days following
the
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date hereof or (b) fifteen (15) business days after the satisfaction of all
conditions to Purchaser's obligations set forth in Section 9 hereof.
4. Deliveries at Closing.
(a) Sellers' Deliveries to Purchaser. At the Closing, Sellers
shall deliver, or shall cause to be delivered, to Purchaser the following:
(i) Bills of sale together with such other
documents or instruments as may be required to transfer ownership to Purchaser
of the Purchased Assets;
(ii) The Leases, Assignments of the Leases ("Lease
Assignments") in the form attached hereto as Exhibit C duly executed by the
applicable Seller and Estoppel Certificates and Consents with respect to each
Lease in the form attached as Exhibit D, duly executed by the respective
landlords thereunder and;
(iii) All Customer Files;
(iv) The Franchise/Food Terminations duly executed
by each Seller;
(v) Resolutions of the Boards of Directors and
stockholder(s) of each Seller, certified by the Secretary of each Seller,
authorizing the execution of this Agreement and the performance by each Seller
of its respective obligations hereunder; and
(vi) Mutual General Release in the form of Exhibit
E, duly executed by each Seller, Rose Management, Inc., a New Jersey
corporation, and R. Morley.
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(b) Purchaser's Deliveries to Sellers. At the Closing,
Purchaser shall deliver, or cause to be delivered, to Sellers the following:
(i) The cash portion of the Purchase Price payable
at Closing;
(ii) The Franchise/Food Terminations, duly executed
by JCWLC and International;
(iii) The Mutual General Release (referred to in
Section 4(a)(vii) above) duly executed by JCWLC, International and Jenny Craig,
Inc., a Delaware corporation ("JCI");
(iv) A notice that Purchaser has approved its due
diligence investigation pursuant to Section 9(e) below; and
(v) An instrument reasonably acceptable to Sellers
and Sedita cancelling the Prior Obligations duly executed by JCWLC and
International; and
(vi) The Purchaser Note, duly executed by
Purchaser.
(c) Deliveries to Escrow. At the Closing, Purchaser shall pay
to Escrow (referred to in Section 11) the Creditor Fund, and Sellers shall pay
to Escrow the additional funds (if any) for creditors, referred to in Section
9(g) hereof.
(d) Deliveries at Execution. Concurrently with the execution
hereof:
(i) Sellers shall execute and deliver to Purchaser
the following:
(A) The promissory note ("Interim Note")
of Sellers to JCWLC in the form of Exhibit F attached hereto in
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the amount of Three Hundred Thousand Seventy Five Dollars ($375,000)
representing cash advanced by JCWLC to pay certain expenses of Seller listed on
Schedule 4(d); and
(B) The Security Agreement in the form of
Exhibit G attached hereto securing repayment of the Interim Note and all
obligations of Sellers to JCWLC and International for food purchases and
royalties that first become due after the date hereof (and not any liabilities
that first became due prior to the date hereof) and UCC-1 financing statements
evidencing the security interest granted thereby.
(ii) Purchaser shall cause JCWLC and International
to execute and deliver to Sellers the Security Agreement (referred to in Section
5(d)(i)(B) above).
5. Representations and Warranties of Seller. Each Seller and Sedita
jointly and severally, represent and warrant to Purchaser as follows:
(a) Ownership and Delivery of Purchased Assets and Execution
and Effect of Agreement.
(i) Rose-NY, Rose-NJ, and Rose-Conn are the sole
owners of all interest as franchisee in the New York Area Franchise Agreement.
(ii) Rose-NY, Rose-NJ and Rose-Conn are the sole
owners of the Purchased Assets constituting or used in connection with the New
York Area Centres.
(iii) Sedita and B. Morley (as successor to Taylor)
are the sole owners of the Purchased Assets constituting or used in connection
with the Hawaii Centres.
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(iv) Chris Lin and Chris Lin-NY are the sole owners
of the Purchased Assets constituting or used in connection with the Chris Lin
Centres and acquired its interest in the Chris Lin Centres pursuant to a
Subfranchise Agreement dated March 28, 1991.
(v) Notwithstanding the involuntarily dissolution
of Taylor and Rose-Conn, as disclosed on Schedule 5(b), each Seller has the full
right, power, and authority to enter into and to perform this Agreement and all
other agreements, certificates, and documents executed or delivered, or to be
executed or delivered, by it in connection with this Agreement (collectively,
with this Agreement, "Sellers' Documents").
(vi) Notwithstanding the involuntarily dissolution
of Taylor and Rose-Conn, as disclosed on Schedule 5(b), on the Closing Date,
each Seller will have the full right, power, and authority to sell, assign,
transfer, and deliver the Purchased Assets as provided in this Agreement, and
such delivery will convey to Purchaser lawful, valid, and marketable title to
the Purchased Assets, free and clear of any and all liens, pledges, security
interests, options, encumbrances, charges, agreements, or claims of any kind
whatsoever.
(vii) Notwithstanding the involuntarily dissolution
of Taylor and Rose-Conn, as disclosed on Schedule 5(b), this Agreement has been
duly authorized by each Seller's board of directors and shareholder(s),
executed, and delivered by each corporate Seller, and each Seller's Documents
are legal,
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valid, and binding obligations of such Seller, enforceable in accordance with
their respective terms.
(viii) The authorization, execution and delivery of
each Seller's Documents and the consummation of the transactions as contemplated
by each Seller's Documents do not and will not violate, conflict with, result in
the breach of or constitute a default under, require any notice or consent (not
obtained at or before Closing) under, give rise to a right of termination of or
accelerate the performance required by any terms or provisions of any agreement,
instrument or writing of any nature affecting the Purchased Assets.
(b) Organization, Good Standing, Authority. Except as set
forth on Schedule 5(b), each Seller (other than Sedita and B. Morley) is duly
organized, validly existing, and in good standing under its state of formation
and has full power and authority to own and lease its assets and properties and
to conduct its business as it is now being conducted. Each Seller is duly
qualified or licensed to do business and is in good standing as a foreign
corporation under the laws of each jurisdiction in which the conduct of its
business or the ownership or leasing of its assets requires such qualification.
(c) Ownership of Stock. All of the issued and outstanding
capital stock of each of Rose-NY, Rose-NJ and Rose-Conn is owned by Sedita and
all of the issued and outstanding capital stock of Chris Lin and Chris Lin-NY is
owned by R. Morley.
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(d) Records; Financial Statements.
(i) The books and records of each Seller are
complete and correct in all material respects and have been maintained in
accordance with good business practices.
(ii) Schedule 5(d) hereto contains a copy of (A)
combining balance sheet of Rose-NY, Rose-NJ, Rose-Conn and Rose Management, Inc.
as at September 30, 1995, (B) combining income statement and statement of
retained earnings of Rose-NY, Rose-NJ, Rose-Conn and Rose Management, Inc. for
the nine months ending September 30, 1995, (C) income statements for each of
Rose-NY, Rose-NJ and Rose-Conn for the nine months ending September 30, 1995,
(D) balance sheet of Taylor as at September 30, 1995, (E) income statement of
Taylor for the nine months ending September 30, 1995 and (F) combining balance
sheet of Chris Lin and Chris Lin-NY as at December 31, 1995 and (G) combining
income statement, statement of stockholder's deficit and combining statement of
cash flows for Chris Lin and Chris Lin-NY for the year ending December 31, 1995
(the "Financials"). The Financials are true, complete and correct, and have been
prepared in accordance with general accepted accounting principles applied on a
consistent basis.
(e) Liabilities. To Sellers' knowledge and subject to update
on or before August 16, 1996, all liabilities of Sellers (whether accrued,
unmatured, contingent, or otherwise, and whether due or to become due) are set
forth on Schedule 5(e), which lists the name of each creditor and the amount of
each creditor's claim as of the date hereof. Without limiting the
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generality of the foregoing, Sellers are not indebted to NatWest Bank NA in an
amount greater than $30,000 and no more than $15,000 is required to be paid to
Pyramid Equipment Leasing Corp. or European American Bank to entitle Sellers to
ownership of the equipment subject to the lease secured by the lien in favor of
such parties listed on Schedule 5(h).
(f) No Adverse Change. Except as set forth on Schedule 5(f),
since September 30, 1995, each Seller has operated the Centres diligently and
only in the ordinary course of business as theretofore conducted, and there has
been no material adverse change in the business, properties, assets,
liabilities, commitments, earnings, financial condition, or prospects of the
Centres.
(g) Business Conducted Only By Sellers. All assets,
properties, and rights relating to each Seller's business are held by, and all
agreements, obligations and transactions relating to the Purchased Assets have
been entered into, incurred, and conducted by, each Seller.
(h) Title to Properties; Absence of Encumbrances. Each Seller
has good and marketable title to or, in the case of the Leases, valid and
subsisting leasehold interests or licenses in, all of the Purchased Assets of
whatever kind (whether real or personal, tangible or intangible), in each case
free and clear of any and all liens, mortgages, pledges, security interests,
restrictions, prior assignments, claims, and encumbrances of any kind
whatsoever, except as may be set forth in Schedule 5(h).
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(i) The Centres. The Centres and all real property, buildings,
and structures, and the equipment therein, and the operations and maintenance
thereof, comply with all applicable agreements and restrictive covenants and
conform to all applicable Legal Requirements (as defined in Section 5(p) below)
including, but not limited to, those relating to health, safety, land use and
zoning. All work and improvements required of any Seller as tenant under any of
the Leases have been duly performed. No condemnation or other proceeding is
pending or threatened which would affect in any material manner the use of any
such property by Purchaser following the Closing. All of the Personal Property
listed on Schedule 1(b)(vi) is currently located at the Centres and will be
delivered, in place, to Purchaser at Closing.
(j) Leases, Contracts and Commitments.
(i) No Seller is a party to, nor are any of the
Purchased Assets subject to, any contract, lease, or commitment except as set
forth in Schedule 5(j).
(ii) Sellers have furnished to Purchaser copies of
the Leases and all contracts and commitments listed in Schedule 5(j), including
summaries of the terms of any unwritten contracts, leases, or commitments.
(iii) Except as set forth in Schedule 5(j), each
Seller and the other parties thereto have complied in all material respects with
the Leases and such contracts and commitments.
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(iv) No Seller is engaged in any material dispute
with any customers or suppliers. To the best knowledge of Seller, no supplier of
the Centres (other than JCWLC) is considering termination, nonrenewal, or any
modification of any contract or commitment listed in Schedule 5(j) which would
adversely affect the Purchased Assets, the Centres or any Seller's business, and
the transactions contemplated by this Agreement will not have a material adverse
effect on any Seller's relationship with any of its suppliers or customers.
(k) Inventory. The Inventory is in good and marketable
condition and is saleable in the normal course of business as currently
conducted at current applicable prices.
(l) Permits; Compliance with Laws. Each Seller holds the
governmental licenses, permits, and authorizations listed in Schedule 5(l)
which, except as set forth in such Schedule, are valid and unimpaired. Each
Seller holds all of the material licenses, permits, and authorizations required
for the ownership or occupancy of the Centres and the operation of its business.
The Centres are and have been operated in compliance therewith and all
applicable laws and regulations (federal, state and local) and all required
reports and filings with governmental authorities have been properly made.
Within the past five years, no Seller has entered into any agreement with, had
any material dispute with, or, to its knowledge, been investigated by, any
governmental authority that could restrict the operation of its business.
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(m) Employees.
(i) Schedule 5(m) contains a list of the names,
Centre locations, and compensation of all full- and part-time employees at the
Centres as of the date hereof; a list of all employment agreements, pension,
retirement, profit-sharing, deferred compensation, option, bonus, medical,
insurance and other benefit or incentive plans covering such employees; a
description of all employee "perks" or other benefit practices; and a
description of any severance pay policy with respect to such employees.
(ii) Sellers are not aware of any efforts within
the past twelve months to attempt to organize any Seller's employees and, during
such period, no strike or labor dispute involving any Seller has occurred or, to
the best knowledge of Sellers, has been threatened.
(iii) Each Seller has complied with all applicable
wage and hour, EEOC, OSHA, and other similar federal, state and local statutes,
rules and regulations relating to Seller's employees.
(iv) The consummation of the transactions
contemplated by this Agreement will not give rise to any liability of Purchaser
for severance pay or termination pay to any employee of any Seller.
(v) Except as set forth on Schedule 5(m), no
Seller, nor any member of any affiliated group of which any Seller was at any
time a member, has ever maintained or currently maintains any "employee benefit
plan" subject to the Employee
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Retirement Income Security Act of 1974, as amended ("ERISA"). No Seller nor any
of its predecessors have ever contributed to or otherwise participated in or has
been required to contribute to or otherwise participate in any "multiemployer
plan", as defined in Section 4001(a)(3) of ERISA.
(n) Litigation. Schedule 5(n) contains a complete and correct
list of all actions, suits, proceedings, claims, workers' compensation claims
and governmental investigations pending or, to the best knowledge of Sellers,
threatened against any Seller, or any Seller's stockholders, officers,
directors, employees or partners in connection with the Centres. Except as set
forth on Schedule 5(n), no Seller is subject or party to any judgment, order, or
other direction of or stipulation with any court or other governmental authority
or tribunal, in connection with the Centres or otherwise, nor are any Seller's
officers, directors, employees or partners, and none are aware of any reasonable
basis for a claim that such a violation exists.
(o) Environmental Matters. Except as disclosed on Schedule
5(o), Sellers' business, assets and properties are and have been operated and
maintained in compliance with all applicable federal, state and local
environmental protection laws and regulations.
(p) Legal Requirements. The authorization, execution, and
delivery of any Seller's Documents and the consummation of the transactions
contemplated by any Seller's Documents do not and will not violate, or result in
a breach of, conflict with, or require any notice, filing or consent under,
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any statute, rule, regulation or other provision of law, or any order, judgment
or other direction of a court or other tribunal, or any other governmental
requirement, permit, registration, license or authorization applicable to the
Purchased Assets, the Centres or any Seller's business (collectively, "Legal
Requirements"), or result in the creation of any lien, claim, encumbrance, or
restriction on the Purchased Assets.
(q) Transactions with Affiliates. Except as set forth in
Schedule 5(q), since September 30, 1995 no Seller has engaged in any transaction
with any stockholder of any Seller or with any of affiliates, associates, or
relatives of any such stockholder. Except as set forth in Schedule 5(q), (i) no
Seller has any obligation to or claim against any stockholder or key employee,
or any of their affiliates, associates, or relatives, (ii) no such person or
entity has any obligation to or claim against any Seller and (iii) no person or
entity has any claim against any Seller, Sedita or Morley that may adversely
affect any Seller's ability to transfer the Purchased Assets to Purchaser free
and clear of all claims.
(r) Disclosure. No representation, warranty, or other
statement by Sellers in this Agreement or in any of Sellers' Documents, contains
or will contain an untrue statement of a material fact, or omits or will omit to
state a material fact necessary to make such statements not misleading. Sellers
are not aware of any matter that could reasonably be expected to have a
materially adverse effect on the Purchased Assets or their
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business prospects that has not been disclosed in writing to Purchaser.
6. Representations and Warranties of Purchaser. Purchaser hereby
represents, warrants, and agrees as follows:
(a) Organization and Good Standing. Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. JCI is a Delaware corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware and is
listed on the New York Stock Exchange. JCI is the ultimate direct or indirect
parent of Purchaser, JCWLC and International.
(b) Execution and Effect of Agreement. Purchaser has the full
right, power, and authority to enter into and perform this Agreement and all
other agreements, certificates and documents executed or delivered or to be
executed or delivered by Purchaser in connection with this Agreement
(collectively, with this Agreement, "Purchaser's Documents"). The execution,
delivery, and performance by Purchaser of Purchaser's Documents have been duly
authorized by all necessary corporate action of Purchaser. This Agreement has
been duly executed and delivered by Purchaser and Purchaser's Documents are
legal, valid, and binding obligations of Purchaser in accordance with their
respective terms.
7. Covenants of Sellers. Sellers covenant and agree that between the
date of this Agreement and the Closing:
(a) Access by Purchaser. Purchaser and its representatives and
advisers shall have free and full access at
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all reasonable times to the Purchased Assets, Centres and lessors of the
premises occupied by the Centres, books and records, accountants, and employees
of each Seller, and each Seller agrees to cooperate fully with Purchaser and
furnish Purchaser with such information and copies of such documents as
Purchaser may reasonably request in connection with Purchaser's due diligence
investigation. Sellers shall promptly furnish to Purchaser all financial reports
and statements of any Seller that are prepared in the ordinary course of
business.
