<PAGE> 1
================================================================================
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, 1997
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)
<TABLE>
<S> <C>
DELAWARE 33-0366188
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
11355 NORTH TORREY PINES ROAD, LA JOLLA, CALIFORNIA 92037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 812-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK, $.000000005 NEW YORK STOCK EXCHANGE
</TABLE>
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. [ ]
As of August 29, 1997, there were 20,687,771 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 August 29, 1997) was approximately $45,327,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended June 30, 1997 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, 1997.
================================================================================
<PAGE> 2
JENNY CRAIG, INC.
1997 FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ITEM 1. BUSINESS................................................................ 1
ITEM 1a. EXECUTIVE OFFICERS OF THE REGISTRANT.................................... 8
ITEM 2. PROPERTIES.............................................................. 9
ITEM 3. LEGAL PROCEEDINGS....................................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................... 10
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.... 10
ITEM 6. SELECTED FINANCIAL DATA................................................. 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................. 10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................................... 11
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................... 11
ITEM 11. EXECUTIVE COMPENSATION.................................................. 11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 11
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................... 11
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........ 11
</TABLE>
i
<PAGE> 3
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 August 29, 1997, there were 554 Company-owned and 104
franchised weight loss Centres throughout the United States, and 106
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 August 29, 1997, there were approximately 90,000 active
participants in the Program in the United States, and 22,000 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 1996 (the "Act"). The words "expects," "anticipates,"
"believes" and similar words generally signify a "forward-looking" statement.
The cautionary statements below are being made pursuant to the provisions of the
Act and with the intention of obtaining the benefit of the "safe harbor"
provisions of the Act. The reader is cautioned that all forward-looking
statements are necessarily speculative and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward-looking statements. The discussion below,
together with portions of the discussion elsewhere in this Report, highlight
some of the more important risks identified by management of the Company but
should not be assumed to be the only things that could affect future financial
performance of the Company. Certain risk factors may also be identified by the
Company from time to time in other filings with the Securities and Exchange
Commission, press releases and other communications.
Competition; Technological and Scientific Developments. The weight loss
business is highly competitive and the Company competes against a large number
of companies of various sizes, some of which may have greater financial
resources than the Company. The Company competes against self-administered
weight loss regimens, doctors, nutritionists, dietitians, the pharmaceutical
industry and certain government agencies and non-profit groups which offer
weight control help by means of medication, diets, exercise and weight loss
drugs. The Company also competes against food manufacturers and distributors
which are developing and marketing low-calorie and diet products to
weight-conscious consumers. In addition, new or different products or methods of
weight control are continually being introduced. Such competition and any
increase in competition, including new pharmaceuticals and other technological
and scientific developments in weight control, may have a material adverse
impact on the Company.
From time to time, medical and health professionals have identified health
risks associated with weight loss. Weight loss pharmaceuticals are not risk-free
and side effects and potential health problems for certain users have been
identified. In September 1997, the United States Food and Drug Administration
requested the withdrawal of fenfluramine (one of the pharmaceuticals used in a
combination commonly known as "phen-fen") and dexfenfluramine, commonly referred
to by its trade name Redux, from the U.S. market based upon potential health
risks. The manufacturer and distributor of these pharmacueticals agreed to an
immediate recall of these drugs. Medical and scientific developments or public
announcements associating a health risk with weight loss could have a material
adverse effect on the Company. See "Competition."
Legislative and Regulatory Restrictions; Litigation. The Company is subject
to a number of laws and regulations regarding its advertising, food products,
franchise operations and relations with consumers. See "Regulation." The Federal
Trade Commission ("FTC") and certain states regulate advertising, disclosures to
consumers and franchisees, and other consumer matters and the Food and Drug
Administration and the United States Department of Agriculture specify quality
standards for foods. The Company's customers may file actions on their own
behalf, as a class or otherwise, and may file complaints with the FTC or state
or local
1
<PAGE> 4
consumer affairs offices and these agencies may take action on their own
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, and a class action
litigation commenced in Alabama against the Company, other weight loss programs,
and certain pharmaceutical companies relating to the distribution and sale of
weight loss pharmaceuticals. Remedies sought in such actions may include the
refund of amounts paid by the complaining customer, refunds to an entire class
of participants, other damages, as well as changes in the Centres' method of
doing business. A complaint because of a practice at one Centre, whether or not
that practice is authorized by the Company, could result in an order affecting
some or all Centres in the particular state, and an order in one state could
influence courts or government agencies in other states considering similar
matters. Proceedings resulting from complaints may result in significant defense
costs, settlement payments or judgments and could have a material adverse effect
on the Company.
Future legislation or regulations including, without limitation,
legislation or regulations affecting the Company's marketing and advertising
practices, relations with consumers or franchisees or its food products, could
have a material adverse impact on the Company.
The Company's foreign operations and franchises are also generally subject
to regulations of the applicable country regarding the offer and sale of
franchises, the content of advertising, the labeling and packaging of food, and
promotion of diet products and programs. Although the Company is not currently
subject to any government-imposed restriction on the withdrawal of funds from
any foreign country, if Australia or any foreign country in which the Company
operates were to impose currency restrictions, the Company's business could be
materially adversely affected.
Effectiveness of Marketing and Advertising Program. The Company's business
is marketing intensive. Its success depends upon its ability to attract new
participants to the program. The effectiveness of the Company's marketing
practices, in particular its advertising campaigns, is important to the
Company's financial performance. If the Company's marketing and advertising
programs do not generate sufficient "leads" and "sales," the Company's results
of operations will be materially adversely affected.
Market Acceptance of New Products and Services. The Company's future
success will depend on its ability to enhance its existing products and services
and to develop and market new products and services on a timely basis that
respond to new and evolving customer demands, achieve market acceptance and keep
pace with new technological and scientific developments. There can be no
assurance that the Company will be successful in developing, introducing on a
timely basis and marketing such new products and services, or that any such new
products or services will be accepted by the market. The failure of such
products and services to be accepted by the market could have a material adverse
impact on the Company.
Cost of Food and Services. As a large percentage of the Company's revenues
are derived from sales of the Company's food products, increases in the cost of
food and food services could have a material adverse impact on the Company.
Fluctuations In Quarterly Operating Results; Seasonality. The Company has
experienced and expects to continue to experience fluctuations in its quarterly
results of operations. The Company's revenues are affected by a number of
factors, including the volume and timing of customer leads, success of marketing
and advertising programs, success of introductions of new services and products,
activities of competitors and the ability of the Company to penetrate new
markets. The Company's business is seasonal with revenues generally decreasing
in the quarter 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.
2
<PAGE> 5
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 assists
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. During fiscal 1997, the
Company introduced an adjunct to its traditional weight loss program which
incorporated weight loss pharmaceuticals for qualified participants. This
program adjunct utilized independently-contracted physicians to examine clients
and prescribe Redux (the trade name for dexfenfluramine, a medication for
obesity approved by the U.S. Food and Drug Administration in April 1996) and a
combination of two other medications commonly known as "phen-fen" to
participants who met the appropriate medical criteria for these medications. In
August 1997, the Company ceased offering a weight loss medication adjunct to its
Program following reports from the medical community as to possible health risks
associated with the use of Redux and phen-fen.
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 now terminated program adjunct which
offered 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.
3
<PAGE> 6
Participants in the Program pay a fixed service fee which covers all
aspects of the Program other than the purchase of Jenny's Cuisine (and, while it
was being offered, certain fees associated with the weight loss medication
program adjunct). For the year ended June 30, 1997, the initial service fee for
the basic program in Company-owned Centres ranged from $10 to $149. As of August
29, 1997, the initial service fee in Company-owned Centres was $99. In addition,
the Company may offer special limited introductory programs for a lower fee.
During the weight loss portion of the Program, participants pay an average of
between $50 and $75 per week for Jenny's Cuisine. The Company also offers a
Success Program which includes a weight maintenance module and a walking program
for a fee which was $199 as of August 29, 1997. A significant number of
participants who enroll in the Program purchase a Success Plus Program for a
fixed fee which was $349 at August 29, 1997. The Success Plus Program includes a
walking program, a weight maintenance module, Program return privileges and
lifestyle video and audio cassette tapes, as well as an ability to obtain a
refund of a portion of the service fee if certain criteria are met. 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 Con Carne.
Product sales, principally comprised of Jenny's Cuisine, accounted for 91%
and 92% of the Company's revenues in fiscal 1996 and 1997, respectively. For the
year ended June 30, 1997, the Company's gross revenues from the product sales
were $333,917,000 compared to $368,166,000 for the year ended June 30, 1996.
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.
4
<PAGE> 7
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 August 29, 1997 as measured
by the number of Centres operating is shown in the following table:
<TABLE>
<CAPTION>
AT JUNE 30, AT
---------------------------------------------------------------------------- 8/29
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company-owned
United States.......... 65 151 273 326 370 476 502 478 485 542 554
Foreign................ 73 70 84 86 88 103 106 102 103 106 106
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
138... 221 357 412 458 579 608 580 588 648 660
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Franchise
United States.......... 10 47 126 186 199 176 159 154 159 113 104
Foreign................ 39 37 29 30 37 39 43 43 36 36 36
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
49.. 84 155 216 236 215 202 197 195 149 140
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total.......... 187 305 512 628 694 794 810 777 783 797 800
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
The number of franchise Centres owned by affiliates at June 30, 1997 and
August 29, 1997 was 16.
The increase in United States Company-owned Centres and the decrease in
United States franchise Centres in 1997 reflects the Company's acquisition of 51
Centres from three franchisees during fiscal 1997. In fiscal 1997, the Company
opened 9 United States Company-owned Centres and closed 3 United States
Company-owned Centres. Also during fiscal 1997, 9 United States franchise
Centres were opened and 4 United States franchise Centres were closed. In July
1997, the Company acquired 6 additional centres 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 (800-97JENNY) that connects the caller directly to the nearest
Centre in every market in the United States.
The Company presently spends more than 10% of gross revenues on advertising
to generate leads, advertising extensively in each local market where it owns
and operates Centres. The majority of this amount is spent on television
advertising, with the balance allocated to print advertising and radio
advertisements. The size of the Company's advertising budget, coupled with the
television spot media buying power of its agency enables the Company to
advertise on a low cost-per-spot basis. Franchise agreements generally require
that
5
<PAGE> 8
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 August 29, 1997, the Company had 140 Centres operating pursuant to
franchise agreements, of which 104 were located throughout the United States, 16
in Australia, 16 in New Zealand and 4 in Canada. During fiscal 1997, the Company
acquired 51 Centres from three franchisees.
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.
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
6
<PAGE> 9
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
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, and a class action
litigation commenced in Alabama against the Company, other weight loss programs,
and certain pharmaceutical companies relating to the distribution and sale of
weight loss pharmaceuticals. Proceedings resulting from complaints may result in
significant defense costs, settlement payments or judgements and could have a
material adverse effect on the Company.
The Company is subject to certain United States laws and regulations in
connection with its food products. The Food, Drug and Cosmetic Act prohibits
adulteration and misbranding and provides for penalties and other remedies such
as seizure of products. The Food and Drug Administration ("FDA") enforces the
Food, Drug and Cosmetic Act, including specifying quality standards for foods
and, as do many states, regulating food labeling.
Those foods which contain 2% or more meat or poultry products, and the
plants which manufacture them, are subject to regulation (including labeling
requirements) and continuous inspection by the United States Department of
Agriculture ("USDA"). Although the FDA and the USDA require the manufacturers of
the Company's food products to obtain appropriate governmental approvals and to
comply with applicable regulations, the Company has responsibility for the
quality and labeling of food and for compliance with FDA and USDA regulations.
Prior to offering franchises in the United States, the Company, as is
generally the case with franchisors, is required under regulations of the
Federal Trade Commission to furnish potential franchisees with a disclosure
document describing the Company, the franchise agreement and related matters.
Some states require their own version of the disclosure document. In addition,
state franchise laws may require the Company to furnish a bond, escrow monies,
submit annual reports and meet other conditions.
Many states have statutes which may be applicable to the Company and
require that a written contract be provided to the participant, and that
participants be permitted to cancel their contract within specified periods
following purchase and receive a refund of the service fee.
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.
7
<PAGE> 10
EMPLOYEES
As of August 29, 1997 the Company had approximately 4,230 employees, of
which 3,570 were located in the United States, 530 were located in Australia,
and 130 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 65 Chairman of the Board and Director
Jenny Craig 65 Vice-Chairman and Director
C. Joseph LaBonte 58 President, Chief Executive Officer and Director
Michael L. Jeub Senior Vice President, Chief Financial Officer and
54 Treasurer
Janet Rheault 36 Senior Vice President, Operations
Leslie Koll 46 Senior Vice President, Marketing
Sunil Dewan 43 Vice President, Franchise Operations
William K. Dix 41 Vice President, General Counsel
Alan V. Dobies 49 Vice President, Corporate Services
Stuart Gaiber 48 Vice President, Information Services
Marvin Sears 70 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 Successories, Inc. and an investor in and a director of
various privately owned enterprises.
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.
Sunil Dewan has served as Vice President, Franchising since June 1997. From
January 1996 to June 1997 Mr. Dewan was Vice President and Managing Director,
International for Orion Food Systems, a privately held
8
<PAGE> 11
vertically integrated branded food company. From 1993 through 1995, Mr. Dewan
served as President of NOEC Corporation, a privately held diversified company
based in Taipei. From 1987 to 1993 Mr. Dewan was Vice President and Managing
Director in charge of international business for Metromedia Steakhouses Company.
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.
Stuart Gaiber has served as Vice President, Information Systems since June
1997. From April 1995 to June 1997 Mr. Gaiber was Director of Information
Technology for KCET, a public television station in Los Angeles, California.
From October 1989 through April 1995, Mr. Gaiber served as Director of MIS for
Avery Dennison, an office products 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.
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 LLP, counsel to the Company during fiscal 1997 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 August 29, 1997, there were 660 Company-owned Centres, all of which are
in leased premises, of which 554 were in the United States, 81 were in
Australia, and 25 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 purchased 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.
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 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
9
<PAGE> 12
services. The full Commission accepted the proposed Consent Order and it was
published for public comment. Unless modified or withdrawn on the basis of
public comment, it will become effective upon service of notice to the Company
by the Commission. The Company does not believe that compliance with the
proposed Consent Order will have a material adverse effect on the Company's
consolidated financial position or results of operations or its current
advertising and marketing practices.
The Company along with other weight loss programs and certain
pharmaceutical companies has been named as a defendant in an action filed in the
Circuit Court for the Eleventh Judicial Circuit in Pickens County, Alabama. The
action was commenced in August, 1997 by three plaintiffs who are seeking to
maintain the action as a class action on behalf of all persons in the United
States and United States Territories who have suffered or may in the future
suffer injury due to the administration of phentermine, fenfluramine (commonly
known as "phen-fen" when taken together) and/or dexfenfluramine (tradename
"Redux"), which were manufactured or sold by the defendants. The complaint
includes claims against the Company and other defendants, acting separately and
in concert, for alleged unlawful and tortious acts, including sale of allegedly
dangerous and defective products, negligent marketing and distribution, failure
to warn of the risks associated with the weight loss medications, breach of
warranty, fraud, and negligent misrepresentation. The complaint seeks
compensatory and punitive damages in unspecified amounts and equitable relief
including the establishment of a medical fund to cover future medical expenses
resulting from the use of the weight loss medications, and a requirement that
the defendants adequately warn the public of the risks associated with the use
of the weight loss medications. The Company has tendered this matter to its
insurance carriers. The Company has also asserted its idemnification rights
under its agreement with the company which provided the physicians who
prescribed the weight loss medications in the Company's centres. The claim has
not progressed sufficiently for the Company to estimate a range of possible
loss, if any. The Company intends to defend the matter vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Material appearing under the caption "Common Stock Data" on page 32 of the
Annual Report to Shareholders of Jenny Craig, Inc. for the fiscal year ended
June 30, 1997 ("1997 Annual Report") is hereby incorporated by this reference.
ITEM 6. SELECTED FINANCIAL DATA
Material appearing under the caption "Selected Financial Data" on page 8 of
the Company's 1997 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 9 through 16 of the
Company's 1997 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 17 through 30 of the
Company's 1997 Annual Report are hereby incorporated by this reference. Material
10
<PAGE> 13
appearing under the caption "Selected Quarterly Financial Information" on page
31 of the Company's 1997 Annual Report is hereby incorporated by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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, 1997. 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, 1997.
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, 1997.
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, 1997.
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 1997 Annual Report at the pages indicated below
and are incorporated into Part II by reference:
<TABLE>
<C> <S> <C>
(1) Independent Auditors' Report....................................... Page 30
(2) Consolidated Balance Sheets as of June 30, 1996 and 1997........... Page 17
(3) Consolidated Statements of Income for the Years Ended June 30, Page 18
1995, 1996 and 1997................................................
(4) Consolidated Statements of Stockholders' Equity for the Years Ended Page 19
June 30, 1995, 1996 and 1997.......................................
(5) Consolidated Statements of Cash Flows for the Years Ended June 30, Page 20
1995, 1996 and 1997................................................
(6) Notes to Consolidated Financial Statements......................... Pages 21 through 29
</TABLE>
11
<PAGE> 14
SCHEDULES
The following financial statement schedule appears on page 16 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.
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Registrant.
3.4 Restated By-laws of Registrant.(1)
10.1 Jenny Craig, Inc. Management Deferred Bonus Program.(1)(2)
10.2 Executive Employment Agreement between Jenny Craig, Inc. and C. Joseph
LaBonte. (Incorporated herein by reference to Exhibit 10.2 to the Report on
Form 10-K of the Company for the fiscal year ended June 30, 1994.)(3)
10.3 Jenny Craig, Inc. Stock Option Plan, as amended. (Incorporated herein by
reference to Exhibit 10.3 to the Report on Form 10-K of the Company for the
fiscal year ended June 30, 1996.)(2)
10.4 Executive Employment Agreement between Jenny Craig, Inc. and Jenny Craig. See
Exhibit 10.30 for Amendment thereto.(1)(3)
10.5 Executive Employment Agreement between Jenny Craig, Inc. and Sid Craig. See
Exhibit 10.29 for Amendment thereto.(1)(3)
10.6 Employment Agreement between Jenny Craig, Inc. and Michael L. Jeub.
(Incorporated herein by reference to Exhibit 10.6 to the Report on Form 10-K
of the Company for the fiscal year ended June 30, 1994.)(3)
10.7 Settlement Agreement among Class Plaintiffs, Jenny Craig, Inc. and Jenny Craig
International, Inc. (Incorporated herein by reference to Exhibit 10.7 to the
Report on Form 10-K of the Company for the fiscal year ended June 30, 1994.)
10.8 Agreement dated as of March 27, 1997 between Jenny Craig, Inc. and Sunil
Dewan. (Incorporated herein by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the three month period ended March 31, 1997.)(3)
10.9 Standard Form of Franchise Agreement of Jenny Craig International, Inc.(1)
10.10 Agreement dated as of April 21, 1997 between Jenny Craig, Inc. and Stewart
Gaiber.(3)
10.11 Office Building Lease between Jenny Craig Weight Loss Centres, Inc. and JLRB
Associates dated September 15, 1988.(1)
10.11.1 Amendment to Office Building Lease between Jenny Craig Weight Loss Centres,
Inc. and JLRB Associates, undated.(1)
10.11.2 Amendment to Office Building Lease between Jenny Craig Weight Loss Centres,
Inc. and JLRB Associates, undated.(1)
10.11.3 Amendment to Office Building Lease between Jenny Craig Weight Loss Centres,
Inc. and JLRB Associates, dated February 21, 1991.(1)
10.11.4 Amendment to Office Building Lease between Jenny Craig Weight Loss Centres,
Inc. and JLRB Associates, undated.(1)
10.11.5 Amendment to Office Building Lease between Jenny Craig Weight Loss Centres,
Inc. and JLRB Associates, undated. (Incorporated herein by reference to
Exhibit 10.11.5 to the Report on Form 10-K of the Company for the fiscal year
ended June 30, 1993.)
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.12 Lease between Jenny Craig Distributing Pty. Ltd. and Indalia Pty. Ltd. dated
November 16, 1990.(1)
10.13 Agreement dated as of June 4, 1997 between Jenny Craig, Inc. and Eileen
Piersa.(3)
10.14 Standard Form Lease dated May 14, 1996 between Jenny Craig Products, Inc. and
RCDC Associates Limited Partnership.
10.16 Tax Allocation and Indemnity Agreement among New York Life Insurance Company
et al, Security Pacific National Bank individually and as Agent, Jenny Craig,
Inc., Jenny Craig Weight Loss Centres, Inc., Craig Enterprises, Inc., SJF
Enterprises, Inc., Sid Craig and Jenny Craig dated as of June 30, 1989, as
amended.(1)
10.17 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.(1)
10.18 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and IBM Foods,
d/b/a Overhill Farms, dated September 22, 1988, with amendments.(1)
10.20 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and Campbell
Soup Company, dated June 1, 1991.(1)
10.21 Metropolitan Insurance and Annuity Company Key Man Life Insurance Policy
Relating to Jenny Craig.(1)
10.23 Prudential Insurance Company of America Key Man Life Insurance Policy Relating
to Jenny Craig.(1)
10.29 Agreement dated as of September 14, 1994 between Sidney Craig and Jenny Craig,
Inc., amending Exhibit 10.5. (Incorporated herein by reference to Exhibit 10.2
to the Report on Form 10-Q of the Company for the three month period ended
September 30, 1994.)(3)
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)(3)
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.)(3)
10.33 Settlement Agreement dated March 29, 1996 with respect to the settlement of a
series of class actions collectively entitled In Re Jenny Craig Securities
Litigation. (Incorporated herein by reference to 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 on Form
10-Q of the Company for the three month period ended March 31, 1996.)(3)
10.35 Agreement dated as of April 26, 1996 between William K. Dix and Jenny Craig,
Inc. (Incorporated herein by reference to Exhibit 10.35 to the Company's
Report on Form 10-K for the fiscal year ended June 30, 1996.)(3)
10.36 Amended and Restated Agreement dated as of August 20, 1996 between Marvin
Sears and Jenny Craig, Inc. (Incorporated herein by reference to Exhibit 10.36
to the Company's Report on Form 10-K for the fiscal year ended June 30,
1996.)(2)
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
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. (Incorporated herein by
reference to Exhibit 10.37 to the Company's Report on Form 10-K for the fiscal
year ended June 30, 1996.)
10.38 Purchase and Sale Agreement dated as of May 22, 1997 between Jenny Craig
Management, Inc. and M&S Balanced Property Fund, L.P. (Incorporated herein by
reference to Exhibit 10.38 to the Company's Report on Form 10-K for the fiscal
year ended June 30, 1996.)
13. Portions of the Annual Report to Shareholders with respect to the fiscal year
ended June 30, 1997 which are incorporated by reference in this Form 10-K.
18. Preferability Letter from KPMG Peat Marwick LLP with respect to change in
accounting method.
22. List of Subsidiaries.
23. Independent Auditors' Consent.
27. Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-1 filed October 29, 1991, Registration No. 33-42564. Each of the
exhibits so incorporated by reference bears the same exhibit number in
Registration Statement No. 33-42564.
(2) Compensatory Plan.
(3) Management contract.
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.
14
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Jenny Craig, Inc.:
Under date of August 20, 1997, we reported on the consolidated balance
sheets of Jenny Craig, Inc. and subsidiaries as of June 30, 1996 and 1997, 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, 1997, as
contained in the 1997 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, 1997. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule as listed in Item
14. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
San Diego, California
August 20, 1997
15
<PAGE> 18
SCHEDULE II
JENNY CRAIG, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED CHARGED CHARGED
TO CHARGED TO CHARGED TO
BALANCE COSTS TO BALANCE COSTS TO BALANCE COSTS
AT AND OTHER WRITE AT AND OTHER WRITE AT AND
DESCRIPTION 6/30/94 EXPENSES ACCOUNTS OFFS 6/30/95 EXPENSES ACCOUNTS OFFS 6/30/96 EXPENSES
- --------------------------- ------- -------- -------- ----- ------- -------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts.................. 5,620 -- -- -- 5,620 (900) -- (3,256) 1,464 --
Accumulated Amortization --
Reacquired Area Franchise
Rights................... 1,899 842 (33) -- 2,708 837 160 -- 3,705 1,015
Accumulated Amortization --
Computer Software........ 747 266 -- -- 1,013 272 -- -- 1,285 75
<CAPTION>
CHARGED
TO BALANCE
OTHER WRITE AT
DESCRIPTION ACCOUNTS OFFS 6/30/97
- --------------------------- -------- ----- -------
<S> <C> <C> <C>
Allowance for Doubtful
Accounts.................. -- (274) 1,190
Accumulated Amortization --
Reacquired Area Franchise
Rights................... (122) -- 4,598
Accumulated Amortization --
Computer Software........ -- -- 1,360
</TABLE>
- ---------------
See accompanying Independent Auditors' Report.
16
<PAGE> 19
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 25, 1997 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 25, 1997
- ---------------------------------------------
Sidney Craig
/s/ JENNY CRAIG Vice Chairman and September 25, 1997
- --------------------------------------------- Director
Jenny Craig
/s/ C. JOSEPH LABONTE President, Chief September 25, 1997
- --------------------------------------------- Executive
C. Joseph LaBonte Officer and Director
(Principal Executive
Officer)
/s/ MICHAEL L. JEUB Senior Vice President, September 25, 1997
- --------------------------------------------- Chief Financial Officer
Michael L. Jeub and Treasurer
(Principal Financial and
Accounting
Officer)
/s/ SCOTT BICE Director September 25, 1997
- ---------------------------------------------
Scott Bice
/s/ MARVIN SEARS Director September 25, 1997
- ---------------------------------------------
Marvin Sears
/s/ ANDREA VAN DE KAMP Director September 25, 1997
- ---------------------------------------------
Andrea Van de Kamp
/s/ ROBERT WOLF Director September 25, 1997
- ---------------------------------------------
Robert Wolf
</TABLE>
17
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE NO.
- ------- ------------------------------------------------------------------------- ------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of Registrant..........
3.4 Restated By-laws of Registrant.(1).......................................
10.1 Jenny Craig, Inc. Management Deferred Bonus Program.(1)(2)...............
10.2 Executive Employment Agreement between Jenny Craig, Inc. and C. Joseph
LaBonte. (Incorporated herein by reference to Exhibit 10.2 to the Report
on Form 10-K of the Company for the fiscal year ended June 30,
1994.)(3)................................................................
10.3 Jenny Craig, Inc. Stock Option Plan, as amended. (Incorporated herein by
reference to Exhibit 10.3 to the Report on Form 10-K of the Company for
the fiscal year ended June 30, 1996.)(2).................................
10.4 Executive Employment Agreement between Jenny Craig, Inc. and Jenny Craig.
See Exhibit 10.30 for Amendment thereto.(1)(3)...........................
10.5 Executive Employment Agreement between Jenny Craig, Inc. and Sid Craig.
See Exhibit 10.29 for Amendment thereto.(1)(3)...........................
10.6 Employment Agreement between Jenny Craig, Inc. and Michael L. Jeub.
(Incorporated herein by reference to Exhibit 10.6 to the Report on Form
10-K of the Company for the fiscal year ended June 30, 1994.)(3).........
10.7 Settlement Agreement among Class Plaintiffs, Jenny Craig, Inc. and Jenny
Craig International, Inc. (Incorporated herein by reference to Exhibit
10.7 to the Report on Form 10-K of the Company for the fiscal year ended
June 30, 1994.)..........................................................
10.8 Agreement dated as of March 27, 1997 between Jenny Craig, Inc. an d Sunil
Dewan. (Incorporated herein by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the three month period ended March 31,
1997.)(3)................................................................
10.9 Standard Form of Franchise Agreement of Jenny Craig International,
Inc.(1)..................................................................
10.10 Agreement dated as of April 21, 1997 between Jenny Craig, Inc. and
Stewart Gaiber.(3).......................................................
10.11 Office Building Lease between Jenny Craig Weight Loss Centres, Inc. and
JLRB Associates dated September 15, 1988.(1).............................
10.11.1 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated.(1)...........................
10.11.2 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated.(1)...........................
10.11.3 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, dated February 21, 1991.(1)...........
10.11.4 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated.(1)...........................
10.11.5 Amendment to Office Building Lease between Jenny Craig Weight Loss
Centres, Inc. and JLRB Associates, undated. (Incorporated herein by
reference to 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.(1)..............................................
10.13 Agreement dated as of June 4, 1997 between Jenny Craig, Inc. and Eileen
Piersa.(3)...............................................................
10.14 Standard Form Lease dated May 14, 1996 between Jenny Craig Products, Inc.
and RCDC Associates Limited Partnership..................................
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE NO.
- ------- ------------------------------------------------------------------------- ------------
<S> <C> <C>
10.16 Tax Allocation and Indemnity Agreement among New York Life Insurance
Company et al, Security Pacific National Bank individually and as Agent,
Jenny Craig, Inc., Jenny Craig Weight Loss Centres, Inc., Craig
Enterprises, Inc., SJF Enterprises, Inc., Sid Craig and Jenny Craig dated
as of June 30, 1989, as amended.(1)......................................
10.17 Shareholders Agreement among Sid Craig, Jenny Craig, W. SJames 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.(1)......................
10.18 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and IBM
Foods, d/b/a Overhill Farms, dated September 22, 1988, with
amendments.(1)...........................................................
10.20 Supply Agreement between Jenny Craig Weight Loss Centres, Inc. and
Campbell Soup Company, dated June 1, 1991.(1)............................
10.21 Metropolitan Insurance and Annuity Company Key Man Life Insurance Policy
Relating to Jenny Craig.(1)..............................................
10.23 Prudential Insurance Company of America Key Man Life Insurance Policy
Relating to Jenny Craig.(1)..............................................
10.29 Agreement dated as of September 14, 1994 between Sidney Craig and Jenny
Craig, Inc., amending Exhibit 10.5. (Incorporated herein by reference to
Exhibit 10.2 to the Report on Form 10-Q of the Company for the three
month period ended September 30, 1994.)(3)...............................
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)(3)................................
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.)(3)...................................................
10.33 Settlement Agreement dated March 29, 1996 with respect to the settlement
of a series of class actions collectively entitled In Re Jenny Craig
Securities Litigation. (Incorporated herein by reference to 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 on Form 10-Q of the Company for the three month period ended March
31, 1996.)(3)............................................................
10.35 Agreement dated as of April 26, 1996 between William K. Dix and Jenny
Craig, Inc. (Incorporated herein by reference to Exhibit 10.35 to the
Company's Report on Form 10-K for the fiscal year ended June 30,
1996.)(3)................................................................
10.36 Amended and Restated Agreement dated as of August 20, 1996 between Marvin
Sears and Jenny Craig, Inc. (Incorporated herein by reference to Exhibit
10.36 to the Company's Report on Form 10-K for the fiscal year ended June
30, 1996.)(2)............................................................
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.
(Incorporated herein by reference to Exhibit 10.37 to the Company's
Report on Form 10-K for the fiscal year ended June 30, 1996.)............
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE NO.
- ------- ------------------------------------------------------------------------- ------------
<S> <C> <C>
10.38 Purchase and Sale Agreement dated as of May 22, 1997 between Jenny Craig
Management, Inc. and M&S Balanced Property Fund, L.P. (Incorporated
herein by reference to Exhibit 10.38 to the Company's Report on Form 10-K
for the fiscal year ended June 30, 1996.)................................
13. Portions of the Annual Report to Shareholders with respect to the fiscal
year ended June 30, 1997 which are incorporated by reference in this Form
10-K.....................................................................
18. Preferability Letter from KPMG Peat Marwick LLP with respect to change in
accounting method........................................................
22. List of Subsidiaries.....................................................
23. Independent Auditors' Consent............................................
27. Financial Data Schedule..................................................
</TABLE>
- ---------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-1 filed October 29, 1991, Registration No. 33-42564. Each of the
exhibits so incorporated by reference bears the same exhibit number in
Registration Statement No. 33-42564.
(2) Compensatory Plan.
(3) Management contract.
<PAGE> 1
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
JCI HOLDINGS, INC.
(ORIGINALLY INCORPORATED ON JUNE 22, 1989)
FIRST: The name of the Corporation is:
JENNY CRAIG, INC.