(b) Conduct of Business. The business of the Centres shall
until Closing be conducted only in the ordinary course, consistent with the
present conduct of its business, and Sellers shall maintain, preserve, and
protect the assets and goodwill of each Seller. Sellers shall maintain at all
times through the Closing Date Inventory in an aggregate amount of not less than
$320,000. Sellers will not take or commit to take any of following actions,
except with the prior written consent of Purchaser: (i) declare or pay any
dividends or make any other distribution of cash or property on its capital
stock, (ii) repurchase or redeem any shares of its capital stock, (iii) enter
into any employment agreement with, or pay or become liable to pay any bonus,
profit-sharing, or incentive payment to, or increase the compensation or
benefits of, any of its officers, directors, or employees, except pursuant to
presently existing plans, arrangements or agreements disclosed in Schedule 5(m)
hereto, (iv) sell, transfer, or acquire any properties or assets, tangible or
intangible, other than in the ordinary course of
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business, (v) make any material changes in its customary method of operations,
including staffing, marketing, advertising, selling, pricing policies and
maintenance of business premises, fixtures, furniture, and equipment, (vi)
cancel or reduce the limits of any of its insurance coverage listed on Schedule
7(b), (vii) modify, amend, or cancel any of the Leases, (viii) modify, amend,
cancel or enter into any contracts, agreements, leases, or understandings other
than in the ordinary course of business and which, alone or in the aggregate,
could result in the creation of a liability of any Seller of more than $5,000,
(ix) enter into any loan agreements, or (x) take any other action which would
cause any of the representations and warranties made in Seller's Documents not
to be true and correct in all material respects on and as of the Closing Date
with the same force and effect as if such representations and warranties had
been made on and as of the Closing Date.
(c) Notification of Purchaser. Sellers shall immediately
notify Purchaser in writing ("Sellers' Notice") if any representation, warranty,
or statement of Sellers, or any schedule delivered to Purchaser, shall become
incorrect. It is understood and agreed that the delivery of such a notice to
Purchaser shall not cure any breach of this Agreement by Seller, nor in any
manner constitute a waiver by Purchaser of any of its rights under this
Agreement; provided, however, if such representation, warranty, statement or
schedule was correct as of the date hereof but became incorrect due solely to
events beyond the control of Sellers occurring after the date hereof and
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Sellers' Notice delivered to Purchaser pursuant to this Section 7(c) so
indicates, then Purchaser may elect, by written notice to Sellers, either (x) to
terminate this Agreement and all obligations of the parties hereunder or (y) to
proceed to close the transactions contemplated hereby pursuant to the terms
hereof, in which event Purchaser shall be deemed to have waived any claim of
default or right to indemnity against Sellers pursuant to Section 13 hereof to
the extent based upon and limited to the events described in Sellers' Notice.
(d) Lockbox. Upon full execution hereof, Purchaser and Sellers
shall arrange for lockbox or escrow accounts (the "Lockbox Accounts") to be
established at Chase Manhattan Bank (the "Bank"), which accounts will be
designated as either joint accounts of Purchaser and Sellers or as escrow
accounts for the benefit of Purchaser and Sellers. From the date hereof until
the Closing Date, all operating revenues derived from or in respect of the
conduct of Sellers' business or other activities of Sellers at the Centres shall
be deposited in the Lockbox Accounts. In connection therewith, each Seller shall
(i) upon execution hereof cause such Seller's current operating bank accounts
("Operating Accounts") to be converted to "deposit only" accounts, (ii) not less
often than daily cause all cash receipts and other payments received by Sellers
in connection with the business and other activities at the Centres to be
deposited in the Operating Accounts and with irrevocable instructions for all
balances in the Operating Accounts to be wire-transferred on a daily basis from
the Operating Accounts to the Lockbox Accounts,
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and (iii) irrevocably revise all of Sellers' accounts, arrangements and
contracts with Visa, Mastercard, Discover, American Express and other credit
card and charge or debit card companies to provide that all proceeds due to any
Seller from all such credit card and charge or debit card companies be paid
directly to the Lockbox Accounts. Subject to the prior written approval of
Purchaser, not to be unreasonably withheld or delayed, the funds in the Lockbox
Accounts may be used only to pay normal and customary operating expenses of the
Centres and Sellers' corporate offices incurred after the date hereof in
connection with the management or operation of the Centres. Except for
reimbursement of Sellers, Sedita and R. Morley for out-of-pocket expenses paid
on behalf of Sellers in connection with the management or operation of the
Centres and related office expenses after the date hereof and approved in
advance by Purchaser (such consent not to be unreasonably withheld or delayed)
and except for salary to be paid to R. Morley at the rate of not more than
$12,500 per month, in no event shall any of the funds in the Lockbox Account be
paid to any Seller, Sedita, R. Morley or any relative or affiliate of any of
them. To the extent funds in the Lockbox Account are available after payment of
all such approved operating expenses, such funds shall be paid to JCWLC and
International to pay any amounts due JCWLC and International by Seller for
royalties accruing after the date hereof and for purchases of food and other
products and other amounts that first become due under the Franchise Agreements
and Food Agreements after the date hereof. Thirty (30) days after
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the Closing Date, all amounts remaining in the Lockbox Accounts after payment or
provision for all liabilities of Sellers (including amounts owed to JCWLC and
International), shall be released to Sellers.
(e) Bulk Sale. Within seven (7) days after the date hereof,
each Seller shall deliver to Purchaser a list containing each Seller's creditors
listed on Schedule 5(e), in the form required to be delivered to a buyer of a
bulk seller's assets by the bulk sale provisions of the Uniform Commercial Code
("Bulk Sales Act") as enacted in the States of New York and Hawaii, and shall
provide all other documents and take such further actions as Purchaser shall
deem necessary or desirable for Purchaser to obtain the full benefit of the
protection afforded buyers of assets subject to the Bulk Sales Act as enacted in
New York and Hawaii. Although the Bulk Sales Act is not in effect in New Jersey
or Connecticut, each Seller shall, concurrently with the delivery of the
documents described in the first sentence above, deliver to Purchaser a list of
creditors and other documents requested by Purchaser and take such further
actions with respect to the Centres located in New Jersey and Connecticut
required to comply with the same provisions of the Bulk Sales Act as enacted in
the State of New York.
(f) Taxes. All sales and use taxes and any other transfer
taxes, if any, payable in connection with transfer of the Purchased Assets shall
be borne paid by Sellers, and Sellers shall indemnify Purchaser with respect
thereto.
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(g) Termination of Employees. At the request of Purchaser, no
later than the day before the scheduled Closing Date, Sellers shall terminate
all employees of Sellers at the Centres.
(h) Reinstatement of Rose-Conn. Sedita will take all actions
necessary to reinstate Rose-Conn to active status in Connecticut as soon as
possible.
8. Covenants of Purchaser. Purchaser covenants and agrees that between
the date of this Agreement and the Closing:
(a) Representations and Warranties. Purchaser will not take
any action which would cause any of the representations and warranties made by
it in Purchaser's Documents not to be true and correct in all material respects
on and as of the Closing Date with the same force and effect as if such
representations and warranties had been made on and as of the Closing Date.
(b) Inventory Purchases. So long as this Agreement remains in
effect and no Seller is in default hereunder, Purchaser will cause JCWLC to
agree that Sellers will not be required to comply with the current modified
"C.O.D." conditions for purchases of food and other products, and payment for
all food and other products purchased by any Seller after the date hereof shall
be deferred until the Closing Date except for payments to be made from the
Lockbox Accounts pursuant to Section 7(d) hereof.
9. Conditions Precedent to Obligations of Purchaser. The obligation of
Purchaser to consummate the transactions contemplated by this Agreement are
subject to the fulfillment, at
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or before the Closing, of each and all of the following conditions:
(a) Representations and Warranties. Each of the
representations and warranties of Sellers in Sellers' Documents shall be true
and correct in all material respects on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date.
(b) Performance of Sellers. Each Seller shall have performed
and complied in all material respects with all agreements, covenants, and
conditions required by such Seller's Documents to be performed or complied with
by it at or before the Closing.
(c) Deliveries. Sellers shall have made all of the deliveries
to Purchaser required pursuant to Section 4(a) and (c).
(d) Litigation. No action or proceeding shall be pending or
threatened before any court, tribunal, or governmental body, and no claim or
demand shall have been made against Purchaser, or any Seller, seeking to
restrain or prohibit or to obtain damages or other relief in connection with the
consummation of the transactions contemplated by any Seller's Documents or
Purchaser's Documents, or which might materially affect the Purchased Assets,
which in the reasonably exercised opinion of Purchaser makes it inadvisable to
consummate such transactions.
(e) Due Diligence. Purchaser shall have been satisfied, in the
exercise of its sole and absolute discretion,
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and approved, by written notice delivered to Sellers at Closing, the results of
its due diligence investigation of the Centres and the business conducted
thereat, including without limitation, the condition of the Centres, the results
of operations and prospects of the business conducted at the Centres, the
Financial Statements, the leases, accounts payable, contracts, commitments and
other documents and information provided to Purchaser or discovered by
Purchaser.
(f) Bulk Sale Compliance. All required actions shall have been
taken in order to ensure that Purchaser shall, at Closing, be entitled to the
full protection afforded by the Bulk Sales Act enacted in the States of New York
and Hawaii in accordance with Section 7(e) above and Purchaser has received the
list of creditors of the Centres located in Connecticut and New Jersey, as
provided in Section 7(e).
(g) Creditor Claims. Purchaser shall have been satisfied, in
the exercise of its sole though reasonable discretion, that the amount of the
Creditor Fund established pursuant to Section 11 below, together with any
additional funds supplied by Sellers (the Creditor Fund together with such
additional funds being referred to herein as the "Escrowed Funds"), is
sufficient to satisfy the aggregate amount owed to all creditors of Sellers,
other than the amounts listed on Schedule 2(b), amounts owed to JCWLC and
International and amounts owed to creditors from whom Sedita or any other Seller
obtains releases of Sellers ("Creditor Claims"); provided, however, if Purchaser
believes that the Escrowed Funds are
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insufficient to satisfy the Creditor Claims, Purchaser may, at its sole option,
elect to complete the purchase of the Purchased Assets pursuant to the terms
hereof and to deduct from all amounts due Sellers hereunder any Creditor Claims
in excess of the amount of the Escrowed Funds.
(h) Leases. Purchaser shall have determined that consents of
all of the landlords under the Leases shall have been obtained. If Sellers are
unable to obtain all such consents at or prior to the Closing Date, Purchaser
shall have the right to terminate this Agreement. If Purchaser chooses not to
terminate this Agreement despite the unavailability of consents with respect to
all of the Leases, Purchaser may waive the condition set forth in this
subsection (h) and cause the transactions contemplated hereby to be consummated
upon the terms contained herein. In such case all Leases (including those for
which consent has not been obtained) shall be included on Schedule 2(b) and
there would be no diminution in the purchase price or other sums paid to the
Sellers. In no case shall Purchaser have any claims against Sellers or Sedita
for their failure to obtain such consents; provided, however, all of the other
representations, warranties, indemnities, and agreements of Sellers and Sedita
and the rights of Purchaser against Sellers and Sedita for breach thereof, if
any, shall be unaffected thereby.
The payment by Purchaser to Sellers of the cash portion of the purchase price at
Closing shall be deemed to constitute satisfaction of Purchaser's conditions
precedent set forth in
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this Section 9, provided that by such payment Purchaser shall not be deemed to
waive or release any rights hereunder to enforce or seek indemnity for the
breach of any representations, warranties, covenants or obligations of Sellers
or Sedita hereunder. In addition, if Purchaser desires to terminate this
Agreement based on the failure of any conditions precedent set forth in this
Section 9 (other than the due diligence condition set forth in Section 9(e)),
Purchaser shall first give a written notice ("Purchaser's Termination Notice")
to Sellers indicating the condition which has not been satisfied. Sellers shall
have five (5) days after the delivery of Purchaser's Termination Notice to cause
such condition to be satisfied. If Sellers do not cause such condition to be so
satisfied within such five (5) day period, Purchaser may terminate this
Agreement by written notice to Sellers. Such termination shall not constitute a
waiver of any of Purchaser's rights to indemnity under Sections 13 and 17 hereof
and nor of any rights of JCWLC and International to recover all amounts owed to
them by Sellers, including, without limitation, the Prior Obligations and the
amounts evidenced by the Interim Note.
10. Conditions Precedent to Obligations of Sellers. The obligations of
Sellers to consummate the transactions contemplated by this Agreement are
subject to the fulfillment, at or before the Closing, of each of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of Purchaser in Purchaser's Documents shall be true and correct in
all material respects on
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and as of the Closing Date with the same force and effect as though the same had
been made on and as of the Closing Date.
(b) Performance by Purchaser. Purchaser shall have performed
and complied in all material respects with the agreements, covenants, and
conditions required by Purchaser's Documents to be performed or complied with by
it at or before the Closing.
(c) Deliveries. Purchaser shall have delivered to Sellers all
of the deliveries required pursuant to Section 4(b) and (c).
The acceptance by Sellers of the cash portion of purchase price at Closing shall
be deemed to constitute satisfaction of Sellers' condition precedent set forth
in this Section 10, provided that by accepting such payment Sellers shall not be
deemed to waive or release any rights hereunder to enforce or seek indemnity for
the breach of any representations, warranties, covenants or obligations of
Purchaser hereunder. In addition, if Sellers desire to terminate this Agreement
based on the failure of any conditions precedent set forth in this Section 10,
Sellers shall first give a written notice ("Sellers' Termination Notice") to
Purchaser indicating the condition which has not been satisfied. Purchaser shall
have five (5) days after the delivery of Sellers' Termination Notice to cause
such condition to be satisfied. If Purchaser does not cause such condition to be
satisfied within said five (5) day period, Sellers may terminate this Agreement
by written notice to Purchaser.
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11. Escrowed Funds. Promptly after execution of this Agreement an
escrow shall be established at Chase Manhattan Bank ("Escrow") to facilitate the
payment of the Creditor Claims. Upon receipt of the creditor list and other
information delivered to Purchaser by each Seller pursuant to Section 7(e)
above, but not earlier than twelve (12) days prior to the scheduled Closing
Date, Purchaser or Escrow shall send a notice to all creditors of each Seller
informing such creditors of the transaction contemplated hereby, requesting that
such creditors submit their final billing to Escrow and provide such other
information that may be required under the Bulk Sales Act or as otherwise may be
deemed desirable to ensure that all Creditor Claims existing as of Closing are
satisfied. If the aggregate amount of the Creditor Claims (other than those for
which Sellers have been released by the creditor) exceeds $1,800,000, Sellers,
prior to Closing, shall either (a) provide to Escrow additional funds sufficient
to satisfy all Creditor Claims in excess of $1,800,000 ("Excess Claims Amount")
or (b) so long as the Excess Claims Amount, together with all other amounts
permitted hereunder to be deducted from the cash payment due Sellers at Closing,
does not exceed $634,100, authorize Purchaser to deduct the Excess Claims Amount
from the cash payment due Sellers at Closing and provide such deducted amount to
Escrow. Escrow shall be instructed to make payments to the holders of the
Creditor Claims upon presentation of invoices or statements for the amount which
will satisfy all Creditor Claims. On the date thirty (30) days following the
Closing Date, any funds remaining in the Escrowed
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Funds, after payment of or provision for all Creditor Claims and all amounts
owed to JCWLC and International, shall be released to Sellers.
12. Brokers and Finders. Each party represents to the other that it has
had no dealings with any broker or finder or similar person in connection with
the transactions contemplated by this Agreement. Should any claim be made for a
broker's, finder's or similar fee on account of any actions or dealings by a
party or its agents, such party shall indemnify and hold the other party
harmless from and against any and all liability and expenses, including
reasonable attorneys' fees, incurred by reason of any claim made by such broker,
finder, or similar person.