SECOND: The address of the Corporation's registered office in the
State of Delaware is to be located at 32 Loockerman Square, Suite L-100, in the
City of Dover, County of Kent, State of Delaware. The name of its registered
agent at such address is The Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which Corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is One Hundred Million (100,000,000) shares of
common stock, and the par value of each share is $0.000000005. Upon the filing
of this Restated Certificate of Incorporation with the Delaware Secretary of
State, each share of common stock having a par value of $0.001 per share issued
and outstanding immediately prior to such filing shall be changed into One
Hundred Eighty Thousand (180,000) validly issued, fully paid and nonassessable
shares of common stock of the Corporation having a par value of $0.000000005 per
share.
FIFTH: The number of directors of the Corporation shall be the
number from time to time fixed by, or in the manner provided in, the bylaws of
the Corporation. Elections of directors need not be by ballot unless the bylaws
of the Corporation shall so provide.
SIXTH: In furtherance and not in limitation of the powers conferred
upon the Board of Directors by law, the Board of Directors shall have power to
make, adopt, alter, amend and repeal from time to time the bylaws of the
Corporation, subject to the right of the stockholders entitled to vote with
respect thereto to alter and repeal bylaws made by the Board of Directors.
SEVENTH: Whenever a compromise or arrangement is proposed between
this Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in
<PAGE> 2
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
EIGHTH: The Corporation reserves the right to amend, alter, change
or repeal any provisions contained in this certificate, and to add or insert
other provisions authorized by the laws of the State of Delaware at the time in
force, in the manner now or hereafter prescribed by law, and all rights and
powers conferred herein on stockholders, directors and officers are granted
subject to this reservation.
NINTH: A director of this Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of Delaware or (iv) for any transaction from which the director derived an
improper personal benefit. The Corporation shall, to the fullest extent
permitted by Section 145 of the General Corporation Law of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it shall
have power to indemnify under said section from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said section
and, as provided in said section, shall advance expenses, including reasonable
attorneys' fees, of any and all such persons, and the indemnification and
advancement of expenses provided for herein shall not be deemed exclusive of any
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation,
having been approved by the Board of Directors and adopted by written consent of
the sole stockholder of the Corporation in accordance with the provisions of
Sections 228, 242, and 245 of the Delaware General Corporation Law, has been
signed and attested on October 22, 1991.
JCI HOLDINGS, INC.
-NEXT RECORD-
<PAGE> 3
By: /s/
--------------------------------
W. James Mallen, Vice President
Attest:
/s/
- ----------------------------------
Marvin Sears, Secretary
-NEXT RECORD-
<PAGE> 1
EXHIBIT 10.10
[JENNY CRAIG LETTERHEAD]
April 21, 1997
Mr. Stuart Gaiber
1436 Mariners Drive
Newport Beach, CA 92660
Phone: (714) 645-5830
Dear Stuart:
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,
and the other issues we discussed, upon your joining the Company:
1. Your position will be Vice President, Information Systems. Initially
you will report directly to me; however, its is understood that this
relationship may change in the future as organizational needs
dictate.
2. The duties of this position involve the oversight and responsibility
for the company's information and communications systems and
equipment. You will interact with all levels of management to define
and prioritize organizational and client needs in order to implement
agreed upon programs and budgets.
3. Your annual compensation will be $125,000 per year payable on a
bi-monthly basis. You will also be eligible to participate in the
company's Executive Incentive Compensation Plan for fiscal year
1998, which begins on July 1, 1997.
<PAGE> 2
Stuart Gaiber
April 21, 1997
Page 2
4. You will receive an option to purchase 20,000 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 the options will
be over a four year period 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. It
is the company's intention to pay the necessary and reasonable
expense of relocating you and your family to the San Diego area. In
addition, the company will also reimburse reasonable expense for a
temporary apartment for up to two months during your search for
permanent residence.
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.
<PAGE> 3
Stuart Gaiber
April 21, 1997
Page 3
7. While we have not yet selected a date upon which you will begin your
duties here at Jenny Craig, you will determine such a date and
communicate it to me on or before April 24, 1997, otherwise this
offer will terminate without further action.
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 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 San Diego, 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
<PAGE> 4
Stuart Gaiber
April 21, 1997
Page 4
party prevailing in such proceeding shall be entitled to recover
from the other party the reasonable costs thereof, including
reasonable attorney and accounting fees.
Stuart, 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,
C. Joseph LaBonte
President & CEO
ACCEPTED AND AGREED:
------------------------------------------
Signature Date
<PAGE> 1
EXHIBIT 10.13
[JENNY CRAIG LETTERHEAD]
June 4, 1997
Ms. Eileen Piersa
4609 Richey Road
Yakima, Washington 98908
Dear Ms. Piersa:
It's been a pleasure to work with you in a consulting capacity during the past
year at Jenny Craig. This letter will formalize our employment offer to you.
While your duties will involve achieving strategic plans and financial goals of
the Company, following is an outline of the specific responsibilities you will
assume, and the other issues we discussed, upon your joining the Company on or
before June 9, 1997.
1. Your position will be Vice President, Operations. You will report
directly to me.
2. The duties of this position involve responsibility for overall
operations, training, and profitability of the Company. You will
interact with management to define and prioritize organizational and
client needs in order to implement agreed upon programs and budgets.
3. Your annual compensation will be $145,000 per year payable on a
bi-monthly basis. You will also be eligible to participate in the
Company's Executive Incentive Compensation Plan for Fiscal Year 1998,
which begins on July 1, 1997.
4. You will receive an option to purchase 20,000 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 the options will be over a four year
period 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.
<PAGE> 2
5. Upon joining the Company, you will be afforded the same fringe benefit
opportunities as other senior executives in the Company, which will
include immediate health care benefits and vacation allowance not to
exceed three weeks per year.
6. It is the Company's intention to pay the necessary and reasonable
expense of relocating you and your family to the San Diego area. In
addition, at the start of your employment with the Company, you will
receive a one-time payment of $15,000 from the Company. If you leave
the Company's employment for any reason within twelve months from the
date of your employment, you agree to reimburse the Company $15,000.
7. 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.
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 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 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; 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. Notwithstanding anything
herein to the contrary, this paragraph # 8 shall not apply to Eileen
Piersa's involvement with Steve Dahl & Associates, Inc. and Piersa
Consulting.
<PAGE> 3
Eileen Piersa 4 June 1997
Page Three
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 San Diego, 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.
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.
Sincerely,
/s/ Janet Rheault
- ------------------------------
Janet Rheault
Senior Vice President
Operations
Accepted and Agreed:
/s/ Eileen Piersa
----------------------------------------
Signature Date
<PAGE> 1
EXHIBIT 10.14
COMMENCEMENT DATE MEMORANDUM
DATE: May 14, 1996
RE: Standard Form Lease dated May 14, 1996, by and between RCDC
Associates L.P., a California limited partnership, as
"Landlord", and, Jenny Craig Products, Inc., a California
corporation, as "Tenant", for the Premises known as 11335
Jersey Boulevard, Rancho Cucamonga, California.
Agreement
The undersigned hereby agree as follows:
1. The Tenant Improvements (as defined in the Lease) to the
Premises have been substantially completed in accordance with the terms and
conditions of the Lease, subject only to "punch list" items agreed to by
Landlord and Tenant pursuant to the terms of the Lease.
2. The Commencement Date, as defined in and determined in
accordance with the Lease, is hereby stipulated for all purposes to be July 1,
1996.
3. In accordance with the Lease, Monthly Rent (as defined in the
Lease) in the amount of $31,735.03, subject to adjustment in accordance with
the terms of the Lease, commences to accrue on July 1, 1996 and is due and
payable in advance on the first day of each and every month during the Term (as
defined in the Lease). Unless and until notified by Landlord to the contrary,
Tenant shall make its rent checks payable to RCDC Associates L.P., c/o 2201
Dupont Drive, Suite 100, Irvine, California 92715.
"Landlord"
RCDC Associates L.P.,
a California limited partnership
By: RC Development L.P.,
a California limited partnership, General Partner
By: 131 Development, Inc.
a California corporation, General Partner
By: ___________________________________________
Douglas D. O'Donnell, Director of Leasing
"Tenant"
-1-
<PAGE> 2
Jenny Craig Products, Inc.,
a California corporation
By: ___________________________________________________________
Its: ___________________________________________________
By: ___________________________________________________________
Its: ___________________________________________________
-2-
<PAGE> 3
STANDARD FORM LEASE
(INDUSTRIAL; MULTI TENANT; NET)
"AS-IS"
This Lease dated May 14, 1996 (this "Lease") is entered into by and between
RCDC Associates L.P., a California limited partnership ("Landlord") and Jenny
Craig Products, Inc., a California corporation ("Tenant").
ARTICLE I
BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall
mean and refer to the following terms, the application of which shall be
governed by the provisions in the remaining Articles of this Lease:
1. Address of Landlord: Insignia ODonnell Commercial Group
2201 Dupont Drive, Suite 100
Irvine, California 92715
2. Building Address: 11335 Jersey Boulevard
Rancho Cucamonga, California 91730
3. Address of Tenant:
(a) Notices: 445 Marine View Avenue, Suite 300
Del Mar, California 92014
(b) Billing: 445 Marine View Avenue, Suite 300
Del Mar, California 92014
4. Tenant's Trade Name: Jenny Craig Products, Inc.
5. Tenant's Contact: Mark Schoffstall Telephone: (619) 259-7000,
Ext. 275
6. Premises Square Footage: Approximately 111,351 Square Feet
Building Square Footage: Approximately 169,941 Square Feet
7. Commencement Date: July 1, 1996
<PAGE> 4
8. Term: Five (5) years and Zero (0) Months
9. Initial Monthly Rent: $31,735.03/month
(subject to adjustment per Exhibit E)
10. Security Deposit: $0.00
11. Permitted Uses: Warehousing and Distribution of dietic foods and
other related products, all in accordance with Applicable Laws and
Restrictions (as hereafter defined) and pursuant to approvals to be
obtained by Tenant from all relevant City, County and other required
governmental agencies and authorities.
12. Broker: CB Commercial Real Estate Group
13. Landlord's Architect: Rengel & Company
14. Guarantor: Jenny Craig, Inc.
15. Vehicle Parking Spaces: Two Hundred Twenty (222)
16. Additional Insureds: Insignia Commercial Group
RCDC Associates L.P.
17. Tenant's Liability Insurance Limits: $2,000,000.00
Exhibits:
<TABLE>
<S> <C>
A Description of Premises G Rules and Regulations
B Project Site Plan H Environmental Questionnaire
C [INTENTIONALLY OMITTED] I Landlord's Disclosures
D Commencement Date Memorandum J Sign Criteria
E Adjustments to Monthly Rent K Insurance Certificate
F Description of Restrictions L Calculation of Tenants Share
</TABLE>
Riders:
1. Work Letter
2. Option to Extend Term
3. Operating Expense Cap
4. Limitations on Landlords Right to Self-Help
-2-
<PAGE> 5
ARTICLE II
DEFINITIONS
2.1 Certain Definitions. The capitalized terms set forth below,
unless the context clearly requires otherwise, shall have the following
meanings in this Lease:
"Additional Rent" means any and all sums (whether or not specifically
called "Additional Rent" in this Lease) other than Monthly Rent which Tenant is
or becomes obligated to pay to Landlord under this Lease. See also Rent.
"Alterations" means any alterations, decorations, modifications,
additions or improvements made in, on, about, under or contiguous to the
Building or the Premises after the Commencement Date, including, but not
limited to, lighting, HVAC and electrical fixtures, pipes and conduits,
transfer, storage and disposal facilities, partitions, drapery, wall coverings,
shelves, cabinetwork, carpeting and other floor coverings, ceiling tiles,
fixtures and carpentry installations.
"Applicable Laws" means the laws, rules, regulations, ordinances,
restrictions, and practices described in Section 5.2.
"Applicable Rate" means the greater of ten percent (10%) per annum or
five percent (5%) in excess of the discount rate of the Federal Reserve Bank of
San Francisco in effect on the twenty-fifth (25th) day of the calendar month
immediately prior to the event giving rise to the Applicable Rate imposition;
provided, however, the Applicable Rate shall in no event exceed the maximum
interest rate permitted to be charged by applicable law.
"Broker" means the person or entity identified in Item 12 of the Basic
Lease Provisions.
"Building" means that certain building within which the Premises are
located.
"Casualty" is defined in Section 12.1.
"CC&R's" means the Declaration of Covenants, Conditions and
Restrictions applicable to the Project recorded in the Official Records of the
County and more particularly described on Exhibit F, as the same may be amended
from time to time.
"City" means the city in which the Premises are located.
"Commencement Date" means the commencement date of the Term, described
in Section 3.2.
-3-
<PAGE> 6
"Common Area" means all areas and facilities within the Project
exclusive of the Premises and other portions of the Project leased (or to be
leased) exclusively to other tenants. The Common Area includes, but is not
limited to, parking areas, access and perimeter roads, sidewalks, landscaped
areas and similar areas and facilities. Tenant's use of the Common Area, and
its rights and obligations with respect thereto, are more particularly
described in Article X.
"County" means the county in which the Premises are located.
"Event of Default" means the Tenant defaults described in Section
15.1.
"Guarantor" means the person(s) or entity identified in Item 14 of the
Basic Lease Provisions, if any.
"HVAC" means the heating, ventilating and air conditioning system
serving the Building.
"Hazardous Materials" is defined in Section 6.1.
"Landlord's Agents" means Landlord's authorized agents,
representatives, property managers (whether as agents or independent
contractors), consultants, contractors, partners, subsidiaries, affiliates,
directors, officers and employees, including without limitation the Additional
Insureds named in Item 16 of the Basic Lease Provisions.
"Landlord's Architect" means the architect or architectural firm from
time to time designated by Landlord to perform the function of Landlord's
Architect set forth in this Lease. Landlord's Architect initially shall be the
architect or architectural firm designated in Item 13 of the Basic Lease
Provisions.
"Lease" means this instrument together with all exhibits, amendments,
addenda and riders attached hereto and made a part hereof.
"Monthly Rent" means the monthly rental which Tenant is to pay to
Landlord pursuant to Section 4.1, as the same may be adjusted from time to time
as set forth in this Lease. See also Rent.
"Mortgage" means any mortgage, deed of trust, or similar lien on or
covering the Project or any part thereof.
"Mortgagee" means any mortgagee of a mortgage, beneficiary of a deed
of trust or lender having a lien on or covering the Project or any part
thereof.
"Notice" means each and every notice, communication, request, demand,
reply or advice, or duplicate thereof, in this Lease provided or permitted to
be given, made or accepted by either party to any other party which shall be in
writing and given in accordance with the provisions of Section 21.6.
-4-
<PAGE> 7
"Operating Expenses" means, collectively, Project Costs and Real
Property Taxes.
"Premises" means the premises shown in Exhibit A, and all areas
appurtenant thereto, if any, for the exclusive use of Tenant, as shown in
Exhibit A. The Premises are located within and constitute a portion of the
Building at the address set forth in Item 2 of the Basic Lease Provisions.
"Premises Square Footage" means the approximate floor area of the
Premises and, if the Building has a common lobby or other internal common
features, then at Landlord's option, an additional factor approximating the
total square footage of such common lobby and features times the ratio of
Tenant's floor area to the total square footage of the Building, as determined
by Landlord's Architect. The Premises Square Footage as of the execution of this
Lease is set forth in Item 6 of the Basic Lease Provisions.
"Project" means that certain real property, and all improvements
thereon, including the Building and other buildings, if any, located within the
boundaries of such property, shown on the Project Site Plan.
"Project Costs" is defined in Section 7.3.
"Project Site Plan" means Exhibit B.
""REA" means the Reciprocal Easement Agreement applicable to the
Project, if any, recorded in the official Records of the County and more
particularly described in Exhibit F, as the same may be amended from time to
time.
"Real Property Taxes" is defined in Section 7.4.
"Rent" means Monthly Rent and Additional Rent, collectively.
"Restrictions" means, collectively, the CC&R's, the REA and any other
covenants, conditions or restrictions affecting the Premises or any portion
thereof, more particularly described in Exhibit F, as the same may be amended
from time to time.
"Rules and Regulations" means the rules and regulations attached
hereto as Exhibit G and any modifications thereto promulgated by Landlord or
Landlord's Agents from time to time.
"Security Deposit" means the amount set forth in Item 10 of the Basic
Lease Provisions, which shall be paid to Landlord by Tenant pursuant to Section
4.6.
"Substantial Completion" and "substantially completed" means repair of
the Premises following a Casualty has been fully completed except for minor
details of construction, mechanical adjustments or decoration which do not
materially interfere with Tenant's use and enjoyment of the Premises (items
normally referred to as "punch list" items).
-5-
<PAGE> 8
"Tenant Delays" means any and all delays due to the fault of the
Tenant, including without limitation Tenant's failure to deliver to Landlord
prior to the Commencement Date executed copies of policies of insurance or
certificates thereof as required under Section 11.8.
Tenant's Agents" means Tenant's agents, representatives, consultants,
contractors, affiliates, subsidiaries, officers, directors, employees,
subtenants, guests and invites.
"Tenant's Personal Property" means Tenant's removable trade fixtures,
furniture, equipment and other personal property located in or on the Premises.
"Term" means the term of this Lease, as provided in Section 3.2.
"Unavoidable Delay" means any delays which are beyond a party's
reasonable control, including, but not limited to, delays due to inclement
weather, strikes, acts of God, inability to obtain labor or materials,
inability to secure governmental approvals or permits, governmental
restrictions, civil commotion, fire, earthquake, explosion, flood, hurricane,
the elements, or the public enemy, action or interference of governmental
authorities or agents, war, invasion, insurrection, rebellion, riots, blackouts
or any other cause whether similar or dissimilar to the foregoing which is
beyond a party's reasonable control; provided however, that in no event shall
any of the foregoing ever apply with respect to the payment of any monetary
obligation.
2.2 Other Definitions. Terms defined elsewhere in this Lease,
unless the context clearly requires otherwise, shall have the means as there
given.
ARTICLE III
PREMISES AND TERM
3.1 Lease of Premises. Subject to and upon the terms and
conditions set forth herein, Landlord hereby leases the Premises to Tenant, and
Tenant hereby leases the Premises from Landlord.
3.2 Term and Commencement. Unless sooner terminated as provided
herein, the Term of this Lease shall be for that period of years and months set
forth in Item 8 of the Basic Lease Provisions, as the same may be extended in
accordance with any option or options to extend the Term granted herein, and
shall commence on the date set forth in Item 7 of the Basic Lease Provisions
(the "Commencement Date"). Promptly following the Commencement Date, Landlord
and Tenant shall execute a Commencement Date Memorandum in the form shown in
Exhibit D.
3.3 Early Entry. Tenant and its authorized agents, contractors,
subcontractors and employees shall be granted a license by Landlord to enter
upon the Premises, at Tenant's sole risk and expense, prior to the
Commencement Date; provided, however, that (i) the provisions of this Lease,
other than with respect to the payment of Monthly Rent, shall apply during such
early
-6-
<PAGE> 9
entry, including, but not limited to, the provisions of Article XI relating to
Tenant's indemnification of Landlord, (ii) prior to any such entry, Tenant
shall pay for and provided evidence of the insurance to be provided by Tenant
pursuant to the provisions of Article XI, and (iii) Tenant shall pay all
utility, service and maintenance charges for the Premises attributable to
Tenant's early entry and use of the Premises as reasonably determined by
Landlord. Upon Tenant's breach of any of the foregoing conditions, Landlord
may, in addition to exercising any of its other rights and remedies set forth
herein, revoke such license upon notice to Tenant. Early entry by Tenant in
accordance with this Section 3.3 shall not constitute occupancy of the Premises
for purposes of establishing the Commencement Date.
3.4 Delay in Possession. If for any reason Landlord cannot
deliver possession of the Premises to Tenant on or before the Commencement
Date. Landlord shall not be subject to any liability therefor, and such
failure shall not affect the validity of this Lease or the obligations of
Tenant hereunder, but in such case, Tenant shall not be obligated to pay
Monthly Rent or Additional Rent other than as provided in Section 3.3 and
Section 3.5 until possession of the Premises has been delivered to Tenant
(which date shall then be deemed the "Commencement Date" for all purposes under
this Lease). If, due to Landlord's delay in delivering possession of the
Premises, the Commencement Date has not occurred within sixty (60) days
following the date set forth in Item 7 of the Basic Lease Provisions plus
periods attributable to Tenant Delays or Unavoidable Delay, Tenant may, at its
option, by Notice to Landlord within ten (10) days thereafter, terminate this
Lease, in which event the parties shall be discharged from all further
obligations hereunder; provided, however, if Tenant fails to give such notice
to Landlord within such ten-day period, Tenant shall no longer have the right
to terminate this Lease under this Section 3.4. Tenant understands that,
notwithstanding anything to the contrary contained herein, Landlord shall have
no obligation to deliver possession of the Premises to Tenant for so long as
Tenant fails to deliver to Landlord executed copies of policies of Insurance or
certificates thereof as required under Section 11.8.
3.5 Tenant Delays. The Commencement Date shall not be delayed or
postponed due to Tenant Delays, and the Term, Tenant's obligations to pay Rent
and all of Tenant's other obligations under this Lease shall commence upon the
date which would have been the Commencement Date but for Tenant Delays.
3.6 Condition of Premises. The taking of possession or use of the
Premises by Tenant for any purpose other than as provided in Section 3.3 shall
conclusively establish that Tenant has inspected the Premises and accepts them
as being in good and sanitary order, condition and repair.
3.7 No Representations. Tenant acknowledges that neither
Landlord nor any of Landlord's Agents has made any representations or
warranties as to the suitability or fitness of the Premises for the conduct of
Tenant's business, including, but not limited to, any representations or
warranties regarding zoning or other land use matters, or for any other
purpose, and that neither Landlord nor any of Landlord's Agents has agreed to
undertake any alterations or additions to the Premises except as expressly
provided in this Lease.
-7-
<PAGE> 10
ARTICLE IV
RENT AND ADJUSTMENTS
4.1 Monthly Rent. From and after the Commencement Date, Tenant
shall pay to the Landlord, for each calendar month of the Term, the Monthly
Rent set forth in Item 9 of the Basic Lease Provisions, as the same may be
adjusted from time to time as provided in Section 4.2. Monthly Rent shall be
due and payable to Landlord in lawful money of the United States, in advance,
on the first (1st) day of each calendar month of the Term, without abatement,
deduction, claim or offset, and without prior notice, invoice or demand, at
Landlord's designate. Tenant's payment of Monthly Rent for the first (1st)
month of the Term shall be delivered to Landlord concurrently with Tenant's
execution of this Lease.
4.2 Adjustments. Monthly Rent shall be adjusted from time to time
provided in Exhibit E.
4.3 Additional Rent. All Additional Rent shall be due and payable
to Landlord in lawful money of the United States, at Landlord's address set
forth in Item 1 of the Basic Lease Provisions or at such other place as
Landlord may from time to time designate, without abatement, deduction, claim
or offset, within ten (10) days of receipt of Landlord's invoice or statement
for same, or, if this Lease provides another time for the payment of certain
items of Additional Rent, then at such other time.
4.4 Prorations. If the Commencement Date is not the first (1st)
day of a month, or if the expiration of the Term of this Lease is not the last
day of a month, a prorated installment of Monthly Rent based on a thirty (30)
day month shall be paid for the fractional month during which the term
commences or terminates.
4.5 Late Payment Charges. Tenant acknowledges that late payment
by Tenant to Landlord of Rent under this Lease will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which is extremely
difficult or impracticable to determine. Such costs include, but are not
limited to, processing and accounting charges, late charges that may be imposed
on Landlord by the terms of any Mortgage, and late charges and penalties that
may be imposed due to late payment of Real Property Taxes. Therefore, if any
Installment of Monthly Payment or any payment of Additional Rent due from
Tenant is not received by Landlord in good funds by the seventh (7th) calendar
day from the applicable due date, Tenant shall pay to Landlord an additional
sum equal to five percent (5%) of the amount overdue as a late charge for every
month or portion thereof that such amount remains unpaid. The parties
acknowledge that this late charge represents a fair and reasonable estimate of
the costs that Landlord will incur by reason of the late payment by Tenant.
Acceptance of any late Rent and late charge therefor shall not prevent Landlord
from exercising any of the other rights and remedies available to Landlord for
any other Event or Default under this Lease. Notwithstanding the foregoing (i)
should any payment of Rent by personal check be rejected for insufficient
funds, Landlord shall have the right, upon notice to Tenant, to require that
all future payments by Tenant under this Lease be by cashier's check acceptable
to Landlord, and (ii) upon the third (3rd) occurrence during the Term of
-8-
<PAGE> 11
Tenant's failure to timely pay Rent when due, Landlord may, upon notice of
Tenant, require that Monthly Rent for the balance of the Term be made in
quarterly installments, in advance, in an amount equal to the sum of the
Monthly Rent amounts payable during such three (3) month period.
ARTICLE V
USE
5.1 Tenant's Use. Tenant shall use the Premises solely for the
purposes set forth in Item 11 of the Basic Lease Provisions and shall use the
Premises for no other purpose. Tenant's use of the Premises shall be subject
to all of the terms and conditions of this Lease, including, but not limited
to, all the provisions of this Article V. Tenant, at Tenant's sole cost and
expense, shall procure, maintain and make available for the proper and lawful
conduct of Tenant's permitted use of the Premises. At Landlord's request,
Tenant shall deliver copies of all such approvals, licenses and permits to
Landlord.
5.2 Compliance with Applicable Laws. Throughout the Term, Tenant,
at Tenant's sole cost and expense, shall comply with, and shall not use the
Premises, Building or Common Area, or suffer or permit anything to be done in
or about the same which will in any way conflict with, (i) any and all present
and future laws, statutes, zoning restrictions, ordinances, orders,
regulations, directions, rules and requirements of all governmental or private
authorities having jurisdiction over all or any part of the Premises
(including, but not limited to state, municipal, county and federal governments
and their departments, bureaus, boards and officials) pertaining to the use or
occupancy of, or applicable to, the Premises or privileges appurtenant to or in
connection with the enjoyment of the Premises, (ii) any and all applicable
federal, state and local laws, regulations or ordinances pertaining to air and
water quality, Hazardous Materials (as defined in Section 6.1), waste disposal,
air emissions and other environmental or health and safety matters, zoning,
land use and utility availability, which impose any duty upon Landlord or
Tenant directly or with respect to the use or occupation of the Project or any
portion thereof, (iii) the requirements of the Board of Fire Underwriters or
other similar body now or hereafter constituted relating to or affecting the
condition, use or occupancy of the Project or any portion thereof, (iv) any
covenants, conditions, easements or restrictions, including but not limited to
the Restrictions, now or hereafter constituted relating to or affecting the
condition, use or occupancy of the Project or the Restrictions, now or
hereafter affecting or encumbering the Project or any portion thereof,
regardless of when they become effective, (v) the Rules and Regulations, and
(vi) good business practices (collectively, (i) through (vi) above are
hereinafter referred to as "Applicable Laws"). Tenant shall not commit any
waste of the Premises, Building or Project, or any public or private nuisance
or any other act or thing which might or would not place or permit to the
placed any load upon the floors, walls or ceilings in excess of the maximum
designed load specified by Landlord or which might damage the Premises or the
Building, or place or permit to be placed any harmful liquids in the drainage
systems, and Tenant shall not dump or store, or permit to be dumped or stored,
any inventory, waste materials, refuse or other materials or allow any such
materials to remain outside the Building proper, except in designated enclosed
trash areas.
-9-
<PAGE> 12
Tenant shall not conduct or permit any auctions, sheriff's sales or other like
activities at the Project or any portion thereof.
5.3 Restrictions. Tenant agrees that this Lease is subject and
subordinate to the Restrictions, as the same may now or hereafter exist, and
that it will execute and deliver to Landlord within fifteen(15) days of
Landlord's request therefor, any further documentation or instruments which
Landlord deems necessary or desirable to evidence or effect such subordination.
Without limiting the provisions of Section 5.2, Tenant shall throughout the
Term timely comply with all of the terms, provisions, conditions and
restrictions of the Restrictions which pertain to, restrict or affect the
Premises or Tenant's use thereof, or Tenant's use of any other area of the
Project permitted hereunder, including the payment by Tenant of any periodic or
special dues or assessments charged against the Premises or Tenant which may be
allocated to the Premises or Tenant in accordance with the provisions of the
Restrictions. Tenant shall hold Landlord, Landlord's Agents and the Premises
harmless and shall indemnify, protect and defend Landlord and Landlord's Agents
from and against any loss, expense, damage, attorneys' fees and costs or
liability arising out of or in connection with the failure of Tenant to so
perform or comply with the Restrictions. Tenant agrees that it will
subordinate this Lease to any other covenants, conditions and restrictions and
any reciprocal easement agreements or any similar agreements which Landlord may
hereafter record against the Premises and to any amendment or modification to
any of the existing Restrictions, provided that such subordination does not
unreasonably interfere with Tenant's use and employment of the Premises.
5.4 Landlord's Right of Entry. Landlord and Landlord's Agents
shall have the right to enter the Premises at all reasonable times upon
reasonable notice to Tenant, except for emergencies in which case no notice
shall be required, to inspect the Premises, to take samples and conduct
environmental investigations, to post notices of nonresponsibility and similar
notices and signs indicating the availability of the Premises for sale, to show
the Premises to interested parties such as prospective lenders and purchasers,
to make necessary Alterations or maintenance and repairs, to perform Tenant's
obligations as permitted herein when Tenant has failed to do so and, at any
reasonable time after one hundred eighty (180) days prior to the expiration of
the Term, to place upon the Premises reasonable signs indicating the
availability of the Premises for lease and to show the Premises to prospective
tenants, all without being deemed to have caused an eviction of tenant and
without any liability to Tenant or abatement of Rent. The above rights are
subject to reasonable security regulations of Tenant, and in exercising its
rights set forth herein, Landlord shall endeavor to cause the least possible
interference with Tenant's business. Landlord shall at all times have the
right to retain a key which unlocks all of the doors in the Premises, and any
entry to the Premises so obtained by Landlord or Landlord's Agents shall not
under any circumstances be deemed to be a forcible or unlawful entry into, or a
detainer of, the Premises, or an eviction of Tenant from the Premises.
-10-
<PAGE> 13
ARTICLE VI
HAZARDOUS MATERIALS
6.1 Definition of Hazardous Materials. For purposes of this
Lease, the term "Hazardous Materials" includes (i) any "hazardous materials" as
defined in Section 25501(k) of the California Health and Safety Code unless
Tenant establishes, to the satisfaction of Landlord, that because of the
quantity, concentration, or physical or chemical characteristics, such
substance or matter does not pose a present or potential hazard to human health
and safety or to the environment, (ii) any other substance or matter which
results in liability to any person or entity from exposure to such substance or
matter which results in liability to any person or entity from exposure to such
substance or matter which results in liability to any person or entity from
exposure to such substance or matter under any statutory or common law theory,
and (iii) any substance or matter which is in excess of relevant and
appropriate levels set forth in any applicable federal, state or local law or
regulation pertaining to any hazardous or toxic substance, material or waste,
or for which any applicable federal, state or local agency orders or otherwise
requires removal, treatment or remediation.
6.2 Use of Hazardous Materials. Tenant shall not cause or permit
any Hazardous Materials to be brought upon, stored, used, generated, released
into the environment or disposed of on, under, from or about the Premises
(which for purposes of this Article VI shall include, but is not limited to,
subsurface soil and ground water) by Tenant or Tenant's Agents without the
prior written consent of Landlord. Landlord may, in its sole discretion, place
such conditions as Landlord deems appropriate with respect to such Hazardous
Materials, and may further require that Tenant demonstrates to Landlord that
such Hazardous materials are necessary or useful to Tenant's business and will
be generated, stored, used and disposed of in a manner that complies with all
Applicable Laws regulating such Hazardous Materials and with good business
practices. Tenant understands that Landlord may utilize an environmental
consultant to assist in determining conditions of approval and monitoring in
connection with the presence, storage, generation or use of Hazardous Materials
on or about the Premises by Tenant, and Tenant agrees that any costs reasonably
incurred by Landlord in connection with any such environmental consultant's
services shall be reimbursed by Tenant to Landlord as Additional Rent upon
demand.
6.3 Environmental Questionnaire; Disclosure. Prior to the
execution of this Lease, Tenant shall complete, execute and deliver to Landlord
an Environmental Questionnaire and Disclosure Statement (the "Environmental
Questionnaire") in the form of Exhibit H, and Tenant shall certify to Landlord
all information contained in the Environmental Questionnaire as true and
correct to the best of Tenant's knowledge and belief. The completed
Environmental Questionnaire shall be deemed incorporated into this Lease for
all purposes, and Landlord shall be entitled to rely fully on the information
contained therein. On each anniversary of the Commencement Date (each such
date is hereinafter referred to as a "Disclosure Date"), until and including
the first Disclosure Date occurring after the expiration or sooner termination
of this Lease, Tenant shall disclose to Landlord in writing the names and
amounts of all Hazardous Materials, or any combination thereof, which were
stored, generated, used or disposed of on, under or about the Premises for the
twelve-month period prior to each Disclosure Date, and
-11-
<PAGE> 14
which Tenant intends to store, generate, use or dispose of on, under or about
the Premises through the next Disclosure Date. At Landlord's option, Tenant's
disclosure obligations under this Section 6.3 shall include a requirement that
Tenant update, execute and deliver to Landlord the Environmental Questionnaire,
as the same may be modified by Landlord from time to time. In addition to the
foregoing, Tenant shall promptly notify Landlord of, and shall promptly provide
Landlord with true, correct, complete and legible copies of all of the
following environmental items relating to the Premises: reports filed pursuant
to any self-reporting requirements; reports filed pursuant to any Applicable
Laws of this Lease; all permit applications, permits, monitoring reports,
workplace exposure and community exposure warnings or notices, and all other
reports, disclosures, plans or documents (even those which may be characterized
as confidential) relating to water discharges, air pollution, waste, generation
or disposal, underground storage tanks or Hazardous Materials; all orders,
reports, notices, listings and correspondence (even those which may be
considered confidential) of or concerning the release, investigation,
compliance, clean up, remedial and corrective actions, and abatement of
Hazardous Materials whether or not required by Applicable Laws; and all
complaints, pleadings and other legal documents filed against Tenant related to
Tenant's use, handling, storage or disposal of Hazardous Materials.
6.4 Inspection; Compliance. Landlord and Landlord's Agents shall
have the right, but not the obligation, to inspect, investigate, sample and/or
monitor the Premises, including any air, soil, water, groundwater or other
sampling, and any other testing, digging, drilling or analyses, at any time to
determine whether Tenant is complying with the terms of this Article VI, and in
connection therewith, Tenant shall provide Landlord with full access to all
relevant facilities, records and personnel. If Tenant is not in compliance
with any of the provisions of this Article VI, or in the event of a release of
any Hazardous Material on, under, from or about the Premises, Landlord and
Landlord's Agents shall have the right, but not the obligation, without
limitation on any of Landlord's other rights and remedies under this Lease, to
immediately enter upon the Premises and to discharge Tenant's obligations under
this Article VI at Tenant's expense, including without limitation the taking of
emergency or long-term remedial action. Landlord and Landlord's Agents shall
endeavor to minimize interference with Tenant's business but shall not be
liable for any such interference. In addition, Landlord, at Tenant's sole cost
and expense, shall have the right, but not the obligation, to join and
participate in any legal proceedings or actions initiated in connection with
any claims or causes of action arising out of the storage, generation, use or
disposal by Tenant or Tenant's Agents of Hazardous Materials on, under, from or
about the Premises. All sums reasonably disbursed, deposited or incurred by
Landlord in connection herewith, including, but not limited to, all costs,
expenses and actual attorneys fees, shall be due and payable by Tenant to
Landlord, as an item of Additional Rent, on demand by Landlord, together with
interest thereon at the Applicable Rate from the date of such demand until paid
by Tenant.
6.5 Tenant Obligations. If the presence of any Hazardous
Materials on, under or about the Premises or the Project caused or permitted by
Tenant or Tenant's Agents results in (i) injury to any person, (ii) injury to
or contamination of the Premises or the Project, or (iii) injury to or
contamination of any real or personal property wherever situated, Tenant, at
its sole cost and expense, shall promptly take all actions necessary to return
the Premises and the Project to the condition existing prior to the
introduction of such Hazardous Materials to the Premises and the
-12-
<PAGE> 15
Project and to remedy or repair any such injury or contamination. Without
limiting any other rights or remedies of Landlord under this Lease, Tenant
shall pay the cost of any cleanup work performed on, under or about the
Premises, the Building and the Project as required by this Lease or any
Applicable Laws in connection with the removal, disposal, neutralization or
other treatment of such Hazardous Materials caused or permitted by Tenant or
Tenant's Agents. If Landlord has reason to believe that Tenant or tenant's
Agents may have caused or permitted the release of a Hazardous Material on,
under, from or about the Premises, then Landlord may require Tenant, at
Tenant's sole cost and expense, to conduct monitoring activities on or about
the Premises satisfactory to Landlord, in its sole and absolute judgment,
concerning such release of Hazardous Materials on, under, from or about the
Premises. Notwithstanding anything in the foregoing, Tenant shall not, without
Landlord's prior written consent, take any remedial action in response to the
presence of any Hazardous Materials on, under or about the Premises, or enter
into any settlement agreement, consent decree or other compromise with any
governmental agency with respect to any Hazardous Materials claims; provided,
however, Landlord's prior written consent shall not be necessary in the event
that the presence of Hazardous Materials on, under or about the Premises (i)
poses an immediate threat to the health, safety or welfare of any individual or
(ii) is of such a nature that an immediate remedial response is necessary and
it is not possible to obtain Landlord's consent before taking such action.
6.6 Indemnification. To the fullest extent permitted by law,
Tenant hereby agrees to indemnify, hold harmless, protect and defend (with
attorneys acceptable to Landlord) Landlord and Landlord's Agents, and any
successors to all or any portion of Landlord's interest in the Premises, the
Building and the Project and their directors, officers, partners, employees,
authorized agents, affiliates, representatives and Mortgagees, from and against
any and all liabilities, losses, damages (including, but not limited to,
damages, for the loss or restriction on use of rentable or usable space or any
amenity of the Premises, the Building and the Project or damages arising from
any adverse impact on marketing of space in the Premises, the Building and the
Project), diminution in the value of the Premises, the Building and the
Project, judgments, fines, demands, claims, recoveries, deficiencies, costs and
expenses (including, but not limited to, reasonable attorneys' fees,
disbursements and court costs and all other professional or consultant's
expenses), whether foreseeable or unforeseeable, arising directly or indirectly
out of the presence, use, generation, storage, treatment, on or off-site
disposal or transportation of Hazardous Materials on, into, from, under or
about the Premises, the Building and the Project by Tenant or Tenant's Agents,
and specifically including the cost of any required or necessary repair,
restoration, clean-up (including, but not limited to, the costs of
investigation and removal of Hazardous Materials) or detoxification of the
Premises, the Building and the Project and the preparation of any closure or
other required plans, whether or not such action is required or necessary
during this Term or after the expiration of this Lease.
6.7 Tenant's Responsibility at Conclusion of Lease. Promptly upon
the expiration or sooner termination of this Lease, Tenant shall represent to
Landlord in writing that (i) Tenant has made a diligent effort to determine
whether any Hazardous Materials are on, under or about the Premises as a result
of any acts or omissions of Tenant or Tenant's Agents and (ii) no such Hazardous
Materials exist on, under or about the Premises other than as specifically
identified to Landlord by Tenant in writing. If Tenant discloses the existence
of Hazardous Materials on,
-13-
<PAGE> 16
under or about the Premises, or if Landlord at any time discovers that
Tenant or Tenant's Agents caused or permitted the release of a Hazardous
Material on, under, from or about the Premises, Tenant shall, at Landlord's
request, immediately prepare and submit to Landlord within thirty (30) days
after such request a comprehensive plan, subject to Landlord's approval,
specifying the actions to be taken by Tenant to return the Premises to the
condition existing prior to the introduction of such Hazardous Materials. Upon
Landlord's approval of such clean up plan, Tenant shall, at Tenant's sole cost
and expense, without limitation on any rights and remedies of Landlord under
this Lease or at law or in equity, immediately implement such plan and proceed
to clean up such Hazardous Materials in accordance with all Applicable Laws and
as required by such plan and this Lease.
6.8 Landlord's Disclosures. Landlord hereby discloses to Tenant,
and Tenant hereby acknowledges, certain facts relating to Hazardous Materials
at the Project known by Landlord to exist as of the date of this Lease, as more
particularly described in Exhibit I attached hereto. Tenant shall have no
liability or responsibility with respect to the Hazardous Materials facts
described in Exhibit I. Notwithstanding the foregoing, Tenant will not be
responsible for hazardous materials brought to the Premises by Landlord.
ARTICLE VII
OPERATING EXPENSES; TAXES; UTILITIES
7.1 Tenant to Bear Tenant's Share of Operating Expenses. Tenant
shall pay to Landlord Tenant's Share (as defined in Section 7.2) of Operating
Expenses as follows: Prior to the Commencement Date and thereafter prior to
the commencement of each of Landlord's fiscal years during the Term, Landlord
shall give Tenant a written estimate of Tenant's Share of Operating Expenses
for the ensuing fiscal year or partial fiscal year, as the case may be. Tenant
shall pay, as an item of Additional Rent, such estimated amount in equal
monthly installments, in advance, on or before the first (1st) day of each
calendar month concurrent with its payment of Monthly Rent. If Landlord has
not furnished its written estimate by the time set forth above, Tenant shall
pay monthly installments of Operating Expenses at the rate established for the
prior fiscal year, if any; provided that when the new estimate is delivered to
Tenant, Tenant shall at the next monthly payment date pay Landlord any accrued
deficiency based on the new estimate, or Landlord shall credit any accrued
overpayment based on such estimate toward Tenant's next installment payment
hereunder. Within a reasonable period of the time after the end of each fiscal
year (in no event less than one hundred twenty (120) days after the end of each
fiscal year unless sooner completed by Landlord) Landlord shall furnish Tenant
a statement showing in reasonable detail Tenant's Share of the actual Operating
Expenses incurred for the period in question. If Tenant's estimated payments
are less than Tenant's Share of actual Operating Expenses incurred for the
period in question. If Tenant's estimated payments are less than Tenant's
Share of actual Operating Expenses as shown by the applicable statement, Tenant
shall pay the difference to Landlord within thirty (30) days thereafter. If
Tenant shall have overpaid Landlord, Landlord shall credit such overpayment
toward Tenant's next installment payment hereunder. When the final
determination is made of Tenant's Share of the actual Operating Expenses for
the fiscal year
-14-
<PAGE> 17
in which this Lease terminates, Tenant shall, even if this Lease has
terminated, pay to Landlord within fifteen (15) days after notice the excess of
Tenant's Share of such actual Operating Expenses over the estimate of Tenant's
Share of Operating Expenses paid. Conversely, any overpayment shall be rebated
by Landlord to Tenant. If Landlord shall determine at any time that the
estimate of Tenant's Share of Operating Expenses for the current fiscal year is
or will become inadequate to meet Tenant's Share of all such Operating Expenses
for any reason, Landlord shall immediately determine the approximate amount of
such inadequacy and issue a supplemental estimate as to Tenant's Share of such
Operating Expenses and Tenant shall pay and increase as reflected by such
supplemental estimate. Landlord shall keep or cause to be kept separate and
complete books of accounting covering all Operating Expenses and showing the
method of calculating Tenant's Share of Operating Expenses, and shall preserve
for at least twelve (12) months after the close of each fiscal year all
material documents evidencing said Operating Expenses for that fiscal year.
Tenant, at its sole cost and expense, through any certified public accountant
designated by it, shall have the right, during reasonable business hours and
not more frequently than once during any fiscal year, to examine and/or audit
the books and documents mentioned above evidencing such costs and expenses for
the previous fiscal year. Any delay or failure by Landlord in delivering any
estimate or statement pursuant to this Section 7.1 shall not constitute a
waiver of its right to require Tenant to pay Tenant's Share of Operating
Expenses pursuant hereto.
7.2 Definition of Tenant's Share. The term "Tenant's Share" means
that portion of an Operating Expense determined by multiplying the cost of such
item by a fraction, the numerator of which is the Premises Square Footage and
the denominator of which is the total square footage of the floor area, as of
the date on which the computation is made, to be charged with such Operating
Expense. A determination of Tenant's Share for various Operating Expenses is
set forth in Exhibit L attached to and made a part of this Lease.
7.3 Definition of Project Costs. The term "Project Costs" means
all costs and expenses incurred by Landlord or Landlord's Agents in connection
with the operation of the Project, including, but not limited to, the
following: repair and maintenance of the roof, foundation and exterior walls
of the buildings in the Project, periodic painting of the buildings in the
Project, periodic cleaning of the exterior windows of the buildings in the
Project, Landscaping services, outside pest control, normal maintenance and
repair of the HVAC, through maintenance contracts or otherwise (but not
including repair or maintenance and repair of the HVAC, unless Landlord elects
to maintain the same pursuant to Section 9.2), sweeping, maintenance services,
repairs to and replacement of asphalt paving, bumpers, striping, light bulbs,
light standards, monument and directional signs and lighting systems, perimeter
walls, retaining walls, sidewalks, planters, landscaping and sprinkler system
in planting area, any and all assessments levied against the Project pursuant
to the Restrictions, water, electrical and other utility services not supplied
directly to a tenant, removal of trash, rubbish and other refuse from the
Project, cleaning of and replacement of signs of the Project, including
relamping and repairs made as required; repair, operation and maintenance of
the Common Area, including, but not limited to, removal of any obstructions not
reasonably required for the Common Area uses, prohibition and removal of the
sale or display of merchandise or the storing of materials and/or equipment in
the Common Area, and payment of all electrical, water and other utility charges
or fees for services furnished to the
-15-
<PAGE> 18
Common Area; obtaining and maintaining public liability, property damage and
other forms of insurance which Landlord may or is required to maintain in
connection with the Project (including the payment of any deductibles
thereunder); costs incurred in connection with compliance of any laws or
changes in laws applicable to the Project, including without limitation any
laws or changes in laws regarding Hazardous Materials; establishment of
reasonable reserves for replacements and/or repair of Common Area improvements,
equipment and supplies; employment of such personnel as Landlord may deem
reasonably necessary, if any, to direct parking and police the Common Area and
facilities; the cost of any capital improvements (other than tenant
improvements for specific tenants) made by or on behalf of Landlord to the
Project or Common Area to the extent of the amortized amount thereof over the
useful life of such capital improvements calculated at a market cost of funds,
all as determined by Landlord, for each such year of useful life during the
Term; depreciation of machinery and equipment used in connection with the
maintenance and operation of the Common Area for which a reasonable reserve has
not been established as herein provided; employment of personnel used in
connection with the maintenance and operation of the Common Area for which a
reasonable reserve has not been established as herein provided; employment of
personnel used in connection with any of the foregoing, including, but not
limited to, payment or provision for unemployment insurance, worker's
compensation insurance and other employee costs; the cost of bookkeeping,
accounting and auditing and legal services provided in connection with any of
the foregoing; the cost of any environmental consultant or other services used
in connection with Landlord's monitoring of the Project with respect to
Hazardous Materials; the cost of any tax, insurance or other consultant
utilized in connection with the Project; and any other items reasonably
necessary from time to time to properly repair, replace, maintain and operate
the Project. Project Costs shall also include a management fee to cover
Landlord's management, overhead and administrative expenses; provided, however,
if Landlord elects to delegate its duties hereunder to a professional property
manager, then Project Costs shall not include any management fee to Landlord
(except for any costs and/or administrative and overhead expenses reasonably
incurred by Landlord in monitoring and auditing the performance delegated to
the professional property manager), but under such circumstances any reasonable
amounts paid to the professional property manager shall be added to and deemed
a part of Project Costs. If Landlord elects to perform any maintenance or
repair herein described in conjunction with properties other than the Project,
and if a common maintenance contractor is contracted with for such purpose, the
contract amount allocable to the Project, as reasonably determined by Landlord,
shall be added to and deemed a part of Project Costs hereunder. Increases in
Project Costs by reason of a disproportionate impact by Tenant thereon (for
example, and not by way of limitation, increases in costs of trash collection
because of Tenant's excessive generation of trash or increases in costs of
Common Area maintenance because of Tenant's unpermitted storage of inventory or
materials in the Common Area), in Landlord's reasonable judgment, may be billed
by Landlord, as an item of Additional Rent, directly to Tenant.
7.4 Definition of Real Property Taxes. The term "Real Property
Taxes" means any form of tax, assessment, charge, license, fee, rent tax, levy,
penalty (if a result of Tenant's delinquency), real property or other tax
(other than Landlord's net income, estate, succession, inheritance, or
franchise taxes), now or hereafter imposed with respect to the Project or any
part thereof (including any Alterations), this Lease or any Rent payable under
this Lease by any
-16-
<PAGE> 19
authority having the direct or indirect power to tax, or by any city, county,
state or federal government or any improvement district or other district or
division thereof, whether such tax or any portion thereof (i) is determined by
the area of the Project or any part thereof or the Rent payable under this
Lease by Tenant including, but not limited to, any gross income or excise tax
levied by any of the foregoing authorities with respect to receipt of the Rent
due under this Lease, (ii) is levied or assessed in lieu of, in substitution
for, or in addition to, existing or additional taxes with respect to the
Project or any part thereof whether or not now customary or within the
contemplation of Landlord or Tenant, or (iii) is based upon any legal or
equitable interest of Landlord in the Project or any part thereof.
7.5 Apportionment of Taxes. If the Project is assessed as part of
a larger parcel, then Landlord shall equitably apportion the Real Property
Taxes assessed against the real property which includes the Project and
reasonably determine the amount of Real Property Taxes attributable to the
Project. If other buildings exist on the assessed parcel, the Real Property
Taxes apportioned to the Project shall be based upon the ratio of the square
footage of all buildings within the Project to the square footage of all
buildings on the assessed parcel, and the amount of Real Property Taxes so
apportioned to the Project shall be included as part of Operating Expenses.
Landlord's reasonable determination of such apportionment shall be conclusive.
7.6 Tax on Improvements; Permitted Contests. Tenant shall, at
Landlord's election, be directly responsible for and shall pay the full amount
of any increase in Real Property Taxes attributable to any improvements of any
kind whatsoever placed in, on or about the Premises for the benefit of, at the
request of, or by Tenant. Tenant may contest the amount or validity of any
Real Property Taxes by appropriate proceedings, provided that Tenant gives
Landlord prior Notice of any such contest and keeps Landlord advised as to all
proceedings, and provided further that Tenant shall continue to reimburse
Landlord for Landlord's payment of such Real Property Taxes unless such
proceedings shall operate to prevent or stay such payment and the collection of
the tax so contested. Landlord shall operate to prevent or stay such payment
and the collection of the tax so contested. Landlord shall join in any such
proceedings if any Applicable Laws shall so require, provided that Tenant shall
hold harmless, indemnify, protect and defend Landlord from and against any
liability, claim, demand, cost or expense in connection therewith, including,
but not limited to, actual attorneys' fees and costs reasonably incurred.
7.7 Utilities and Services. Tenant shall be responsible for and
shall pay promptly, directly to the appropriate supplier, all charges for
water, gas, electricity, heat, light, power, telephone, refuse pickup,
janitorial service, interior landscape maintenance and all other utilities,
materials and services furnished directly to tenant or the Premises or used by
Tenant in, on or about the Premises during the term, together with any taxes
thereon. If any utilities or services are not separately metered or assessed
to Tenant, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such amount to Landlord, as an item of Additional Rent, within ten (10)
days after receipt of Landlord's statement or invoice therefor. Alternatively,
Landlord may elect to include such cost in the definition of Project Costs, in
which event Tenant shall pay Tenant's Share of such cost in the manner set
forth in Section 7.1. Landlord may also require Tenant to have any Specialized
HVAC system separately metered to Tenant, at Tenant's expense. Landlord shall
not be liable in
-17-
<PAGE> 20
damages or otherwise for any failure or interruption of any utility or other
service furnished to the Premises. No such failure or interruption shall be
deemed an eviction or entitle Tenant to terminate this Lease or withhold or
abate any Rent due hereunder.
ARTICLE VIII
ALTERATIONS
8.1 Permitted Alterations. After the Commencement Date, Tenant
shall not make or permit any Alterations in, on or about the Premises without
the prior written consent of Landlord (which consent shall not be unreasonably
withheld), except for Alterations not exceeding One Dollar ($1.00) per square
foot of the Premises in aggregate cost over the Term. Notwithstanding the
foregoing, without the prior written consent of Landlord (which consent may be
withheld in Landlord's sole and absolute discretion), in no event shall any
Alterations (i) affect the exterior of the Building or the outside areas (or be
visible from adjoining sites), (ii) affect or penetrate any of the structural
portions of the Building, including, but not limited to, the roof, (iii)
require any change to the basic floor plan of the Premises, any change to the
structural or mechanical components of the Premises, or any governmental
approval or permit as a prerequisite to the construction thereof, (iv)
interfere in any manner with the proper functioning of or Landlord's access to
any mechanical, electrical, plumbing or HVAC systems, facilities or equipment
located in or serving the Building, or (v) diminish the value of the Premises.
All Alterations shall be constructed pursuant to plans and specifications
previously provided to and, when applicable, approved in writing by Landlord,
shall be installed by a licensed contractor at Tenant's sole expense in
compliance with all Applicable laws, and shall be accomplished in a good and
workmanlike manner conforming in quality and design with the Premises existing
as of the Commencement Date. No Hazardous Materials, including, but not
limited to, asbestos or asbestos-containing materials, shall be used by Tenant
or Tenant's Agents in the construction of any Alterations permitted hereunder.
Tenant shall, if required by Landlord, obtain and pay for, at its own expense,
a completion and indemnity bond covering such work, the form and amount of
which shall be subject to the approval of Landlord. All Alterations made by
Tenant shall be and become the property of Landlord upon the installation
thereof and shall not be deemed Tenant's Personal Property; provided, however,
that Landlord may, at its option, require that Tenant, upon the termination of
this Lease, at Tenant's expense, remove any or all non-structural Alterations
installed by or on behalf of Tenant and return the Premises to its condition as
of the Commencement Date of this Lease, normal wear and tear excepted.
Notwithstanding any other provisions of this Lease, Tenant shall be solely
responsible for the maintenance, repair and replacement of any and all
Alterations made by or on behalf of Tenant (including without limitation by
Landlord on behalf of Tenant) to the Premises.
8.2 Trade Fixtures. Tenant shall, at its own expense, provide,
install and maintain in good condition all of Tenant's Personal Property
required in the conduct of its business in the Premises.
-18-
<PAGE> 21
8.3 Mechanic's Liens. Tenant shall give Landlord Notice of
Tenant's intention to perform any work on the Premises which might result in
any claim of lien at least twenty (20) days prior to the commencement of such
work to enable Landlord to post and record a notice of nonresponsibility or
other notice Landlord deems proper prior to the commencement of any such work.
Tenant shall not permit any mechanic's, materialmen's, or other liens to be
filed against the property of which the Premises are a part or against Tenant's
leasehold interest in the Premises. If Tenant fails to cause the release of
record of any lien(s) filed against the Premises or its leasehold estate
therein by payment or posting of a proper bond within ten (10) days from the
date of the lien filing(s), then Landlord may, at Tenant's expense, cause such
lien(s) to be released by any means Landlord deems proper, including, but not
limited to, payment of or defense against the claim giving rise to the lien(s),
including, but not limited to, the claim giving rise to the lien(s). All sums
reasonably disbursed, deposited or incurred by Landlord in connection with the
release of the lien(s), including, but not limited to, all costs, expenses and
actual attorneys' fees, shall be due and payable by Tenant to Landlord, as an
item of Additional Rent, on demand by Landlord, together with interest thereon
at the Applicable Rate from the date of such demand until paid by Tenant.
ARTICLE IX
MAINTENANCE AND REPAIR
9.1 Landlord's Maintenance and Repair Obligations. Landlord
shall, subject to receiving Tenant's Share of Operating Expenses, and subject
to Section 9.2, Article XII and Article XIII, maintain in good condition and
repair the roof (excluding any skylights, but including as needed any
replacement thereof), exterior walls and foundation of the Building, provide
normal maintenance services for the HVAC serving the Building through
maintenance contracts or otherwise, and paint the exterior of the Building and
clean the exterior windows of the Building as and when such painting or window
cleaning, as the case may be, becomes necessary in Landlord's sole discretion.
Landlord shall also provide maintenance and repair services to the electrical,
plumbing, and mechanical systems serving the Premises. Landlord shall not be
required to make any repairs to the roof, exterior walls, foundation or any
systems within the Premises unless and until Tenant has notified Landlord in
writing of the need for such repair and Landlord shall have a reasonable period
of time thereafter to commence and complete said repair, if warranted. The
cost of any maintenance and repairs on the part of Landlord provided for in
this Section 9.1 shall be considered part of Project Costs, except that repairs
which Landlord deems arise out of any act or omission of Tenant or Tenant's
Agents shall be made at the expense of Tenant. Landlord's obligation to so
repair and maintain the Premises shall be limited to the cost of effecting such
repair and maintenance and in no event shall Landlord be liable for any costs
or expenses in excess of said amounts, including, but not limited to, any
consequential damages, opportunity costs or lost profits incurred or suffered
by Tenant.
9.2 Tenant's Maintenance and Repair Obligations. Tenant shall at
all times during the Term of this Lease, at Tenant's sole cost and expense,
clean, keep, maintain, repair and make necessary improvements to, the Premises
and every portion thereof and all improvements therein
-19-
<PAGE> 22
or thereto, in good and sanitary order and condition to the reasonable
satisfaction of Landlord and in compliance with all Applicable Laws, usual wear
and tear excepted. Any damage or deterioration of the Premises shall not be
deemed usual wear and tear if the same could have been prevented by good
maintenance practices by Tenant. Tenant's repair and maintenance obligations
herein shall include, but are not limited to, all necessary maintenance and
repairs to all portions of the Premises, and all exterior entrances, all glass,
windows, window casements, show window moldings, partitions, doors, door jambs,
door closures, hardware, fixtures, electrical lighting and outlets, plumbing
fixtures, sewage facilities, interior walls, floors, ceilings, skylights, fans
and exhaust equipment, fire extinguisher equipment and systems, and all repairs
to Specialized HVAC (as hereinafter defined). As part of its maintenance
obligations hereunder, Tenant shall, at Landlord's request, provide Landlord
with copies of all maintenance schedules, reports and notices prepared by, for,
or on behalf of Tenant. Landlord may impose reasonable restrictions and
requirements with respect to repairs by Tenant, which repairs shall be at least
equal in quality to the original work, and the provisions of Section 8.3 shall
apply to all such repairs. Tenant's obligation to repair includes the
obligation to replace, as necessary, regardless of whether the benefit of such
replacement extends beyond the Term. Any special or above-standard heating,
ventilating and air conditioning installed by, on behalf of, or at the request
of Tenant ("Specialized HVAC"), shall be paid for and maintained by Tenant at
Tenant's sole cost and expense. Notwithstanding the foregoing, Landlord shall
have the right, upon Notice to Tenant, to undertake the responsibility for
maintenance and repair of automatic fire extinguisher equipment, such as
sprinkler systems and alarms, Specialized HVAC and other obligations of Tenant
hereunder which Landlord deems appropriate to undertake that affect the
Building as a whole, in which event the cost thereof shall be included as part
of Project Costs and paid by Tenant in the manner set forth in Section 7.1.
Tenant shall not permit or authorize any person to go onto the roof of the
Building without the prior written consent of Landlord.
9.3 Waiver. Tenant hereby waives all rights provided for by the
provisions of Sections 1941 and 1942 of the California Civil Code and any
present or future laws regarding Tenant's right to make repairs at the expense
of Landlord or to terminate this Lease because of the condition of the
Premises.
9.4 Self-Help. If Tenant refuses or fails to repair and maintain
the Premises as required hereunder within ten (10) days from the date on which
Landlord makes a written demand on Tenant to effect such repair and
maintenance, Landlord may enter upon the Premises and make such repairs or
perform such maintenance without liability to Tenant for any loss or damage
that may accrue to Tenant or its merchandise, fixtures, or other property or to
Tenant's business by reason thereof. All sums reasonably disbursed, deposited
or incurred by Landlord in connection with such repairs or maintenance, plus
ten percent (10%) for overhead, shall be due and payable by Tenant to Landlord,
as an item of Additional Rent, on demand by Landlord, together with interest at
the Applicable Rate on such aggregate amount from the date of such demand until
paid by Tenant. In the event of damage to the Premises or repairs which
Landlord is obligated to make pursuant to Section 9.1 above and for which (i)
Landlord has received prior notice as required under this Lease and (ii) the
damage or need for such repair is to such an extent as to cause an imminent
threat of injury to persons or damage to personal property if repairs are not
promptly performed, then provided no Event of Default has occurred and is
continuing, Tenant may elect to
-20-
<PAGE> 23
make repairs strictly in accordance with the following: (a) before making any
such repair, Tenant shall deliver to Landlord a second Notice of the need for
such repair, which Notice shall specifically advise Landlord that Tenant
intends to exercise its self-help rights hereunder ("Self-Help Notice"); (b)
should Landlord further fail, within ten (10) days following its receipt of the
Self-Help Notice, to commence the necessary repairs or make other arrangements
reasonable under the circumstances, then Tenant shall have the right to make
only such repairs as are necessary to secure the Premises from the imminent
threat of injury to persons or damage to personal property; (c) any such
repairs undertaken by Tenant shall be performed and completed in accordance
with Tenant's obligations for its own repairs and Alterations under Article
VIII above and Section 9.2 above; and (d) provided the damage was not caused by
Tenant or Tenant's Agents, the reasonable costs of such repairs shall be
reimbursed by Landlord to Tenant promptly following demand therefore, such
demand to be accompanied by proper invoices or receipts and statutory lien
release waivers from all contractors and material suppliers in form and content
reasonably acceptable to Landlord. It is understood and agreed that in no
event shall Tenant have the right to offset any costs of such repairs against
Rent due hereunder. Tenant further understands and agrees that all costs so
reimbursed by Landlord hereunder shall be added to and be a part of Project
Costs.
ARTICLE X
COMMON AREA AND PARKING
10.1 Grant of Non-exclusive Common Area License and Right.
Landlord hereby grants to Tenant and its permitted subtenants, in common with
Landlord and all persons, firms and corporations conducting business in the
Project and their respective customers, guests, licensees, invitees,
subtenants, employees and agents, to use the Common Area within the Project for
vehicular parking, for pedestrian and vehicular ingress, egress and travel, and
for such other purposes and for doing such other things as may be provided for,
authorized and/or permitted by the Restrictions, such non-exclusive license and
right to be appurtenant to Tenant's leasehold estate created by this Lease.
The non-exclusive license and rights granted pursuant to the provisions of this
Article X shall be subject to the provisions of the Restrictions, which pertain
in any way to the Common Area covered by such Restrictions, and the provisions
of this Lease.
10.2 Use of Common Area. Notwithstanding anything to the contrary
herein, Tenant and its successors, assigns, employees, agents and invitees
shall use the Common Area only for the purposes permitted hereby and by the
Restrictions and the Rules and Regulations. All uses permitted within the
Common Area shall be undertaken with reason and judgment so as not to interfere
with the primary use of the Common Area which is to provide parking and
vehicular and pedestrian access throughout the Common Area within the Project
and to adjacent public streets for the Landlord, Landlord's Agents, its
tenants, subtenants and all persons, firms and corporations conducting business
within the Project and their respective customers, guests and licensees. In no
event shall Tenant erect, install, or place, or cause to be erected, installed,
or placed any structure, building, trailer, fence, wall, signs or other
obstructions on the Common
-21-
<PAGE> 24
Area except as otherwise permitted herein and in the Restrictions, and Tenant
shall not store or sell any merchandise, equipment or materials on the Common
Area.