13. Indemnification by Sellers. Subject to the survival limitations set
forth in Section 15(a) hereof, Sedita and each Seller, jointly and severally,
shall indemnify, defend, and hold harmless Purchaser, and its affiliates,
promptly upon demand at any time and from time to time, against any and all
losses, liabilities, claims, actions, damages, and expenses, including, without
limitation, reasonable attorneys' fees and expenses (collectively, "Losses"),
arising out of or in connection with any of the following: (a) any
misrepresentation or breach of any warranty made by any Seller in any of any
Seller's Documents; (b) the Retained Liabilities; (c) any breach or
nonfulfillment of any covenant or agreement made by any Seller in any of any
Seller's Documents; (d) the claims of any broker, finder, or similar person
engaged by any Seller; (e) any sales or transfer taxes
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payable in connection with the transactions contemplated hereby; (f) the
involuntary dissolution of Taylor and Rose-Conn and the failure of Sedita to
cause Rose-Conn to be reinstated to active status; and (g) without in any manner
limiting the foregoing, any liabilities or obligations of, or claims or causes
of action against, Purchaser or its affiliates concerning or relating to the
Purchased Assets which arise with respect to or relate to any period or periods
on or prior to the Closing Date, including, without limitation, based upon any
Seller's negotiations with creditors after the date hereof.
14. Indemnification By Purchaser. Subject to the survival limitations
set forth in Section 15(a) hereof, Purchaser shall indemnify, defend, and hold
harmless Sellers, Sedita and R. Morley, promptly upon demand at any time and
from time to time, against any and all Losses arising out of or in connection
with any of the following: (a) any misrepresentation or breach of any warranty
made by Purchaser in any of Purchaser's Documents; (b) any breach or
nonfulfillment of any covenant or agreement made by Purchaser in Purchaser's
Documents; (c) the claims of any broker, finder, or similar person engaged by
Purchaser and (d) the liabilities listed on Schedule 2(b), including, without
limitation all obligations, liabilities, undertakings and agreements of any of
the Sellers and any guarantors of the Sellers' obligations arising or first
accruing after the Closing under any Leases.
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15. Survival of Representations and Warranties; Offset.
(a) Survival. All representations, warranties, indemnities,
covenants, and agreements made by Sellers in Sellers' Documents and Purchaser in
Purchaser's Documents shall survive the Closing, notwithstanding any examination
or investigation made by or for any party, and notwithstanding the delivery of
any notice pursuant to Section 7(c); provided that neither Purchaser nor Sellers
shall be entitled to indemnity under this Agreement unless a written notice
specifying such party's claims for indemnity is delivered to the other party
hereunder within two (2) years after the Closing Date, and then only for such
claims set forth in such notice.
(b) Offset. An indemnified party may offset against and deduct
from any amounts due the other party hereunder all Losses incurred by the
indemnified party pursuant to Sections 13 or 14 hereunder.
16. Obligations of Sedita and Morley.
(a) Restrictive Covenant. The parties acknowledge that JCWLC,
Purchaser and International carry on their business in various cities and
counties throughout the United States and Puerto Rico, that following the
Closing JCWLC, Purchaser and International will distribute and market products
and programs throughout such territories, that Purchaser's, JCWLC's and
International's customers and weight loss centres are or will be located
throughout such territories, that a substantial portion of the value of the
Purchased Assets and the business of Sellers being purchased is the goodwill
from the operations of the
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Centres. Accordingly, for a period of seven (7) years following the Closing Date
(the "Restriction Period"), neither Sedita, B. Morley nor R. Morley shall: (i)
directly or indirectly engage or be interested in or carry on (whether as a
shareholder (other than a passive investment of less than 5% of the capital
stock of a publicly traded company), as an owner, partner, shareholder,
director, consultant, employee, agent, or otherwise) any business, activity, or
enterprise in any part of the cities and counties in which the business of
Purchaser, JCWLC and International or any of their divisions and subsidiaries
has been carried on (the "Territory") which: (A) engages in the operation of a
weight loss or weight control centre similar to the business carried on at the
Centres or (B) provides goods or services which are similar to or compete with
the businesses then being carried on by JCWLC, Purchaser or International; (ii)
directly or indirectly employ or otherwise engage, or offer to employ or
otherwise engage, any person who is then (or was at any time within two years
prior to the time of such employment, engagement, or offer thereof) an employee
or agent of any Seller or JCWLC, Purchaser or International; or (iii) solicit
any business from any person or entity that has been a customer of any Seller or
JCWLC, Purchaser or International or directly or indirectly induce or influence
any customer, supplier, or other person that has a business relationship with
any Seller or JCWLC, Purchaser or International or any affiliate thereof to
discontinue or reduce the extent of such relationship. Notwithstanding the
foregoing, Sedita, B. Morley and R. Morley
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may own and operate fitness facilities throughout the Territory which may
provide nutritional and fitness guidance to customers. In addition, Sedita,
Sellers, and their affiliates shall never use or divulge any trade secrets,
customer or supplier lists, pricing information, marketing arrangements,
strategies, business plans, internal performance statistics, training manuals,
or other proprietary or confidential information concerning JCWLC, Purchaser or
International or their subsidiaries and affiliated companies. Because the breach
or attempted or threatened breach of this restrictive covenant will result in
immediate and irreparable injury to JCWLC, Purchaser and International for which
JCWLC, Purchaser and International will not have an adequate remedy at law,
JCWLC, Purchaser and International shall be entitled, in addition to all other
remedies, to a decree of specific performance of this covenant and to a
temporary and permanent injunction enjoining such breach, without posting bond
or furnishing similar security.
(b) Guaranty. Sedita absolutely and unconditionally guarantees
the full and prompt performance of all obligations ("Sedita Guarantied
Obligations") of Sellers under this Agreement, including, without limitation,
the indemnity obligations set forth in Section 13 hereof and under the Interim
Note (referred to in Section 4(d)(ii) hereof and delivered to Purchaser
concurrently with the execution of this Agreement). This Guaranty shall remain
in full force and effect despite any amendment of or other change in any of the
Sedita Guarantied Obligations, any extensions thereof, any forebearances,
delays,
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waivers or compromises with respect thereto, and any other action or omission
whatsoever of any person, whether with or without any notice to Sedita or her
consent (any right to notice or to consent being hereby expressly waived), and
any and all of foregoing shall be binding upon her. Payment of all amounts now
or hereafter owed to Sedita by any Seller is hereby subordinated to the payment
in full to Purchaser, JCWLC or International of the Sedita Guarantied
Obligations and Sedita hereby assigns all such rights against Sellers to
Purchaser as security for the payment of the Sedita Guarantied Obligations. In
addition, Sedita hereby irrevocably and unconditionally waives and relinquishes
all statutory, contractual, common law, equitable and other claims against each
Seller for subrogation, reimbursement, exoneration, contribution,
indemnification, setoff or other recourse in respect of sums paid or payable by
Sedita hereunder. This is a direct and continuing guaranty of payment and
recovery may be had from Sedita in all cases without first making, pursuing or
exhausting any demand, claim or remedy against Sellers or any other person or
entity. Sedita hereby waives all presentments, demands for performance, notices
of nonperformance, protests, notices of protest, notices of dishonor, and
notices of acceptance of this guaranty.
17. JCI Guaranty. JCI absolutely and unconditionally guarantees the
full and prompt performance of all obligations (the "JCI Guarantied
Obligations") of Purchaser under this Agreement, including, without limitation,
the indemnity obligations set forth in Section 14 hereof and under the
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Purchaser Note (referred to in Section 2(a)(iii). This Guaranty shall remain in
full force and effect despite any amendment of or other change in any of the JCI
Guarantied Obligations, any extensions thereof, any forebearances, delays,
waivers or compromises with respect thereto, and any other action or omission
whatsoever of any person, whether with or without any notice to JCI or her
consent (any right to notice or to consent being hereby expressly waived), and
any and all of foregoing shall be binding upon it. In addition, JCI hereby
irrevocably and unconditionally waives and relinquishes all statutory,
contractual, common law, equitable and other claims against each Purchaser for
subrogation, reimbursement, exoneration, contribution, indemnification, setoff
or other recourse in respect of sums paid or payable by JCI hereunder. This is a
direct and continuing guaranty of payment and recovery may be had from JCI in
all cases without first making, pursuing or exhausting any demand, claim or
remedy against Purchaser or any other person or entity. JCI hereby waives all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance of this
guaranty.
18. Further Assurances. The parties shall cooperate and take such
actions, and execute such other documents, at the Closing or subsequently, as
either may reasonably request in order to carry out the provisions or purpose of
this Agreement. In particular, Sellers and Purchaser shall cooperate in
obtaining
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consents to the assignment of the Leases and contracts made pursuant to the
terms hereof.
19. Notices. All notices or other communications in connection with
this Agreement shall be in writing and shall be considered given when received
if directed as follows:
If to Purchaser:
Jenny Craig Operations, Inc.
445 Marine View Avenue
Suite 300
Del Mar, California 92014
Attn: Mr. Michael Jeub
Telephone No. (619) 259-7000
Telecopier No. (619) 259-1947
With copies to:
Proskauer Rose Goetz & Mendelsohn LLP
2121 Avenue of the Stars, Suite 2700
Los Angeles, California 90067
Attn: Marvin Sears, Esq.
Telephone No. (310) 557-2900
Telecopier No. (310) 557-2193
If to Sellers
Ms. Audrey Sedita
c/o Rose Enterprises, Inc.
40-623 Desert Creek Lane
Rancho Mirage, California 92270
Telephone No. (619) 772-3590
Telecopier No. (619) 773-3932
With copies to:
Marcus, Perres, Campanale & Weiner
19 South La Salle Street
Suite 1500
Chicago, Illinois 60603
Attn: Ira Marcus, Esq.
Telephone No. (312) 641-2233
Telecopier No. (312) 332-4629
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<PAGE> 46
20. Entire Agreement. This Agreement (which includes the recitals set
forth in the preamble and the schedules and exhibits hereto) sets forth the
parties' final and entire agreement with respect to its subject matter and
supersedes any and all prior understandings and agreements. This Agreement can
be amended, supplemented, or changed, and any provision of this Agreement can be
waived, only by a written instrument making specific reference to this Agreement
signed by the party against whom enforcement of any such amendment, supplement,
change, or waiver is sought.
21. Successors. This Agreement shall be binding upon and shall inure to
the benefit of the parties and their respective heirs, executors,
administrators, personal representatives, successors, and assigns; provided,
however, that neither this Agreement nor any right or obligation under this
Agreement may be assigned or transferred by either Sellers or Purchaser (except
to any parent, subsidiary or affiliate of Purchaser) without the written consent
of the other party. The assignment of Purchaser's interest herein to a parent,
subsidiary or affiliate of Purchaser will not affect the obligations of JCI
pursuant to Section 17 hereof.
22. Section Headings. The section headings in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
23. Severability. If any provision of this Agreement shall be held by
any court of competent jurisdiction to be illegal, invalid, or unenforceable,
such provision shall be construed and enforced as if it had been more narrowly
drawn so as not to be
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illegal, invalid, or unenforceable, and such illegality, invalidity, or
unenforceability shall have no effect upon and shall not impair the
enforceability of any other provision of this Agreement.
24. Governing Law. This Agreement shall be governed by and construed
and interpreted in accordance with the internal law of the State of California
(without reference to its rules as to conflicts of law).
25. Attorneys' Fees. If any legal action or proceeding is brought for
the enforcement of any of Purchaser's Documents or Sellers' Documents, or
because of an alleged dispute, default or misrepresentation in connection with
any of Purchaser's Documents or Sellers' Documents, Purchaser, on the one hand,
and Sellers and Sedita on the other, whichever may be the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees,
charges and costs in addition to any other relief to which they may be entitled.
26. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
27. Waiver. No party shall be deemed to have waived any right or remedy
hereunder unless such waiver is contained in a writing signed by the party
purporting to have waived such right or remedy. No delay by any party in
exercising any right or remedy shall operate as a waiver, and no single or
partial
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exercise of any right or remedy shall preclude any other or future exercise of
any other right or remedy.
28. Arbitration. Any dispute arising out of or relating to this
Agreement that cannot be settled by good faith negotiation between the parties
will be submitted to JAMS/ENDISPUTE, or any other mediation service the parties
mutually agree upon, for non-binding mediation, and if complete agreement cannot
be reached within twenty (20) days of submission to mediation, any remaining
issues will be submitted to JAMS/ENDISPUTE, or any other arbitration service as
the parties may mutually agree upon, for final and binding arbitration,
provided, however, that either party may seek injunctive relief from the Courts
of California without resorting to or completing mediation or arbitration. No
mediator or arbitrator shall have the authority to grant injunctive relief.
It is agreed that the arbitration hearings, if any, shall be
held in the State of California pursuant to the California Arbitration Act,
California Code of Civil Procedure Section 1280 et seq., and any such dispute,
claim or controversy shall be settled in accordance with JAMS/ENDISPUTE's
Streamlined Arbitration Rules and Procedures then in effect if no disputed claim
or counterclaim exceeds $250,000, not including interest, or in accordance with
JAMS/ENDISPUTE's Comprehensive Arbitration Rules and Procedures then in effect
if any disputed claim or counterclaim exceeds $250,000, not including interest
(which Rules are incorporated herein by reference as though set forth at length
herein other than those with respect to the number of
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arbitrators) and any decision or order or finding rendered by a panel of three
(3) arbitrators ("arbitrators"), of whom one is chosen by Purchaser, one is
chosen by Sedita and the third is chosen by the arbitrators chosen by Purchaser
and Sedita, shall be final, binding and conclusive upon the parties hereto and
judgment upon the finding or decision rendered may be entered in the Court of
the forum, state or federal, having jurisdiction. The arbitrators will be
expressly instructed to apply the substantive law of the State of California.
The arbitrators' jurisdiction is expressly limited to the terms of the
Agreement.
The arbitrators, if they deem that the matter requires it, are
authorized to award to the party whose contention is sustained such sums as they
or a majority of them shall deem proper to compensate such party for the time
and expense incident to the proceedings and, if the arbitration was demanded
without reasonable cause, then they may also award damages for delay, if any.
The arbitrators shall determine their own reasonable compensation in accordance
with such JAMS/ENDISPUTE Rules, and, unless otherwise provided by agreement,
shall assess the cost and charges of the proceedings equally to both parties
unless the arbitrators shall find an issue raised by either party was
unreasonable or frivolous and that therefore the costs of the arbitration or any
portion thereof shall be born by the said party.
29. Cure. Neither Sellers nor Purchaser shall be deemed to be in
default of its obligations hereunder unless the party claiming a breach thereof
shall have given a written notice to
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the breaching party setting forth the reason for such breach and granting the
breaching party five (5) business days to cure any such breach; provided,
however, if the breach is not of a monetary nature, and the breaching party
shall have commenced a cure thereof and shall be diligently prosecuting such
cure, such breaching party shall not be deemed to be in default hereunder if
such breach is cured within thirty (30) days after the date of the notice.
Notwithstanding the foregoing, the curing by any party of any breach hereunder
shall not excuse nor diminish any party's obligation to pay Losses, if any,
suffered by the other party pursuant to the indemnification provisions contained
in Sections 13 and 14 hereof.
30. Consent. Unless stated in the contrary herein, wherever in this
agreement a party's consent, authorization, permission or approval is required,
such consent, authorization, permission or approval shall not be unreasonably
withheld or delayed.
31. Sellers. Sedita and B. Morley are included in the defined term
"Sellers" solely for the purposes of conveying the Purchased Assets used in
connection with the Hawaii Centres and shall not otherwise be deemed to have the
obligations of "Sellers" hereunder except for such purpose; it being understood,
however, that nothing contained in this Section 31 shall affect Sedita's
obligations and liabilities under Section 5 (Representations and Warranties),
Section 13 (Indemnification), and Section 16 (Restrictive Covenant and
Guaranty).
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IN WITNESS WHEREOF, the parties have duly executed this Asset
Purchase Agreement as of the date first above written.
PURCHASER:
JENNY CRAIG OPERATIONS, INC.,
a Delaware corporation
By: /s/ Michael L. Jeub
------------------------------------------
Name: Michael L. Jeub
Title: Sr. V.P. & C.F.O.
SELLERS:
CHRIS LIN ENTERPRISES, INC., a New Jersey
corporation
By: /s/ Robert Morley, President
------------------------------------------
Name:
Title:
CHRIS LIN ENTERPRISES NEW YORK, INC., a New
York corporation
By: /s/ Robert Morley, President
------------------------------------------
Name:
Title:
ROSE ENTERPRISES, INC.,
a New York corporation
By: /s/ Audrey Sedita, Pres.
------------------------------------------
Name:
Title:
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ROSE ENTERPRISES, INC. NJ,
a New Jersey corporation
By: /s/ Audrey Sedita, Pres.
------------------------------------------
Name:
Title:
ROSE ENTERPRISES OF CONNECTICUT, INC.
a Connecticut corporation
By: /s/ Audrey Sedita, Pres.