10.3 Control of Common Area. Subject to provisions of the
Restrictions, all Common Area and all Improvements located from time to time
within the Common Area shall at all times be subject to the exclusive control
and management of the Landlord. Landlord shall have the right to construct,
maintain and operate lighting facilities within the Common Area; to police the
Common Area from time to time; to change the area, level, location and
arrangement of the parking areas and other improvements within the Common Area;
to restrict parking by tenants, their officers, agents and employees to
employee parking areas; to enforce parking charges (by operation of meters or
otherwise); to close all or any portion of the Common Area or improvements
therein to such extent as may, in the opinion of counsel for Landlord, be
legally sufficient to prevent a dedication thereof or the accrual of any rights
to any person or to the public therein; to close temporarily all or any portion
of the Common Area and/or the improvements thereon; to discourage noncustomer
parking; and to do and perform such other acts in and to said Common Area and
Improvements thereon as, in the use of good business judgment, Landlord shall
determine to be advisable.
10.4 Maintenance of Common Area. Subject to the provisions of the
Restrictions, Landlord shall operate and maintain (or cause to be operated and
maintained) the Common Area in a first-class condition, in such manner as
Landlord in its sole discretion shall determine from time to time. Without
limiting the scope of such discretion, Landlord shall have the full right and
authority to employ or cause to be employed all personnel and to make or cause
to be made all rules and regulations pertaining to or necessary for the proper
operation and maintenance of the Common Area and the improvements located
thereon. The cost of such maintenance of the Common Area shall be included as
part of Project Costs. No part of the Common Area may be used for the storage
of any items, including without limitation, vehicles, materials, inventory and
equipment. All trash and other refuse shall be placed in designated
receptacles. No work of any kind, including, but not limited to, painting,
drying, cleaning, repairing, manufacturing, assembling, cutting, merchandising
or displaying shall be permitted upon the Common Area.
10.5 Revocation of License. All Common Area and Improvements
located thereon which Tenant is permitted to use and occupy pursuant to the
provisions of this Lease are to be used and occupied under a revocable license
and right, and if any such license be revoked, or if the amount of such areas
be diminished, Landlord shall not be subject to any liability nor shall Tenant
be entitled to compensation or diminution or abatement to Rent, and such
revocation or diminution of such areas shall not be deemed constructive or
actual eviction. It is understood and agreed that the condemnation or other
taking or appropriation by any public or quasi-public authority, or sale in
lieu of condemnation, of all or any portion of the Common Area shall not
constitute a violation of Landlord's agreements hereunder, and Tenant shall not
be entitled to participate in or make any claim for any award or other
condemnation proceeds arising from any such taking or appropriation of the
Common Area. Notwithstanding the foregoing, so long as no Event of Default has
occurred and is continuing, Landlord shall provide to Tenant the number of
vehicle parking spaces set forth in item 15 of the Basic Lease Provisions
throughout the Term (subject to the rights of Landlord under this Article X).
-22-
<PAGE> 25
10.6 Landlord's Reserved Rights. Landlord reserves the right to
install, use, maintain, repair, relocate and replace pipes, ducts, conduits,
wires and appurtenant meters and equipment included in the Premises or outside
the Premises, change the boundary lines of the Project and install, use,
maintain, repair, alter or relocate, expand and replace any Common Area;
provided, however, Landlord shall not unreasonably interfere with Tenant's use
of the Premises. Such rights of Landlord shall include, but are not limited
to, designating from time to time certain portions of the Common Area as
exclusively for the benefit of certain tenants in the Project.
10.7 Parking. Tenant shall be entitled to the number of vehicle
parking spaces set forth in item 15 of the Basic Lease Provisions, which spaces
be unreserved and unassigned, on those portions of the Common Area designated
by Landlord for parking. Tenant shall not use more parking spaces than such
number. All parking spaces shall be used only for parking by vehicles no
larger than full size passenger automobiles or pick-up trucks. Tenant shall
not permit or allow any vehicles that belong to or are controlled by Tenant or
Tenant's employees, suppliers, shippers, customers, or invitees to be loaded,
unloaded, or parked in areas other than those designated by Landlord for such
activities. If Tenant permits or allows any of the prohibited activities
described above, then Landlord shall have the right, without notice, in
addition to such other rights and remedies that Landlord may have, to remove or
tow away the vehicle involved and charge the cost to Tenant, which cost shall
be immediately payable upon demand by Landlord. Parking within the Common Area
shall be limited to striped parking stalls, and no parking shall be permitted
in any driveways, accessways or in any area which would prohibit or impede the
free flow of traffic within the Common Area. There shall be no overnight
parking of any vehicles of any kind, and vehicles which have been abandoned or
parking in violation of the terms hereof may be towed away at the owner's
expense.
ARTICLE XI
INDEMNITY AND INSURANCE
11.1 Indemnification. To the fullest extent permitted by law,
Tenant hereby agrees to defend (with attorneys acceptable to Landlord),
indemnify, protect and hold harmless Landlord and Landlord's Agents and any
successors to all or any portion of Landlord's interest in the Premises and
their directors, officers, partners, employees, authorized agents,
representatives, affiliates and Mortgagees, from and against any and all
damage, loss, claim, liability and expense including, but not limited to,
actual attorneys' fees and legal costs, incurred directly or indirectly by
reason of any claim, suit or judgment brought by or on behalf of (i) any person
or persons for damage, loss or expense due to, but not limited to, bodily
injury or property damage sustained by such person or persons which arise out
of, are occasioned by, or are in any way attributable to the use or occupancy
of the Premises or the acts or omissions of the Tenant or Tenant's Agents in or
about the Premises or the Project (including but not limited to any Event of
Default hereunder), or (ii) Tenant or Tenant's Agents for damage, loss or
expense due to, but not limited to, bodily injury or property damage which
arise out of, are occasioned by, or are in any way attributable to the use of
any of the Common Area, except to the extent caused by the active negligence or
willful misconduct of Landlord.
-23-
<PAGE> 26
11.2 Property Insurance. Landlord shall obtain and keep in force
during the term of this Lease a policy or policies of insurance, with
deductibles at the sole discretion of Landlord, covering loss or damage to the
Premises, the Building, and objects owned by Landlord and normally covered
under a "Boiler and Machinery" policy (as such term is used in the insurance
industry), at least in the amount of the full replacement cost thereof, and in
no event less than the total amount required by Mortgagees, against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils ("all risk" or "special causes of
action," as such terms are used in the insurance industry, including, at
Landlord's option, collapse, earthquake and flood) and other perils as required
by the Mortgagees or deemed necessary by Landlord. A stipulated value or
agreed amount endorsement deleting any co-insurance provision of said policy or
policies shall be procured with said insurance. The cost of such insurance
policies shall be included in the definition of Project Costs, and shall be
paid by Tenant in the manner set forth in Section 7.1. Such insurance policies
shall provide for payment of loss thereunder to Landlord or, at Landlord's
election, to the Mortgagees. If the Premises are part of a larger building, or
if the Premises are part of a group of buildings owned by Landlord which are
adjacent to the Premises, then Tenant shall pay for any increase in the
property insurance of the Building or such other building or buildings within
the Project if such increase is caused by Tenant's acts, omissions, use or
occupancy of the Premises. Tenant shall obtain and keep in force during the
Term, at its sole cost and expense, (i) an "all risk" or "special causes of
action" property policy in the amount of the full replacement cost covering
Tenant's Personal Property and any Alterations made by or at the request of
Tenant, with Landlord insured as its interest may appear, and (ii) an "all
risk" or "special causes of action" policy of business interruption and/or loss
of income insurance covering a period of two (2) years, plus such additional
period of time, if any, as will permit Tenant to be in a position to have the
same revenues as were in effect the day before a loss giving rise to a claim
under such insurance occurs, with loss payable to Landlord to the extent of
Monthly Rent and Additional Rent only. Tenant may self-insure on Sections i
and ii referenced above.
11.3 Liability/Miscellaneous Insurance. Tenant shall maintain in
full force and effect at all times during the Term (plus such earlier and later
periods as Tenant may be in occupancy of the Premises), at its sole cost and
expense, for the protection of Tenant, Landlord and Landlord's Agents and
Mortgagees, policies of insurance issued by a carrier or carriers acceptable to
Landlord and the Mortgagees which afford the following coverages: (i)
statutory workers' compensation, (ii) employer's liability with minimum limits
of Five Hundred Thousand Dollars ($500,000), (iii) comprehensive/commercial
general liability insurance including, but not limited to, blanket contractual
liability (including the indemnity set forth in Section 11.1), fire and water
legal liability, broad form property damage, personal injury, completed
operations, products liability, independent contractors, warehouser's legal
liability and, if alcoholic beverages are served, manufactured, distributed or
sold in the Premises, comprehensive liquor liability, and owned, non-owned and
hired vehicles, of not less than the limits set forth in Item 17 of the Basic
Lease Provisions (or current limit carried, whichever is greater), naming
Landlord, the Mortgagees, and the Additional insureds named in Item 16 of the
Basic Lease Provisions as additional insureds, and including a cross-liability
or severability of interests indorsement, and (iv) such other insurance in such
form and amounts as may be required by Landlord or the Mortgagees from time to
time. Landlord or Landlord's Agents on behalf of Landlord may, at
-24-
<PAGE> 27
Landlord's election, obtain liability insurance in such amounts and on such
terms as Landlord shall determine, and the cost thereof shall be included in
Project Costs and paid by Tenant in the manner described in Section 7.1.
11.4 Hazardous Materials. In the event Landlord consents to
Tenant's use, generation or storage of Hazardous Materials on, under or about
the Premises pursuant to Section 6.2, Landlord shall have the continuing right
to require Tenant, at Tenant's sole cost and expense, to purchase insurance
specified and approved by Landlord, with coverage of no less than Five Million
Dollars ($5,000,000.00), insuring (i) any Hazardous Materials shall be removed
from the Premises, (ii) the Premises shall be restored to a clean, neat,
attractive, healthy, safe and sanitary condition, and (iii) any liability of
Tenant, Landlord and Landlord's Agents arising from such Hazardous Materials.
11.5 Deductibles; Blanket Coverage. Any policy of insurance
required pursuant to this Lease containing a deductible exceeding Five Thousand
Dollars ($5,000.00) per occurrence must be approved in writing by Landlord
prior to the issuance of such policy. Tenant shall be solely responsible for
the payment of any deductible. Any insurance required of Tenant pursuant to
this Lease may be provided by means of a so-called "blanket policy," so long as
(i) the Premises are specifically covered (by rider, endorsement or otherwise),
(ii) the limits of the policy are applicable on a "per location" basis to the
Premises and provide for restoration of the aggregate limits, and (iii) the
policy otherwise complies with the provisions of this Lease.
11.6 Increased Coverage. Upon demand, Tenant shall provide
Landlord, at Tenant's expense, with such Increased amount of existing
insurance, and such other insurance as Landlord or the Mortgagees may
reasonably require.
11.7 Sufficiency Coverage. Neither Landlord nor any of Landlord's
Agents makes any representation that the types of insurance and limits
specified to be carried by Tenant under this Lease are adequate to protect
Tenant. If Tenant believes that any such insurance coverage is insufficient,
Tenant shall provide, at its own expense, such additional insurance as Tenant
deems adequate. Nothing contained herein shall limit Tenant's liability under
this Lease, and Tenant's liability under any provision of this Lease, including
without limitation under any Indemnity provisions, shall not be limited to the
amount of any insurance obtained.
11.8 Insurance Requirements. Tenant's Insurance (i) shall be in a
form satisfactory to Landlord and the Mortgagees and shall be carried with
companies that have a general policyholder's rating of not less than "A" and
that are determined by Landlord, in its sole discretion, as financially sound
on a current basis, (ii) shall provide that such policies shall not be subject
to material alteration or cancellation except after at least thirty (30) days
prior written notice to Landlord, and (iii) shall be primary, and any insurance
carried by Landlord or Landlord's Agents shall be noncontributing. Tenant's
policy or policies, or duly executed certificates for them in the form and
content of Exhibit K attached hereto, shall be deposited with Landlord prior to
the Commencement Date, and prior to renewal of such policies. If Tenant fails
to procure and maintain the insurance required to be procured by Tenant under
this Lease, Landlord may, but shall not be required to, order such insurance at
Tenant's expense. All sums reasonably disbursed,
-25-
<PAGE> 28
deposited or incurred by Landlord in connection therewith, including, but not
limited to, all costs, expenses and actual attorneys' fees, shall be due and
payable by Tenant to Landlord, as an item of Additional Rent, on demand by
Landlord, together with interest thereon at the Applicable Rate from the date
of such demand until paid by Tenant.
11.10 Landlord's Disclaimer. Notwithstanding any other provisions
of this Lease, and to the fullest extent permitted by law, Landlord and
Landlord's Agents shall not be liable for any loss or damage to persons or
property resulting from theft, vandalism, fire, explosion, falling materials,
glass, tile or sheetrock, steam, gas, electricity, water or rain which may leak
from any part of the Premises, or from the pipes, appliances or plumbing works
therein or from the roof, street or subsurface or whatsoever, unless caused by
or due to the sole active negligence or willful misconduct of Landlord.
Landlord and Landlord's Agents shall not be liable for interference with light
or air, or for any latent defect in the Premises except as otherwise expressly
provided in this Lease. Tenant shall give prompt Notice to Landlord in case of
a casualty, accident or repair needed to the Premises.
11.11 Waiver of Subrogation. Landlord, except to the extent
Tenant's insurance covers loss to Landlord plus Tenant's obligations with
respect to maintenance and repair and payment of insurance deductibles
hereunder, and Tenant each hereby waives all rights of recovery against the
other and the other's agents on account of loss and damage occasioned to such
waiving party to the extent only that such loss or damage is insured against
under any insurance policies required by this Article XI (and to the extent
such insurance is inadequate to cover such loss, this waiver shall not apply to
amounts of loss above such coverage). Tenant and Landlord shall, upon
obtaining policies of insurance required hereunder, give notice to the
insurance carriers that the foregoing waiver of subrogation is contained in
this Lease. Notwithstanding the foregoing, it is agreed that in the event that
any loss is due to the act, omission or negligence or willful misconduct of
Tenant or Tenant's Agents, Tenant's liability insurance shall be primary and
shall cover all losses and damages prior to any other insurance hereunder.
ARTICLE XII
DAMAGE OR DESTRUCTION
12.1 Landlord's Obligation to Rebuild. If the Premises are damaged
or destroyed by fire or other casualty (a "Casualty"), Tenant shall promptly
give notice thereof to Landlord, and Landlord shall thereafter repair the
Premises as set forth in Sections 12.4 and 12.5 unless Landlord has the right
to terminate this Lease as provided in Section 12.2 and Landlord elects to so
terminate or Tenant has the right to terminate this Lease as provided in
Section 12.3 and Tenant elects to so terminate.
12.2 Landlord's Right to Terminate. Landlord shall have the right
to terminate this Lease following a Casualty if any of the following occurs:
(i) insurance proceeds (together with any additional amounts Tenant elects, at
its option, to contribute) are not available to Landlord to pay one hundred
percent (100%) of the cost to fully repair the Premises, excluding the
deductible
-26-
<PAGE> 29
(for which Tenant shall pay Tenant's Share of such deductible); (ii) Landlord's
Architect determines that the Premises cannot, with reasonable diligence, be
fully repaired by Landlord (or cannot be safely repaired because of the
presence of hazardous factors, including, but not limited to, Hazardous
Materials, earthquake faults, radiation, chemical waste and other similar
dangers) within one hundred eighty (180) days after the date of such Casualty;
(iii) the Premises are destroyed or damaged during the last twelve (12) months
of the Term; or (iv) an Event of Default has occurred and is continuing at the
time of such Casualty. If Landlord elects to terminate this Lease following a
Casualty pursuant to this Section 12.2, Landlord shall give Tenant Notice of
its election to terminate within thirty (30) days after Landlord has knowledge
of such Casualty, and this Lease shall terminate fifteen (15) days after the
date of such Notice.
12.3 Tenant's Right to Terminate. Subject to the later terms
hereof, Tenant shall have the right to terminate this Lease following the
destruction of the Premises (or damage to the Premises so extensive as to
reasonably prevent Tenant's substantial use and enjoyment of the Premises) if
any of the following occurs: (i) the Premises cannot, with reasonable
diligence, be fully repaired by Landlord within one hundred eighty (180) days
after the date of the damage or destruction, as determined by Landlord's
Architect; (ii) the Premises cannot safely be repaired because of the presence
of hazardous factors, including Hazardous Materials, earthquake faults,
radiation, chemical waste and other similar dangers; or (iii) the damage or
destruction occurs during the last twelve (12) months of the Term and cannot,
with reasonable diligence, be fully repaired by Landlord within ninety (90)
days after the date of the destruction or damage, as determined by Landlord's
Architect. Notwithstanding the foregoing, Tenant shall not have the right to
terminate under this Section 12.3 if (a) a material Event of Default has
occurred and is continuing at the time of such damage or destruction or at the
time of exercising the right to terminate, or (b) the damage or destruction was
caused, in whole or in part, by the act or omission of Tenant or Tenant's
Agents. If Tenant elects to terminate this Lease pursuant to this Section
12.3, Tenant shall give Landlord Notice of its election to terminate within
fifteen (15) days after the date of such damage or destruction, and this Lease
shall terminate thirty (30) days after the date of such Notice.
12.4 Effect of Termination. If this Lease is terminated following
a Casualty pursuant to Section 12.2 or Section 12.3, Landlord shall, subject to
the rights of the Mortgagees, be entitled to receive and retain all the
insurance proceeds resulting from or attributable to such Casualty, except for
those proceeds payable under policies obtained by Tenant which specifically
insure Tenant's Personal Property. If neither party exercises any such right
to terminate this Lease, this Lease will continue in full force and effect, and
Landlord shall, promptly following the tenth (10th) day after the date of such
Casualty and receipt of the amounts set forth in clause (i) of Section 12.2,
commence the process of obtaining necessary permits and approvals for the
repair of the Premises, and shall commence such repair and prosecute the same
diligently to completion as soon thereafter as is practicable. Tenant shall
fully cooperate with Landlord in removing Tenant's Personal Property and any
debris from the Premises to facilitate the making of such repairs.
12.5 Limited Obligation to Repair. Landlord's obligation, should
it elect or be obligated to repair the Premises following a Casualty, shall be
limited to the basic building and
-27-
<PAGE> 30
Tenant shall, at its expense, replace or fully repair all Tenant's Personal
Property and any Alterations installed by Tenant existing at the time of such
Casualty.
12.6 Abatement of Monthly Rent. During any period when Landlord or
Landlord's Architect reasonably determines that there is substantial
interference with Tenant's use of the Premises by reason of a Casualty, Rent
shall be temporarily abated in proportion to the degree of such substantial
interference. Such abatement shall commence upon the date Tenant notifies
Landlord of such Casualty and shall end upon the Substantial Completion of the
repair of the Premises which Landlord undertakes or is obligated to undertake
hereunder. Tenant shall not be entitled to any compensation or damages from
Landlord for loss of the use of the Premises. Tenant's Personal Property or
other damage or any inconvenience occasioned by a Casualty or by the repair or
restoration of the Premises thereafter, including, but not limited to, any
consequential damages, opportunity costs or lost profits incurred or suffered
by Tenant. Tenant hereby waives the provisions of Section 1932(2) and Section
1933(4) of the California Civil Code, and the provisions of any similar or
successor statutes.
12.7 Landlord's Determination. The determination in good faith by
Landlord's Architect of or relating to the estimated cost of repair of any
damage, replacement cost, the time period required for repair or the
interference or suitability of the Premises for Tenant's use or occupancy shall
be conclusive for purposes of this Article XII and Article XIII.
ARTICLE XIII
CONDEMNATION
13.1 Total Taking -- Termination. If title to the Premises or so
much thereof is taken for any public or quasi-public use under any statute or
by right of eminent domain so that reconstruction of the Premises will not
result in the Premises being reasonably suitable for Tenant's continued
occupancy for the uses and purposes permitted by this Lease, this Lease shall
terminate as of the date possession of the Premises or part thereof is so
taken.
13.2 Partial Taking. If any part of the Premises is taken for any
public or quasi-public use under any statute or by right of eminent domain and
the remaining part is reasonably suitable for Tenant's continued occupancy for
the uses permitted by this Lease, this Lease shall, as to the part so taken,
terminate as of the date that possession of such part of the Premises is taken
and the Rent shall be reduced in the same proportion that the floor area of the
portion of the Premises so taken (less any addition thereto by reason of any
reconstruction) bears to the original floor area of the Premises, as reasonably
determined by Landlord or Landlord's Architect. Landlord shall, at its own
cost and expense, make all necessary repairs or alterations to the Premises so
as to make the portion of the Premises not taken a complete architectural unit.
Such work shall not, however, exceed the scope of the work done by Landlord in
originally constructing the Premises. If severance damages from the condemning
authority are not available to Landlord in sufficient amounts to permit such
restoration, Landlord may terminate this Lease upon Notice to Tenant. Monthly
Rent due and payable hereunder shall be temporarily abated during such
restoration
-28-
<PAGE> 31
period in proportion to the degree to which there is substantial interference
with Tenant's use of the Premises, as reasonably determined by Landlord or
Landlord's Architect. Each party hereby waives the provisions of Section
1265.130 of the California Code of Civil Procedure and any present or future
law allowing either party to petition the Superior court to terminate this
Lease in the event of a partial taking of the Building or Premises.
13.3 No Apportionment of Award. No award for any partial or total
taking shall be apportioned, it being agreed and understood that Landlord shall
be entitled to the entire award for any partial or entire taking. Tenant
assigns to Landlord its interest in any award which may be made in such taking
or condemnation, together with any and all rights of Tenant arising in or to
the same or any part thereof. Nothing contained herein shall be deemed to give
Landlord any interest in or require Tenant to assign to Landlord any separate
award made to Tenant for the taking of Tenant's Personal Property, for the
interruption of Tenant's business or its moving costs, or for the loss of its
goodwill.
13.4 Temporary Taking. No temporary taking of the Premises (which
for purposes hereof shall mean a taking of all or any part of the Premises for
one hundred eighty (180)days or less) shall terminate this Lease or give Tenant
any right to any abatement of Rent. Any award made to Tenant by reason of such
temporary taking shall belong entirely to Tenant and Landlord shall not be
entitled to share therein. Each party agrees to execute and deliver to the
other all instruments that may be required to effectuate the provisions of this
Section 13.4.
13.5 Sale Under Threat of condemnation. A sale made in good faith
to any authority having the power of eminent domain, either under threat of
condemnation or while condemnation proceedings are pending, shall be deemed a
taking under the power of eminent domain for all purposes of this Article XIII.
ARTICLE XIV
ASSIGNMENT AND SUBLETTING
14.1 Prohibition. Tenant shall not directly or indirectly,
voluntarily or by operation of law, assign (which term shall include any
transfer, assignment, pledge, mortgage or hypothecation) this Lease, or any
right or interest hereunder, or sublet the Premises or any part thereof, or
allow any other person or entity to occupy or use all or any part of the
Premises without first obtaining the written consent of Landlord in each
instance, which consent shall not be unreasonably withheld. No assignment,
encumbrance, subletting, or other transfer in violation of the terms of this
Article XIV, whether voluntary or involuntary, by operation of law, under legal
process or proceedings, by receivership, in bankruptcy, or otherwise shall be
valid or effective and, at the option of Landlord, shall constitute an Event of
Default under this Lease. To the extent not prohibited by provisions of the
Bankruptcy code of 1978, 11 U.S.C. Section 101 et seq. (The "Bankruptcy
Code"), Tenant on behalf of itself, creditors, administrators and assigns
waives the applicability of Sections 541(c) and 365(e) of the Bankruptcy Code
unless the proposed assignee of the trustee for the estate of the bankrupt
meets Landlord's standards for consent as set forth below. Landlord has
entered into this Lease with Tenant in order to obtain
-29-
<PAGE> 32
for the benefit of the Project the unique attraction of Tenant's name and
business; the foregoing prohibition on assignment or subletting is expressly
agreed to by Tenant in consideration of such fact. If this Lease is assigned
to any person or entity pursuant to the provisions of the Bankruptcy Code, any
and all monies or other considerations payable or otherwise to be delivered in
connection with such assignment shall be paid or delivered to Landlord, shall
be and remain the exclusive property of Landlord and shall not constitute
property of Tenant or the estate of Tenant within the meaning of the Bankruptcy
Code. Any and all monies or other considerations constituting Landlord's
property under the preceding sentence not paid or delivered to Landlord shall
be held in trust for the benefit of Landlord and be promptly paid or delivered
to Landlord. Any person or entity to which this Lease is assigned pursuant to
the provisions of the Bankruptcy Code shall be deemed without further act or
deed to have assumed all of the obligations arising under this Lease on and
after the date of such assignment. Any such assignment shall upon demand
execute and deliver to Landlord an instrument confirming such assumption.
14.2 Landlord's Consent. In the event Landlord consents to any
assignment or subletting, such consent shall not constitute a waiver of any of
the restrictions of this Article XIV and the same shall apply to each
successive assignment or subletting hereunder, if any. In no event shall
Landlord's consent to an assignment or subletting affect the continuing primary
liability of Tenant (which, following assignment, shall be joint and several
with the assignee), or relieve Tenant of any of its obligations hereunder
without an express written release being given by Landlord. In the event that
Landlord shall consent to an assignment or subletting under this Article XIV,
such assignment or subletting shall not be effective until the assignee or
sublessee shall assume all of the obligations of this Lease on the part of
Tenant to be performed or observed and whereby the assignee or sublessee shall
agree that the provisions contained in this Lease shall, notwithstanding such
assignment or subletting, continue to be binding upon it with respect to all
future assignments and sublettings. Such assignment or sublease agreement
shall be duly executed and a fully executed copy thereof shall be delivered to
Landlord, and Landlord may collect Monthly Rent and Additional Rent due
hereunder directly from the assignee or sublessee. Collection of Monthly Rent
and Additional Rent directly from an assignee or sublessee shall not constitute
a consent or a waiver of the necessity of consent to such assignment or
subletting, nor shall such collection constitute a recognition of such assignee
or sublessee as the Tenant hereunder or a release of Tenant from the performance
of all of its obligations hereunder.
14.3 Information. Regardless of whether Landlord's consent is
required under this Article XIV, Tenant shall notify Landlord in writing of
Tenant's intent to assign this Lease or any right or interest hereunder, or to
sublease the Premises or any part thereof, and of the name of the proposed
assignee or sublessee, the nature of the proposed assignee's or sublessee's
business to be conducted on the Premises, the terms and provisions of the
proposed assignment or sublease, a copy of the proposed assignment or sublease
form, and such other information as Landlord may reasonably request concerning
the proposed assignee or sublessee, including, but not limited to, net worth,
income statements and other financial statements for a two-year period
preceding Tenant's request for consent, evidence of insurance complying with
the requirements of Article XI, a completed Environmental Questionnaire from
the proposed assignee or sublessee, and the fee described in Section 14.7.
-30-
<PAGE> 33
14.4 Standard for Consent. Landlord shall, within thirty (30) days
of receipt of such notice and all information requested by Landlord concerning
the proposed assignee or sublessee, elect to take one of the following actions:
(a) consent to such proposed assignment or sublease;
(b) refuse to consent to such proposed assignment or
sublease, which refusal shall be on reasonable grounds; or
(c) if Tenant proposes to sublease all or part of the
Premises for the entire remaining Term, Landlord may, at its option exercised
by thirty (30) days Notice to Tenant, elect to recapture such portion of the
Premises as Tenant proposes to sublease and as of the thirtieth (30th) day
after Landlord so notifies Tenant of its election to recapture, this Lease
shall terminate as to the portion of the Premises recaptured and the Monthly
Rent payable under this Lease shall be reduced in the same proportion that
the floor area of that portion of the Premises so recaptured bears to the
floor area of the Premises prior to such recapture.
Tenant agrees, by way of example and without limitation, that it shall
not be unreasonable for Landlord to withhold its consent to a proposed
assignment or subletting if any of the following situations exist or may exist:
(i) Landlord determines that the proposed
assignee's or sublessee's use of the Premises conflicts with Article V
or Article VI, presents an unacceptable risk, as determined by
Landlord, under Article VI (and Landlord may require such assignee or
sublessee to complete the Environmental Questionnaire in the manner
described in Section 6.5 prior to making such determination), or
conflicts with any other provision under this Lease;
(ii) Landlord determines that the proposed
assignee or sublessee is not as financially responsible as Tenant as
of the date of Tenant's request for consent or as of the effective
date of such assignment or subletting;
(iii) Landlord determines that the proposed
assignee or sublessee lacks sufficient business reputation or
experience to conduct on the Premises a business of a type and quality
equal to that conducted by Tenant;
(iv) Landlord determines that the proposed
assignment or subletting would breach a covenant, condition or
restriction in some other Lease, financing agreement or other
agreement relating to the Project, the Building, the Premises or this
Lease;
(v) Landlord determines that the proposed
assignee or sublessee (A) has been required by any prior Landlord,
Lender or governmental authority to take remedial action in connection
with Hazardous Materials contaminating a property if such
contamination resulted from the proposed assignee's or sublessee's
actions or use of the property in question, or (B) is subject to any
enforcement order issued by any
-31-
<PAGE> 34
governmental authority in connection with the use, disposal or storage
of a Hazardous Material; or
(vi) An Event of Default has occurred and is
continuing at the time of Tenant's request for Landlord's consent, or
as of the effective date of such assignment or subletting.
Tenant acknowledges that if Tenant has any exterior sign
rights under this Lease, such rights are personal to Tenant and may not be
assigned or transferred to any assignee of this Lease or sublessee of the
Premises without Landlord's prior written consent, which consent may be
withheld in Landlord's sole and absolute discretion.
14.5 Bonus Value. Tenant agrees that fifty percent (50%) of any
amounts paid by the assignee or sublessee, however described, in excess of (i)
the Monthly Rent payable by Tenant hereunder (or, in the case of sublease of a
portion of the Premises, in excess of the Monthly Rent reasonably allocable to
such portion), plus (ii) Tenant's direct out-of-pocket costs which Tenant
certifies to Landlord have been paid to provide occupancy related services to
such assignee or sublessee of a nature commonly provided by landlords of
similar space, shall be the property of Landlord and such amounts shall be
payable directly to Landlord by the assignee or sublessee. At Landlord's
request, a written agreement shall be entered into by and among Tenant,
Landlord and the proposed assignee or sublessee confirming the requirements of
this Section 14.5.
14.6 Certain Transfers. The sale of all or substantially all of
Tenant's assets (other than bulk sales in the ordinary course of business), or,
if Tenant is a corporation, an unincorporated association, or a partnership,
the transfer, assignment or hypothecation of any stock or interest in such
corporation, association or partnership in the aggregate in excess of
twenty-five percent (25%) (except for publicly traded shares of stock
constituting a transfer of twenty-five percent (25%) or more in the aggregate,
so long as no change in the controlling interests of Tenant occurs as a result
thereof) shall be deemed an assignment within the meaning and provisions of
this Article XIV.
14.7 Landlord's Fee and Expenses. If Tenant requests Landlord's
consent to an assignment or subletting by Tenant under this Lease, Tenant shall
pay to Landlord a fee of Five Hundred Dollars ($500) and all of Landlord's
out-of-pocket expenses, including but not limited to, attorneys' fees
reasonably incurred related to such assignment or subletting by Tenant, whether
or not the assignment or subletting is approved.
14.8 Transfer of the Premises by Landlord. Upon any conveyance of
the Premises and assignment by Landlord of this Lease, Landlord shall and is
hereby entirely released from all liability under any and all of its covenants
and obligations contained in or derived from this Lease occurring after the
date of such conveyance and assignment, and Tenant agrees to attorn to any
entity purchasing or otherwise acquiring the Premises. Notwithstanding the
foregoing, Tenant may sublease the Premises to an affiliate without Landlord's
prior approval. Said sublease shall not in any way limit Tenant's liability
under the terms and conditions of the Lease.
-32-
<PAGE> 35
ARTICLE XV
DEFAULTS AND REMEDIES
15.1 Tenant's Default. At the option of Landlord, a default under
this Lease by Tenant shall exist if any of the following events shall occur
(each is called an "Event of Default"):
(a) Tenant fails to pay the Rent payable hereunder, as
and when due, for a period of three (3) days after Notice by Landlord;
provided, however, the Notice given hereunder shall be in lieu of, and not in
addition to, any notice required under Section 1161, et seq., of the California
Code of Civil Procedure;
(b) Tenant attempts to make or suffers to be made any
transfer, assignment or subletting, except as provided in Article XIV hereof;
(c) Any of Tenant's rights under this Lease are sold or
otherwise transferred by or under court order or legal process or otherwise or
if any of the actions described in Section 15.2 are taken by or against Tenant
or any Guarantor;
(d) The Premises are used for any purpose other than as
permitted pursuant to Article V;
(e) Tenant vacates or abandons the Premises;
(f) Any representation or warranty given by Tenant under
or in connection with this Lease proves to be materially false or misleading;
(g) Tenant fails to timely comply with the provisions of
Article VI ("Hazardous Materials"), Article XIV ("Assignment and Subletting"),
Article XVI ("Subordination; Estoppel Certificate; Financials"), Section 21.5
("Modifications for Mortgagees") or Section 21.19 ("Authority"); or
(h) Tenant fails to observe, keep, perform or cure within
twenty (20) days after Notice by Landlord any of the other terms, covenants,
agreements or conditions contained in this Lease or those set forth in any
other agreements or rules or regulations which Tenant is obligated to observe
or perform. In the event such default reasonably could not be cured or
corrected within such twenty (20) day period, but is reasonably susceptible to
cure or correction, then Tenant shall not be in default hereunder if Tenant
commences the cure or correction of such default within such twenty (20) day
period and diligently prosecutes the same to completion after commencing such
cure or correction. The Notice required by this subparagraph 15.1(h) shall be
in lieu of, and not in addition to, any notice required under Section 1161, et
seq., of the California Code of Civil Procedure.
Notices given under this Section 15.1 shall specify the alleged default and
shall demand that Tenant perform the provisions of this Lease or pay the Rent
that is in arrears, as the case may be,
-33-
<PAGE> 36
within the applicable period of time, or quit the Premises. No such Notice
shall be deemed a forfeiture or a termination of this Lease unless Landlord so
elects in the Notice.
15.2 Bankruptcy or Insolvency. In no event shall this Lease be
assigned or assignable by operation of law and in no event shall this Lease be
an asset of Tenant in any receivership, bankruptcy, insolvency or
reorganization proceeding. In the event:
(a) A court makes or enters any decree or order adjudging
Tenant to be insolvent, or approving as properly filed by or against Tenant a
petition seeking reorganization or other arrangement of Tenant under any
provisions of the Bankruptcy Code or any applicable state law, or directing the
winding up or liquidation of Tenant and such decree or order shall have
continued for a period of thirty (30) days;
(b) Tenant makes or suffers any transfer which
constitutes a fraudulent or otherwise avoidable transfer under any provisions
of the Bankruptcy Code or any applicable state law;
(c) Tenant assigns its assets for the benefit of its
creditors; or
(d) The material part of the property of Tenant or any
property essential to Tenant's business or of Tenant's interest in this Lease
is sequestered, attached or executed upon, and Tenant fails to secure a return
or release of such property within ten (10) days thereafter, or prior to sale
pursuant to such sequestration, attachment or levy, whichever is earlier;
then this Lease shall, at Landlord's election, immediately terminate and be of
no further force or effect whatsoever, without the necessity for any further
action by Landlord, except that Tenant shall not be relieved of obligations
which have accrued prior to the date of such termination. Upon such
termination, the provisions herein relating to the expiration or earlier
termination of this Lease shall control and Tenant shall immediately surrender
the Premises in the condition required by the provisions of this Lease.
Additionally, Landlord shall be entitled to all relief, including recover of
damages from Tenant, which may from time to time be permitted, or recoverable,
under the Bankruptcy Code or any other applicable state laws.
15.3 Landlord's Remedies. Upon the occurrence of an Event of
Default, then, in addition to and without waiving any other rights and remedies
available to Landlord at law or in equity or otherwise provided in this Lease,
Landlord may, at its option, cumulatively or in the alternative, exercise the
following remedies:
(a) Landlord may terminate Tenant's right to possession
of the Premises, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. No act by
Landlord other than giving Notice to Tenant of Landlord's election to terminate
Tenant's right to possession shall terminate this Lease. Acts of maintenance,
efforts to relet the Premises, or the appointment of a receiver on Landlord's
initiative to protect Landlord's interest under this lease shall not constitute
a termination of Tenant's right to possession. Termination shall terminate
Tenant's right to possession of the Premises but shall not
-34-
<PAGE> 37
relieve Tenant of any obligation under this Lease which has accrued prior to
the date of such termination. Upon such termination, Landlord shall have the
right to re-enter the Premises, and remove all persons and property, and
Landlord shall also be entitled to recover from Tenant:
(i) The worth at the time of award of the unpaid
Monthly Rent and Additional Rent which had been earned at the time of
termination;
(ii) The worth at the time of award of the amount
by which the unpaid Monthly Rent and Additional Rent which would have
been earned after termination until the time of award exceeds the
amount of such rental loss that Tenant proves could have been
reasonably avoided;
(iii) The worth at the time of award of the amount
by which the unpaid Monthly Rent and Additional Rent for the balance
of the Term after the time of award exceeds the amount of such rental
loss that Tenant proves could be reasonably avoided;
(iv) Any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure
to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result from Tenant's default,
including, but not limited to, the cost of recovering possession of
the Premises, commissions and other expenses of reletting, including
necessary repair, demolition and renovation of the Premises to the
condition existing immediately prior to Tenant's occupancy, the
unamortized portion of any brokerage commissions funded by Landlord in
connection with this Lease, the cost of rectifying any damage to the
Premises occasioned by the act or omission of Tenant, reasonable
attorneys' fees, and any other reasonable costs; and
(v) At Landlord's election, all other amounts in
addition to or in lieu of the foregoing as may be permitted by law.
As used in subsections (i) and (ii) above, the "worth at the time of
award" shall be computed by allowing interest at the maximum legal rate
permitted by law. As used in subsection (iii) above, the "worth at the time of
award" shall be computed by discounting the amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
(b) Landlord may elect not to terminate Tenant's right to
possession of the Premises, in which event this Lease will continue in full
force and effect as long as Landlord does not terminate Tenant's right to
possession, and Landlord may continue to enforce all of its rights and remedies
under this Lease, including the right to collect all Rent as it becomes due.
In the event that Landlord elects to avail itself of the remedy provided by
this subparagraph 15.3(b), Landlord shall not unreasonably withhold its consent
to an assignment or subletting of the Premises subject to the reasonable
standards for Landlord's consent as are contained in this Lease. In addition,
in the event Tenant has entered into a sublease which is valid under the terms
of this Lease, Landlord may also, at its option, cause Tenant to assign to
Landlord the interest of
-35-
<PAGE> 38
Tenant under said sublease, including, but not limited to, Tenant's right to
payment of Rent as it becomes due. Landlord may elect to enter the Premises
and relet them, or any part of them, to third parties for Tenant's account.
Tenant shall be liable immediately to Landlord for all costs Landlord incurs in
reletting the Premises, including, but not limited to, broker's commissions,
expenses of cleaning and remodeling the Premises required by the reletting,
attorneys' fees and like costs. Reletting can be for a period shorter or
longer than the remaining Term of this Lease and for the entire Premises or any
portion thereof. Tenant shall pay to Landlord the Monthly Rent and Additional
Rent due under this Lease on the dates the Monthly Rent and such Additional
Rent are due, less the Rent Landlord actually collects from any reletting.
Except as provided in the preceding sentence, if Landlord relets the Premises
or any portion thereof, such reletting shall not relieve Tenant of any
obligation hereunder. Notwithstanding the above, no act by Landlord allowed by
this subparagraph 15.3(b) shall terminate this Lease unless Landlord notifies
Tenant in writing that Landlord elects to terminate this Lease.
15.4 No Surrender. Tenant waives any right of redemption or relief
from forfeiture under California Code of Civil Procedure Section 1174 and 1179,
or under any other present or future law in the event Tenant is evicted or
Landlord takes possession of the Premises by reason of an Event of Default. No
act or thing done by Landlord or Landlord's Agents during the Term shall be
deemed an acceptance of a surrender of the Premises, and no agreement to accept
a surrender shall be valid unless in writing and signed by Landlord. No
employee of Landlord or of Landlord's Agents shall have any power to accept the
keys to the Premises prior to the termination of this Lease, and the delivery
of the keys to any employee shall not operate as a termination of this Lease or
a surrender of the Premises.
15.5 Interest on Late Payments. Any Rent due under this Lease that
is not paid to Landlord within three (3) days of the date when due shall
commence to bear interest at the Applicable Rate until fully paid. Neither the
accrual nor the payment of interest shall cure any default by Tenant under this
Lease.
15.6 Attorneys' and Other Fees. All sums reasonably incurred by
Landlord in connection with an Event of Default or holding over of possession
by Tenant after the expiration or termination of this Lease, including, but not
limited to, all costs, expenses and actual accountants', appraisers',
attorneys' and other professional fees, and any collection agency or other
collection charges, shall be due and payable by Tenant to Landlord on demand,
and shall bear interest at the Applicable Rate from the date of such demand
until paid by Tenant. In addition, in the event that any action shall be
instituted by either of the parties hereto for the enforcement of any of its
rights in and under this Lease, the party in whose favor judgment shall be
rendered shall be entitled to recover from the other party all expenses
reasonably incurred by the prevailing party in such action, including actual
costs and reasonable attorneys' fees.
15.7 Landlord's Default. Landlord shall not be deemed to be in
default in the performance of any obligation required to be performed by it
hereunder unless and until it has failed to perform such obligation within
twenty (20) days after receipt of Notice by Tenant to Landlord (and the
Mortgagees who have provided Tenant with notice) specifying the nature of such
default; provided, however, that if the nature of Landlord's obligation is such
that more than
-36-
<PAGE> 39
twenty (20) days are required for its performance, then Landlord shall not be
deemed to be in default if it shall commence such performance within such
twenty (20) day period and thereafter diligently prosecutes the same to
completion.
15.8 Limitation of Landlord's Liability. The obligations of
Landlord do not constitute the personal obligations of the individual partners,
trustees, directors, officers or shareholders of Landlord or its constituent
partners. If Landlord shall fail to perform any covenant, term, or condition
of this Lease upon Landlord's part to be performed, Tenant shall be required to
deliver to Landlord Notice of the same. If, as a consequence of such default,
Tenant shall recover a money judgment against Landlord, such judgment shall be
satisfied only out of the proceeds of sale received upon execution of such
judgment and levied thereon against the right, title and interest of Landlord
in the Building and out of rent or other income from such property receivable
by Landlord or out of consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right, title or interest in the
Building, and no action for any deficiency may be sought or obtained by Tenant.
15.9 Mortgagee Protection. Upon any default on the part of
Landlord, Tenant will give notice by registered or certified mail to any
Mortgagee who has provided Tenant with notice of its interest together with an
address for receiving notice, and shall offer such Mortgagee a reasonable
opportunity to cure the default (which in no event shall be less than sixty
(60) days), including time to obtain possession of the Premises by power of
sale or a judicial foreclosure, if such should prove necessary , to effect a
cure. Tenant agrees that each of the Mortgagees to whom this Lease has been
assigned by Landlord is an express third party beneficiary hereof. Tenant
shall not make any prepayment of Monthly Rent more than one (1) month in
advance without the prior written consent of such Mortgagee. Tenant waives any
right under California Civil Code Section 1950.5 or any other present or future
law to the collection of any deposit from such Mortgagee or any purchaser at a
foreclosure sale of such Mortgagee's interest unless such Mortgagee or such
purchaser shall have actually received and not refunded the deposit. Tenant
agrees to make all payments under this Lease to the Mortgagee with the most
senior encumbrance upon receiving a direction, in writing, to pay said amounts
to such Mortgagee. Tenant shall comply with such written direction to pay
without determining whether an event of default exists under such Mortgagee's
loan to Landlord.
15.10 Landlord's Right to Perform. If Tenant shall at any time fail
to make any payment or perform any other act on its part to be made or
performed under this Lease, Landlord may (but shall not be obligated to), at
Tenant's expense, and without waiving or releasing Tenant from any obligation
of Tenant under this Lease, make such payment or perform such other act to the
extent Landlord may deem desirable, and in connection therewith, pay expenses
and employ counsel. All sums paid by Landlord and all penalties, interest and
costs, including, but not limited to, collection costs and attorneys' fees
reasonably incurred in connection therewith, shall be due and payable by Tenant
to Landlord, as an item of Additional Rent, on demand by Landlord, together
with interest thereon at the Applicable Rate from the date of such demand until
paid by Tenant.
15.11 Limitation of Actions Against Landlord. Any claim, demand or
right of any kind by Tenant which is based upon or arises in connection with
this Lease shall be barred unless
-37-
<PAGE> 40
Tenant commences an action thereon within six (6) months after the date that
the act, omission, event or default upon which the claim, demand or right
arises, has occurred.
15.12 Waiver of Jury Trial. To the full extent permitted by law,
Tenant hereby waives the right to trial by jury in any action, proceeding or
counterclaim brought by Tenant on any matter whatsoever arising out of or in
any way connected with this Lease, the relationship of Landlord and Tenant,
Tenant's use or occupancy of the Premises and/or any claim of injury or damage.
ARTICLE XVI
SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
16.1 Subordination, Attornment and Non-Disturbance. Without the
necessity of any additional document being executed by Tenant for the purpose
of effecting a subordination, and at the election of Landlord or any Mortgagee
or any ground lessor with respect to the land of which the Premises are a part,
this Lease shall be subject and subordinate at all times to (i) all ground
leases or underlying leases which may now exist or hereafter be executed
affecting the Building, and (ii) the lien of any Mortgage which may now exist
or hereafter be executed in any amount for which the Project, the Building,
ground leases or underlying leases, or Landlord's interest or estate in any of
said items is specified as security. Landlord or any such Mortgagee or ground
lessor shall have the right, at its election, to subordinate or cause to be
subordinated any such ground leases or underlying leases or any such liens to
this Lease. No subordination shall permit material interference with Tenant's
rights hereunder, and any ground lessor or Mortgagee shall recognize Tenant and
its permitted successors and assigns as the tenant of the Premises and shall
not disturb Tenant's right to quiet possession of the Premises during the Term
so long as no Event of Default has occurred and is continuing under this Lease.
If Landlord's interest in the Premises is acquired by any ground lessor or
Mortgagee, or in the event proceedings are brought for the foreclosure of, or
in the event of exercise of the power of sale under, any Mortgage made by
Landlord covering the Premises or any part thereof, or in the event a
conveyance in lieu of foreclosure is made for any reason, Tenant shall,
notwithstanding any subordination and upon the request of such successor in
interest to Landlord, attorn to and become the Tenant of the successor in
interest to Landlord and recognize such successor in interest as the Landlord
under this Lease. Although this Section 16.1 is self-executing, Tenant
covenants and agrees to execute and deliver, upon demand by Landlord and in the
form requested by Landlord, or any Mortgagee or ground lessor, any additional
documents evidencing the priority or subordination of this Lease with respect
to any such ground leases or underlying leases or the lien of any such
Mortgage, or evidencing the attornment of Tenant to any successor in interest
to Landlord as herein provided. Tenant's failure to timely execute and deliver
such additional documents shall, at Landlord's option, constitute an Event of
Default hereunder.
16.2 Estoppel Certificate. Tenant shall within ten (10) days
following written request by Landlord, execute and deliver to Landlord any
documents, including estoppel certificates, in a form required by Landlord (i)
certifying that this Lease is unmodified and in full force and effect
-38-
<PAGE> 41
or, if modified, attaching a copy of such modification and certifying that this
Lease, as so modified, is in full force and effect and the date to which the
Rent and other charges are paid in advance, if any, (ii) acknowledging that
there are not, to Tenant's knowledge, any uncured defaults on the part of the
Landlord or stating the nature of any uncured defaults, (iii) evidencing the
status of this Lease as may be required by a Mortgagee or a purchaser of the
Premises, (iv) certifying the current Monthly Rent amount and the amount and
form of Security Deposit on deposit with Landlord, and (v) certifying to such
other information as Landlord, Landlord's Agents, Mortgagees and prospective
purchasers may reasonably request, including, but not limited to, any requested
information regarding Hazardous Materials. Tenant's failure to deliver an
estoppel certificate within ten (10) days after delivery of Landlord's written
request therefor shall constitute an Event of Default hereunder.
16.3 Financial Information. Tenant shall deliver to Landlord,
prior to the execution of this Lease, and within ten (10) days following
written request therefor by Landlord at any time during the Term, Tenant's
current financial statements, and Tenant's financial statements for the two (2)
years prior to the current fiscal financial statement's year, certified to be
true, accurate and complete by the chief financial officer of Tenant, including
a balance sheet and profit and loss statement for the most recent prior year
(collectively, the "Statements"), which Statements shall accurately and
completely reflect the financial condition of Tenant. Landlord agrees that it
will keep the Statements confidential, except that Landlord shall have the
right to deliver the same to any proposed purchaser of the Premises, the
Project or any portion thereof, and to the Mortgagees of Landlord or such
purchaser. Tenant acknowledges that Landlord is relying on the Statements in
its determination to enter into this Lease, and Tenant represents to Landlord,
which representation shall be deemed made on the date of this Lease and again
on the Commencement Date, that no material change in the financial condition of
Tenant, as reflected in the Statements, has occurred since the date Tenant
delivered the Statements to Landlord. If any material change in Tenant's
financial condition, as reflected in the Statements, occurs prior to the date
of this Lease or prior to the Commencement Date, as the case may be, or if
Tenant fails to inform Landlord of any such material change, Landlord shall
have the right, in addition to any other rights and remedies of Landlord, to
terminate this Lease by notice to Tenant given within thirty (30) days after
Landlord learns of such material change.
ARTICLE XVII
SIGNS AND GRAPHICS
Landlord shall designate the location on the Premises, if any, for one
(1) or more exterior identification signs for Tenant. Tenant shall have no
right to maintain identification signs in any other location in, on or about
the Premises and shall not display or erect any other signs, displays or other
advertising materials that are visible from the exterior of the Building. The
size, design, color and other physical aspects of permitted signs shall be
subject to Landlord's written approval prior to installation, which approval
may be withheld in Landlord's discretion, any Restrictions and any applicable
municipal or other governmental permits and approvals. All such signs and
graphics shall conform to the Sign Criteria set forth in Exhibit J. The cost
of all signs and
-39-
<PAGE> 42
graphics, including the installation, maintenance and removal thereof, shall be
at Tenant's sole cost and expense. If Tenant fails to maintain its signs, or
if Tenant fails to remove same upon termination of this Lease and repair any
damage caused by such removal (including, but not limited to, repainting the
affected area, if required by Landlord), Landlord may do so at Tenant's
expense. All sums reasonably disbursed, deposited or incurred by Landlord in
connection with such removal, including, but not limited to, all costs,
expenses and actual attorneys' fees, shall be due and payable by Tenant to
Landlord on demand by Landlord, together with interest thereon at the
Applicable Rate from the date of such demand until paid by Tenant.
ARTICLE XVIII
QUIET ENJOYMENT
Landlord covenants that Tenant, upon performing the terms, conditions
and covenants of this Lease, shall have quiet and peaceful possession of the
Premises as against any person claiming the same by, through or under Landlord.
ARTICLE XIX
SURRENDER; HOLDING OVER
19.1 Surrender of the Premises. Upon the expiration or earlier
termination of this Lease, Tenant shall surrender the Premises to Landlord in
its condition existing as of the Commencement Date, normal wear and tear and
acts of God excepted, with all interior walls in good repair, all carpets
shampooed and cleaned, the HVAC equipment, plumbing, electrical and other
mechanical installations in good operating order and all floors cleaned and
waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove
from the Premises all of Tenant's Alterations which Landlord requires Tenant to
remove pursuant to Section 8.1 and all Tenant's Personal Property, and shall
repair any damage and perform any restoration work caused by such removal. If
Tenant fails to remove such Alterations and Tenant's Personal Property which
Tenant is authorized and obligated to remove pursuant to the above, and such
failure continues after the termination of this Lease, Landlord may retain such
property and all rights of Tenant with respect to it shall cease, or Landlord
may place all or any portion of such property in public storage for Tenant's
account. Tenant shall pay to Landlord, upon demand, the costs of removal of
any such Alterations and Tenant's Personal Property and storage and
transportation costs of same, and the cost of repairing and restoring the
Premises, together with attorneys' fees and interest on said amounts at the
Applicable Rate from the date of expenditure by Landlord. If the Premises are
not so surrendered at the termination of this Lease, Tenant hereby agrees to
indemnify Landlord and Landlord's Agents against all loss or liability
resulting from any delay by Tenant in so surrendering the Premises, including,
but not limited to, any claims made by any succeeding tenant, losses to
Landlord due to lost opportunities to lease to succeeding tenants, and actual
attorneys' fees and costs.
-40-
<PAGE> 43
19.2 Holding Over. If Tenant remains in possession of all or any
part of the Premises after the expiration of the Term with the prior written
consent of Landlord, such possession shall constitute a month-to-month tenancy
only and shall not constitute a renewal or extension for any further term. If
Tenant remains in possession of all or any part of the Premises after the
expiration of the Term without the prior written consent of Landlord, such
possession shall constitute a tenancy of sufferance. In either of such events,
Monthly Rent shall be increased to an amount equal to one hundred fifty percent
(150%) of the Monthly Rent payable during the last month of the Term, and any
other sums due hereunder shall be payable in the amounts and at the times
specified in this Lease. Any such tenancy shall be subject to every other
term, condition, and covenant contained in this Lease.
ARTICLE XX
[INTENTIONALLY OMITTED]
ARTICLE XXI
MISCELLANEOUS AND INTERPRETIVE PROVISIONS
21.1 Broker. Landlord and Tenant each warrant and represent to the
other than neither has had any dealings with any real estate broker, agent or
finder in connection with the negotiation of this Lease or the introduction of
the parties to this transaction, except for the Broker (whose commission shall
be paid by Landlord), and that it knows of no other real estate broker, agent
or finder who is or might be entitled to a commission or fee in connection with
this Lease. In the event of any additional claims for brokers' or finders'
fees with respect to this Lease, Tenant shall indemnify, hold harmless, protect
and defend Landlord from and against such claims if they shall be based upon
any statement or representation or agreement made by Tenant, and Landlord shall
indemnify, hold harmless, protect and defend Tenant from and against such
claims if they shall be based upon any statement, representation or agreement
made by Landlord.
21.2 Examination of Lease. Submission of this Lease for
examination or signature by Tenant does not create a reservation of or option
to lease. This Lease shall become effective and binding only upon full
execution of this Lease by both Landlord and Tenant.
21.3 No Recording. Tenant shall not record this Lease or any
memorandum of this Lease without Landlord's prior written consent, but if
Landlord so requests, Tenant agrees to execute, have acknowledged and deliver a
memorandum of this Lease in recordable form which Landlord thereafter may file
for record.
21.4 Quitclaim. Upon any termination of this Lease, Tenant shall,
at Landlord's request, execute, have acknowledged and deliver to Landlord an
instrument in writing releasing and quitclaiming to Landlord all right, title
and interest of Tenant in and to the Premises by reason of this Lease or
otherwise.
-41-
<PAGE> 44
21.5 Modifications for Mortgagees. If in connection with obtaining
financing for the Premises or any portion thereof, Landlord's Mortgagees shall
request reasonable modifications to this Lease as a condition to such
financing, Tenant shall not unreasonably withhold, delay or defer its consent
thereto, provided such modifications do not adversely affect Tenant's rights
hereunder. Tenant's failure to so consent shall constitute an Event of Default
under this Lease.
21.6 Notice. Any Notice required or desired to be given under this
Lease shall be in writing and shall be addressed to the address of the party to
be served. The addresses of Landlord and Tenant are as set forth in Items 1
and 3, respectively, of the Basic Lease Provisions, except that (a) prior to
the Commencement Date, the address for Notices to Tenant shall be as set forth
opposite Tenant's signature on this Lease, and (b) from and after the
Commencement Date, notwithstanding the addresses for Tenant set forth in Item 3
of the Basic Lease Provisions, all Notices regarding the operation and
maintenance of the Project shall be delivered to Tenant at the Premises. Each
such Notice shall be deemed effective and given (i) upon receipt, if personally
delivered (which shall include delivery by courier or overnight delivery
service), (ii) upon being telephonically confirmed as transmitted, if sent by
telegram, telex or telecopy, (iii) two (2) business days after deposit in the
United States mail in Orange County or in the county in which the Premises are
located, certified and postage prepaid, properly addressed to the party to be
served, or (iv) upon receipt if sent in any other way. Any party hereto may
from time to time, by Notice to the other in accordance with this Section 21.6,
designate a different address than that set forth above for the purposes of
Notice.
21.7 Captions. The captions and headings used in this Lease are
for the purpose of convenience only and shall not be construed to limit or
extend the meaning of any part of this Lease.
21.8 Executed Copy. Any fully executed copy of this Lease shall be
deemed an original for all purposes.
21.9 Time. Time is of the essence for the performance of each
term, condition and covenant of this Lease.
21.10 Severability. If any one or more of the provisions contained
herein shall for any reason be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality, or unenforceability shall not affect
any other provision of this Lease, but this Lease shall be construed as if such
invalid, illegal or unenforceable provision had not been contained herein.
21.11 Survival. All covenants and indemnities set forth herein
which contemplate the payment of sums, or the performance by Tenant after the
Term or following an Event of Default, including specifically, but not limited
to, the covenants and indemnities set forth in Section 5.3, Article VI, Article
VII, Section 8.1, Section 9.2, Section 11.1, Section 11.10, Article XV, and
Article XIX, and all representations and warranties of Tenant, shall survive
the expiration or sooner termination of this Lease.
-42-
<PAGE> 45
21.12 Choice of Law. This Lease shall be construed and enforced in
accordance with the laws of the State of California. The language in all parts
of this Lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against either Landlord or Tenant.
21.13 Gender; Singular, Plural. When the context of this Lease
requires, the neuter gender includes the masculine, the feminine, a partnership
or corporation or joint venture, the singular includes the plural and the
plural includes the singular.
21.14 Non-Agency. It is not the intention of Landlord or Tenant to
create hereby a relationship of master-servant or principal- agent, and under
no circumstances shall Tenant herein be considered the agent of Landlord, it
being the sole purpose and intent of the parties hereto to create a
relationship of Landlord and Tenant.
21.15 Successors. The terms, covenants, conditions and agreements
contained in this Lease shall, subject to the provisions as to assignment,
subletting, and bankruptcy contained herein and any other provisions
restricting successors or assigns, apply to and bind the heirs, successors,
legal representatives and assigns of the parties hereto.
21.16 Waiver; Remedies Cumulative. The waiver by either party of
any term, covenant, agreement or condition herein contained shall not be deemed
to be a waiver of any subsequent breach of the same or any other term,
covenant, agreement or condition herein contained, nor shall any custom or
practice which may grow up between the parties in the administration of this
Lease be construed to waive or to lessen the right of Landlord to insist upon
the performance by Tenant in strict accordance with all of the provisions of
this Lease. The subsequent acceptance of Rent hereunder by Landlord shall not
be deemed to be a waiver of any preceding breach by Tenant of any provisions,
covenant, agreement or condition of this Lease, other than the failure of
Tenant to pay the particular Rent payment so accepted, regardless of Landlord's
knowledge of such preceding breach at the time of acceptance of such Rent
payment. Landlord's acceptance of any check, letter or payment shall in no
event be deemed an accord and satisfaction, and Landlord shall accept the
check, letter or payment without prejudice to Landlord's right to recover the
balance of the Rent or pursue any other remedy available to it. The rights and
remedies of either party under this Lease shall be cumulative and in addition
to any and all other rights and remedies which either party has or may have.
21.17 Unavoidable Delay. Except for the monetary obligations of
Tenant under this Lease, neither party shall be chargeable with, liable for, or
responsible to the other for anything or in any amount for any Unavoidable
Delay and any Unavoidable Delay shall not be deemed a breach of or default in
the performance of this Lease, it being specifically agreed that any time limit
provision contained in this Lease (other than the scheduled expiration of the
Term) shall be extended for the same period of time lost by Unavoidable Delay.
21.18 Entire Agreement. This Lease is the entire agreement between
the parties, and supersedes any prior agreements, representations, negotiations
or correspondence between the
-43-
<PAGE> 46
parties except as expressed herein. Except as otherwise provided herein, no
subsequent change or addition to this Lease shall be binding unless in writing
and signed by the parties hereto.
21.19 Authority. If Tenant is a corporation or a partnership,
each individual executing this Lease on behalf of the corporation or
partnership, as the case may be, represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of said entity in
accordance with its corporate bylaws, statement of partnership or certificate
of limited partnership, as the case may be, and that this Lease is binding upon
said entity in accordance with its terms. If Tenant is a corporation, Tenant
shall, if requested by Landlord, within thirty (30) days after execution of
this Lease and prior to entering into possession of the Premises, deliver to
Landlord a certified copy of a resolution of the Board of Directors of the
corporation or certificate of the Secretary of the corporation, authorizing,
ratifying or confirming the execution of this Lease. If Tenant is a
partnership, Tenant shall, if requested by Landlord, within thirty (30) days
after the execution of this Lease and prior to entering into possession of the
Premises, deliver to Landlord a certified copy of its partnership agreement
authorizing such execution.
21.20 Guaranty. As a condition to the execution of this Lease by
Landlord, the obligations, covenants and performance of the Tenant as herein
provided shall be guaranteed in writing by the Guarantor listed in Item 14 of
the Basic Lease Provisions, if any, on a form of guarantee provided by
Landlord.
21.21 Exhibits; References. All exhibits, amendments, riders and
addenda attached to this Lease are hereby incorporated into and made a part of
this Lease. In the event of variation or discrepancy, the duplicate original
hereof (including exhibits, amendments, riders and addenda, if any, specified
above) held by Landlord shall control. All references in this Lease to
Articles, Sections, Exhibits, Riders and clauses are made, respectively, to
Articles, Sections, Exhibits, Riders and clauses of this Lease, unless
otherwise specified.
21.22 Basic Lease Provisions. The Basic Lease Provisions at the
beginning of this Lease are intended to provide general information only. In
the event of any inconsistency between the Basic Lease Provisions and the
specific provisions of this Lease, the specific provisions of this Lease shall
prevail.
21.23 No Merger. The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, or a termination by Landlord, shall
not work a merger, and shall, at the option of Landlord, terminate all or any
existing subtenancies or may, at the option of Landlord, operate as an
assignment to Landlord of any or all such subtenancies.
21.24 Joint and Several Obligations. If more than one person or
entity is Tenant, the obligations imposed on each such person or entity shall
be joint and several.
21.25 No Light or Air Easement. Any diminution or shutting off of
light or air by any structure which may be erected on lands adjacent to the
Building shall in no way affect this Lease, abate Rent or otherwise impose any
liability on Landlord. This Lease does not confer any right with regard to the
subsurface below the ground level of the Building.
-44-
<PAGE> 47
21.26 Security Measures. Tenant hereby acknowledges that Landlord
shall have no obligation whatsoever to provide guard service or other security
measures for the benefit of the Premises or the Project. Tenant assumes all
responsibility for the protection of Tenant, Tenant's Agents and the property
of Tenant and of Tenant's Agents from acts of third parties. Nothing herein
contained shall prevent Landlord, at Landlord's sole option, from providing
security protection for the Project or any part thereof, in which event the
cost thereof shall be included within the definition of Project Costs and paid
by Tenant in the manner set forth in Section 7.1.
21.27 Unless expressly written otherwise in the Lease, in any
circumstances where Landlord's or Tenant's consent is required, said consent
shall be reasonable and not delayed. In addition, there shall not be a charge
or fee imposed for said consent.
21.28 Attorneys' Fees. In the event either party places the
enforcement of any provision of the Lease, or in the event of any dispute
between Landlord and Tenant arising out of the Lease, the prevailing party
shall be entitled to recover from the losing party, the full amount of all
reasonable attorneys' fees, court costs, or other expenses related thereto.
Such costs shall be recoverable whether or not suit is actually filed or a
judgment entered.
THIS LEASE is effective as of the date the last signatory necessary to
execute this Lease shall have executed this Lease.