------------------------------------------
Name:
Title:
/s/ Bradley Morley
---------------------------------------------
Bradley Morley
/s/ Audrey Sedita, Pres.
---------------------------------------------
Audrey Sedita
The undersigned Robert Morley executes this Agreement in order to be bound to
his obligations set forth in Section 16 hereof.
/s/ Robert Morley
---------------------------------------------
Robert Morley
The undersigned Jenny Craig, Inc. executes this Agreement to be
bound to its obligations set forth in Section 17 hereof.
JENNY CRAIG, INC., a Delaware corporation
By: /s/ Michael L. Jeub
------------------------------------------
Name:
Title:
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<PAGE> 1
EXHIBIT 10.38
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (the "Agreement") is dated as of May
22, 1996, by and between M&S BALANCED PROPERTY FUND, L.P., a California limited
partnership ("Seller"), JENNY CRAIG MANAGEMENT, INC., a California corporation
("Buyer").
IN CONSIDERATION of the respective agreements hereinafter set forth,
Seller and Buyer agree as follows:
1. Property Included in Sale. Seller hereby agrees to sell and convey
to Buyer, and Buyer hereby agrees to purchase from Seller, subject to the terms
and conditions set forth herein, the following:
(a) that certain real property located in La Jolla,
California, consisting of approximately 2.72 acres of land and more particularly
described in Exhibit A attached hereto (the "Real Property");
(b) all rights, privileges and easements appurtenant to the
Real Property and owned by Seller, including, without limitation, all minerals,
oil, gas and other hydrocarbon substances on and under the Real Property, all
development rights, air rights, water, water rights, riparian rights and water
stock relating to the Real Property and any rights-of-way or other appurtenances
used in connection with the beneficial use and enjoyment of the Real Property
(collectively, the "Appurtenances");
(c) all improvements and fixtures located on the Real
Property, including, without limitation, one office building commonly known as
11355 North Torrey Pines Road, La Jolla, California, as well as any other
buildings and structures presently located on the Real Property, all apparatus,
equipment and appliances used exclusively in connection with the operation or
occupancy of the Real Property, and all on-site parking (collectively, the
"Improvements");
(d) all personal property owned by Seller and presently
located on or in and used in connection with the Real Property and Improvements
including the fixtures and furniture described in Exhibit B attached hereto (the
"Personal Property"); and
(e) any intangible personal property owned by Seller and used
in the ownership, use or operation of the Real Property, Appurtenances,
Improvements and Personal Property, and, to the extent approved by Buyer
pursuant to this Agreement, any contract or warranty rights, utility contracts
or other agreements or rights as they relate to the ownership, use and operation
of the Property, as defined below (collectively, the "Intangible Property").
All of the items referred to in subparagraphs (a), (b), (c), (d) and (e) above
are collectively referred to as the "Property."
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2. Purchase Price.
(a) The purchase price of the Property is EIGHT MILLION
DOLLARS ($8,000,000.00) (the "Purchase Price").
(b) The Purchase Price shall be paid as follows:
(i) Upon execution of this Agreement by Buyer and
Seller, Buyer shall deposit in escrow with First American Title Insurance
Company ("Title Company"), a deposit in the amount of Two Hundred Fifty Thousand
Dollars ($250,000.00) (the "Deposit").
(ii) The Deposit shall be held in an interest-bearing
account and interest accruing thereon shall be held for the account of Buyer. In
the event the sale of the Property as contemplated hereunder is consummated, the
Deposit plus interest accrued thereon shall be credited against the Purchase
Price. Cash deposited by Buyer with Title Company will be invested and
reinvested, in any certificate(s) of deposit, savings or other account(s) of any
California state or federal savings and loan association or California state
bank or national banking association, as Buyer may instruct Title Company in
writing, provided that there shall be no risk of loss of principal. However, no
investment or reinvestment certificate or account may have a maturity date later
than the Closing. Absent such written instructions, Title Company will have no
responsibility to invest or reinvest any of the Deposit.
(iii) The balance of the Purchase Price shall be paid
to Seller in immediately available funds at the closing of the purchase and sale
contemplated hereunder (the "Closing").
3. Transfer of Title to the Property.
(a) At the Closing, Seller shall convey to Buyer fee simple
title to the Real Property, the Appurtenances and the Improvements, by duly
executed and acknowledged grant deed substantially in the form attached hereto
as Exhibit C (the "Deed"). Evidence of delivery of marketable and insurable fee
simple title shall be the issuance by Title Company to Buyer of an ALTA Owner's
Policy of Title Insurance (Form - 1995) in the amount of the Purchase Price,
insuring fee simple title to the Real Property, the Appurtenances and the
Improvements in Buyer, in such form and with such special endorsements and
subject only to such exceptions as Buyer shall approve pursuant to Subsection
5(a) below, and subject to such other exceptions as may be reasonably approved
by Buyer (the "Title Policy").
(b) At the Closing, Seller shall transfer title to the
Personal Property by a bill of sale in the form attached hereto as Exhibit D
(the "Bill of Sale").
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(c) At the Closing, Seller shall transfer title to any
Intangible Property approved by Buyer as provided herein by an Assignment of
Intangible Property in the form attached hereto as Exhibit E (the "Assignment of
Intangible Property").
4. Due Diligence Period; As Is.
(a) Due Diligence Period. Buyer, or its designees, shall
commence promptly upon Seller's execution hereof due diligence with respect to
the Property and the due diligence period shall expire thirty (30) days after
the date of Seller's execution hereof (the "Due Diligence Period"). In the event
this Agreement terminates pursuant to this Section 4 or Section 5 below, then
the Deposit plus interest accrued thereon immediately shall be returned to
Buyer, Buyer shall pay any title or escrow cancellation fees, and neither party
shall have any further rights or obligations hereunder. All documents and other
information required to be provided by Seller to Buyer and specified below,
shall be provided to Buyer within five (5) business days after the date of
Seller's execution of this Agreement and Seller will either deliver such
documents and information and/or authorize and direct its agents to deliver such
documents and information to the extent in such agents' possession.
(b) AS-IS. During the Due Diligence Period, Buyer will have
the adequate opportunity to examine and inspect the Property and to become
familiar with the physical condition, quality, quantity and state of repair of
the Property, the operation thereof or prospects therefor in all respects, and
all other aspects of the Property. Buyer acknowledges that, except as otherwise
specifically set forth herein, Buyer is acquiring the Property in its "AS-IS"
condition solely in reliance of its own inspections, examinations and evaluation
of the Property. Buyer agrees and acknowledges that, except for Seller's
representations and warranties set forth in Section 8, no other representations,
statements or warranties have at any time been made by Seller or its agents
regarding the Property, including without limitation regarding the physical
condition, quality, quantity or state of repair of the Property, the operation
of or prospects for the Property or Buyer's use thereof, or any other aspects of
the Property. Buyer specifically agrees and acknowledges that Seller makes no
representation or warranty to Buyer regarding the permitted uses of the Property
or the fitness of the Property for any intended use by Buyer.
5. Buyer's Conditions to Closing. The following conditions are
precedent to Buyer's obligation to purchase the Property (the "Conditions
Precedent"):
(a) Buyer's review and approval of title to the Property and
delivery to Buyer of the following items:
(i) a current preliminary title report on the Real
Property, issued by Title Company (the "Preliminary Report"), together with
copies of the underlying documents to the exceptions to coverage set forth
therein; and
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(ii) the existing ALTA survey of the Real Property
and Improvements (dated 5/2/95) which is currently in Seller's possession.
Buyer shall have the further right to obtain at its own expense, and to review
and approve, a color coded map plotting all easements disclosed by the
Preliminary Report and a new or updated ALTA as-built survey of the Property
prepared by a licensed engineer or surveyor acceptable to Buyer. For purposes of
approval of title, Buyer shall advise Seller within five (5) business days prior
to the end of the Due Diligence Period what exceptions to title, if any, and
what form of title insurance, including any special endorsements, will be
accepted by Buyer.
(b) Buyer's review and approval, within the Due Diligence
Period, of the structural, mechanical, electrical and other physical
characteristics and condition of the Property, structural calculations for the
Improvements, if any, site plans, engineering reports and plans, grading plans,
topographical maps, landscape plans, and floor plans, environmental reports,
soils reports, engineering and architectural studies, and copies of any as-built
plans and specifications for the Property. Such review may include a reasonable
examination for the presence or absence of any hazardous material (as further
described in Section 12 below), which shall be performed or arranged by Buyer at
Buyer's sole expense. For these purposes, Seller shall provide Buyer with copies
of all plats, maps, plans and specifications, engineering and structural reports
and studies (other than preliminary or partial studies intended to result in
complete or final reports) in Seller's possession and Seller will authorize and
direct its agents to deliver copies to the extent in such agents' possession.
(c) Subject to subparagraph (d) below, Buyer's review and
approval, within the Due Diligence Period, of all governmental permits and
approvals relating to the construction, operation, use or occupancy of the
Property, which will be delivered by Seller to Buyer to the extent copies
thereof are in Seller's possession and Seller will authorize and direct its
agent to deliver copies to the extent in such agents' possession, and all
zoning, land-use, subdivision, environmental, building and construction laws and
regulations restricting or regulating or otherwise affecting the use, occupancy
or enjoyment of the Property.
(d) Buyer's obtaining approval reasonably satisfactory to
Buyer from the City of San Diego for Buyer's intended expansion of the parking
area on the Property. Buyer shall submit any required request or application for
such approval within five (5) business days of the mutual execution of this
Agreement, and Buyer shall use its best efforts to obtain such approval within
the Due Diligence Period. In the event that Buyer certifies to Seller that all
Conditions Precedent contained in this Section 5 have been satisfied with the
exception of the condition set forth in this paragraph 5(d), and Buyer has used
its best efforts to satisfy this condition, the Due Diligence Period may be
extended for an additional fifteen (15) days (the "Extension Period") upon
Buyer's delivery to Seller of such certification and notice prior to the
expiration of the Due Diligence Period.
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(e) Buyer's review and approval, within the Due Diligence
Period, of all certificates of occupancy; presently effective warranties or
guaranties; report of insurance carriers insuring the Property respecting the
claims history of the Property while owned by Seller, if any; environmental
reports, soils reports, engineering and architectural studies; and other
contracts or documents of significance to the Property; all of which will be
delivered by Seller to Buyer to the extent that such items are in the possession
of Seller and as to which Seller will authorize and direct its agents to deliver
copies to the extent in such agents' possession (collectively, the "Other
Documents").
(f) Buyer's review and approval, within the Due Diligence
Period, of all service contracts, utility contracts and maintenance contracts
which may continue after Closing and the HVAC Contract (as defined in Section 16
below) ("Contracts"). For these purposes, Seller will furnish to Buyer copies of
any the HVAC Contract and Contracts that may continue in effect after Closing,
and Buyer will have the right to approve during the Due Diligence Period a
schedule (the "Schedule of Assumed Contracts") setting forth an exclusive list
of all of the Contracts and Other Documents that shall be assigned to, and
assumed by, Buyer at Closing (the "Assumed Contracts"). The Schedule of Assumed
Contracts will be attached as Schedule 2 to the Assignment of Intangible
Property.
Buyer will have the right to contact third parties that prepared reports, maps,
surveys or similar information delivered by Seller to Buyer hereunder for
purposes of assisting in Buyer's conducing its due diligence investigation
hereunder. The Conditions Precedent contained in this Section 5 are intended
solely for the benefit of Buyer. Subject to the provisions of Section 6 below,
if any of the Conditions Precedent is not satisfied, Buyer shall have the right
in its sole discretion either to waive in writing the Condition Precedent and
proceed with the purchase or terminate this Agreement. If Buyer shall not have
given notice to Seller prior to the end of the Due Diligence Period that each
Condition Precedent has been waived or satisfied (except as may be provided in
Section 5(d) above), or Buyer shall not have given notice to Seller prior to the
end of the Extension Period, to the extent applicable under Section 5(d) above,
that the final Condition Precedent described therein has been waived or
satisfied, this Agreement shall terminate and be void and of no further force or
effect as of the end of the Due Diligence Period or the Extension Period, as
applicable.
6. Remedies.
(a) In the event the sale of the Property is not consummated
because of the failure of any then existing condition or any other reason except
a default under this Agreement on the part of Buyer, the Deposit plus interest
accrued thereon immediately shall be returned to Buyer. If any breach or default
under this Agreement occurs on the part of Buyer, the Deposit and interest
accrued thereon shall be paid to and retained by Seller as liquidated damages
and as Seller's sole remedy for such breach or default (except as hereafter
provided in this paragraph). The parties have agreed that Seller's actual
damages, in the event of a breach or default by Buyer, would be extremely
difficult or impracticable to determine. THEREFORE, BY PLACING THEIR INITIALS
BELOW,
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THE PARTIES ACKNOWLEDGE THAT THE DEPOSIT HAS BEEN AGREED UPON, AFTER
NEGOTIATION, AS THE PARTIES' REASONABLE ESTIMATE OF SELLER'S DAMAGES AND AS
SELLER'S EXCLUSIVE REMEDY AGAINST BUYER, AT LAW OR IN EQUITY, IN THE EVENT OF A
BREACH OR DEFAULT UNDER THIS AGREEMENT ON THE PART OF BUYER. HOWEVER, NOTHING IN
THIS SECTION SHALL PRECLUDE THE RECOVERY OF ATTORNEYS' FEES OR OTHER COSTS
INCURRED BY SELLER PURSUANT TO SECTION 17(g) OR LIMIT THE EFFECTIVENESS OF ANY
INDEMNIFICATION OBLIGATIONS OF BUYER UNDER THIS AGREEMENT.
INITIALS: Seller__________ Buyer__________
(b) In the event the sale of the Property is not consummated
because of a default under this Agreement on the part of Seller, Buyer may
either terminate this Agreement by delivery of notice of termination to Seller,
whereupon Buyer's Deposit plus interest accrued thereon immediately shall be
returned to Buyer; or continue this Agreement pending Buyer's action for
specific performance. Buyer shall not be entitled to pursue and hereby waives
any claim for damages hereunder.
7. Closing and Escrow.
(a) Upon mutual execution of this Agreement, the parties shall
deposit an executed counterpart of this Agreement with Title Company and this
Agreement shall serve as instructions to Title Company as the escrow holder for
consummation of the purchase and sale contemplated hereby. Seller and Buyer
agree to execute such additional escrow instructions as may be appropriate, or
required by Title Company, to enable the escrow holder to comply with this
Agreement; provided, however, that in the event of any conflict between the
provisions of this Agreement and any supplementary escrow instructions, the
terms of this Agreement shall control.
(b) The Closing hereunder shall be held and delivery of all
items to be made at the Closing shall be made at the offices of Title Company on
a date selected by Buyer and Seller but no earlier than June 10, 1996 and no
later than July 22, 1996 (such selected date is the "Closing Date"). In the
event the Closing does not occur on or before the Closing Date, Title Company
shall, unless it is notified by both parties to the contrary within five (5)
days after the Closing Date, return to the depositor thereof items which were
deposited hereunder. Any such return shall not, however, relieve either party of
any liability it may have for its wrongful failure to close.
(c) At or before the Closing, Seller shall deliver to Buyer
the following:
(i) a duly executed and acknowledge Deed;
(ii) a duly executed Bill of Sale;
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(iii) a duly executed Assignment of Intangible
Property;
(iv) such resolutions or authorizations relating to
Seller as shall be reasonably required by Buyer or Title Company;
(v) any other instruments, records or correspondence
called for hereunder which have not previously been delivered;
(vi) an affidavit pursuant to Section 1445(b)(2) of
the United States Internal Revenue Code (the "Code") and on which Buyer is
entitled to rely, that Seller is not a "foreign person" within the meaning of
Section 1445(f)(3) of the Code, substantially in the form of Exhibit F attached
hereto; and
(vii) a California Franchise Tax Board Form No. 590,
evidencing that Seller is not subject to income tax withholding pursuant to
California Revenue and Taxation Code Section 18805.
Buyer may waive compliance on Seller's part under any of the foregoing items by
an instrument in writing.
(d) At or before the Closing, Buyer shall deliver to Seller
the following:
(i) A DULY EXECUTED ASSIGNMENT OF INTANGIBLE
PROPERTY;
(ii) such resolutions and authorizations relating to
Buyer as shall be reasonably required by Seller or Title Company;
(iii) cash equal to the amount actually incurred and
paid by Seller prior to Closing in constructing the HVAC Work as described in
and as limited by Section 16 below (as set forth in a certified demand delivered
by Seller to Buyer and the Title Company); and
(iv) the Purchase Price.