"LANDLORD"
RCDC Associates L.P.,
a California limited partnership
By: RC Development L.P.,
a California limited partnership,
General Partner
By: 131 Development, Inc.
a California corporation,
General Partner
By:_________________________
--------------------------
Vice President
-45-
<PAGE> 48
ADDRESSES FOR NOTICES PRIOR TO "TENANT"
COMMENCEMENT DATE:
Jenny Craig Products, Inc.,
a California corporation
445 Marine View Avenue
Del Mar, California 92014-3950
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
-46-
<PAGE> 49
EXHIBIT A
DESCRIPTION OF PREMISES
This Exhibit is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership, as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
-1-
<PAGE> 50
EXHIBIT B
PROJECT SITE PLAN
This Exhibit is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership, as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
-2-
<PAGE> 51
EXHIBIT D
COMMENCEMENT DATE MEMORANDUM
DATE: May 14, 1996
RE: Standard Form Lease dated April 24, 1996, by and between RCDC
Associates L.P., a California limited partnership, as
"Landlord", and, Jenny Craig Products, Inc., a California
corporation, as "Tenant", for the Premises known as 11335
Jersey Boulevard, Rancho Cucamonga, California.
Agreement
The undersigned hereby agree as follows:
1. The Tenant Improvements (as defined in the Lease) to the
Premises have been substantially completed in accordance with the terms and
conditions of the Lease, subject only to "punch list" items agreed to by
Landlord and Tenant pursuant to the terms of the Lease.
2. The Commencement Date, as defined in and determined in
accordance with the Lease, is hereby stipulated for all purposes to be July 1,
1996.
3. In accordance with the Lease, Monthly Rent (as defined in the
Lease) in the amount of $31,735.03, subject to adjustment in accordance with
the terms of the Lease, commences to accrue on July 1, 1996 and is due and
payable in advance on the first day of each and every month during the Term (as
defined in the Lease). Unless and until notified by Landlord to the contrary,
Tenant shall make its Rent checks payable to RCDC Associates L.P., c/o 2201
Dupont Drive, Suite 100, Irvine, California 92715.
"Landlord"
NOT FOR SIGNATURE
"Tenant"
NOT FOR SIGNATURE
-3-
<PAGE> 52
EXHIBIT E
ADJUSTMENTS TO MONTHLY RENT
(FIXED ADJUSTMENT)
This Exhibit is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership, as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
The capitalized terms used and not otherwise defined in this
Exhibit shall have the same definitions as set forth in the Lease. The
provisions of this Exhibit shall supersede any inconsistent or conflicting
provisions of the Lease.
The Monthly Rent shall be adjusted, as of the commencement of
the dates set forth below, in accordance with the following schedule:
<TABLE>
<CAPTION>
Months During Term Monthly Rent
------------------ ------------
<S> <C>
1 - 3 $0.00*
4 - 30 $31,735.03
31 - 60 $35,075.56
</TABLE>
*Subject to the following Deferred Rent Agreement.
E-1
<PAGE> 53
DEFERRED RENT AGREEMENT
(WAIVER AND REDUCTION)
This Deferred Rent Agreement is attached to and made a part of
that certain Standard Form Lease dated May 14, 1996, by and between RCDC
Associates L.P., a California limited partnership, as "Landlord", and Jenny
Craig Products, Inc., a California corporation, as "Tenant", for the Premises
known as 11335 Jersey Boulevard, Rancho Cucamonga, California.
The capitalized terms used and not otherwise defined in this
Agreement shall have the same definitions as set forth in the Lease to which it
is attached. The provisions of this Agreement shall supersede any inconsistent
or conflicting provisions of the Lease.
Tenant acknowledges that the total amount of Ninety Five
Thousand Two Hundred Five Dollars and 9/100 ($95,205.09) (constituting (i)
Landlord's scheduled Monthly Rent for the Premises in the amount of $31,735.03
per month for months -1- through -3- of the Term and (ii) a reduction of
$31,735.03 per month from Landlord's scheduled Monthly Rent for the Premises
for months -1- through -3- of the Term) shall, subject to the provisions set
forth below, be waived (such waived Monthly Rent being hereinafter collectively
referred to as "Deferred Rent"). Notwithstanding said Deferred Rent, all of
the terms and conditions of the Lease shall remain in full force and effect
during said months -1- through -3- of the Term, including, without limitation,
the obligation of Tenant to pay all Additional Rent as required under the
Lease.
-1-
<PAGE> 54
EXHIBIT F
DESCRIPTION OF RESTRICTIONS
(RCDC II)
This Exhibit is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
The capitalized terms used and not otherwise defined in this
Exhibit F shall have the same definitions as set forth in the Lease.
1. The CC&R's referred to in the Lease consist of that
certain Declaration of Covenants, Conditions and Restrictions recorded May 13,
1983 as Instrument No. 83-104614 in the Official Records of San Bernardino
County, California. Tenant acknowledges having had the opportunity to receive
and review a copy of the recorded CC&Rs.
2. There currently is no REA (as that term is meant and
defined in the Lease) encumbering the Premises.
-1-
<PAGE> 55
EXHIBIT G
RULES AND REGULATIONS
(INDUSTRIAL)
This Exhibit is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership, as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
This Exhibit sets forth the rules and regulations governing
Tenant's use of the Common Area and the Premises leased to Tenant pursuant to
the terms, covenants and conditions of the Lease to which this Exhibit is
attached and therein made part thereof. Unless otherwise defined, capitalized
terms used herein shall have the same meanings as set forth in the Lease. In
the event of any conflict or inconsistency between this Exhibit and the Lease,
the Lease shall control.
1. Tenant shall not place anything or allow anything to be placed
near the glass of any window, door, partition or wall which may appear
unsightly from outside the Premises.
2. The walls, walkways, sidewalks, entrance passages, courts and
vestibules shall not be obstructed or used for any purpose other than ingress
and egress of pedestrian travel to and from the Premises, and shall not be used
for loitering or gathering, or to display, store or place any merchandise,
equipment or devices, or for any other purpose. The walkways, entrance
passageways, courts, vestibules and roof are not for the use of the general
public and Landlord shall in all cases retain the right to control and prevent
access thereto by all persons whose presence in the judgment of the Landlord
shall be prejudicial to the safety, character, reputation and interests of the
Building and its tenants, provided that nothing herein contained shall be
construed to prevent such access to persons with whom Tenant normally deals in
the ordinary course of Tenant's business unless such persons are engaged in
illegal activities. No tenant or employee or invitee of any tenant shall be
permitted upon the roof of the Building.
3. No awnings or other projection shall be attached to the
outside walls of the Building. No security bars or gates, curtains, blinds,
shades or screens shall be attached to or hung in, or used in connection with,
any window or door of the Premises without the prior written consent of
Landlord. Neither the interior nor exterior of any windows shall be coated or
otherwise sunscreened without the express written consent of Landlord.
4. Tenant shall not in any way deface any part of the Premises or
the Building. Tenant shall not lay linoleum, tile, carpet or other similar
floor covering so that the same shall be affixed to the floor of the Premises
in any manner except as approved by Landlord in writing. The expense of
repairing any damage resulting from a violation of this rule or removal of any
floor covering shall be borne by Tenant.
-5-
<PAGE> 56
5. The toilet rooms, urinals, wash bowls and other plumbing
apparatus shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the Tenant.
6. Landlord shall direct electricians as to the manner and
location of any future telephone wiring. No boring or cutting for wires will
be allowed without the prior written consent of Landlord. The locations of the
telephones, call boxes and other office equipment affixed to the Premises shall
be subject to the prior written approval of Landlord.
7. The Premises shall not be used for manufacturing, offices or
the storage of merchandise except as the same may be incidental to the
permitted use of the Premises. No exterior storage shall be allowed at any
time without the prior written approval of Landlord. The Premises shall not be
used for cooking or washing clothes without the prior written consent of
Landlord, or for lodging or sleeping or for any immoral or illegal purposes.
8. Tenant shall not make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them, whether by the use of
any musical instrument, radio, phonograph, machinery, or otherwise. Tenant
shall not use, keep or permit to be used, or kept, any foul or obnoxious gas or
substance in the Premises or permit or suffer the Premises to be used or
occupied in any manner offensive or objectionable to Landlord or other
occupants of this or neighboring buildings or premises by reason of any odors,
fumes or gases.
9. Neither Tenant nor any of Tenant's Agents shall at any time
bring or keep upon the Premises any toxic, hazardous, inflammable, combustible
or explosive fluid, chemical or substance without the prior written consent of
Landlord.
10. No animals shall be permitted at any time within the Premises.
11. Tenant shall not use the name of the Building or the Project
in connection with or in promoting or advertising the business of Tenant,
except as Tenant's address, without the prior written consent of Landlord.
Landlord shall have the right to prohibit any advertising by Tenant which, in
Landlord's reasonable opinion, tends to impair the reputation of the Project or
its desirability for its intended uses, and upon written notice from Landlord
Tenant shall refrain from or discontinue such advertising.
12. Canvassing, soliciting, peddling, parading, picketing,
demonstrating or otherwise engaging in any conduct that unreasonably impairs
the value or use of the Premises or the Project are prohibited and Tenant shall
cooperate to prevent the same.
13. All equipment of any electrical or mechanical nature shall be
placed by Tenant on the Premises, in settings approved by Landlord in writing,
in such a way as to best minimize, absorb and prevent any vibration, noise or
annoyance. No equipment of any type shall be placed
-6-
<PAGE> 57
on the Premises which in Landlord's opinion exceeds the load limits of the
floor or otherwise threatens the soundness of the structure or improvements of
the Building.
14. All furniture, equipment and freight shall be moved in and out
of the Building only at hours and in accordance with rules established by
Landlord, and shall not impair vehicular and pedestrian circulation in the
Common Area. Landlord will not be responsible for loss or damage to any
furniture, equipment, or other personal property of Tenant from any cause.
15. No air conditioning unit or other similar apparatus shall be
installed or used by Tenant without the prior written consent of Landlord.
16. No aerial antenna shall be erected on the roof or exterior
walls of the Premises, or on the grounds, without in each instance the prior
written consent of Landlord. Any aerial or antenna so installed by or on
behalf of Tenant without such written consent shall be subject to removal by
Landlord at any time without prior notice at the expense of Tenant, and Tenant
shall upon Landlord's demand pay a removal fee to Landlord of not less than
$200.00.
17. The entire Premises, including vestibules, entrances, doors,
fixtures, windows and plate glass, shall at all times be maintained in a safe,
neat and clean condition by Tenant. All trash, refuse and waste materials
shall be regularly removed from the Premises by Tenant and placed in the
containers at the locations designated by Landlord for refuse collection. All
cardboard boxes must be "broken down" prior to being placed in the trash
containers. All styrofoam chips must be bagged or otherwise contained prior to
placement in the trash containers, so as not to constitute a nuisance. Pallets
may not be disposed of in the trash containers or enclosures. The burning of
trash, refuse or waste materials is prohibited.
18. Tenant shall use at Tenant's cost such pest extermination
contractor as Landlord may direct and at such intervals as Landlord may
require.
19. All keys for the Premises shall be provided to Tenant by
Landlord and Tenant shall return to Landlord any of such keys so provided upon
the termination of the Lease. Tenant shall not change locks or install other
locks on doors of the Premises, without the prior written consent of Landlord.
In the event of loss of any keys furnished by Landlord or Tenant, Tenant shall
pay to Landlord the costs thereof.
20. No person shall enter or remain within the Project while
intoxicated or under the influence of liquor or drugs. Landlord shall have the
right to exclude or expel from the Project any person who, in the absolute
discretion of Landlord, is under the influence of liquor or drugs.
Tenant agrees to comply all such Rules and Regulations. Should Tenant
not abide by these Rules and Regulations, Landlord or any "Operator,"
"Association" or "Declarant" under any Restrictions may serve a three (3) day
notice to correct the deficiencies. If Tenant has not corrected the
deficiencies by the end of the notice period, Tenant will be in default of the
Lease, and Landlord and/or its designee shall have the right, without further
notice, to cure the violation at Tenant's expense.
-7-
<PAGE> 58
Landlord reserves the right to amend or supplement the foregoing Rules
and Regulations and to adopt and promulgate additional rules and regulations
applicable to the Premises. Notice of such rules and regulations and
amendments and supplements thereto, if any, shall be given to the Tenant.
Neither Landlord nor Landlord's Agents or any other person or entity
shall be responsible to Tenant or to any other person for the ignorance or
violation of these Rules and Regulations by any other tenant or other person.
Tenant shall be deemed to have read these Rules and Regulations and to have
agreed to abide by them as a condition precedent, waivable only by Landlord, to
Tenant's occupancy of the Premises.
-8-
<PAGE> 59
EXHIBIT I
LANDLORD'S DISCLOSURES
(RANCHO CUCAMONGA DISTRIBUTION CENTER II)
This Exhibit is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership, as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
The capitalized terms used and not otherwise defined in this
Exhibit shall have the same definitions as set forth in the Lease. The
provisions of this Exhibit shall supersede any inconsistent or conflicting
provisions of the Lease.
None known at this time.
-1-
<PAGE> 60
EXHIBIT "J"
SIGN CRITERIA
This Exhibit is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership, as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
I. This criteria establishes the uniform policy for all Tenant
identification signs for buildings at Rancho Cucamonga Distribution
Center. This criteria has been established for the purpose of
maintaining the overall appearance of the buildings while giving the
Tenant maximum visibility. Conformance will be strictly enforced.
Any sign installed that does not conform to the sign criteria will be
brought into conformity at the expense of the Tenant.
A. GENERAL REQUIREMENTS
1. A blueline design of each proposed sign showing size,
construction material and location shall be approved by the
Landlord prior to fabrication of the building sign. A paper
layout of life-size copy is required for approval by the
Landlord prior to production of the glass entry sign.
2. Landlord shall direct the placement of all Tenant signs and
the method of attachment to the building.
3. All signs and sign installation must comply with all
applicable Rancho Cucamonga building codes. Tenant is
responsible for obtaining all required sign permits and
approvals.
4. Tenant is responsible for the fulfillment of all requirements
of this criteria. Upon removal of any sign, any damage to the
building will be repaired by Landlord at Tenant's expense.
5. Landlords Disclaimer -- All signage is established on a deal
by deal basis per product type and must be within city and
Landlord signage parameters.
<PAGE> 61
EXHIBIT K
(PAGE 1 OF 4)
SPECIFIC INSURANCE REQUIREMENTS
This Exhibit is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership, as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
SPECIFIC LEASE REQUIREMENTS
ALL COVERAGES MUST BE PLACED WITH A BEST'S "A" RATED CARRIER, ANY LOWER RATING
WILL NOT BE ACCEPTED
<TABLE>
<S> <C> <C>
General Liability $3,000,000 Combined Single Limit per Occurrence (Contractual
Liab., Fire & Water Legal Liab., and Cross Liab. &
Severability of Interest clause) Note: may be in
combination with umbrella or excess policy.
Business Auto Liability $1,000,000 (Stating any HIRED and NON-OWNED autos, or ANY AUTO)
Workers Compensation Statutory limits set forth by the law of the State of
California
Employer's Liability $1,000,000 (If there are no employees, please provide a statement
of such)
Business Personal Property ("All Risk" including Fire & Extended coverage with
Vandalism & Malicious Mischief, Tenant's Improvements
and Replacement Costs)
Business Interruption or Loss of (In an amount appropriate to the monthly rents of the
Income/Rents Named Insured's business) Naming the Landlord as
Loss Payee (WHEN REQUIRED BY LEASE)
</TABLE>
<PAGE> 62
EXHIBIT K
(PAGE 2 OF 4)
SPECIFIC INSURANCE REQUIREMENTS
SPECIFIC ENDORSEMENTS REQUIRED
Additional Insured Endorsement "HARD COPY" must be attached to certificate
naming the following Additional Insureds as respects to General Liability for
the Leased Premises. (may use attached ISO form #CG-2011, or carrier's
equivalent endorsement)
*Additional Insureds: RCDC Associates L.P. (Landlord);
And Insignia Commercial Group, Inc. (Prop. Mgmt.)
*Certificate Holder: Insignia Commercial Group, Inc.
2201 Dupont Drive, Suite 100, Irvine, CA 92715
Primary Wording Clauses stating Additional Insured(s) insurance is
non-contributing with any other insurance. (may use attached endorsement
#CG-0704, or carrier's equivalent endorsement)
Or the following statement may be provided: It is further agreed that
such insurance as is afforded by this policy for the benefit of the
additional insured(s) shown above shall be primary insurance, but only
as respects any claims, loss or liability arising out of the
operations of the named insured or from occupancy, maintenance or use
of the premises by the named insured an any insurance maintained by
the additional insured(s) shall be non-contributing.
30-day Notice of Cancellation: (may use attached endorsement #CG-0212, or
carrier's equivalent endorsement)
WHEN REQUIRED BY LEASE: Waiver of Subrogation on Workers Compensation AND/OR
Waiver of Subrogation on General Liability (may use attached ISO form
#CG-2404, or carrier's equivalent endorsement)
Or the following statement may be provided: WAIVER OF RIGHTS OF
RECOVERY -- The carrier will not apply the Recovering Damages from a
Third Party rule when a contract specifies that the carrier waive
their subrogation rights. The carrier will only waive their
subrogation rights PRIOR to the occupance of the actual loss or
damage.
<PAGE> 63
EXHIBIT K
(PAGE 3 OF 4)
SPECIFIC INSURANCE REQUIREMENTS
(NOTE to UNDERWRITER): If waiver(s) is not able to be provided immediately,
please send a memo stating that waiver will follow upon approval and completion,
OR have carrier provide a statement that they cannot comply with this request.)
PLEASE FAX IMMEDIATELY A COPY OF THE CERTIFICATE & ENDORSEMENTS TO INSIGNIA
O'DONNELL COMMERCIAL GROUP, INC. (714) 851-2218, & MAIL THE ORIGINAL.
<PAGE> 64
EXHIBIT K
(PAGE 4 OF 4)
SPECIFIC INSURANCE REQUIREMENTS
POLICY NUMBER: COMMERCIAL GENERAL LIABILITY
THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.
ADDITIONAL INSUREDS - MANAGERS OR LESSORS OF PREMISES
This endorsement modifies insurance provided under the following:
COMMERCIAL GENERAL LIABILITY COVERAGE PART
SCHEDULE
1. Designation of the Premises (Part Leased to You):
11335 Jersey Boulevard
Rancho Cucamonga
California
2. Name of Person or Organization (Additional
Insured):
RCDC Associates L.P.
and Insignia Commercial Group, Inc.
2201 Dupont Drive, Suite 100
Irvine, CA 92715
3. Additional Premium:
(If no entry appears above, the information required to complete this
endorsement will be shown in the Declaration as applicable to this
endorsement.)
WHO IS INSURED (Section II) is amended to include as an insured the person or
organization shown in the Schedule, but only with respect to liability arising
out of the ownership, maintenance of use of that part of the Premises leased to
you and shown in the Schedule and subject to the following additional
exclusions.
This Insurance does not apply to:
1. Any "occurrence" which takes place after you cease to be a tenant in
that Premises.
2. Structural alterations, new construction of demolition operations
performed by or on behalf of the person or organization shown in the
Schedule.
<PAGE> 65
EXHIBIT L
CALCULATION OF TENANT'S SHARE
This Exhibit is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership as "Landlord", and Jenny Craig Products, Inc., a
California corporation, as "Tenant", for the Premises known as 11355 Jersey
Boulevard, Rancho Cucamonga, California.
The capitalized terms used and not otherwise defined herein
shall have the same definitions as set forth in the Lease. The provisions of
this Exhibit shall supersede any inconsistent or conflicting Provisions of the
Lease.
Building and Project:
Tenant understands that the Premises are a part of a
multi-tenant Building having the approximate square footage as set forth in
Item 6 of the Basic Lease Provisions contained in the Lease, and that the
Building is part of a multi-building Project containing as of the date of the
Lease approximately 635,970 square feet of space.
Product:
Tenant also acknowledges that the Project is or will
ultimately be composed of one product types; for purposes of the Lease, the
product type of Tenant, as determined by the Permitted Uses of the Premises set
forth in Item 11 of the Basic Lease Provisions contained in the Lease, is
industrial ("Product").
Circulation of Tenant's Share:
Tenant's Share of various Operating Expenses under the Lease
shall be determined as a function of Building square footage, Project square
footage or Product square footage, depending upon the nature of the Operating
Expense to be charged. Tenant acknowledges that the total square footage of
the Building, the Project or other uses of the Project by tenants in the same
Product type as Tenant, may change from time to time, and that Tenant's Share
under any or all of the foregoing categories may vary accordingly, effective on
the first day of the month after each such change occurs.
Set forth below is the initial Tenant's share (i.e.,
calculated as of the date of the Lease) with respect to Operating Expenses to
be charged as a function of the Building, of the Project, and of the Product,
as of the date of the Lease. Tenant understands that (i) Landlord shall
determine, in its sole discretion, what Operating Expenses are included within
each category to be charged as a function of the Building, the Project or the
Product, and (ii) Landlord may change the category of any Operating Expense at
any time, at Landlord's sole discretion.
Tenant's Share of the Building: 111,351/169,941 percent (65.5%)
<PAGE> 66
LEASE RIDER
WORK LETTER
(Tenant Improvement Allowance)
(Pending Preliminary Plans)
This Lease Rider is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership as "Landlord", and Jenny Craig Products, Inc., a
California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
1. APPLICATION OF EXHIBIT
Capitalized terms used and not otherwise defined herein shall have the
same definitions as set forth in the Lease. The provisions of this Work Letter
shall apply to the planning and completion of leasehold improvements requested
by Tenant (the "Tenant Improvements") for the fitting out of the Initial
Premises, as more fully set forth herein.
2. LANDLORD AND TENANT PRE-CONSTRUCTION OBLIGATIONS
(a) Preliminary Plans. If necessary, within fifteen (15) days
following execution of this Lease by both Landlord and Tenant, Landlord's
Architect shall prepare preliminary space plans for the Tenant Improvements
(the "Preliminary Plans") which shall include, without limitation, sketches
and/or drawings showing the locations of doors, partitioning, electrical
fixtures, outlets and switches, plumbing fixtures, floor loads and other
requirements, and a list of all specialized installations and improvements and
upgrade specifications determined by Tenant as required for its use of the
Premises. Tenant agrees to and shall promptly and fully cooperate with
Landlord's Architect and shall supply all information Landlord's Architect
deems necessary for the preparation of the Preliminary Plans. Tenant
acknowledges that the Preliminary Plans shall be prepared by Landlord's
Architect after consultation and cooperation between Tenant and Landlord's
Architect regarding the proposed Tenant Improvements and Tenant's requirements.
Landlord and Landlord's Architect shall be entitled, in all respects, to rely
upon all information supplied by Tenant regarding the Tenant Improvements. The
costs associated with preparation of the Preliminary Plans shall be borne by
Tenant and paid as set forth in Sections 5 and 6 of the Work Letter.
(b) Working Drawings. If necessary, within five (5) days
following full execution of this Lease by both Landlord and Tenant, Landlord's
Architect shall prepare working drawings (the "Working Drawings") for the
Tenant Improvements based upon the approved Preliminary Plans. The Working
Drawings shall include architectural, mechanical and electrical construction
drawings for the Tenant Improvements based on the Preliminary Plans.
Notwithstanding the Preliminary Plans, in all cases the Working Drawings (i)
shall be subject to Landlord's final approval, which approval shall not be
unreasonably withheld, (ii) shall not be in conflict with building codes for
the City or County or with insurance requirements for a fire resistive Class A
building, and (iii) shall be in a form satisfactory to appropriate governmental
authorities responsible for
C-1
<PAGE> 67
issuing permits and licenses required for construction. The costs associated
with preparation of the Working Drawings shall be borne by Tenant and paid as
set forth in Sections 5 and 6 of this Work Letter.
(c) Approval of Working Drawings. Landlord or Landlord's
Architect shall submit the Working Drawings to Tenant for Tenant's review, and
Tenant shall notify Landlord and Landlord's Architect within five (5) days
after delivery thereof of any requested revisions. Within five (5) days after
receipt of Tenant's notice, Landlord's Architect shall make all approved
revisions to the Working Drawings and submit two (2) copies thereof to Tenant
for its final review and approval, which approval shall be given within three
(3) days thereafter. Concurrently with the above review and approval process,
Landlord may submit all plans and specifications to City and other applicable
governmental agencies in an attempt to expedite City approval and issuance of
all necessary permits and licenses to construct the Tenant Improvements as
shown on the Working Drawings. Any changes which are required by City or other
governmental agencies shall immediately submitted to Landlord for Landlord's
review and reasonable approval, and Landlord shall promptly notify Tenant of
such changes.
(d) Schedule of Critical Dates. Set forth below is a schedule of
certain critical dates relating to Landlord's and Tenant's respective
obligations for the design and construction of the Tenant Improvements. Such
dates and the respective obligations of Landlord and Tenant are more fully
described elsewhere in this Work Letter. The purpose of the following schedule
is to provide a reference for Landlord and Tenant and to make certain the Final
Approval Date occurs as set forth herein. Following the Final Approval Date,
Tenant shall be deemed to have released Landlord to commence construction of
the Tenant Improvements as set forth in Section 4 below.
<TABLE>
<CAPTION>
Reference Date Due Responsible Party
--------- -------- -----------------
<S> <C> <C> <C>
A. "Preliminary Plan Completion" fifteen (15) days after full execution Tenant and Landlord
of the Lease
B. "Working Drawings Completion" five (5) days after full execution of Landlord
the Lease
C. "Working Drawings Review" Five (5) days after Landlord submits the Tenant
Working Drawings to Tenant
D. "Working Drawings Revision" five (5) days after Tenant returns the Landlord
Working Drawings to Landlord
E. "Final Approval Date" Three (3) days after Landlord submits Tenant
the revised Working Drawings to Tenant
</TABLE>
3. BUILDING PERMIT
After the Final Approval Date has occurred, Landlord shall, if
Landlord has not already done so, submit the Working Drawings to the
appropriate governmental body or bodies for final plan checking and a building
permit. Landlord, with Tenant's cooperation, shall cause to be made any change
in the Working Drawings necessary to obtain the building permit; provided,
however,
C-2
<PAGE> 68
after the Final Approval Date, no changes shall be made to the Working Drawings
without the prior written approval of both Landlord and Tenant, and then only
after agreement by Tenant to pay any excess costs resulting from such changes.
4. CONSTRUCTION OF TENANT IMPROVEMENTS
After the Final Approval Date has occurred and a building permit for
the work has been issued, Landlord shall, through a guaranteed maximum cost or
fixed price (at Landlord's sole option) construction contract ("Construction
Contract") with a reputable, licensed contractor selected by Landlord
("Contractor"), cause the construction of the Tenant Improvements to be carried
out in substantial conformance with the Working Drawings in a good and
workmanlike manner using first-class materials. The costs associated with the
construction of the Tenant Improvements shall be paid as set forth in Sections
5 and 6 of this Work Letter. Landlord shall see that the construction complies
with all applicable building, fire, health, and sanitary codes and regulations,
the satisfaction of which shall be evidenced by a certificate of occupancy for
the Premises.
5. TENANT IMPROVEMENT ALLOWANCE
Landlord shall provide Tenant with a Tenant Improvement Allowance in
the amount of Fifty Thousand Dollars and No/100 ($50,000.00)) towards the cost
of the design, purchase and construction of the Tenant Improvements, including
without limitation design, engineering and consulting fees (collectively, the
"Tenant Improvement Costs"). The Tenant Improvement Allowance shall be used
for payment of the following Tenant Improvements Costs:
(i) Preparation by Landlord's Architect of the
Preliminary Plans and the Working Drawings as provided in Section 2 of
this Work Letter, including without limitation all fees charged by
City (including without limitation fees for building permits and plan
checks) in connection with the Tenant Improvements work in the
Premises;
(ii) Construction work for completion of the Tenant
Improvements as reflected in the Construction Contract; and
(iii) All contractors' charges, general conditions,
performance bond premiums, construction fees, and construction
management and supervision fees.
6. COSTS IN EXCESS OF TENANT IMPROVEMENT ALLOWANCE AT TENANT'S EXPENSE
(a) Cost Approval. Tenant shall pay the excess of the Tenant
Improvement Costs over the amount of the Tenant Improvement Allowance available
to defray such costs. Concurrent with the plan checking referred to in Section
3 of this Work Letter, Landlord shall prepare and submit to Tenant a written
estimate of the amount of the remaining Tenant Improvement Costs and the Cost
of the Tenant Improvement Allowance still available to defray such costs (after
preparation of the Preliminary Plans and Working Drawings). Tenant shall
C-3
<PAGE> 69
approve or disapprove any such estimate by written notice to Landlord within
three(3) days after receipt thereof. If Tenant fails to notify Landlord of its
disapproval within such three (3) day period, Tenant shall be deemed to have
approved such estimate. If such estimate exceeds the Tenant Improvement
Allowance then still available and Tenant approves such estimate, Tenant's
notice of approval shall include payment to Landlord for the full amount of
such excess. If Tenant disapproves such estimate within the three (3) day
period, Tenant shall be required to direct Landlord and Landlord's Architect to
amend the Working Drawings in a manner satisfactory Landlord so as to reduce
the estimated costs to an amount acceptable to Tenant, and any excess estimated
costs remaining after such amendment shall be paid by Tenant in the manner
described in the preceding sentence. Tenant shall additionally pay any costs
resulting from such amendment and Tenant shall be liable for the delay in
completing the Tenant Improvements and the increased costs, if any resulting
from such delay. If tenant is unwilling or unable to amend the Working
Drawings in a manner acceptable to Landlord, then Tenant shall be deemed to
have approved of the estimate for the Working Drawings as prepared, and shall
pay in full the amount of any excess estimated costs together with any costs
arising from delay as a result of Tenant's actions hereunder, in the manner
hereinabove provided.
(b) Final Costs. Within sixty (60) days after completion by
Landlord of the Tenant Improvements, Landlord shall determine the actual final
Tenant Improvements Costs and shall submit a written statement of such amount
to Tenant. If any estimate previously paid by Tenant exceeds the amount due
hereunder from Tenant for such work, such excess shall be refunded to Tenant.
If any amount is still due from Tenant for such work, then Tenant shall pay
such amount in full within ten (10) days of receipt of Landlord's statement.
5. CHANGE ORDERS
Tenant may from time to time request and obtain change orders during
the course of construction provided that: (i) each such request shall be
reasonable, shall be in writing and signed by or on behalf of Tenant, and shall
not result in any structural change in the Building, as reasonably determined
by Landlord; (ii) all additional charges and costs, including without
limitation architectural and engineering costs, construction and material
costs, processing costs of any governmental entity, and increased construction,
construction management and supervision fees, together with an administrative
fee to Landlord to cover its change order processing costs of $100.00 per
occurrence, shall be the sole and exclusive obligation of Tenant; and (iii) any
resulting delay in the completion of the Tenant Improvements shall be deemed a
Tenant Delay and in no event shall extend the Commencement Date of the Lease.
Upon Tenant's request for a change order, Landlord shall as soon as reasonably
possible submit to Tenant a written estimate of the increased or decreased
cost and anticipated delay, if any, attributable to such requested change.
Within three (3) days of the date such estimated cost adjustment and delay are
delivered to Tenant, Tenant shall advise Landlord whether it wishes to proceed
with the change order, and if Tenant elects to proceed with the change order,
Tenant shall remit, concurrently with the Tenant's notice to proceed, the
amount of the increased cost, if any, attributable to such change order.
Election by Tenant to not proceed with any change order shall not relieve
Tenant from its obligation to pay to Landlord its administration processing
charge of $100.00. Unless Tenant includes in its initial change order request
that the work in process at the time such request is
C-4
<PAGE> 70
made be halted pending approval and execution of a change order, Landlord shall
not be obligated to stop construction of the Tenant Improvements, whether or
not the change order relates to the work then in process or about to be
started.
8 TENANT DELAYS
In no event shall the Commencement Date of the Lease be extended or
delayed due or attributable to delays due to the fault of Tenant ("Tenant
Delays"). Tenant Delays shall include, but are not limited to, delays caused
by any one or more of the following:
(a) Tenant's failure to timely review and reasonably
approve the Working Drawings or to promptly cooperate with Landlord's
Architect and furnish information to Landlord for the preparation of
the Preliminary Plans and Working Drawings;
(b) Tenant's request for or use of special materials,
finishes or installations which are not readily available, provided
that Landlord shall notify Tenant in writing that the particular
material, finish, or installation is not readily available promptly
upon Landlord's discovery of same;
(c) Change orders requested by Tenant;
(d) Interference by Tenant or by Tenant's Agents with
Landlord's construction activities;
(e) Tenant's failure to approve any other item or perform
any other obligation in accordance with and by the dates specified
herein or in the Construction Contract;
(f) Tenant's requested changes in the Preliminary Plans,
Working Drawings or any other plans and specification after the
approval thereof by Tenant or submission thereof by Tenant to
Landlord;
(g) Tenant's failure to approve written estimates of
costs in accordance with this Work Letter; and
(h) Tenant's obtaining or failure or obtain any necessary
governmental approvals or permits for Tenant's intended use of the
Premises.