Seller may waive compliance on Buyer's part under any of the foregoing items by
an instrument in writing.
(e) Seller and Buyer shall each deposit such other instruments
as are reasonably required by the escrow holder or otherwise required to close
the escrow and consummate the purchase of the Property in accordance with the
terms hereof, including, without limitation, an agreement designating Title
Company as the "Reporting Person" for the transaction pursuant to Section
6045(e) of the California Revenue & Taxation Code and the regulations
promulgated thereunder, and executed by Seller, Buyer and Title Company.
(f) The following are to be apportioned as of the Closing
Date:
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(i) Utility Charges. Seller shall cause all the
utility meters to be read on the Closing Date, and will be responsible for the
cost of all utilities used prior to the Closing Date. Buyer will be responsible
for the cost of all utilities used on or after the Closing Date.
(ii) Other Apportionments. Amounts payable under the
Assumed Contracts, annual or periodic permit and/or inspection fees (calculated
on the basis of the period covered), and liability for other Property operation
and maintenance expenses and other recurring costs shall be apportioned as of
the Closing Date. Seller shall pay the premium for a CLTA Policy of Title
Insurance for the Property in the amount of the Purchase Price. Buyer shall pay
the difference between the cost of an ALTA Policy of Title Insurance (if
obtained by Buyer) and a CLTA Policy of Title Insurance for the Property in the
amount of the Purchase Price, the cost of any endorsements requested by Buyer,
and the cost of any change or update to the existing survey requested by Buyer.
Sales tax (if any) on the Personal Property shall be paid by Seller. Seller
shall pay the cost of any transfer taxes applicable to the sale, as well as
one-half of escrow agent's fees, costs, and charges. Buyer shall pay all other
costs, including legal fees, incurred by it in connection with the transaction
contemplated by this Agreement, as well as one-half of escrow agent's fees,
costs, and charges.
(iii) Real Estate Taxes and Special Assessments.
General real estate taxes and assessments and personal property taxes payable
for all tax years ending prior to the Closing Date shall be paid by Seller.
General real estate taxes and assessments and personal property taxes payable
for the tax year in which the Closing Date occurs shall be prorated by Seller
and Buyer as of the Closing Date. Any supplemental tax assessments relating to
the period of time prior to the Closing shall be the responsibility of Seller.
(iv) Closing Statement. Title Company shall prepare a
preliminary Closing settlement statement and shall deliver such computation to
Buyer and Seller for approval prior to Closing.
(v) Post-Closing Reconciliation. If any of the
aforesaid prorations cannot be calculated accurately on the Closing Date, then
they shall be calculated as soon after the Closing Date as feasible. Either
party owing the other party a sum of money based on such subsequent proration(s)
shall promptly pay said sum to the other party.
(vi) Survival. The provisions of this Subsection 7(f)
shall survive the Closing.
8. Representations and Warranties of Seller. Seller hereby represents
and warrants to and covenants with Buyer as follows; provided that all
representations and warranties set forth below to the extent limited to the
knowledge or best knowledge of Seller are made solely on the basis of and are
therefore limited to the actual knowledge of Kenneth A. Baber, principal of
Seller:
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(a) Status. Seller is duly organized, validly existing and
qualified and empowered to conduct its business, and has full power and
authority to enter into and fully perform and comply with the terms of this
Agreement. Neither the execution and delivery of this Agreement, nor its
performance by Seller, will conflict with or result in the breach of any
contract, agreement, law, rule or regulation to which Seller is a party or by
which Seller is bound.
(b) Insolvency; Bankruptcy. There are no actions or
proceedings pending or threatened to liquidate, reorganize, place in bankruptcy
or dissolve Seller.
(c) Enforceability. This Agreement is duly authorized and
executed by Seller's sole general partner, and this Agreement and all documents
required to be executed by Seller in connection herewith, shall be valid,
legally binding obligations of Seller, enforceable in accordance with their
terms.
(d) Proceedings. To Seller's knowledge, there is no action,
proceeding or investigation pending against Seller relating to the Property, or
against the Property or any part thereof, before any court or governmental
department, commission, board, agency or instrumentality.
(e) Assessment or Condemnation Proceedings. To Seller's
knowledge, there is no presently pending or threatened special assessment
proceedings or condemnation actions concerning the Property or any part thereof.
(f) Possession. At the Closing, Seller shall deliver
possession of the Property to Buyer, free and clear of any leases entered into
by Seller. To Seller's knowledge, there are no agreements in effect that would
adversely affect Buyer's possession of or occupancy of the Property other than
as described in the Preliminary Report or other items delivered to Buyer under
this Agreement.
(g) Casualties. Seller has no knowledge of any material fire
or other casualty to the Property, including flooding thereof, that has occurred
during the period of its ownership except as disclosed in the materials
delivered to Buyer during the Due Diligence Period.
(h) Personal Property. Seller will not remove any of the
Personal Property described on Exhibit B from the Property prior to Closing.
(i) Contracts. Seller has not entered into any contracts that
would bind Buyer with respect to the Property after Closing other than the
Assumed Contracts or as shown in the Preliminary Report.
9. Representations and Warranties of Buyer. Buyer hereby represents and
warrants to Seller as follows:
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(a) Status. Buyer is duly organized, validly existing and
qualified and empowered to conduct its business, and has full power and
authority to enter into and fully perform and comply with the terms of this
Agreement. Neither the execution and delivery of this Agreement, nor its
performance by Buyer, will conflict with or result in the breach of any
contract, agreement, law, rule, or regulation to which Buyer is a party or by
which Buyer is bound. Buyer is a wholly owned subsidiary of Jenny Craig, Inc.
(b) Insolvency; Bankruptcy. There are no actions or
proceedings pending or threatened to liquidate, reorganize, place in bankruptcy
or dissolve Buyer.
(c) Enforceability. This Agreement is the duly authorized and
executed obligation of Buyer, and this Agreement and all documents required to
be executed by Buyer in connection herewith, shall be valid, legally binding
obligations of Buyer, enforceable in accordance with their terms.
(d) Notice of Actions. Buyer has not been served with, nor to
Buyer's knowledge does there exist, any action, proceeding or investigation
pending against Buyer that would affect its ability to carry out its obligations
under this Agreement, before any court or governmental department, commission,
board, agency or instrumentality; and Buyer does not have knowledge of the
threat of any such action, proceeding or investigation.
(e) Claims. All bills and claims for labor performed and
services and materials furnished with respect to the Property at the behest of
Buyer shall be paid by Buyer, and there will be no mechanic's or materialmen's
liens affecting the Property as a result thereof.
(f) Use of Property. Buyer intends to use the Property as its
corporate headquarters.
10. Indemnification.
(a) Except to the extent limited by Section 6 above, each
party agrees to indemnify the other party and defend and hold it harmless from
and against any and all claims, demands, liabilities, costs, expenses,
penalties, damages and losses, including, without limitation, attorneys' fees,
resulting from any misrepresentation or breach of warranty or breach of covenant
made by such party in this Agreement or in any document, certificate, or exhibit
given or delivered to the other pursuant to or in connection with this
Agreement.
(b) Buyer hereby indemnifies, protects, defends and holds
Seller and the Property free and harmless from and against any and all costs,
losses, liabilities, damages, lawsuits, judgments, actions, proceedings,
penalties, demands, attorneys' fees, mechanic's liens, or expenses of any kind
or nature whatsoever, arising out of or resulting from any entry or activities
upon the Property by Buyer, Buyer's agents, contractors or subcontractors, or
the contractors and subcontractors of such agents.
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(c) The indemnification provisions of this Section 10 and the
covenants, representations and warranties hereunder, shall survive beyond the
Closing, or, if the Closing does not occur pursuant to this Agreement, beyond
any termination of this Agreement, for a period up to one year after the Closing
Date.
11. Risk of Loss. In the event any of the Property is damaged or
destroyed prior to the Closing Date, and such damage or destruction (i) costs
less than Two Hundred Fifty Thousand Dollars ($250,000) to repair and is fully
covered by Seller's insurance, except for the deductible amounts thereunder, and
the insurer agrees to timely pay for the entire cost of such repair, or (ii)
would cost less than Fifty Thousand Dollars ($50,000) to repair or restore but
the repair cost is not fully covered by insurance, then this Agreement shall
remain in full force and effect and Buyer shall acquire the Property upon the
terms and conditions set forth herein. In such event, Buyer shall receive a
credit against the Purchase Price equal to: (a) in the event of (i) above, such
deductible amount, and Seller shall assign to Buyer all of Seller's right, title
and interest in and to all proceeds of insurance on account of such damage or
destruction, or (b) in the event of (ii) above, an amount reasonably determined
by Seller and Buyer (after consultation with unaffiliated experts) to be the
uninsured cost of repairing such damage or destruction, but in no event more
than Fifty Thousand Dollars ($50,000). In the event either condition set forth
in (i) or (ii) above is not satisfied, then Seller shall notify Buyer whether it
elects to make such repair or credit Buyer therefor. If Seller does not elect to
make such repair or credit, or if condemnation proceedings are commenced against
any substantial portion of the Property, or if the cost of repair of a casualty
exceeds $250,000, then Buyer shall have the right, at its election, to terminate
this Agreement by delivery of notice of termination to Seller within fifteen
(15) days after having been given notice of such circumstance, whereupon Buyer
and Seller each shall be released from all obligations hereunder pertaining to
the Property (other than the indemnification obligations under Section 10(b)).
In the event Buyer elects not to terminate this Agreement, Seller shall assign
to Buyer any proceeds of insurance or condemnation awards. Any repairs elected
to be made by Seller pursuant to this Section 11 shall be made within one
hundred and eighty (180) days following such damage or destruction and the
Closing shall be extended until the repairs are substantially completed.
12. Possession. Possession of the Property shall be delivered to Buyer
on the Closing Date, provided, however, that prior to the Closing Date Seller
shall afford authorized representatives of Buyer reasonable access to the
Property for purposes of satisfying Buyer with respect to the satisfaction of
all Conditions Precedent to the Closing contained herein or for purposes of
improvement design and space planning, upon one business day's (a minimum of
twenty-four (24) hours'), or in the case of any invasive physical testing, three
(3) business days' prior verbal notice given to Kenneth A. Baber (415/461-3890)
personally on behalf of Seller, including, without limitation, the performance
of such inspections, surveys and tests as are commercially reasonable and
appropriate considering the nature and intended use of the Property such as
soils tests, hazardous waste analysis, geological and/or engineering studies and
land use or related studies. Buyer shall use care and consideration in
connection with any of its inspections or tests and shall not drill test wells
or take soil borings unless approved by Seller, which approval shall not be
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withheld unreasonably. Seller shall have the right to be present during any
inspection of the Property by Buyer or its agents. Buyer hereby agrees to obtain
such liability insurance as Seller shall reasonably require with respect to any
such tests and inspections. In the event this Agreement is terminated, Buyer
shall restore the Property to the condition in which it was found.
13. Maintenance of the Property. Between Seller's execution of this
Agreement and the Closing, Seller shall maintain the Property in good order,
condition and repair, reasonable wear and tear and damage or destruction by
casualty or condemnation excepted, provided that Seller shall not be responsible
to make any capital or other significant repairs other than the HVAC Work
described in Section 16. Seller shall maintain commercially reasonable property
damage insurance on the Property during the period prior to Closing.
14. New Contracts; Termination of Existing Contracts. Except with
respect to the HVAC Work as described in Section 16 below, Seller shall not,
after the date of Seller's execution of this Agreement, enter into any lease or
contract, or any amendment thereof, or waive any rights of Seller under any
contract, to the extent such contract or lease would bind Buyer after the
Closing, without in each case obtaining Buyer's prior written consent thereto,
which consent shall not be unreasonably withheld or delayed beyond five (5) days
after Seller's request. Seller shall terminate prior to the Closing, any
agreements entered into by Seller with respect to the Property that are not
listed on the Schedule of Assumed Contracts, identified in the preliminary title
report or related documents, or approved or deemed approved by Buyer.
15. Contacts with Governmental Authorities. Buyer shall notify Seller
(which in this case shall mean verbal notice given personally to Kenneth A.
Baber) no less than two (2) business days (a minimum of forty-eight (48) hours)
prior to any contact with respect to the Property with the City of San Diego or
any other governmental authority of any substantive (as opposed to purely
ministerial or information request) nature, and shall afford Seller an
opportunity to make joint contact therewith. Buyer shall obtain Seller's prior
written approval of any request or application made to a governmental authority
and shall copy Seller on all correspondence with such governmental authorities.
Buyer shall not enter into any binding agreement or commitment with respect to
the Property until the Closing.
16. Heating, Ventilation, and Air Conditioning Work. Buyer hereby
acknowledges that Seller has entered into contract(s) (collectively, the "HVAC
Contract") with costs totaling Three Hundred Fifty Thousand Dollars
($350,000.00) for a new heating, ventilation and air conditioning system to be
installed on the Property (the "HVAC Work"). During the Due Diligence Period,
Seller will deliver to Buyer a copy of the HVAC Contract and any change orders
thereunder. Buyer hereby agrees to reimburse Seller at the Closing for all of
Seller's actual costs in completing the HVAC Work (or, in the event the HVAC
Work is not completed at the Closing, for all of Seller's actual costs incurred
up to the date of the Closing), which costs shall include any cost overruns
under change orders to the HVAC Contract that may be reasonably made during the
course of completing the HVAC Work, provided that Buyer will not be responsible
for any amendments to or change orders
12
<PAGE> 13
under the HVAC Contract that would increase the cost of the HVAC Work by more
than a total of fifteen percent (15%) unless Buyer's prior written approval is
obtained, which approval shall not be unreasonably withheld or delayed. The
amount of the reimbursement due to Seller at the Closing for the cost of the
HVAC Work shall be based on a certified demand delivered from Seller to the
Title Company at the Closing, which will reflect the amount actually incurred
and spent by Seller under the HVAC Contract prior to the Closing. At the
closing, the HVAC Contract, to the extent any obligations remain undischarged
thereunder, will be assigned from Seller to Buyer pursuant to the Assignment of
Intangible Property, and Seller will obtain from the contractors under the HVAC
Contract any legally available lien releases for the HVAC work.
17. Miscellaneous.
(a) Notices. Any notice, consent or approval required or
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been given upon (i) hand delivery, (ii) one day after being
deposited with Federal Express or another reliable overnight courier service or
transmitted by facsimile telecopy, provided that the notice is in fact timely
delivered, or (iii) three (3) days after being deposited in the United States
mail, registered or certified mail, postage prepaid, return receipt required,
and addressed as follows:
If to Seller: M&S Balanced Property Fund, L.P.
c/o Maier & Siebel, Inc.
Wood Island, Fourth Floor
East Sir Francis Drake Boulevard
Larkspur, California 94939
Attn: Kenneth A. Baber
Fax No.: (415) 461-7537
With a copy to: The Law Offices of Caryl Welborn
126 South Park
San Francisco, CA 94107
Fax No.: (415) 536-0699
Attn: Caryl B. Welborn
If to Buyer: Jenny Craig Management, Inc.
International Headquarters
445 Marine View Avenue, Suite 300
Del Mar, CA 92014
Attn: Michael L. Jeub
Fax No.: (619) 792-9935
13
<PAGE> 14
With a copy to: Kolodny & Pressman
11975 El Camino Real, Suite 201
San Diego, CA 92130
Attn: Jed L. Weinberg, Esq.
Fax No.: (619) 453-9347
or such other address as either party may from time to time specify in writing
to the other.
(b) Brokers and Finders. Neither party has had any contact or
dealings regarding the Property, or any communication in connection with the
subject matter of this transaction, through any real estate broker or other
person who can claim a right to a commission or finder's fee in connection with
the sale contemplated herein, except for (a) John Casey of John Burnham &
Company, whose commission, if any is due, shall be the responsibility of Seller,
and (b) Ron Jacobson of Colliers Iliff Thorn Company, to whom Seller shall pay a
2.0% commission at Closing (to the extent that Buyer may have agreed to pay such
broker more than such amount, that obligation shall be solely that of Buyer). In
the event that any other broker or finder perfects a claim for a commission or
finder's fee based upon any such contact, dealings or communication, the party
through whom the broker or finder makes its claim shall be responsible for and
shall indemnify the other party from and against said commission or fee and all
costs and expenses (including reasonable attorneys' fees) incurred by the other
party in defending against the same. The provisions of this paragraph shall
survive the Closing.
(c) Successors and Assigns. This Agreement shall be binding
upon, and inure to the benefit of, the parties hereto and their respective
successors, heirs, administrators and assigns. Buyer shall not have the right to
assign its rights or obligations under this Agreement except to an affiliate
owned and controlled by Jenny Craig, Inc., a Delaware corporation.
(d) Amendments. Except as otherwise provided herein, this
Agreement may be amended or modified only by a written instrument executed by
Seller and Buyer.
(e) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
(f) Integration of Prior Agreements. This Agreement and the
exhibits hereto constitute the entire agreement between the parties and
supersede all prior agreements and understandings between the parties relating
to the subject matter hereof.
(g) Enforcement. In the event a dispute arises concerning the
performance, meaning or interpretation of any provision of this Agreement, the
defaulting party or the party not prevailing in such dispute shall pay any and
all costs and expenses incurred by the other party in enforcing or establishing
its rights hereunder, including, without limitation, arbitration and court costs
and attorneys' and experts' fees. Any such attorneys' fees and other expenses
incurred by either party in enforcing a judgment in its favor under this
14
<PAGE> 15
Agreement shall be recoverable separately from and in addition to any other
amount included in such judgment, and such attorneys' fees obligation is
intended to be severable from the other provisions of this Agreement and to
survive and not be merged into any such judgment.
(h) Confidentiality. Buyer shall not disclose the contents of
any proprietary or confidential material or reports furnished by Seller to Buyer
(including any material related to Seller's internal affairs or composition) or,
unless authorized by Seller, the terms of the purchase of the Property except to
its partners, attorneys, accountants, consultants, agents and prospective
lenders as necessary in connection with the consummation of this transaction.
Unless authorized by Buyer, Seller will not disclose to any third party other
than its attorneys or accountants the Purchase Price or terms of purchase of the
Property by Buyer or any proprietary, financial, or confidential information or
reports furnished by Buyer to Seller. From and after the Closing, either party
shall be authorized to disclose the terms of the purchase of the Property.
(i) Time of the Essence. Time is of the essence of this
Agreement.
(j) Severability. If any provision of this Agreement, or the
application thereof to any person, place, or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
(k) Marketing. Seller shall have the right to market or show
the Property to and to enter into agreements contingent on the Closing not
occurring hereunder with any other prospective purchasers or tenants during the
Due Diligence Period and the Extension Period, if applicable. After the
expiration of the Due Diligence Period and the Extension Period, if applicable,
and the satisfaction of all conditions precedent set forth herein, Seller no
longer shall have the right to market or show the Property to any other
prospective purchasers or tenants for the remaining term of this Agreement.
Seller shall indemnify and hold harmless Buyer from and against any and all
losses, costs and liabilities arising from Seller entering into any such
agreements with other prospective purchasers or tenants, except to the extent
caused by Buyer's breach of this Agreement.
(l) Counterparts. This Agreement may be executed in
counterparts, each of which will be deemed an original, but all of which will
constitute one and the same instrument.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
Buyer: JENNY CRAIG MANAGEMENT, INC.,
a California corporation
By /s/ C. Joseph LaBonte
----------------------------------------
Name
------------------------------
Its President
-------------------------------
Seller: M&S BALANCED PROPERTY FUND, L.P.,
a California limited partnership
By: Maier & Siebel, Inc.,
a California corporation
Its General Partner
By /s/ Kenneth A. Baber
-----------------------------------
Kenneth A. Baber
Principal
16
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
Years ended June 30, all amounts in thousands, except per share data.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $461,153 490,549 403,341 378,093 401,018
Operating income 72,850 59,178 1,021 17,363 35,521
Income before
extraordinary item 43,095 36,760 534 11,772 22,912
Per share amounts:
Income before
extraordinary item 1.64 1.35 .02 .46 .95
Net income 1.40 1.35 .02 .46 .95
Dividends declared .40 .60 .45 -- --
Total assets 115,262 124,243 104,190 115,376 104,401
Shares outstanding 27,500 26,500 26,076 25,196 20,856
</TABLE>
[1]
<PAGE> 2
Jenny Craig, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING 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, 1996, 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:
<TABLE>
<CAPTION>
Years Ended June 30, 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CENTRES OPEN AT END OF YEAR:
Company-owned
United States 370 476 502 478 485
Foreign 88 103 106 102 103
- -----------------------------------------------------------------------------------------------------
458 579 608 580 588
- -----------------------------------------------------------------------------------------------------
Franchise
United States 199 176 159 154 159
Foreign 37 39 43 43 36
- -----------------------------------------------------------------------------------------------------
236 215 202 197 195
- -----------------------------------------------------------------------------------------------------
Total 694 794 810 777 783
- -----------------------------------------------------------------------------------------------------
AVERAGE REVENUE PER CENTRE IN THOUSANDS:
Company-owned
United States $965 859 628 600 642
Foreign 447 387 346 356 407
Franchise
United States 986 937 644 654 659
Foreign 463 437 441 343 328
</TABLE>
Average revenue per centre for foreign operations is significantly less than
for United States operations due to fewer program participants and,
accordingly, operating margins for foreign operations are lower than for
United States operations. See Note 13 of Notes to Consolidated Financial
Statements for additional information regarding foreign operations.
[15]
<PAGE> 3
Jenny Craig, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The following table presents the range of initial service and maintenance
fees charged by the Company:
<TABLE>
<CAPTION>
Initial Service Maintenance
- -------------------------------------------------------------------------------
Fiscal Year Low High Low High
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1992 $29 79 99 125
1993 19 79 99 129
1994 10 99 99 125
1995 10 99 99 99
1996 10 180 99 181
</TABLE>
YEAR ENDED JUNE 30, 1996 AS COMPARED
TO YEAR ENDED JUNE 30, 1995
Revenues from United States Company-owned operations increased 6% from
$291,327,000 in 1995 to $309,415,000 in 1996. There was a 1% increase in the
total number of United States Company-owned centres in operation from 478 in
fiscal 1995 to 485 in fiscal 1996. Average revenue per United States
Company-owned centre increased 7% from $600,000 in 1995 to $642,000 in 1996.
Although there was a 7% decrease in the number of new participants enrolled in
the program between the years, service revenues from United States Company-owned
operations increased 15%, from $18,870,000 in 1995 to $21,769,000 in 1996. This
increase in service revenues was due to an increase in the average service fee
charged per new participant. Product sales, which consists primarily of food
products, from United States Company-owned operations increased 6% from
$272,457,000 in 1995 to $287,646,000 in 1996, principally due to an increase in
the average food purchase per active participant in the program between the
years, and reflected an approximate 5% increase in the retail selling price of
the Company's food products effected in November 1995. Revenues from foreign
Company-owned operations increased 12% from $36,989,000 in 1995 to $41,590,000
in 1996 and average revenue per foreign Company-owned centre increased 14% from
$356,000 in 1995 to $407,000 in 1996 principally due to an increase in the
number of new enrollments in the program. There was a 2% average increase in the
Australian and Canadian currencies in relation to the U.S. dollar between the
years. The number of foreign Company-owned centres in operation increased 1%
from 102 at June 30, 1995 to 103 at June 30, 1996.
In April 1996, the United States Food and Drug Administration ("FDA")
approved dexfenfluramine, commonly referred to by its trade name Redux,(TM) for
use as a doctor-prescribed medication for the treatment of obesity. The Company
believes that the extensive publicity that accompanied the introduction of
Redux(TM) heightened the public's interest in weight loss pharmaceuticals, and
appears to be responsible for softened demand being experienced by the Company
for its products and services. For the months of July and August 1996, leads,
which represent inquiries about the program received at the Company's centres,
were reduced approximately 33%, new program sales were reduced approximately
38%, and active clients and weekly deposits were down approximately 14% and 13%,
respectively, from the same period in the prior year. In July 1996, the Company
began test marketing, on a very limited basis, a new weight loss program
incorporating the traditional elements of the Company's program for qualified
clients who choose to utilize weight loss medications. Preliminary results in
the test markets appear to demonstrate interest in this new program with leads
up in July and August 1996 from the same period in the prior year. New program
sales, weekly deposits, and active clients in the test markets, however, did not
increase and were down approximately the same as the remainder of the Company's
cen-
[16]
<PAGE> 4
Jenny Craig, Inc. and Subsidiaries
tres during July and August 1996 compared to the same period in the prior year.
Costs and expenses of United States Company-owned operations increased less
than 1% from $264,549,000 in 1995 to $264,693,000 in 1996. Costs and expenses of
United States Company-owned operations in 1995 included a $2,200,000 provision
to reflect the settlement of certain securities class action litigation against
the Company. Costs and expenses of United States Company-owned operations in
1996 were reduced by a $2,200,000 credit that resulted from the Company's
successful litigation recovery from one of its insurance carriers related to the
1995 settlement. Costs and expenses of United States Company-owned operations as
a percentage of United States Company-owned revenues decreased from 91% to 86%
between the years principally due to the aforementioned credit for the
litigation recovery, the favorable effect of the revenue increase between the
years which reflected, in large part, an increase in the retail selling price of
the Company's products and services without a related increase in costs and
expenses, and the lower proportion of fixed costs when compared to the increased
revenues. Costs and expenses of foreign Company-owned operations increased 12%
from $35,127,000 in 1995 to $39,357,000 in 1996 principally because costs and
expenses of foreign Company-owned operations in 1995 was reduced by $1,843,000
representing the reversal of a portion of a provision originally recorded in
1994 for centre closures and the increased variable costs related to the higher
level of operations. After including the allocable portion of general and
administrative expenses, foreign Company-owned operations had operating income
of $58,000 for fiscal 1996 as compared to an operating loss of $203,000 for
fiscal 1995.
The Company's gross margin on product sales from Company-owned operations
increased from 7% in 1995 to 11% in 1996 and its gross margin on service
revenues increased from 35% in 1995 to 39% in 1996. 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
improvement in gross margins in 1996 compared to 1995 results principally from
the increase in the retail selling price of the Company's products and services
without a related increase in costs and expenses, and the $2,200,000 provision
recorded in 1995 compared to the $2,200,000 credit recorded in 1996 pertaining
to the aforementioned litigation.
Revenues from franchise operations increased slightly from $49,777,000 in
1995 to $50,013,000 in 1996 despite a 1% decrease in the number of franchise
centres operating between the years from 197 in 1995 to 195 in 1996.
Costs and expenses of franchise operations, which consist primarily of
product costs, decreased 5% from $34,726,000 in 1995 to $32,985,000 in 1996, and
decreased as a percent of franchise revenues, principally because of a reduction
in the purchase of national television advertising, a portion of which is
allocated to franchise operations, and a $900,000 reversal of a portion of the
Company's allowance for doubtful accounts reflecting improved collectibility of
receivables from franchisees.
General and administrative expenses increased 8% from $26,328,000 in 1995 to
$28,462,000 in 1996 but remained relatively constant at 7.1% of total revenues
in 1996 compared to 7.0% in 1995. The absolute increase was principally due to
increased compensation and consulting expenses as well as a $1,000,000 charge
for the early termination of the Company's corporate office lease, net of
estimated sublease income.
The elements discussed above combined to result in an increase in operating
income from $17,363,000 in 1995 to $35,521,000 in 1996 and an increase in net
income from $11,772,000, or $.46 per share, in 1995 to $22,912,000, or $.95 per
share, in 1996.
The Company and complaint counsel for the Federal Trade Commission have
entered into a proposed Consent
[17]
<PAGE> 5
Jenny Craig, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Order 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 proposed 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 proposed Consent Order requires certain procedures and disclosures in
connection with the Company's advertisements of its products and services. If
the full Commission accepts the proposed Consent Order it will be published for
public comment and, unless modified or withdrawn on the basis of public
comments, it thereafter will become effective. The Company does not believe that
compliance with the proposed Consent Order will have a material adverse effect
on the Company's consolidated financial statements or its current advertising
and marketing practices.
YEAR ENDED JUNE 30, 1995 AS COMPARED
TO YEAR ENDED JUNE 30, 1994
Revenues from United States Company-owned operations decreased 5% from
$307,925,000 in 1994 to $291,327,000 in 1995. There was a 5% decrease in the
total number of United States Company-owned centres in operation from 502 to
478. Average revenue per United States Company-owned centre declined 4% from
$628,000 in 1994 to $600,000 in 1995. Although there was a 6% increase in the
number of new participants enrolled in the program between the years, service
revenues from United States Company-owned operations declined 11%, from
$21,303,000 in 1994 to $18,870,000 in 1995. This decline in service revenues was
due to a decrease in the average service fee charged per new participant.
Product sales, which consists primarily of food products, from United States
Company-owned operations declined 5% from $286,623,000 in 1994 to $272,457,000
in 1995, principally due to a decrease in the average number of active
participants in the program between the years. Revenues from foreign
Company-owned operations increased 2% from $36,140,000 in 1994 to $36,989,000 in
1995 and average revenue per foreign Company-owned centre increased 3% from
$346,000 in 1994 to $356,000 in 1995 principally as a result of a net 5% average
increase in the Australian and Canadian currencies in relation to the U.S.
dollar between the years. There was a 4% decrease in the number of foreign
Company-owned centres in operation, from 106 at June 30, 1994 to 102 at June 30,
1995.
During fiscal 1994, the Company accrued a provision for loss of $5,029,000 in
connection with the planned closure of 55 Company-owned centres, $2,529,000 of
which was designated for 30 United States centres and $2,500,000 for 25 foreign
centres. With respect to the United States planned closures, 48 centres were
closed as of June 30, 1995. The additional 18 centres which were closed did not
require an addition to the provision for centre closures as these centres were
principally closed on their respective lease termination dates and therefore did
not require material lease termination costs or fixed asset write-offs. Total
cash payments made through June 30, 1995 in connection with the closure of U.S.
centres were $1,155,000 and total non-cash fixed asset write-offs were
$1,120,000. The Company estimates that future cash payments totaling
approximately $250,000 will be made to complete the planned closure of the
United States centres. With respect to the foreign centres, two centres were
closed during the nine months ended March 31, 1995 which reduced the original
accrual by $38,000. The revenues and operating results of most of the remaining
23 foreign centres originally designated for closure improved substantially
during the quarter ended June 30, 1995 (and to a lesser extent during the
quarter ended March 31, 1995), and management determined that 17 of these
centres should not be closed.
[18]
<PAGE> 6
Jenny Craig, Inc. and Subsidiaries
Management's decision to continue to operate these centres was based principally
on the average revenue per centre levels attained by these centres during the
quarter ended June 30, 1995. Average revenue per centre at these centres was
approximately 40% higher in the quarter ended June 30, 1995 compared to the
quarter ended March 31, 1994. As a result, $1,843,000, or $.07 per share, of the
remaining accrued liability of $2,462,000 in connection with the closure of the
foreign centres was reversed and is reflected in fiscal 1995 operating results
in the Company-owned operations section of the "Costs and Expenses" caption of
the Consolidated Statements of Income.
Costs and expenses of United States Company-owned operations decreased 10%
from $294,054,000 in 1994 to $264,549,000 in 1995. Costs and expenses of United
States Company-owned operations in 1994 included provisions for loss totaling
$8,779,000 pertaining to centre closures and certain litigation. Costs and
expenses of United States Company-owned operations in 1995 included a $2,200,000
provision to reflect the settlement of certain securities class action
litigation. This settlement required an aggregate payment of $9,500,000 into a
settlement fund. The Company's primary insurance carrier paid $5,000,000
directly into this fund in connection with the settlement and covered defense
costs and the Company paid $4,500,000 into the fund. The $2,200,000 is the net
provision after taking into account previously accrued legal fees of $2,300,000
in connection with this litigation. The decrease in costs and expenses of United
States Company-owned operations reflects the reduced variable costs related to
the lower level of operations, the reduced fixed costs resulting from the
reduced number of United States Company-owned centres in operation, the
Company's efforts in controlling expenses, particularly advertising which was
approximately $9,400,000 lower in 1995 compared to 1994, and the substantial
difference in the provisions for loss between the years. As a result, costs and
expenses of United States Company-owned operations as a percentage of United
States Company-owned revenues decreased from 95% to 91% between the years. Costs
and expenses of foreign Company-owned operations decreased 12% from $40,071,000
in 1994 to $35,127,000 in 1995 principally because 1994 included the
aforementioned provision for loss of $2,500,000 for centre closures while 1995
included the reversal of $1,843,000 of such provision. After including this
reversal and the allocable portion of general and administrative expenses,
foreign Company-owned operations incurred an operating loss of $203,000 for
fiscal 1995 as compared to an operating loss of $5,905,000 for fiscal 1994.