If the Commencement Date of the Lease is delayed by any Tenant Delays,
whether or not within the control of Tenant, then the Commencement Date of the
Lease and the payment of Rent shall be accelerated by the number of days of such
delay. Landlord shall give Tenant written notice within a reasonable time of
any circumstance that Landlord believes constitutes a Tenant Delay.
9. TRADE FIXTURES AND EQUIPMENT
Tenant acknowledge and agrees that Tenant is solely
responsible for obtaining, delivering and installing in the Premises
all necessary and desired furniture, trade fixtures, equipment and
other similar items and that Landlord shall have no responsibility
whatsoever with regard thereto. Tenant further acknowledges and
agrees that neither the Commencement Date of the Lease nor the Payment
of Rent shall be delayed for any period of time whatsoever due to any
delay in the furnishing of the Premises with such items.
C-5
<PAGE> 71
10. FAILURE OF TENANT TO COMPLY
Any failure of Tenant to comply with any of the provisions contained
in this Work Letter within the times for compliance herein set forth shall be
deemed a default under the Lease. In addition to the remedies provided to
Landlord in this Work Letter upon the occurrence of such a default by Tenant,
Landlord shall have all remedies available at law or equity to a landlord
against a defaulting tenant pursuant to a written lease, including but not
limited to those set forth in the Lease.
C-6
<PAGE> 72
LEASE RIDER NO. 2
OPTION TO EXTEND TERM
(FAIR MARKET VALUE ADJUSTMENT)
This Lease Rider is attached to and made a part of that
certain Standard Form Lease dated May 14, 1996, by and between RCDC Associates
L.P., a California limited partnership, as "Landlord", and Jenny Craig
Products, Inc., a California corporation, as "Tenant", for the Premises known
as 11335 Jersey Boulevard, Rancho Cucamonga, California.
The capitalized terms used and not otherwise defined herein
shall have the same definitions as set forth in the Lease. The provisions of
this Lease Rider shall supersede any inconsistent or conflicting provisions of
the Lease.
A. Option to Extend Term.
1. Grant of Option. Landlord hereby grants to Tenant the option
(the "Option") to extend the Term of the Lease for an additional consecutive
term of five (5) years and zero (0) months (the "Extension"), on the same terms
and conditions as set forth in the Lease, except the Monthly Rent shall be the
amount determined as set forth below. The Option shall be exercised only by
written notice delivered to Landlord at least one hundred twenty (120) days
before the expiration of the initial Term of the Lease. If Tenant fails to
deliver to Landlord written notice of the exercise of the Option within the
time period prescribed above, the Option shall lapse and there shall be no
further right to extend the Term of the Lease. The Option shall be exercisable
by Tenant on the express conditions that (i) at the time of the exercise of the
Option, and thereafter at all times prior to the commencement of the Extension,
an Event of Default shall not have occurred and be continuing under the Lease,
and (ii) Tenant has not been ten (10) or more days late in the payment of Rent
more than a total of five (5) times during the Term of the Lease. If Tenant
properly exercises the Option, "Term", as used herein and in the Lease, shall
be deemed to include the Extension, unless specified otherwise herein or in the
Lease.
2. Personal Option. The Option is personal to Tenant. If Tenant
subleases or assigns or otherwise transfers any interest under the Lease prior
to the exercise of the Option, the Option shall lapse. If Tenant subleases or
assigns or otherwise transfers any interest of Tenant under the Lease after the
exercise of the Option but prior to the commencement of the Extension, the
Option shall lapse and the Term of the Lease shall expire as if the Option were
not exercised.
B. Calculation of Monthly Rent.
1. Initial Monthly Rent. If Landlord and Tenant have not agreed
upon the Fair Market Value of the Premises at least ninety (90) days prior to
the Rental Adjustment Date, the Fair Market Value shall be determined by the
following appraisal method:
-1-
<PAGE> 73
(i) If Landlord and Tenant are not able
to agree upon the Fair Market Value of the Premises within the
time period described above, then Landlord and Tenant shall
attempt to agree in good faith upon a single appraiser not
later than seventy-five (75) days prior to the Rental
Adjustment Date. If Landlord and Tenant are unable to agree
upon a single appraiser within such time period, then Landlord
and Tenant shall each appoint one appraiser not later than
sixty-five (65) days prior to the Rental Adjustment Date, and
Landlord and Tenant shall each give written notice to the
other of such appointment at the time of such appointment.
Within ten (10) days thereafter, the two appointed appraiser
shall appoint a third appraiser. If either Landlord or Tenant
fails to appoint its appraiser and to give written notice
thereof to the other party within the prescribed time period,
the single appraiser appointed shall determine the Fair Market
Value of the Premises. If both parties fail to appoint
appraisers within the prescribed time periods, then the first
appraiser thereafter selected by a party (such selection to be
by written notice thereof to such appraiser and the other
party) shall determine the Fair Market Value of the Premises.
Each party shall bear the cost of its own appraiser and the
parties shall share equally the cost of the single or third
appraiser if applicable. All appraisers shall have at least
five (5) years' experience in the appraisal of
commercial/industrial real property in the area in which the
Premises are located and shall be members of professional
organizations such as MAI or its equivalent.
(ii) For purposes of such appraisal, the term
"Fair Market Value" shall mean the price that a ready and willing
tenant would pay, as of the Rental Adjustment Date, as monthly rent,
to a ready and willing landlord of property comparable to the Premises
if such property were exposed for lease on the open market for a
reasonable period of time and taking into account all of the purposes
for which such property may be used. If a single appraiser is chosen,
then such appraiser shall determine the Fair Market Value of the
Premises. Otherwise, the Fair Market Value of the Premises shall be
the arithmetic average of the two (2) of the three (3) appraisals
which are closest in amount, and the third appraisal shall be
disregarded. Landlord and Tenant shall instruct the appraiser(s) to
complete their determination of the Fair Market Value not later than
thirty (30) days prior to the Rental Adjustment Date. If the Fair
Market Value is not determined prior to the Rental Adjustment Date,
then Tenant shall continue to pay to Landlord the Monthly Rent
applicable to the Premises immediately prior to the Rental Adjustment
Date until the Fair Market Value is determined. When the Fair Market
Value of the Premises is determined, Landlord shall deliver notice
thereof to Tenant, and Tenant shall pay to Landlord, within ten (10)
days after receipt of such notice, the difference between the Monthly
Rent determined hereunder effective as of the Rental Adjustment Date.
2. Adjustments to Monthly Rent. The Monthly Rent during the
Extension shall be further increased, effective on the first (1st) day of the
month of the annual anniversary of the date of the commencement of the
Extension (each hereinafter referred to as a "CPI Adjustment Date"), by the
percentage increase, if any, in the Consumer Price Index, Urban Wage Earners
and Clerical Workers (Los Angeles-Anaheim-Riverside region; "All Items";
Reference Base Year 1982-1984=100), as published by the United States
Department of Labor, Bureau of Labor Statistics or its successor (the "Index"),
as follows: The Index for the second month preceding each CPI
-2-
<PAGE> 74
Adjustment Date shall be compared with the Index for the second month preceding
the last CPI Adjustment Date (or, for the first CPI Adjustment Date, the second
month preceding the Rental Adjustment Date), and the Monthly Rent then in
effect shall be increased by the amount of the percentage increase, if any,
between them. In no event shall the Monthly Rent be reduced by reason of each
computation. If the Index ceases to be published, is published less frequently
or is altered in any material respect, then Landlord shall adopt, at its sole
discretion, a substitute index or substitute procedure which reasonably
reflects and monitors changes in consumer prices. Landlord shall use diligent
efforts to calculate and give Tenant notice of any such increase in the Monthly
Rent on or near each CPI Adjustment Date, and Tenant shall commence to pay the
increased Monthly Rent effective on the applicable CPI Adjustment Date. In the
event Landlord is unable to deliver to Tenant the notice of the increased
Monthly Rent at least five (5) days prior to any CPI Adjustment Date, Tenant
shall commence to pay the increased Monthly Rent on the first day of the month
following the receipt of such notice, which notice must be sent at least five
(5) days prior to the first day of such month (the "Payment Date"). Tenant
shall also pay, together with the first payment of the increased Monthly Rent,
an amount determined by multiplying the amount of the increase in Monthly Rent
times the number of months that have elapsed between such CPI Adjustment Date
and such Payment Date.
-3-
<PAGE> 75
LEASE RIDER NO. 3
OPERATING EXPENSE CAP
This Lease Rider is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership, as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
The capitalized terms used and not otherwise defined herein shall have
the same definitions as set forth in the Lease. The provisions of this Lease
Rider shall supersede any inconsistent or conflicting provisions of the Lease.
Notwithstanding anything to the contrary contained in Section
7.1 of the Lease, provided no Event of Default has occurred and is continuing,
(a) for the first twelve (12) months of the Term, Tenant's Share of Operating
Expenses and Taxes (exclusive of insurance and Capital Improvements) shall not
exceed five percent (5%) per annum, compounded, for each succeeding year of the
initial Term of the Lease only. Tenant acknowledges and agrees that Tenant
shall be responsible for Tenant's Share of all increases in Capital
Improvements and insurance occurring after the twelfth (12th) month of the
Term.
-1-
<PAGE> 76
LEASE RIDER NO. 4
LIMITATIONS ON LANDLORD'S RIGHT TO SELF-HELP
This Lease Rider is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership, as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
The capitalized terms used and not otherwise defined herein shall have
the same definitions as set forth in the Lease. The provisions of this Lease
Rider shall supersede any inconsistent or conflicting provisions of the Lease.
TO BE ADDED TO THE END OF SECTION 9.4:
Notwithstanding the foregoing, if the nature of any required repair or
maintenance is such that more than ten (10) days is required for its
performance, then so long as no other Event of Default has occurred and is
continuing and no emergency or other condition exists which poses a threat of
damage or injury to persons or property if left uncorrected, Landlord shall not
enter upon the Premises for the purpose of performing such repair or
maintenance if Tenant commences such performance within ten (10) days from the
date on which Landlord makes written demand on Tenant to effect such repair or
maintenance and Tenant thereafter diligently and continuously prosecutes the
same to completion.
-2-
<PAGE> 77
LEASE RIDER NO. 5
LICENSE TO USE REFRIGERATION EQUIPMENT
This Lease Rider is attached to and made a part of that certain
Standard Form Lease dated May 14, 1996, by and between RCDC Associates L.P., a
California limited partnership as "Landlord", and Jenny Craig Products, Inc.,
a California corporation, as "Tenant", for the Premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California.
The capitalized terms used and not otherwise defined herein shall have
the same definitions as set forth in the Lease. The provisions of this Lease
Rider shall supersede any inconsistent or conflicting provisions of the Lease.
Landlord hereby grants to Tenant an exclusive license and right to use
certain refrigeration, freezer and cooling equipment and units currently
located within the Premises (collectively, the "Refrigeration Equipment") until
the expiration or earlier termination of the Term of the Lease, in accordance
with the agreements hereinafter set forth.
In consideration of the foregoing license and right to use the
Refrigeration Equipment, Tenant hereby agrees as follows:
(a) Tenant shall, at Tenant's expense, continuously operate the
Refrigeration Equipment, acknowledging that failure to continuously operate the
Refrigeration Equipment shall adversely affect the life of such Refrigeration
Equipment;
(b) Tenant shall, at Tenant's expense, maintain and repair such
Refrigeration Equipment (including without limitation any replacements required
thereto) so that the Refrigeration Equipment shall at all times be in good
condition and operating properly;
(c) At least six (6) months prior to the expiration of the term of
the Lease or any extensions thereof, or as soon as possible following any
earlier termination of the Term, Landlord shall advise Tenant if Landlord
desires Tenant to remove all or any portion of the Refrigeration Equipment from
the Premises, and if Landlord so advises Tenant of same, then Tenant shall, at
Tenant's expense, remove the designated Refrigeration Equipment from the
Premises and repair any damage caused thereby and restore the Premises to a
suitable condition without such Refrigeration Equipment.
The failure of Tenant to comply with any of the foregoing agreements shall (i)
entitle Landlord, upon Notice to Tenant, to terminate this License and right to
use the Refrigeration Equipment, and/or (ii) constitute an Event of Default by
Tenant under this Lease.
-1-
<PAGE> 78
LEASE GUARANTY AGREEMENT
This Lease Guaranty Agreement (this "Guaranty"), made by Jenny Craig,
Inc. ("Guarantor"), whose address for purposes hereof is 445 Marine View Avenue,
Suite 300, Del Mar, California in favor of RCDC Associates L.P., a California
limited partnership ("Landlord"), whose address for purposes hereof is One
Technology Drive, Building G, Irvine, California is dated and shall be
effective as of the 12th day of June, 1996.
RECITALS
A. Landlord and Jenny Craig Products, Inc., a California
corporation ("Tenant") have agreed to enter into a Standard Form Lease of even
date herewith (the "Lease") wherein Landlord shall lease to Tenant and Tenant
shall lease from Landlord those certain premises known as 11335 Jersey
Boulevard, Rancho Cucamonga, California, which premises are more particularly
described in the Lease (the "Premises").
B. In consideration of and as a condition in inducement to
Landlord to enter into the Lease with the Tenant, Landlord has required that
Guarantor execute and deliver to Landlord a guaranty of the Lease in the form
of this Guaranty.
C. Capitalized terms not otherwise defined herein shall have the
meaning given to them in the Lease, and Guarantor acknowledges that it has read
and fully understands the terms, provisions, covenants, conditions and
obligations of Tenant under the Lease.
NOW, THEREFORE, incorporating the above Recitals by reference, and in
consideration of, and as an inducement for, the execution and delivery to
Tenant of the Lease by Landlord, Guarantor hereby agrees as follows:
1. Obligations Guaranteed.
1.1 Obligations. Guarantor hereby absolutely and unconditionally
guarantees to Landlord and its legal representatives, successors and assigns,
and independently assumes liability to Landlord and its legal representatives,
successors and assigns, without any requirement whatsoever of resort by
Landlord to any other party, for (i) the payment of all Monthly Rent,
Additional Rent, and any and all other payments, costs or expenses (including
but not limited to indemnifications, interest charges and attorneys' fees),
however, designated, required to be paid by Tenant pursuant to the terms of the
Lease and (ii) the performance of each and every other term, provision,
covenant, condition or obligation of Tenant under the Lease in accordance with
the terms of the Lease (collectively, the payment and performance obligations
set forth in (i) and (ii) above are hereinafter called the "Obligations").
1.2 Default. Upon any default by Tenant under the Lease, Landlord
may, but need not, at its sole option, proceed directly against Guarantor,
without proceeding against Tenant or any other person or entity, and without
foreclosing upon, selling or otherwise disposing of or
-2-
<PAGE> 79
collecting or applying any collateral or other property, real or personal,
which Tenant may have theretofore delivered to Landlord as security for the
payment and performance of the Obligations. Guarantor hereby waives the right
to require Landlord to proceed against Tenant or any other person or entity, or
to pursue any other remedy, and Guarantor further waives the right to have any
other property of Tenant or any other person or entity first applied to the
discharge of any Rent or other obligations of Tenant under the Lease.
2. Nature of Guarantor's Liability; No Exoneration or Subrogation Until
All Obligations Fully Satisfied.
2.1 Guaranty Unconditional. The guaranty by Guarantor provided
for in this Guaranty is an absolute and unconditional guaranty of payment and
performance, and is not a guaranty of collection, regardless of (i) the absence
of any action to enforce the same by Landlord, or (ii) Landlord's obtaining any
judgment against Tenant or taking any action to enforce same. The liability of
Guarantor under this Guaranty is independent of the Obligations which are
hereby guaranteed and of the liabilities of any other guarantors of the
Obligations.
2.2 Waiver of Formalities. Guarantor hereby fully waives all
requirements, if any, of notice, demand for payment, diligence, filing of claims
with a court in the event of the bankruptcy of Tenant, and all other notices of
every kind or nature (including those of any action or inaction of the part of
Tenant, Landlord, or anyone else) in respect of the Obligations.
2.3 Guarantor's Consent. Guarantor hereby consents to the
following:
(a) any and all changes, modifications, amendments,
alterations, renewals, extensions, increases, reductions, releases and
cancellations which may hereafter be made to the Lease or any of the
Obligations (collectively, the "Modifications");
(b) any and all alterations, impairments, suspensions,
terminations and expirations (including, without limitation, all such
as might result from the Modifications or from any action or inaction
of the type described in paragraph __ below) of the remedies or rights
of Landlord against Tenant or any other person in respect of any of
the Obligations; and
(c) any and all action or inaction on the part of
Landlord (including, without limitation, election of remedies,
amendment, substitution, surrender, release, forfeiture, enforcement,
foreclosure and sale, under power of sale or otherwise), in its sole
and unfettered discretion. In respect of any security (or any part
thereof) now held or hereafter acquired by Landlord for the
performance of the Obligations.
even though any rights or defenses which Guarantor may otherwise have, by
subrogation, reimbursement, indemnification or otherwise against Tenant,
Landlord or others may be diminished, destroyed or otherwise adversely affected
by any such alteration, impairment, suspension, termination, expiration, action
or inaction, all to the end that Guarantor shall not be exonerated, released or
discharged any law, rule, arrangement or relationship now or
-3-
<PAGE> 80
hereafter existing, or otherwise, from its absolute, unconditional and
independent liability hereunder by any such alteration, impairment, suspension,
termination, expiration, action or inaction.
2.4 Further Waivers. Guarantor waives any right pursuant to any
law, rule, arrangement or relationship now or hereafter existing, or otherwise,
to require or compel Landlord to (a) proceed against Tenant or any other
guarantor; (b) proceed against or exhaust any security for the Obligations; or
(c) pursue any other remedy in Landlord's power whatsoever; and failure of
Landlord to do any of the foregoing shall not exonerate, release or discharge
Guarantor from its absolute, unconditional and independent liability to
Landlord hereunder. Guarantor waives any right pursuant to any law, rule,
arrangement or relationship now or hereafter existing, or otherwise, in the
event that any property of Guarantor is or may be hypothecated with property of
Tenant, as security for any of the Obligations, to have such property of Tenant
first applied to the discharge of such Obligations. Guarantor further waives
(a) any right to plead or assert any election of remedies and (b) the defense
of the statute of limitations in any action to enforce this Guaranty.
2.5 Separate Action. Landlord may bring and prosecute a separate
action against Guarantor to enforce Guarantor's liability hereunder, whether or
not any action is brought against Tenant or any other person and whether or not
Tenant or any other person is joined in any such action or actions. Nothing
shall prohibit Landlord from exercising its rights against Guarantor, Tenant,
the security, if any, for the Obligations, and any other person simultaneously,
jointly and/or severally. Guarantor shall be bound by each and every ruling,
order and judgment obtained by Landlord against Tenant in respect of the
Obligations, whether or not Guarantor is a party to the action or proceeding in
which such ruling, order or judgment is issued or rendered.
2.6 No Exoneration. Guarantor shall not be discharged, released
or exonerated, in any way, from its absolute, unconditional and independent
liability hereunder, even though any rights or defenses which Guarantor may
have against Tenant, Landlord or others may be destroyed, diminished or
otherwise affected by any of the following:
(a) Any declaration by Landlord of a default in respect
of any of the Obligations.
(b) The exercise by Landlord of any rights or remedies
against Tenant or any other person.
(c) The failure of Landlord to exercise any rights or
remedies against Tenant or any other person.
(d) The sale or enforcement of, or realization upon,
(through judicial foreclosure, power of sale or any other means) any
security for any of the Obligations, even though (i) recourse may not
thereafter be had against Tenant for any deficiency or (ii) Landlord
fails to pursue any such recourse which might otherwise be available,
whether by way of deficiency judgment following judicial foreclosure,
or otherwise.
-4-
<PAGE> 81
2.7 No Subrogation. Until all the Obligations have been performed
in full, Guarantor shall have no right to subrogation, and Guarantor waives
(a) any right pursuant to any law, rule, arrangement or relationship now or
hereafter existing, or otherwise, to enforce any remedy which Landlord now has
or may hereafter have against Tenant and (b) any benefit of, and any right to
participate in any security now or hereafter held by Landlord.
2.8 No Discharge. Guarantor shall not be discharged, released or
exonerated, in any way, from its absolute, unconditional, and independent
liability hereunder, or by the voluntary or involuntary participation by Tenant
in any settlement or composition for the benefit of Tenant's creditors, either
in liquidation, readjustment, receivership, bankruptcy or otherwise.
2.9 Bankruptcy. Guarantor understands and acknowledges that by
virtue of this Guaranty, it has specifically assumed any and all risks of a
bankruptcy or reorganization case or proceeding with respect to Tenant. As an
example and not by way of limitation, a subsequent modification of the Lease in
any reorganization case concerning Tenant shall not affect the obligation of
Guarantor to discharge the Obligations in accordance with the original terms
of the Lease.
3. Subordination of Guarantor's Claims. Any indebtedness of Tenant now
or hereafter held by Guarantor is hereby subordinated to the Obligations; and
such indebtedness of Tenant to Guarantor, if any default occurs under any of
the obligations and Landlord so requests, shall be collected, enforced and
received by Guarantor as trustee for Landlord and be paid over to Landlord on
account of the Obligations but without reducing or affecting in any manner the
absolute, unconditional and independent liability of Guarantor under this
Guaranty.
4. Costs of Enforcement. Guarantor agrees to indemnify Landlord for all
costs and expenses, including, without limitation, all attorneys' fees whether
or not legal action be instituted, incurred or paid by Landlord in enforcing
this Guaranty.
5. Benefit. This Guaranty may be assigned or transferred in whole or in
part by Landlord, and the benefit of this Guaranty shall automatically pass
with a transfer or assignment of the Premises (or any portion thereof) to any
subsequent owner thereof. All references to Landlord herein shall be deemed to
include any successors or assignees or any subsequent owners of the Premises
(or any portion thereof) or any of them. This Guaranty is also made for the
benefit of any person claiming by, through or under Landlord and any purchaser
of any security or any portion thereof at foreclosure or otherwise as a result
of the exercise of any right or remedy.
6. Notices. All notices and other communications, demands or payments
required or permitted under this Guaranty shall be in writing, served
personally on, or mailed by certified or registered United States mail to, the
party to be charged with receipt thereof. Notices and other communications
given by personal service shall be deemed given upon receipt and if served by
mail shall be deemed given hereunder 72 hours after deposit of such notice or
communication in a United States post office as certified or registered mail
with postage prepaid and duly addressed to the party to whom such notice or
communication is to be given, to the applicable address set forth above. Any
party may change its address for purposes of this Section 6 by giving to the
-5-
<PAGE> 82
party intended to be bound thereby, in the manner provided herein, a written
notice of such change.
7. Successors. All of the terms and provisions of this Guaranty shall be
binding upon, and inure to the benefit of, and be enforceable by, the
respective successors and assigns of the parties hereto, whether so expressed
or not.
8. Entire Agreement. This Guaranty embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements
and understandings related to the subject matter hereof.
9. Headings. The headings in this Guaranty are for the purpose of
reference only and shall not limit or otherwise affect the terms or
provisions hereof.
10. Changes, Waivers, Etc. Neither this Guaranty nor any term or
provision thereof may be changed, waived, discharged or terminated except by
an instrument in writing executed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
11. Disclosure. Guarantor assumes full responsibility for being and
remaining informed of the financial condition of Tenant and all other
circumstances bearing upon the risk of nonpayment or nonperformance of any of
the Obligations, and Landlord shall have no duty to advise Guarantor of
information known to Landlord regarding such condition or any such
circumstance.
12. Governing Law. This Guaranty is being delivered in, and shall be
construed in accordance with and governed by the laws of, the State of
California. In the event of litigation arising out of any dispute in
connection with this Guaranty, Guarantor hereby consents to the jurisdiction of
the California courts.
13. Right to Execute. The person executing this Guaranty on behalf of
Guarantor has the full right, power and authority to do so.
-6-
<PAGE> 83
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed
as of the day and year first above written.
"GUARANTOR"
Jenny Craig, Inc.
By: _____________________________________________
Its:_________________________________________
By: _____________________________________________
Its:_________________________________________
"LANDLORD"
RCDC Associates L.P.,
a California limited partnership
By: RC Development L.P.,
a California limited partnership, General Partner
By: 131 Development, Inc.,
a California corporation, General Partner
By: ______________________________________________
James B. Pierre, Asset Manager
-7-
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL DATA
Years ended June 30, all amounts in thousands except per share data
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $490,549 $403,341 $378,093 $401,018 $365,134
Operating income 59,178 1,021 17,363 35,521 11,840
Income before cumulative
effect of accounting
change 36,760 534 11,772 22,912 8,332
Per share amounts:
Income before cumulative
effect of accounting
change 1.35 .02 .46 .95 .40
Net income 1.35 .02 .46 .95 .04
Dividends declared .60 .45 -- -- --
Total assets 124,243 104,190 115,376 104,401 112,297
Note payable -- -- -- -- 5,716
Shares outstanding 26,500 26,076 25,196 20,856 20,688
</TABLE>
In 1997, the Company changed its method of accounting for service fees received
from customers. See Note 1 of Notes to Consolidated Financial Statements for
further information regarding this change.
8
<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, 1997, 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, 1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CENTRES OPEN AT END OF YEAR:
Company-owned
United States 476 502 478 485 542
Foreign 103 106 102 103 106
- ----------------------------------------------------------------------------------------------
579 608 580 588 648
- ----------------------------------------------------------------------------------------------
Franchise
United States 176 159 154 159 113
Foreign 39 43 43 36 36
- ----------------------------------------------------------------------------------------------
215 202 197 195 149
- ----------------------------------------------------------------------------------------------
Total 794 810 777 783 797
==============================================================================================
AVERAGE REVENUE PER CENTRE IN THOUSANDS:
Company-owned
United States $859 628 600 642 538
Foreign 387 346 356 407 483
Franchise
United States 937 644 654 659 517
Foreign 437 441 343 328 452
</TABLE>
The increase in United States Company-owned centres and the decrease in United
States franchised centres in 1997 reflects the Company's acquisition of 51
centres from three franchisees during 1997.
9
<PAGE> 3
Jenny Craig, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
See Note 14 of Notes to Consolidated Financial Statements for additional
information regarding United States and foreign operations.
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>
1993 $19 79 99 129
1994 10 99 99 125
1995 10 99 99 99
1996 10 180 99 181
1997 10 149 99 99
</TABLE>
YEAR ENDED JUNE 30, 1997 AS COMPARED
TO YEAR ENDED JUNE 30, 1996
The Company operated in a difficult and dynamic environment in fiscal 1997. 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
heightened the public's interest in weight loss pharmaceuticals, including
interest in a combination of two other medications commonly known as "phen-fen,"
and resulted in significantly reduced demand for the Company's program. In July
1996, the Company began test marketing an adjunct to its traditional weight loss
program which incorporated weight loss pharmaceuticals. This program adjunct
utilized independently-contracted physicians to examine clients and prescribe
Redux only to persons who met the FDA's protocol and phen-fen to persons who met
the appropriate medical criteria for this medication. In January 1997, the
weight loss medication adjunct was incorporated into virtually all of the
Company's centres in the United States. In August 1997, the Company ceased
offering a weight loss medication adjunct to its program following reports from
the medical community as to possible health risks associated with the use of
Redux and phen-fen.
Revenues from United States Company-owned operations decreased 10% from
$309,415,000 in 1996 to $279,090,000 in 1997. There was a 12% increase in the
total number of United States Company-owned centres in operation, from 485 at
June 30, 1996 to 542 at June 30, 1997. The increase in United States
Company-owned centres reflects the Company's acquisition of 51 centres from
three franchisees and the net opening of six centres in 1997. Average revenue
per United States Company-owned centre decreased 16% from $642,000 in 1996 to
$538,000 in 1997. Service revenues from United States Company-owned operations
decreased 1% from $21,769,000 in 1996 to $21,448,000 in 1997. This decrease in
service revenues was primarily due to an 11% decrease (18% on an average per
centre basis) in the number of new participants enrolled in the program between
the periods offset, in part, by $804,000 of additional service revenues
recognized in 1997 as a result of the Company's change in method of accounting
for service fees described
10
<PAGE> 4
Jenny Craig, Inc. and Subsidiaries
below. The decline in new enrollments also resulted in a decline in the number
of active participants in the program and led to a 10% decline in product sales,
which consists primarily of food products, from United States Company-owned
operations from $287,646,000 in 1996 to $257,642,000 in 1997. Revenues from
foreign Company-owned operations increased 21% from $41,590,000 in 1996 to
$50,308,000 in 1997, and average revenue per foreign Company-owned centre
increased 19% from $407,000 in 1996 to $483,000 in 1997 principally due to an
increase in the number of new enrollments in the program at the Company's 81
centres in Australia. 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 3% from 103 at June 30,
1996 to 106 at June 30, 1997.
Costs and expenses of United States Company-owned operations decreased 2%
from $264,693,000 in 1996 to $258,458,000 in 1997. Costs and expenses of United
States Company-owned operations were reduced by a $2,200,000 net credit in 1996
and a $3,267,000 net credit in 1997 that resulted from the Company's successful
litigation recoveries from certain of its insurance carriers. The decrease in
costs and expenses in 1997 reflects the decreased variable costs, principally
product costs, related to the lower level of operations offset, in part, by the
additional costs, principally comprised of independently-contracted physicians
and related medical professionals totaling $8,150,000 associated with offering
the program adjunct utilizing weight loss medications, increased compensation
expense associated with the introduction of this program, and increased fixed
costs associated with operating the 57 additional Company-owned centres in 1997
compared to 1996. Costs and expenses of United States Company-owned operations
as a percentage of United States Company-owned revenues increased from 86% to
93% between the years principally due to the higher proportion of fixed costs
when compared to the reduced level of revenues, the increased expenses of the
program component utilizing weight loss medications, and increased compensation
expense related to staffing levels associated with the introduction of this
program. After including the allocable portion of general and administrative
expenses, United States Company-owned operations had operating income of
$732,000 in 1997 compared to operating income of $25,226,000 in 1996. Costs and
expenses of foreign Company-owned operations increased 8% from $39,357,000 in
1996 to $42,422,000 in 1997 principally because of 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 $5,249,000, or 44% of total operating income, principally as
a result of the Australian centres, for fiscal 1997 as compared to operating
income of $58,000, or less than 1% of total operating income, for fiscal 1996.
The Company's gross margin on product sales from Company-owned operations
decreased from 11% in 1996 to 7% in 1997 and its gross margin on service
revenues decreased from 39% in 1996 to 31% in 1997. 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
decline in gross margins in 1997 compared to 1996 results principally from the
increased expenses associated with the program adjunct utilizing weight loss
medications and the higher proportion of fixed costs, which
11
<PAGE> 5
Jenny Craig, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
include the fixed costs associated with operating the 57 additional
Company-owned centres in 1997 compared to 1996, when compared to the reduced
level of revenues.
Revenues from franchise operations decreased 29% from $50,013,000 in 1996 to
$35,736,000 in 1997. This decline was principally due to a 24% decrease in the
number of franchise centres in operation, from 195 at June 30, 1996 to 149 at
June 30, 1997, and a decrease in the number of new participants enrolled in the
program at franchise centres resulting in reduced product sales and royalties.
The decrease in the number of franchise centres reflects the Company's
acquisition of 51 centres from three franchisees in 1997.
Costs and expenses of franchise operations, which consist primarily of
product costs, decreased 28% from $32,985,000 in 1996 to $23,907,000 in 1997
principally because of the reduced level of franchise operations. Franchise
costs and expenses as a percentage of franchise revenues remained relatively
constant at 66% in 1996 compared to 67% in 1997.
General and administrative expenses remained relatively constant at
$28,462,000 in 1996 compared to $28,507,000 in 1997, but increased from 7.1% to
7.8% of total revenues in 1996 and 1997, respectively. General and
administrative expenses in 1996 included a one time $1,000,000 charge for the
early termination of the Company's corporate office lease, net of estimated
sublease income. After considering this one time charge in the prior year, the
increase in general and administrative expenses in 1997 was principally due to
an increase in consulting expenses, primarily pertaining to information systems.