The Company's gross margin on product sales from Company-owned operations
increased from 1% in 1994 to 7% in 1995 and its gross margin on service revenues
increased from 24% in 1994 to 35% in 1995. 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 improvement in
gross margins in fiscal 1995 compared to fiscal 1994 results principally from
the absence in fiscal 1995 of the provisions for loss pertaining to centre
closures and certain litigation recorded in fiscal 1994.
Revenues from franchise operations decreased 16% from $59,276,000 in 1994 to
$49,777,000 in 1995. This decline is principally due to a 10% decrease in the
average number of franchised centres operating between the years and an
approximate 6% reduction in the price charged to United States franchisees for
food products effective July 1, 1994. The decrease in the average number of
franchised centres is principally due to the Company's acquisition of 31 centres
from affiliated franchisees in April 1994.
Costs and expenses of franchise operations, which consist primarily of
product costs, decreased 21% from $43,686,000 in 1994 to $34,726,000 in 1995
primarily due to the reduced level of franchise operations. In addition,
[19]
<PAGE> 7
Jenny Craig, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
costs and expenses of franchise operations in 1994 included bad debt provisions
totaling $4,155,000. The decrease in fiscal 1995 in costs and expenses of
franchise operations as a percentage of franchise revenues was principally due
to the aforementioned bad debt provisions recorded in the prior year offset in
part by the reduction in the price charged to United States franchisees for food
products.
General and administrative expenses increased 7% from $24,509,000 in 1994 to
$26,328,000 in 1995 and from 6.1% to 7.0% of total revenues for the years ended
June 30, 1994 and 1995, respectively. This increase was principally due to
professional fees and an increase in insurance costs.
The elements discussed above combined to result in an increase in operating
income from $1,021,000 in 1994 to $17,363,000 in 1995 and an increase in net
income from $534,000, or $.02 per share, in 1994 to $11,772,000, or $.46 per
share, in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and short-term investments were $50,580,000 at June 30,
1996, a $9,198,000 decrease from 1995. This decrease was principally due to the
Company's purchase of 4,396,689 shares of its common stock at a cost of
$44,395,000, offset in part by net cash provided by operating activities. The
Company believes that its cash flow from operations will be sufficient to fund
its day-to-day operations and capital expenditures.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
requires that the Company review for impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS 121 will be effective for the Company's fiscal year
beginning July 1, 1996. The Company does not expect that the adoption of this
statement will have a material impact on the Company's financial position or
results of operations.
The FASB also issued SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company is required to adopt SFAS 123 for the fiscal year beginning July 1,
1996. This statement establishes accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans. Under SFAS 123 the Company may either adopt the new fair value-based
accounting method or continue the intrinsic value-based method and provide pro
forma disclosures of net income and earnings per share as if the fair value
accounting provisions of this statement had been adopted. The Company plans to
adopt only the disclosure requirements of SFAS 123; therefore such adoption will
have no effect on the Company's financial position or results of operations.
[20]
<PAGE> 8
Jenny Craig, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and 1996
($ in thousands)
<TABLE>
<CAPTION>
1995 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 51,819 43,535
Short-term investments 7,959 7,045
Accounts receivable, net 2,129 3,668
Inventories 17,676 17,401
Prepaid expenses and other assets 7,821 8,282
- ---------------------------------------------------------------------------------------------------
Total current assets 87,404 79,931
Cost of reacquired area franchise rights, net 8,218 7,496
Property and equipment, net 18,254 15,474
Other assets 1,500 1,500
- ---------------------------------------------------------------------------------------------------
$115,376 104,401
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 16,794 20,916
Accrued liabilities 17,855 22,415
Income taxes payable 3,311 2,102
Deferred service revenue 3,269 4,506
- ---------------------------------------------------------------------------------------------------
Total current liabilities 41,229 49,939
Stockholders' equity:
Common stock $.000000005 par value, 100,000,000 shares authorized;
Issued: 1995--27,500,400 shares; 1996--27,557,340 shares
Outstanding: 1995--25,196,000 shares; 1996--20,856,251 shares -- --
Additional paid-in capital 71,148 71,478
Retained earnings 31,318 54,230
Equity adjustment from foreign currency translation 415 1,883
Treasury stock, at cost:
1995--2,304,400 shares; 1996--6,701,089 shares (28,734) (73,129)
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 74,147 54,462
Commitments and contingencies
- ---------------------------------------------------------------------------------------------------
$115,376 104,401
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
[21]
<PAGE> 9
Jenny Craig, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the years ended June 30, 1994, 1995 and 1996
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
1994 1995 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Company-owned operations:
Product sales $319,843 306,924 326,107
Service revenue 24,222 21,392 24,898
- --------------------------------------------------------------------------------------
344,065 328,316 351,005
- --------------------------------------------------------------------------------------
Franchise operations:
Product sales 49,782 41,852 42,059
Royalties 8,929 7,740 7,719
Initial franchise fees 565 185 235
- --------------------------------------------------------------------------------------
59,276 49,777 50,013
- --------------------------------------------------------------------------------------
Total revenues 403,341 378,093 401,018
- --------------------------------------------------------------------------------------
Costs and expenses:
Company-owned operations:
Product 315,771 285,700 288,954
Service 18,354 13,976 15,096
- --------------------------------------------------------------------------------------
334,125 299,676 304,050
- --------------------------------------------------------------------------------------
Franchise operations:
Product 39,880 32,520 30,699
Other 3,806 2,206 2,286
- --------------------------------------------------------------------------------------
43,686 34,726 32,985
- --------------------------------------------------------------------------------------
25,530 43,691 63,983
General and administrative expenses 24,509 26,328 28,462
- --------------------------------------------------------------------------------------
Operating income 1,021 17,363 35,521
Other income, principally interest 1,589 2,403 2,960
- --------------------------------------------------------------------------------------
Income before taxes 2,610 19,766 38,481
Provision for income taxes 2,076 7,994 15,569
- --------------------------------------------------------------------------------------
Net income $ 534 11,772 22,912
- --------------------------------------------------------------------------------------
Net income per share $ .02 .46 .95
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
[22]
<PAGE> 10
Jenny Craig, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 1994, 1995 and 1996
($ in thousands)
<TABLE>
<CAPTION>
Equity
adjustment
from
Additional foreign
Common paid-in Retained currency Treasury
stock capital earnings translation stock Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 -- $71,145 30,745 (870) (16,477) 84,543
Net income -- -- 534 -- -- 534
Dividends on common stock ($.45 per share) -- -- (11,733) -- -- (11,733)
Purchase of 424,300 shares
of common stock, at cost -- -- -- -- (6,330) (6,330)
Translation adjustment -- -- -- 1,334 -- 1,334
- ---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 -- 71,145 19,546 464 (22,807) 68,348
Net income -- -- 11,772 -- -- 11,772
Purchase of 880,500 shares
of common stock, at cost -- -- -- -- (5,927) (5,927)
Exercise of stock options -- 3 -- -- -- 3
Translation adjustment -- -- -- (49) -- (49)
- ---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 -- 71,148 31,318 415 (28,734) 74,147
Net income -- -- 22,912 -- -- 22,912
Purchase of 4,396,689 shares
of common stock, at cost -- -- -- -- (44,395) (44,395)
Exercise of stock options -- 330 -- -- -- 330
Translation adjustment -- -- -- 1,468 -- 1,468
- ---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 -- $71,478 54,230 1,883 (73,129) 54,462
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
[23]
<PAGE> 11
Jenny Craig, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 1994, 1995
and 1996 ($ in thousands)
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 534 11,772 22,912
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,544 8,540 7,405
Provision for doubtful accounts 4,155 -- (900)
Provision for centre closures 5,029 (1,843) --
Loss on disposal of property and equipment 1,074 694 167
(Increase) decrease in:
Accounts receivable (2,432) 1,092 (639)
Inventories (483) (1,969) 275
Prepaid expenses and other assets (7,784) 4,035 (461)
Increase (decrease) in:
Accounts payable 2,934 2,912 4,122
Accrued liabilities (3,439) 322 4,560
Income taxes payable (3,573) 3,311 (1,209)
Deferred service revenue (1,357) 682 1,237
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,202 29,548 37,469
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (6,649) (1,931) (3,662)
Purchase of short-term investments (32,621) (8,294) (9,877)
Proceeds from maturity of short-term investments 46,141 23,932 10,791
Payments for acquisition of franchised centres (239) -- --
Increase in other assets -- (1,500) --
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 6,632 12,207 (2,748)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (6,330) (5,927) (44,395)
Dividends on common stock (15,710) -- --
Proceeds from exercise of stock options -- 3 330
- -----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (22,040) (5,924) (44,065)
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1,083 -- 1,060
Net increase (decrease) in cash and cash equivalents (10,123) 35,831 (8,284)
Cash and cash equivalents at beginning of year 26,111 15,988 51,819
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 15,988 51,819 43,535
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Income taxes paid $ 11,482 3,652 16,780
Supplemental disclosure of noncash investing
activities--acquisition of franchised centres:
Cancellation of accounts receivable $ 1,777 -- --
Fair value of assets acquired $ 2,302 -- --
Liabilities assumed $ 525 -- --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
[24]
<PAGE> 12
Jenny Craig, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994, 1995 and 1996
Jenny Craig, Inc. (the "Company"), through its wholly-owned subsidiaries,
operates and franchises centres offering weight loss programs to the general
public in the United States, Australia, New Zealand, Canada and Puerto Rico.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
CASH EQUIVALENTS 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 Short-term investments consist principally of U.S.
Government securities and tax exempt municipal obligations. The Company adopted
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115)
effective July 1, 1994. The adoption of SFAS 115 did not have a material effect
on the Company's consolidated financial statements. Under SFAS 115, the Company
currently 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 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 Property and equipment is 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.
REACQUIRED AREA FRANCHISE RIGHTS The cost of reacquired area franchise rights is
amortized using the straight-line method over their estimated useful lives of
approximately 17 years. The Company evaluates the recoverability of the carrying
amount of reacquired area franchise rights when events or circumstances indicate
that the carrying amount may not be recovered. The Company would recognize an
impairment charge if the evaluation indicated that the expected future net cash
flows on an undiscounted basis were less than the carrying amount of reacquired
area franchise rights.
REVENUE RECOGNITION Service revenue is derived from the sale of weight
management and maintenance programs under contracts which entitle the customer
to participate in the program. The Company recognizes $60 as revenue at the time
of sale to match the costs incurred in establishing individual programs for new
participants. The remaining service revenue is deferred and recognized as
revenue based upon expected customer attendance at the centres. Service revenue
not recognized in income is recorded as deferred service revenue in the
accompanying consolidated balance sheets.
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.
[25]
<PAGE> 13
Jenny Craig, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company's allowance for doubtful accounts amounted to $5,620,000 and
$1,464,000 at June 30, 1995 and 1996, respectively.
ADVERTISING COSTS Advertising costs are charged to expense as incurred.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS 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 income 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 accumulated in a separate component of stockholders'
equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS 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.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles 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.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards
Board (FASB) has issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
requires that the Company review for impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS 121 will be effective for the Company's fiscal year
beginning July 1, 1996. The Company does not expect that the adoption of this
statement will have a material impact on the Company's financial position or
results of operations.
The FASB also issued SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company is required to adopt SFAS 123 for the fiscal year beginning July 1,
1996. This statement establishes accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans. Under SFAS 123, the Company may either adopt the new fair value-based
accounting method or continue the intrinsic value-based method and provide pro
forma disclosures of net income and earnings per share as if the fair value
accounting provisions of this statement had been adopted. The Company plans to
adopt only the disclosure requirements of SFAS 123; therefore such adoption will
have no effect on the Company's financial position or results of operations.
RECLASSIFICATION Certain prior year balances have been reclassified to conform
with the current year's presentation.
2. PROPERTY AND EQUIPMENT Property and equipment at June 30 is summarized as
follows ($ in thousands):
<TABLE>
<CAPTION>
1995 1996
- ---------------------------------------------------------
<S> <C> <C>
Furniture and equipment $37,218 39,421
Leasehold improvements 19,033 20,155
- ---------------------------------------------------------
56,251 59,576
Less accumulated depreciation
and amortization (37,997) (44,102)
- ---------------------------------------------------------
$18,254 15,474
- ---------------------------------------------------------
</TABLE>
[26]
<PAGE> 14
Jenny Craig, Inc. and Subsidiaries
3. ACCRUED LIABILITIES
Accrued liabilities at June 30 are summarized as follows
($ in thousands):
<TABLE>
<CAPTION>
1995 1996
- ---------------------------------------------------------
<S> <C> <C>
Accrued salaries, wages and benefits $12,478 14,267
Other accruals 5,377 8,148
- ---------------------------------------------------------
$17,855 22,415
- ---------------------------------------------------------
</TABLE>
4. INCOME TAXES
The Company and its United States subsidiaries file consolidated federal and
combined state income tax returns. Jenny Craig Weight Loss Centres, Pty. Ltd.
and Jenny Craig Weight Loss Centres (Canada), Ltd., both foreign corporations,
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 carry-forwards. 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.
The Company's income before taxes results substantially from United States
operations. For the years ended June 30, 1994, 1995, and 1996, income before
taxes from United States operations was $5,808,000, $17,788,000 and $36,693,000,
respectively.
The following summarizes income taxes
($ in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $5,169 5,670 11,459
State 1,425 1,393 2,494
Foreign -- 253 1,347
- ---------------------------------------------------------
Total current 6,594 7,316 15,300
- ---------------------------------------------------------
Deferred:
Federal (3,242) 814 794
State (798) 78 215
Foreign (478) (214) (740)
- ---------------------------------------------------------
Total deferred (4,518) 678 269
- ---------------------------------------------------------
Total provision for
income taxes $2,076 7,994 15,569
- ---------------------------------------------------------
</TABLE>
Deferred income taxes result from the temporary differences between the tax
basis of an asset or a liability and its reported amount in the consolidated
balance sheets. The components that comprise deferred tax assets and liabilities
at June 30, 1995 and 1996 are as follows ($ in thousands):
<TABLE>
<CAPTION>
1995 1996
- ---------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Employee benefits $2,384 2,745
Allowance for doubtful accounts 1,921 545
Depreciation and amortization 1,808 3,534
State income taxes 509 350
Inventories 298 354
Other accruals 818 1,470
- ---------------------------------------------------------
Total gross deferred tax assets 7,738 8,998
Less valuation allowance (2,156) (700)
- ---------------------------------------------------------
Net deferred tax assets 5,582 8,298
Deferred tax liabilities:
Receivable from foreign subsidiary -- (3,725)
Deferred service revenue (935) (195)
- ---------------------------------------------------------
Total deferred tax liabilities (935) (3,920)
- ---------------------------------------------------------
Net deferred tax asset $4,647 4,378
- ---------------------------------------------------------
</TABLE>
[27]
<PAGE> 15
Jenny Craig, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the
uncertainty of the recoverability of such deferred tax assets. Based upon the
Company's history of taxable income and its projection of future earnings,
management believes that it is more likely than not that sufficient taxable
income will be generated in the foreseeable future to realize the net
deferred tax asset.
Income taxes for the years ended June 30, 1994, 1995 and 1996 differed
from the amounts expected by applying the U.S. federal income tax rate of 34%
for 1994 and 35% for 1995 and 1996 to income before taxes as follows ($ in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Computed income taxes $ 887 6,918 13,468
State taxes, net of
federal benefit 414 956 1,761
Change in the valuation
allowance for deferred
tax assets 622 (50) (1,456)
Other 153 170 1,796
- ------------------------------------------------------------
$2,076 7,994 15,569
- ------------------------------------------------------------
</TABLE>
5. PROVISIONS FOR LOSS
During the year ended June 30, 1994, the Company recorded the following
provisions for loss:
<TABLE>
<S> <C>
Centre closures $ 5,029,000
Allowance for doubtful accounts 3,600,000
Litigation settlement 6,250,000
- ------------------------------------------------------------
$14,879,000
- ------------------------------------------------------------
</TABLE>
The $5,029,000 provision for loss pertaining to centre closures was based upon
management's plan to close 55 underperforming Company-owned centres,
representing 9% of the total Company-owned centres operating as of June 30,
1994, with projected closure dates through the end of fiscal 1995. The provision
was comprised of $2,418,000 estimated for lease termination costs, $417,000 for
customer refunds, $402,000 for severance pay to employees and $1,792,000 for the
write-off of fixed assets and leasehold improvements. The $5,029,000 provision
for loss is reflected in the Company-owned operations section of the
Consolidated Statements of Income for the year ended June 30, 1994. In 1995, the
operating results of 17 of the centres originally designated for closure
improved substantially and management determined that these centres should not
be closed. As a result, $1,843,000 of the original accrual was reversed at June
30, 1995 and is reflected in operating results.
During the quarter ended March 31, 1994, the allowance for doubtful accounts
was increased by $3,600,000 in order to reduce aggregate receivables to their
estimated net realizable value. This provision resulted from the fact that
certain franchisees experienced unfavorable operating results during 1994 and
thus were unable to meet their obligations to the Company when due. The
$3,600,000 charge is reflected in the Franchise operations section of the "Costs
and Expenses" caption of the Consolidated Statements of Income for the year
ended June 30, 1994. In fiscal l996, receivables totaling $3,256,000 were
written-off against the allowance for doubtful accounts with respect to this
matter.
In April 1994, the Company agreed to settle a consumer class action
litigation entitled Ellen Schenk v. Jenny Craig, Inc. The settlement required
the Company to make a payment of $4,000,000 into a settlement fund administered
by the plaintiff's counsel and to pay certain administrative costs; it required
the Company's insurance carriers to pay an aggregate of $6,000,000 directly into
the settlement fund. As a result, the Company accrued $4,250,000 at March 31,
1994, which was included in the Company-owned operations section of the "Costs
and Expenses" caption of the Consolidated Statements of Income for fiscal 1994.
In June 1994, a dispute with the excess insurance carrier arose whereby the
carrier refused to pay its $2,000,000 agreed portion of the settlement. The
Company paid this additional amount in order to complete the settlement and,
accordingly, the additional $2,000,000 was expensed by the Company in the
quarter ended June 30,
[28]
<PAGE> 16
Jenny Craig, Inc. and Subsidiaries
1994. All disbursements were made prior to June 30, 1994 and thus there were no
accrued liabilities remaining with respect to this matter at June 30, 1994. The
Company has commenced litigation against the excess carrier for its failure to
pay the $2,000,000 agreed portion of the settlement.
In March 1995, the Company agreed to settle the securities class action
entitled In re Jenny Craig Securities Litigation. The settlement required an
aggregate payment of $9,500,000 into a settlement fund. The Company's primary
insurance carrier paid $5,000,000 directly into this fund. The Company's excess
insurer, which also issued a $5,000,000 policy, refused to contribute any
meaningful amount to the settlement. In order to complete the settlement, the
Company paid $4,500,000 into the settlement fund and commenced litigation
against the excess insurer to recover under the policy. The Company accrued a
provision of $2,200,000 at March 31, 1995 after taking into account previously
accrued legal fees of $2,300,000 in connection with this litigation. The
$2,200,000 provision is reflected in the Company-owned operations section of the
"Costs and Expenses" caption of the 1995 Consolidated Statements of Income. All
disbursements were made prior to June 30, 1995 and thus, there were no accrued
liabilities remaining with respect to this matter at June 30, 1995. In March
1996, the Company was successful in its litigation efforts against the excess
insurer and, accordingly, received a net cash payment of $2,200,000. This amount
is reflected as a reduction in the Company-owned operations section of the
"Costs and Expenses" caption of the 1996 Consolidated Statements of Income.
6. COMMON STOCK AND NET INCOME PER SHARE
In August 1994, the Board of Directors authorized the purchase of up to
2,000,000 shares of the Company's outstanding common stock. The purchases may be
made from time to time, depending upon the current market, economic and
corporate circumstances, in the open market, through block trading, or in
privately negotiated transactions. As of June 30, 1996, a total of 1,813,000
shares had been purchased pursuant to the August 1994 authorization.
In March 1996, the Company purchased 3,464,189 shares of its common stock via
a tender offer, in the form of a Dutch Auction, at a purchase price of $10 per
share. The shares purchased pursuant to this transaction represented
approximately 14.3% of the common stock outstanding immediately prior to the
offer.
The computation of net income per share is based on the weighted average
number of outstanding common shares during each year and the assumed exercise of
dilutive stock options using the treasury stock method. The weighted average
number of common and common equivalent shares outstanding for the years ended
June 30, 1994, 1995 and 1996 were 26,147,000, 25,534,000 and 24,195,000,
respectively.
7. LEASES
The Company's operations are conducted from premises leased under noncancellable
operating leases, generally for terms of five years with renewal options for
like periods. The Company's rent expense under such noncancellable operating
leases amounted to $25,019,000, $25,108,000 and $24,217,000 for the years ended
June 30, 1994, 1995 and 1996, respectively.
As of June 30, 1996, the scheduled minimum annual rent payments, excluding
renewal provisions, are as follows ($ in thousands):
<TABLE>
<S> <C>
1997 $20,437
1998 12,257
1999 5,808
2000 2,520
2001 1,187
Thereafter 49
- ------------------------------------------------------------
$42,258
- ------------------------------------------------------------
</TABLE>
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.
[29]
<PAGE> 17
Jenny Craig, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. RELATED PARTY TRANSACTIONS
In March 1996, a corporation controlled by the beneficial owners of a majority
of the outstanding stock of the Company sold 2,000,000 shares of the Company's
common stock to the Company at a price of $10 per share pursuant to a Dutch
Auction self tender offer commenced by the Company in February 1996 and open to
all shareholders. See Note 6.
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 $3,647,000, $3,251,000 and $4,143,000 for the years ended
June 30, 1994, 1995 and 1996, 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 $2,027,000, $2,239,000 and $2,096,000 in 1994, 1995 and 1996,
respectively.
In accordance with the employment agreement of an executive of the Company,
the Company made a $1,500,000 loan to such executive in 1995 for the purpose of
purchasing a principal residence. The loan does not bear interest and is secured
by a first trust deed on the principal residence. The loan is due and payable at
the earlier of the sale of the principal residence or one year after termination
of the executive's employment. Craig Enterprises, Inc. ("CEI"), a corporation
controlled by the beneficial owners of a majority of the outstanding stock of
the Company, has agreed with the executive that if the executive's employment is
not terminated for cause, as defined in the executive's employment agreement, as
and when the loan became due CEI would use its best efforts to cause the Company
to forgive the loan or, if the loan was not forgiven, CEI would indemnify the
executive for the amount of the loan. The loan is included in other assets in
the accompanying balance sheet as of June 30, 1995 and 1996.
In accordance with the employment agreement of a previous officer of the
Company, $890,000 was paid to such officer in 1994 representing the amount due
if appreciation in value of certain options granted to the previous officer were
less than $900,000, adjusted to reflect a discount for early payment.
In April l994, the Company completed the purchase of 31 franchised centres
from four privately-held corporations owned by family members of individuals
who, through wholly-owned corporations, are the beneficial owners of a majority
of the outstanding stock of the Company. The purchase price consisted of
$1,641,000 in cancelled trade receivables due to the Company and assumption of
certain current liabilities. The transaction was negotiated and approved by a
committee of independent directors of the Company's Board of Directors who
received a fairness opinion from an independent investment banking firm.
9. COST OF REACQUIRED AREA FRANCHISE RIGHTS
The Company has acquired, from time-to-time, centres which were previously owned
by franchisees. The excess cost over net assets acquired of $10,758,000 is being
amortized using the straight-line method over the then remaining term of the
acquired franchise territorial rights, which averages 17 years. Amortization
expense was $639,000, $842,000 and $837,000 for the years ended June 30, 1994,
1995 and 1996, respectively. Accumulated amortization was $2,708,000 and
$3,705,000 at June 30, 1995 and 1996, respectively.
10. EMPLOYEE BENEFITS
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 expensed $91,000 in 1996 with respect to 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
one percent of operating income for the fiscal
[30]
<PAGE> 18
Jenny Craig, Inc. and Subsidiaries
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.
Amounts expensed under this plan were $10,000, $174,000 and $386,000 in 1994,
1995 and 1996, respectively.
11. STOCK OPTION PLAN
The Company's Stock Option Plan (the "Option Plan") was adopted in October
1991.
The Option Plan, under which a total of 2,500,000 shares of common stock may
be issued, provides for the grant of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended, to key
employees, and of nonqualified stock options to key employees, consultants,
directors and Medical Advisory Board members.
Except with regard to non-employee directors, who receive options upon
election to the Board and annually thereafter, the Compensation Committee of the
Board of Directors selects the optionees, authorizes the grant of options and
determines the exercise price, term and vesting schedule for options. The
exercise prices may not be less than fair market value on the date of grant.
Additionally, no options may be exercisable more than 10 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 generally
become exercisable over four to five years.
The following summarizes the status of the Option Plan:
<TABLE>
<CAPTION>
Number Exercise price
of options per option
- ---------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1993 503,476 $14.82 to 24.00
Granted 1,071,500 6.57 to 14.56
Cancelled or expired (304,976) 14.82 to 21.00
- ---------------------------------------------------------------
Outstanding at June 30, 1994 1,270,000 6.57 to 24.00
Granted 676,300 4.63 to 7.44
Cancelled or expired (268,000) 5.63 to 24.00
Exercised (400) 6.57
- ---------------------------------------------------------------
Outstanding at June 30, 1995 1,677,900 4.63 to 21.00
Granted 187,000 9.13 to 16.25
Cancelled or expired (59,380) 5.63 to 21.00
Exercised (56,940) 5.63 to 7.32
- ---------------------------------------------------------------
Outstanding at June 30, 1996 1,748,580 4.63 to 21.00
- ---------------------------------------------------------------
Exercisable at June 30, 1996 671,810 4.63 to 21.00
- ---------------------------------------------------------------
</TABLE>
During fiscal 1995, the compensation committee of the Board of Directors
authorized the grant of 226,700 options at an exercise price of $5.63 per share,
the fair market value on the date of grant. These grants were conditioned upon
the cancellation of an equal number of previously existing options which had
exercise prices ranging from $7.25 to $24.00 per share. The vesting rate of the
new options is the same as the canceled options, commencing on the grant date of
the new options.
12. CONTINGENCIES
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 all such matters will not have a material effect on
the consolidated financial statements.
[31]
<PAGE> 19
Jenny Craig, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company and complaint counsel for the Federal Trade Commission have
entered into a proposed Consent Order 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 proposed 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 proposed Consent Order requires certain procedures and
disclosures in connection with the Company's advertisements of its products and
services. If the full Commission accepts the proposed Consent Order it will be
published for public comment and, unless modified or withdrawn on the basis of
public comments, it thereafter will become effective. The Company does not
believe that compliance with the proposed Consent Order will have a material
adverse effect on the Company's consolidated financial statements or its current
advertising and marketing practices.
13. BUSINESS SEGMENTS AND GEOGRAPHIC
INFORMATION
The Company operates in one industry segment. 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 following presents information
about operations in different geographic areas ($ in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Revenue derived from
customers:
Company-owned
Operations:
Unaffiliated:
United States $307,925 291,327 309,415
Foreign 36,140 36,989 41,590
Franchise Operations:
Unaffiliated:
United States 43,706 43,087 43,119
Foreign 4,113 3,439 2,751
Affiliated:
United States 7,810 -- --
Foreign 3,647 3,251 4,143
Operating income (loss):
Company-owned
Operations:
United States (2,777) 8,453 25,226
Foreign (5,905) (203) 58
Franchise Operations:
United States 7,312 7,259 8,818
Foreign 2,391 1,854 1,419
Identifiable assets:
United States 95,254 105,960 93,208
Foreign 8,936 9,416 11,193
</TABLE>
[32]
<PAGE> 20
Jenny Craig, Inc. and Subsidiaries
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Jenny Craig, Inc.:
We have audited the accompanying consolidated balance sheets of Jenny Craig,
Inc. and subsidiaries as of June 30, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended June 30, 1996. 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 generally accepted auditing
standards. 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, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Diego, California
August 16, 1996
[33]
<PAGE> 21
Jenny Craig, Inc. and Subsidiaries
SELECTED QUARTERLY FINANCIAL INFORMATION
(Unaudited)
The following is a summary of the unaudited quarterly results of operations
($ in thousands, except per share data):
<TABLE>
<CAPTION>
Three-Month Period Ended
- ------------------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, Total
Current Year 1995 1995 1996 1996 Year
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $99,620 89,453 107,304 104,641 401,018
Operating income 6,292 3,987 13,217 12,025 35,521
Net income 4,062 2,771 8,255 7,824 22,912
Net income per share .16 .11 .35 .36 .95
<CAPTION>
Three-Month Period Ended
- ------------------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, Total
Prior Year 1994 1994 1995 1995 Year
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $95,135 86,527 98,199 98,232 378,093
Operating income 5,488 2,424 1,643 7,808 17,363
Net income 3,392 1,570 1,217 5,593 11,772
Net income per share .13 .06 .05 .22 .46
</TABLE>
The quarter ended March 31, 1995 includes a $2,200,000 pre-tax provision to
reflect the settlement of certain securities class action litigation against the
Company, while the quarter ended March 31, 1996 includes a pre-tax credit of
$2,200,000 that resulted from the Company's successful litigation recovery from
one of its insurance carriers related to the March 1995 settlement. The quarter
ended June 30, 1995 includes a credit of $1,843,000 representing the reversal of
a portion of the accrual for centre closures originally recorded at March 31,
1994. See Note 5.
The net income per share computed for each quarter and the year are separate
calculations.
[34]
<PAGE> 22
Jenny Craig, Inc. and Subsidiaries
COMMON STOCK DATA
(Unaudited)
At August 31, 1996, there were approximately 3,500 holders of the Company's
common stock, which is traded on the New York Stock Exchange (NYSE) under the
symbol JC. The following table reflects the range of high and low sales prices
as reported by the NYSE for the indicated periods.
<TABLE>
<CAPTION>
1995 1996
---------------- -----------------
High Low High Low
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter ended September 30 $6 3/4 4 1/2 10 1/2 7 3/8
Second quarter ended December 31 8 5 1/2 10 5/8 8 1/8
Third quarter ended March 31 8 5/8 6 1/2 10 1/8 8 7/8
Fourth quarter ended June 30 8 1/4 6 5/8 18 8 7/8
</TABLE>
In June 1994, the Company suspended payment of its quarterly dividend, subject
to quarterly review by the Board of Directors. The Company currently believes
that its stockholders are best served by directing cash resources to the
Company's marketing efforts and further improvement of its business, as well as
periodic purchases of shares of the Company's common stock as circumstances
warrant.
[35]
<PAGE> 1
EXHIBIT 22
AMENDED AND RESTATED LIST OF SUBSIDIARIES
Jenny Craig Weight Loss Centres, Inc. (Delaware)
Jenny Craig International, Inc. (California)
Jenny Craig Australia Holdings, Inc. (Delaware)
Jenny Craig Weight Loss Centres Pty. Ltd. (Australia)
Jenny Craig Distributing Pty. Ltd. (Australia)
Jenny Craig Weight Loss Centres (Canada) Limited (Canada)
Jenny Craig Management, Inc. (California)
Jenny Craig Operations, Inc. (California)
Jenny Craig Products, Inc. (California)
JCCH1, Inc. (California)
JCCH2, Inc. (California)
JCH, Inc. (California)
The companies listed above do business under the name of "Jenny Craig
Weight Loss Centres."
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Shareholders 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 16, 1996, relating to the consolidated balance sheets of Jenny
Craig, Inc. and subsidiaries as of June 30, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended June 30, 1996, and the related
schedule, which report appears in the June 30, 1996 annual report on Form 10-K
of Jenny Craig, Inc.
KPMG PEAT MARWICK LLP
San Diego, California
September 24, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR
ENDED JUNE 30, 1996, INCLUDED IN THE REPORT FILED ON FORM 10-K OF JENNY CRAIG,
INC. FOR THE YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 43535
<SECURITIES> 7045
<RECEIVABLES> 3668<F1>
<ALLOWANCES> 0
<INVENTORY> 17401
<CURRENT-ASSETS> 79931
<PP&E> 15474<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 104401
<CURRENT-LIABILITIES> 49939
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 54462
<TOTAL-LIABILITY-AND-EQUITY> 104401
<SALES> 368166
<TOTAL-REVENUES> 401018
<CGS> 319653
<TOTAL-COSTS> 337035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (900)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 38481
<INCOME-TAX> 15569
<INCOME-CONTINUING> 22912
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22912
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF ALLOWANCES
AND DEPRECIATION, RESPECTIVELY.
</FN>
</TABLE>