The elements discussed above combined to result in a decrease in operating
income from $35,521,000 in 1996 to $11,840,000 in 1997 and a decrease in income
before the cumulative effect of accounting change from $22,912,000, or $.95 per
share, in 1996 to $8,332,000, or $.40 per share, in 1997.
In June 1997, the Company changed its method of accounting for service fees
received from customers, retroactively effective as of July 1, 1996. Previously,
the Company recognized $60 as revenue at the time of each new sale and the
remaining service revenue was deferred and recognized as revenue using an
accelerated method based upon expected customer attendance at the centres. Under
the new method, all service fees collected are deferred and recognized as
revenue on a straight-line basis over the 14-month period of expected customer
attendance at the centres. The Company believes the new method is preferable as
it provides a better matching of revenues and expenses because the costs
incurred in performing the weight loss consulting services are generally
incurred on a level basis. The cumulative effect of this accounting change for
periods prior to July 1, 1996 of $7,509,000, or $.36 per share, is shown as a
cumulative adjustment on the consolidated statement of income. The effect of
this change for the year ended June 30, 1997 was to increase income before
cumulative effect of accounting change by $525,000, or $.03 per share. The pro
forma effect of retroactive application of this new method of accounting would
not have materially affected the results of operations for the years ended June
30, 1996 and 1995. The increase in deferred service revenue from $4,506,000 at
June 30, 1996 to $14,558,000 at June 30, 1997 results principally from this
change in accounting method.
The Company and 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
12
<PAGE> 6
Jenny Craig, Inc. and Subsidiaries
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. The full Commission accepted the
proposed Consent Order and it has been published for public comment. Unless
modified or withdrawn on the basis of public comment, it will become effective
upon service of notice to the Company by the Commission. The Company does not
believe that compliance with the proposed Consent Order will have a material
adverse effect on the Company's consolidated financial position or results of
operations or its current advertising and marketing practices.
The Company along with other weight loss programs and certain pharmaceutical
companies has been named as a defendant in an action filed in the Circuit Court
for the Eleventh Judicial Circuit in Pickens County, Alabama. The action was
commenced in August 1997 by three plaintiffs who are seeking to maintain the
action as a class action on behalf of all persons in the United States and
United States Territories who have suffered or may in the future suffer injury
due to the administration of phentermine, fenfluramine (commonly known as
"phen-fen" when taken together) and/or dexfenfluramine (trade name, "Redux"),
which were manufactured or sold by the defendants. The complaint includes claims
against the Company and other defendants, acting separately and in concert, for
alleged unlawful and tortious acts, including sale of allegedly dangerous and
defective products, negligent marketing and distribution, failure to warn of the
risks associated with the weight loss medications, breach of warranty, fraud,
and negligent misrepresentation. The complaint seeks compensatory and punitive
damages in unspecified amounts and equitable relief including the establishment
of a medical fund to cover future medical expenses resulting from the use of the
weight loss medications, and a requirement that the defendants adequately warn
the public of the risks associated with the use of the weight loss medications.
The Company has tendered this matter to its insurance carriers. The Company has
also asserted its indemnification rights under its agreement with the company
which provided the physicians who prescribed the weight loss medications in the
Company's centres. The claim has not progressed sufficiently for the Company to
estimate a range of possible loss, if any. The Company intends to defend the
matter vigorously.
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
13
<PAGE> 7
Jenny Craig, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
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
centres 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
14
<PAGE> 8
Jenny Craig, Inc. and Subsidiaries
$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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had cash, cash equivalents, and short-term
investments of $38,944,000 compared to $50,580,000 at June 30, 1996. Sources of
cash, cash equivalents, and short-term investments during the year ended June
30, 1997 include $3,069,000 provided by operations and $6,000,000 from a note
payable to finance the purchase of the Company's corporate office building. Uses
of cash, cash equivalents, and short-term investments during the year ended June
30, 1997 include $17,125,000 for the purchase of property and equipment (which
includes $10,014,000 for the purchase of the corporate office building and
related improvements), $2,156,000 for the acquisition of franchised centres, and
$1,633,000 for the purchase
15
<PAGE> 9
Jenny Craig, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
of treasury stock. The Company believes that its cash, cash equivalents, and
short-term investments and its cash flow from operations are adequate for its
needs in the foreseeable future.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
Per Share" ("APB 15") and specifies the computation, presentation, and
disclosure requirements of earnings per share ("EPS"). SFAS No. 128 replaces
"primary" and "fully diluted" EPS under APB 15 with "basic" and "diluted" EPS.
Unlike primary EPS, basic EPS excludes the dilutive effects of options, warrants
and other convertible securities. Dilutive EPS reflects the potential dilution
of securities that could share in the earnings of an entity, similar to fully
diluted EPS. However, under SFAS 128, the Company would use the average market
price for its stock during the reporting period to determine the cost of options
as opposed to the greater of the closing price at the end of the period or the
average market price during the period, as currently required by APB 15. SFAS
128 is effective for years ending after December 15, 1997. The Company does not
expect that the adoption of this statement will have a material impact on the
Company's results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. SFAS 131 establishes standards for
the manner in which public business enterprises report information about
operating segments and also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS 130 and SFAS
131 are effective for years beginning after December 15, 1997. The Company does
not expect that the adoption of SFAS 130 and SFAS 131 will have a material
impact on the Company's financial position or results of operations.
16
<PAGE> 10
Jenny Craig, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1996 and 1997
($ in thousands)
<TABLE>
<CAPTION>
1996 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 43,535 37,438
Short-term investments 7,045 1,506
Accounts receivable, net 3,668 2,967
Inventories 17,401 15,285
Prepaid expenses and other assets 8,282 16,497
- -----------------------------------------------------------------------------------------------
Total current assets 79,931 73,693
Cost of reacquired area franchise rights, net 7,496 9,550
Property and equipment, net 15,474 27,554
Other assets 1,500 1,500
- -----------------------------------------------------------------------------------------------
$ 104,401 112,297
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 20,916 14,938
Accrued liabilities 22,415 19,117
Income taxes payable 2,102 4,050
Deferred service revenue 4,506 14,558
- -----------------------------------------------------------------------------------------------
Total current liabilities 49,939 52,663
Note payable -- 5,716
- -----------------------------------------------------------------------------------------------
Total liabilities 49,939 58,379
Stockholders' equity:
Common stock $.000000005 par value, 100,000,000 shares authorized;
Issued: 1996 - 27,557,340 shares; 1997 - 27,579,060 shares;
Outstanding: 1996 - 20,856,251 shares; 1997 - 20,687,771 shares -- --
Additional paid-in capital 71,478 71,615
Retained earnings 54,230 55,053
Equity adjustment from foreign currency translation 1,883 2,012
Treasury stock at cost: 1996 - 6,701,089 shares;
1997 - 6,891,289 shares (73,129) (74,762)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 54,462 53,918
Commitments and contingencies
- -----------------------------------------------------------------------------------------------
$ 104,401 112,297
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 11
Jenny Craig, Inc. and Subsidiaries
Consolidated Statements of Income
For the years ended June 30, 1995, 1996 and 1997 ($ in thousands, except per
share amounts)
<TABLE>
<CAPTION>
1995 1996 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Company-owned operations:
Product sales $ 306,924 326,107 304,240
Service revenue 21,392 24,898 25,158
- ----------------------------------------------------------------------------------------------
328,316 351,005 329,398
- ----------------------------------------------------------------------------------------------
Franchise operations:
Product sales 41,852 42,059 29,677
Royalties 7,740 7,719 5,794
Initial franchise fees 185 235 265
- ----------------------------------------------------------------------------------------------
49,777 50,013 35,736
- ----------------------------------------------------------------------------------------------
Total revenues 378,093 401,018 365,134
- ----------------------------------------------------------------------------------------------
Costs and expenses:
Company-owned operations:
Product 285,700 288,954 283,643
Service 13,976 15,096 17,237
- ----------------------------------------------------------------------------------------------
299,676 304,050 300,880
- ----------------------------------------------------------------------------------------------
Franchise operations:
Product 32,520 30,699 22,067
Other 2,206 2,286 1,840
- ----------------------------------------------------------------------------------------------
34,726 32,985 23,907
- ----------------------------------------------------------------------------------------------
43,691 63,983 40,347
General and administrative expenses 26,328 28,462 28,507
- ----------------------------------------------------------------------------------------------
Operating income 17,363 35,521 11,840
Other income, net, principally interest 2,403 2,960 1,585
- ----------------------------------------------------------------------------------------------
Income before taxes and cumulative effect
of accounting change 19,766 38,481 13,425
Provision for income taxes 7,994 15,569 5,093
- ----------------------------------------------------------------------------------------------
Income before cumulative effect
of accounting change 11,772 22,912 8,332
Cumulative effect on prior years of change in
accounting for service revenue,
net of $4,498 income tax benefit -- -- 7,509
- ----------------------------------------------------------------------------------------------
Net income $ 11,772 22,912 823
==============================================================================================
Per share amounts:
Income before cumulative effect
of accounting change $ .46 .95 .40
Cumulative effect of accounting change -- -- .36
- ----------------------------------------------------------------------------------------------
Net income per share $ .46 .95 .04
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 12
Jenny Craig, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the years ended June 30, 1995, 1996 and 1997
($ 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, 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
Net income -- -- 823 -- -- 823
Purchase of 190,200 shares
of common stock, at cost -- -- -- -- (1,633) (1,633)
Exercise of stock options -- 137 -- -- -- 137
Translation adjustment -- -- -- 129 -- 129
- ----------------------------------------------------------------------------------------------
Balance at June 30, 1997 -- $71,615 55,053 2,012 (74,762) 53,918
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 13
Jenny Craig, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended June 30, 1995, 1996 and 1997
($ in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $11,772 22,912 823
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,540 7,405 7,461
Cumulative effect of change in accounting
for service revenue -- -- 7,509
Provision for doubtful accounts -- (900) --
Provision for centre closures (1,843) -- (400)
Loss on disposal of property and equipment 694 167 134
(Increase) decrease in:
Accounts receivable 1,092 (639) (566)
Inventories (1,969) 275 2,526
Prepaid expenses and other assets 4,035 (461) (3,717)
Increase (decrease) in:
Accounts payable 2,912 4,122 (5,977)
Accrued liabilities 322 4,560 (4,717)
Income taxes payable 3,311 (1,209) 1,948
Deferred service revenue 682 1,237 (1,955)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,548 37,469 3,069
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (1,931) (3,662) (17,125)
Purchase of short-term investments (8,294) (9,877) (16,359)
Proceeds from maturity of short-term investments 23,932 10,791 21,898
Payments for acquisition of franchise centres -- -- (2,156)
Increase in other assets (1,500) -- --
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 12,207 (2,748) (13,742)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (5,927) (44,395) (1,633)
Proceeds from note payable -- -- 6,000
Principal payments on note payable -- -- (95)
Proceeds from exercise of stock options 3 330 137
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (5,924) (44,065) 4,409
- ----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash -- 1,060 167
Net increase (decrease) in cash and cash equivalents 35,831 (8,284) (6,097)
Cash and cash equivalents at beginning of year 15,988 51,819 43,535
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $51,819 43,535 37,438
==============================================================================================
Supplemental disclosure of cash flow information:
Income taxes paid $ 3,652 16,780 2,848
Interest paid -- -- 238
Supplemental disclosure of noncash investing
activities - acquisition of franchise centres:
Fair value of assets acquired $ -- -- (1,629)
Liabilities assumed $ -- -- (1,267)
Cancellation of accounts receivable $ -- -- 5,052
- ----------------------------------------------------------------------------------------------
Cash paid for acquisitions $ -- -- 2,156
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 14
Jenny Craig, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1995, 1996 and 1997
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, tax-exempt municipal obligations, and commercial paper.
The Company accounts for its short-term investments in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"). 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 an 18-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 are stated at cost, net of
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
predominantly five years. Leasehold improvements are amortized over the shorter
of their useful life or related lease term, predominantly five years. The
Company's corporate headquarters building, purchased in 1997, is being
depreciated using the straight-line method over 30 years.
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.
Impairment of Long-Lived Assets The Company adopted the provisions of Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), on
July 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Reacquired area
franchise rights are evaluated for recovery of the carrying amount on an
individual area franchise basis. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Adoption of SFAS 121 did not have a material
21
<PAGE> 15
Jenny Craig, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
impact on the Company's financial position, results of operations, or liquidity.
Revenue Recognition In June 1997, the Company changed its method of accounting
for service fees received from customers, retroactively effective as of July 1,
1996. Previously, the Company recognized $60 as revenue at the time of each new
sale and the remaining service revenue was deferred and recognized as revenue
based upon expected customer attendance at the centres. Under the new method,
all service fees collected are deferred and recognized as revenue on a
straight-line basis over the 14-month period of expected customer attendance at
the centres. The Company believes the new method is preferable as it provides a
better matching of revenues and expenses because the costs incurred in
performing the weight loss consulting services are generally incurred on a level
basis. The cumulative effect of this accounting change for periods prior to July
1, 1996 of $7,509,000, or $.36 per share, is shown as a cumulative effect
adjustment on the consolidated statement of income. The effect of this change
for the year ended June 30, 1997 was to increase income before cumulative effect
of accounting change by $525,000, or $.03 per share. The pro forma effect of
retroactive application of this new method of accounting would not have
materially affected the results of operations for the years ended June 30, 1996
and 1995. 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.
The Company's allowance for doubtful accounts amounted to $1,464,000 and
$1,190,000 at June 30, 1996 and 1997, 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. The carrying amount of the note payable
approximates fair value because the interest rate is reset each quarter to
reflect current market rates.
Stock-Based Compensation The Company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, the Company continues to account for
stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations. As such, compensation
expense for employee stock
22
<PAGE> 16
Jenny Craig, Inc. and Subsidiaries
option grants is recorded on the date of grant only if the current market price
of the Company's stock exceeds the exercise price.
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.
(2) PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets at June 30 are summarized as follows ($ in
thousands):
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------
<S> <C> <C>
Net deferred tax asset $4,378 9,279
Insurance settlement
receivable -- 4,000
Other 3,904 3,218
- ---------------------------------------------
$8,282 16,497
=============================================
</TABLE>
The insurance settlement was received by the Company in July 1997.
(3) PROPERTY AND EQUIPMENT
Property and equipment at June 30 is summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------
<S> <C> <C>
Land $ -- 2,000
Building -- 7,128
Furniture and equipment 39,421 43,750
Leasehold improvements 20,155 23,931
- ---------------------------------------------
59,576 76,809
Less accumulated
depreciation
and amortization (44,102)(49,255)
- ---------------------------------------------
$15,474 27,554
=============================================
</TABLE>
In July 1996, the Company purchased a 75,000-square-foot office building
located in La Jolla, California which serves as the Company's corporate
headquarters.
(4) ACCRUED LIABILITIES
Accrued liabilities at June 30 are summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------
<S> <C> <C>
Accrued salaries, wages
and benefits $14,267 12,283
Other accruals 8,148 6,834
- ---------------------------------------------
$22,415 19,117
=============================================
</TABLE>
(5) INCOME TAXES
The Company and its United States subsidiaries file consolidated federal and
combined or separate state income tax returns. Jenny Craig Weight Loss Centres,
Pty. Ltd. and Jenny Craig Weight Loss Centres (Canada), Ltd., both foreign
corporations, are subject to income tax in foreign jurisdictions.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
23
<PAGE> 17
Jenny Craig, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
The following summarizes income taxes ($ in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
- ---------------------------------------------
<S> <C> <C> <C>
Current:
Federal $5,670 11,459 1,132
State 1,393 2,494 371
Foreign 253 1,347 3,993
- ---------------------------------------------
Total current 7,316 15,300 5,496
- ---------------------------------------------
Deferred:
Federal 814 794 1,112
State 78 215 (153)
Foreign (214) (740) (1,362)
- ---------------------------------------------
Total deferred 678 269 (403)
- ---------------------------------------------
Total provision for
income taxes $7,994 15,569 5,093
=============================================
</TABLE>
Deferred income taxes result from the temporary differences between the tax
basis of an asset or a liability and its reported amount in the consolidated
balance sheets. The components that comprise deferred tax assets and liabilities
at June 30, 1996 and 1997 are as follows ($ in thousands):
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------
<S> <C> <C>
Deferred tax assets:
Employee benefits $2,745 2,158
Allowance for doubtful
accounts 545 463
Depreciation and
amortization 3,534 3,294
State income taxes 350 --
Inventories 354 358
Foreign operations -- 1,500
Deferred service revenue -- 3,853
Other accruals 1,470 1,710
- ---------------------------------------------
Total gross deferred
tax assets 8,998 13,336
Less valuation allowance (700) (700)
- ---------------------------------------------
Net deferred tax assets 8,298 12,636
Deferred tax liabilities:
Receivable from foreign
subsidiary (3,725) (3,357)
Deferred service revenue (195) --
- ---------------------------------------------
Total deferred tax
liabilities (3,920) (3,357)
- ---------------------------------------------
Net deferred tax asset $4,378 9,279
=============================================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and management's projections for future taxable income
over the reversing periods, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowance which has been established to offset a portion of
the deferred tax assets based upon the above factors.
Income taxes for the years ended June 30, 1995, 1996 and 1997 differed from
the amounts expected by applying the U.S. federal income tax rate of 35% to
income before taxes as follows ($ in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
- ---------------------------------------------
<S> <C> <C> <C>
Computed income taxes $6,918 13,468 4,699
State taxes, net of
federal benefit 956 1,761 237
Change in the
valuation allowance
for deferred
tax assets (50) (1,456) --
Other 170 1,796 157
- ---------------------------------------------
$7,994 15,569 5,093
=============================================
</TABLE>
(6) NOTE PAYABLE
In October 1996, the Company borrowed $6,000,000 from a bank, secured by the
Company's corporate office building. The note bears interest at the London
Interbank Offered Rate plus one percent
24
<PAGE> 18
Jenny Craig, Inc. and Subsidiaries
(6.875% at June 30, 1997). Quarterly principal payments of $47,390 are due until
the maturity date in November 2006, at which time all remaining unpaid principal
is due. The current portion of the note, amounting to $190,000, is included in
accrued liabilities at June 30, 1997.
(7) 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. As of June 30, 1997,
a total of 2,000,000 shares had been purchased pursuant to this 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 primary 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, 1995, 1996 and 1997 were 25,534,000, 24,195,000 and
20,767,000, respectively.
(8) LEASES
The Company's centre 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 $25,108,000, $24,217,000 and $25,074,000 for the
years ended June 30, 1995, 1996 and 1997, respectively.
As of June 30, 1997, the scheduled minimum annual rent payments, excluding
renewal provisions, are as follows ($ in thousands):
<TABLE>
<S> <C>
1998 $19,956
1999 12,128
2000 7,011
2001 3,673
2002 1,509
Thereafter 170
- ---------------------------------------------
$44,447
=============================================
</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.
(9) 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 7.
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 $3,251,000, $4,143,000 and $4,997,000 for the years ended
June 30, 1995, 1996 and 1997, 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 $2,239,000, $2,096,000 and $1,067,000 in 1995, 1996 and 1997,
respectively.
25
<PAGE> 19
Jenny Craig, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
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 sheets at June 30, 1996 and 1997.
(10) 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 $14,148,000 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 $842,000, $837,000 and $1,015,000 for the years ended June 30, 1995,
1996 and 1997, respectively. Accumulated amortization was $3,705,000 and
$4,598,000 at June 30, 1996 and 1997, respectively.
(11) 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 and $191,000 in 1996 and 1997,
respectively, in connection with this plan.
In 1991, the Company adopted a management deferred bonus plan covering
certain members of the Company's management group. The bonus pool, which is
determined by the Board of Directors following each fiscal year, cannot exceed
one percent of operating income for the fiscal year plus a percentage of the
increase, if any, in operating income over the prior fiscal year. Participants
receive 25% of their allocated portion of the bonus pool approximately 90 days
after the end of each fiscal year. Payment of the remaining 75% is deferred for
five years and is subject to vesting at the rate of 20% per year. The unvested
portion is forfeited if the participant terminates employment for any reason
other than retirement after attainment of age 65 and completion of 10 years of
participation in the management plan. Amounts expensed under this plan were
$174,000, $386,000 and $100,000 in 1995, 1996 and 1997, respectively.
(12) STOCK OPTION PLAN
The Company's Stock Option Plan (the "Option Plan") was adopted in October 1991
and provides for the grant of incentive stock options to key employees and of
nonqualified stock options to key employees, consultants, directors and Medical
Advisory Board members. A total of 2,500,000 shares of common stock have been
reserved for issuance under the Option Plan, of which 506,060 shares remain
available for future grant. The exercise price of the options may not be less
than fair market value on the date of grant. Additionally, no options may be
exercisable more than 10 years after the date of grant and,
26
<PAGE> 20
Jenny Craig, Inc. and Subsidiaries
with certain exceptions, no option may become exercisable prior to the
expiration of six months from the date of grant. The options granted to
employees generally become exercisable over four to five years.
The Company applies APB Opinion No. 25 in accounting for the Option Plan
and, accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income and net income per share would have been reduced to the
pro forma amounts as follows ($ in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------
<S> <C> <C>
Net income - as reported $22,912 823
Net income - pro forma 22,883 574
Net income per share -
as reported .95 .04
Net income per share -
pro forma .95 .03
</TABLE>
The per share weighted-average fair value of stock options granted during
1996 and 1997 was $4.36 and $3.70, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: expected life of 4 years, expected volatility of 44% in 1996 and
47% in 1997, no dividends, and risk-free interest rate of 5.0%.
Pro forma net income reflects only options granted in 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of four years, and compensation cost for options granted prior to July 1,
1995 is not considered.
The following summarizes the status of the Option Plan:
<TABLE>
<CAPTION>
Weighted
average
Number of Range of exercise
options exercise price price
- ---------------------------------------------------------
<S> <C> <C> <C>
Outstanding at
June 30, 1994 1,270,000 $6.57-24.00 $ 8.78
Granted 676,300 4.63- 7.44 6.41
Cancelled (268,000) 5.63-24.00 15.79
Exercised (400) 6.57 6.57
- ---------------------------------------------------------
Outstanding at
June 30, 1995 1,677,900 4.63-21.00 6.73
Granted 187,000 9.13-16.25 11.68
Cancelled (59,380) 5.63-21.00 7.09
Exercised (56,940) 5.63- 7.32 5.82
- ---------------------------------------------------------
Outstanding at
June 30, 1996 1,748,580 4.63-21.00 7.28
Granted 267,000 6.00-15.75 8.62
Cancelled (78,980) 5.63-16.25 10.14
Exercised (21,720) 5.63- 7.32 6.31
- ---------------------------------------------------------
Outstanding at
June 30, 1997 1,914,880 $4.63-21.00 $ 7.36
=========================================================
Exercisable at
June 30, 1997 1,071,780 $4.63-21.00 $ 7.11
=========================================================
</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.
27
<PAGE> 21
Jenny Craig, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
Information with respect to options outstanding and exercisable by exercise
price range at June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------
Weighted
average Weighted
remaining average
Range of Number contractual exercise
exercise prices outstanding life (in years) price
- ----------------------------------------------------------------
<S> <C> <C> <C>
$ 4.63- 4.63 5,000 7.1 $ 4.63
5.63- 8.45 1,529,380 7.1 6.56
8.46-12.69 318,500 9.3 9.42
12.70-19.05 49,500 8.1 15.62
19.06-21.00 12,500 4.3 21.00
- ----------------------------------------------------------------
$ 4.63-21.00 1,914,880 7.4 $ 7.36
================================================================
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
-------------------
Weighted
average
Range of Number exercise
exercise prices exercisable price
- ----------------------------------------------------
<S> <C> <C>
$ 4.63- 4.63 5,000 $ 4.63
5.63- 8.45 963,280 6.58
8.46-12.69 71,500 9.43
12.70-19.05 19,500 16.77
19.06-21.00 12,500 21.00
- ----------------------------------------------------
$ 4.63-21.00 1,071,780 $ 7.11
====================================================
</TABLE>
At June 30, 1995 and 1996, the number of options exercisable were 312,600
and 671,810, respectively, and the weighted average exercise prices were $7.66
and $6.99, respectively.
(13) 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.
The Company and 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.
The full Commission accepted the proposed Consent Order and it has been
published for public comment. Unless modified or withdrawn on the basis of
public comment, it will become effective upon service of notice to the Company
by the Commission. The Company does not believe that compliance with the
proposed Consent Order will have a material adverse effect on the Company's
consolidated financial position or results of operation or its current
advertising and marketing practices.
28
<PAGE> 22
Jenny Craig, Inc. and Subsidiaries
The Company along with other weight loss programs and certain pharmaceutical
companies has been named as a defendant in an action filed in the Circuit Court
for the Eleventh Judicial Circuit in Pickens County, Alabama. The action was
commenced in August 1997 by three plaintiffs who are seeking to maintain the
action as a class action on behalf of all persons in the United States and
United States Territories who have suffered or may in the future suffer injury
due to the administration of phentermine, fenfluramine (commonly known as
"phen-fen" when taken together) and/or dexfenfluramine (trade name, "Redux"),
which were manufactured or sold by the defendants. The complaint includes claims
against the Company and other defendants, acting separately and in concert, for
alleged unlawful and tortious acts, including sale of allegedly dangerous and
defective products, negligent marketing and distribution, failure to warn of the
risks associated with the weight loss medications, breach of warranty, fraud,
and negligent misrepresentation. The complaint seeks compensatory and punitive
damages in unspecified amounts and equitable relief including the establishment
of a medical fund to cover future medical expenses resulting from the use of the
weight loss medications, and a requirement that the defendants adequately warn
the public of the risks associated with the use of the weight loss medications.
The Company has tendered this matter to its insurance carriers. The Company has
also asserted its indemnification rights under its agreement with the company
which provided the physicians who prescribed the weight loss medications in the
Company's centres. The claim has not progressed sufficiently for the Company to
estimate a range of possible loss, if any. The Company intends to defend the
matter vigorously.
(14) 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>
1995 1996 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Revenue derived from
customers:
Company-owned
operations:
Unaffiliated:
United States $291,327 309,415 279,090
Foreign 36,989 41,590 50,308
Franchise operations:
Unaffiliated:
United States 43,087 43,119 27,525
Foreign 3,439 2,751 3,214
Affiliated:
United States -- -- --
Foreign 3,251 4,143 4,997
Operating income (loss):
Company-owned
operations:
United States 8,453 25,226 732
Foreign (203) 58 5,249
Franchise operations:
United States 7,259 8,818 3,677
Foreign 1,854 1,419 2,182
Identifiable assets:
United States 105,960 93,208 100,689
Foreign 9,416 11,193 11,608
</TABLE>
29
<PAGE> 23
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, 1996 and 1997, 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, 1997. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Diego, California
August 20, 1997
30
<PAGE> 24
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 1996 1996 1997 1997 year
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $91,012 83,388 96,536 94,198 365,134
Operating income 3,649 751 1,170 6,270 11,840
Income before cumulative effect
of accounting change 2,489 879 908 4,056 8,332
Cumulative effect of change in
accounting for service revenue (7,509) -- -- -- (7,509)
Net income (loss) (5,020) 879 908 4,056 823
Per share amounts:
Income before cumulative effect
of accounting change 0.12 0.04 0.04 0.20 0.40
Cumulative effect of change in
accounting for service revenue (0.36) -- -- -- (0.36)
Net income (loss) (0.24) 0.04 0.04 0.20 0.04
</TABLE>
In the fourth quarter of fiscal 1997, the Company changed its method of
accounting for service fees received from customers, retroactively effective as
of July 1, 1996 (see Note 1 of Notes to Consolidated Financial Statements). The
quarterly results of operations for the first three quarters of fiscal 1997
reflect the effect of the change in accounting method as if the change had
occurred on July 1, 1996 and do not differ materially from the amounts as
originally reported.
The quarter ended June 30, 1997 includes a pre-tax credit of $3,267,000 (or
$.10 net income per share) resulting from the Company's litigation recovery from
an insurance carrier.
<TABLE>
<CAPTION>
Three-Month Period Ended
--------------------------------------------------
September 30, December 31, March 31, June 30, Total
Prior 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
</TABLE>
The quarter ended March 31, 1996 includes a pre-tax credit of $2,200,000 (or
$.05 net income per share) resulting from the Company's litigation recovery from
an insurance carrier.
The net income per share computed for each quarter and the year are separate
calculations.
31
<PAGE> 25
Jenny Craig, Inc. and Subsidiaries
Common Stock Data
At August 29, 1997, 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>
1996 1997
---------------- --------------
High Low High Low
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter ended September 30 $10 1/2 7 3/8 17 3/4 9 1/8
Second quarter ended December 31 10 5/8 8 1/8 9 7/8 8 1/8
Third quarter ended March 31 10 1/8 8 7/8 10 3/4 6 1/2
Fourth quarter ended June 30 18 8 7/8 7 7/8 5 1/8
</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.
32
<PAGE> 1
EXHIBIT 18
[KPMG PEAT MARWICK LETTERHEAD]
Jenny Craig, Inc.
La Jolla, California
August 20, 1997
Ladies and Gentlemen:
We have audited the consolidated balance sheets of Jenny Craig, Inc. and
subsidiaries as of June 30, 1996 and 1997, 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, 1997, and have reported thereon
under date of August 20, 1997. The aforementioned consolidated financial
statements and our audit report thereon are incorporated by reference in the
Company's annual report on Form 10-K for the year ended June 30, 1997. As
stated in Note 1 to those financial statements, the Company changed its method
of accounting for service revenue, retroactively effective as of July 1, 1996
and states that the newly adopted accounting principle is preferable as it
provides a better matching of revenues and expenses. Previously, the Company
recognized $60 as revenue at the time of each new sale and the remaining
service revenue was deferred and recognized as revenue based upon expected
customer attendance at the centre. Under the new method, all service fees
collected are deferred and recognized as revenue on a straight-line basis over
the 14-month period of expected customer attendance at the centres. In
accordance with your request, we have reviewed and discussed with Company
officials the circumstances and business judgment and planning upon which the
decision to make this change in the method of accounting was based.
With regard to the aforementioned accounting change, authoritative criteria
have not been established for evaluating the preferability of one acceptable
method of accounting over another acceptable method. However, for purposes of
Jenny Craig, Inc.'s compliance with the requirements of the Securities and
Exchange Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting is
preferable in the Company's circumstances.
Very truly yours,
KPMG PEAT MARWICK LLP
<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 Management, Inc. (California)
Jenny Craig Operations, Inc. (California)
Jenny Craig Products, Inc. (California)
JCCH1, Inc. (California)
JCCH2, Inc. (California)
JCH, Inc. (California)
Jenny Craig Weight Loss Centres (Canada) Company (Nova Scotia)
Jenny Craig (Canada) Holdings, LLC (Delaware)
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 20, 1997, relating to the consolidated balance sheets of Jenny
Craig, Inc. and subsidiaries as of June 30, 1996 and 1997, 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, 1997, and the related
financial statement schedule, which report appears in the June 30, 1997 annual
report on Form 10-K of Jenny Craig, Inc.
KPMG PEAT MARWICK LLP
San Diego, California
September 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR
ENDED JUNE 30, 1997, INCLUDED IN THE REPORT ON FORM 10-K OF JENNY CRAIG, INC.
FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 37,438
<SECURITIES> 1,506
<RECEIVABLES> 2,967<F1>
<ALLOWANCES> 0
<INVENTORY> 15,285
<CURRENT-ASSETS> 73,693
<PP&E> 27,554<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 112,297
<CURRENT-LIABILITIES> 52,663
<BONDS> 5,716
<COMMON> 0
0
0
<OTHER-SE> 53,918
<TOTAL-LIABILITY-AND-EQUITY> 112,297
<SALES> 333,917
<TOTAL-REVENUES> 365,134
<CGS> 305,710
<TOTAL-COSTS> 324,787
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297
<INCOME-PRETAX> 13,425
<INCOME-TAX> 5,093
<INCOME-CONTINUING> 8,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 7,509
<NET-INCOME> 823
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT AMOUNTS NET OF
ALLOWANCES AND DEPRECIATION, RESPECTIVELY.
</FN>
</TABLE>
