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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________
TO ___________________.
COMMISSION FILE NUMBER: 0-21854
DISCOVERY ZONE, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 36-3877601
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or
organization)
565 TAXTER ROAD,
FIFTH FLOOR
ELMSFORD, NEW YORK 10523
(Address of principal (Zip Code)
executive offices)
</TABLE>
Registrant's telephone number, including area code: (914) 345-4500
Securities registered pursuant to Section 12(b) of the Securities Act of 1933:
None
Securities registered pursuant to Section 12(g) of the Securities Act of 1933:
Common Stock, par value $.01 per share
13 1/2% Senior Secured Notes due 2002
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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 registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 1998 was estimated to be approximately $21.9 million.
As of March 31, 1998, the number of shares of Common Stock outstanding was
4,000,000.
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
This report includes "forward-looking statements," including statements
containing the words "believes," "anticipates," "expects" and words of similar
import. All statements other than statements of historical facts included in
this report including, without limitation, such statements set forth in Items 1
and 7 and located elsewhere herein, regarding the Company or any of the
transactions described herein, including the timing, financing, strategies and
effects of such transactions, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from expectations are disclosed in this report, including,
without limitation, in conjunction with the forward-looking statements in this
report and/or under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors that may Affect
Future Operating Performance." The Company does not intend to update these
forward-looking statements.
OVERVIEW
Discovery Zone, Inc. is a Delaware corporation founded in 1989. The Company
and its consolidated subsidiaries are referred to herein as "DZ" or the
"Company." The Company's principal executive offices are located at 565 Taxter
Road, Fifth Floor, Elmsford, New York 10523.
The Company owns and operates pay-for-play children's entertainment centers
in North America, with a national network of 205 FunCenters in 39 states, Canada
and Puerto Rico which are targeted to appeal to children ages two to 12. DZ
hosted approximately 18.5 million visits by children and adults in the 205
FunCenters in 1997. The Company also operates two entertainment centers under
the "Block Party" name which are targeted to appeal to adults.
The Company's FunCenters are designed to offer children ages two to 12 years
old a unique entertainment experience while meeting their parents' needs for
value and convenience. FunCenters generally are located in strip shopping
centers and, to a lesser extent, in shopping malls. Through December 1997,
FunCenters included: (i) "soft play" zones consisting of a series of tubes,
slides, ball bins, climbing mountains, air trampolines, obstacle courses, ramps
and other devices for crawling, jumping, running, swinging and climbing, all of
which have been designed and constructed with an emphasis on safety; (ii) "game
zones" consisting of games that award tickets redeemable for prizes; (iii) food
and beverage operations; and (iv) party rooms for birthdays and other group
events.
The Company operated under the protection of chapter 11 ("Chapter 11") of
the U.S. Bankruptcy Code from March 25, 1996 through July 29, 1997 (the
"Effective Date"). Throughout 1997, and on an accelerated basis since the
Effective Date, the Company has implemented a new business strategy designed to
revitalize, reposition and restore the Company's core business through (i) a
broad expense reduction program, (ii) new in-store programs that feature added
entertainment activities, and (iii) a refocused marketing strategy.
Since emerging from bankruptcy, through the first quarter of 1998, the
Company completed renovation of approximately 60% of its FunCenters to expand
and update its product offerings to include: (i) themed laser tag, (ii) arts and
crafts, (iii) promotional areas featuring changing events, and (iv) a stage area
which features custom DZ programming and kid KARAOKE, and creates a FunCenter
focal point for character appearances and other presentations. The Company's
strategy is to create a changing entertainment environment featuring
cross-promotional activities with major entertainment and consumer product
companies. During this period, the Company also completed the conversion of
approximately 80% of its
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FunCenters to offer Pizza Hut brand menu items. See "-- Product Improvements"
and "-- New Marketing Strategies."
NEW OWNERSHIP AND MANAGEMENT
During the Company's reorganization under Chapter 11, an affiliate of
Wellspring Associates L.L.C. ("Wellspring") acquired a controlling interest in
the Company. Wellspring recruited Scott W. Bernstein to assist in developing a
new business strategy for, and to assume the role of Chief Executive Officer of
the Company. Mr. Bernstein previously served as a senior executive at Time
Warner, Inc. and Six Flags Theme Parks, Inc., most recently as President of Six
Flags' Northeast operations, where he led a turnaround of the Six Flags Great
Adventure theme park in New Jersey. Mr. Bernstein was named President and Chief
Executive Officer of the Company in December 1996, and the Company has
subsequently hired several other senior managers with backgrounds in the
entertainment and consumer marketing industries.
PRE-CHAPTER 11 REORGANIZATION
The Company was founded in 1989 and grew from 28 locations in 1991 to a peak
of 347 locations in 1994, achieving much of its growth through the acquisition
of certain of its franchisees and other businesses. In 1995, the Company
acquired two Block Party Stores and certain related leases from Blockbuster
Entertainment Group ("Blockbuster"). The Company acquired no businesses during
1996 or 1997.
The Company financed its growth primarily through the issuance of debt
securities. In addition, the Company completed an initial public offering of its
common stock, par value $0.01 per share (the "Old Common Stock") in June 1993.
In a series of transactions, Blockbuster acquired 49.9% of the Old Common Stock.
Blockbuster subsequently merged into Viacom Inc. ("Viacom"), which thereby
succeeded to Blockbuster's ownership interest in the Company.
The Company's rapid expansion resulted in a loss of control over costs and
quality at the store and corporate levels, which diminished customer service,
reduced store operating margins and caused selling, general and administrative
expenses to increase dramatically. This negatively affected the Company's
overall profitability and led to a series of defaults under the Company's
revolving credit facility in late 1995 and early 1996.
On March 25, 1996 (the "Petition Date"), Discovery Zone, Inc. and all of its
domestic subsidiaries (the "Discovery Zone Group") filed voluntary petitions for
relief under Chapter 11 with the U.S. Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). After its Chapter 11 filing, the Company
entered into a debtor-in-possession credit facility (as amended and
supplemented, the "DIP Facility") to provide working capital during the
reorganization. Under Bankruptcy Court supervision, the Discovery Zone Group
continued to manage and operate its businesses as debtor in possession and, as
described above, developed a Plan of Reorganization (the "Plan") to restructure
its financial affairs, including assuming or rejecting executory contracts and
leases.
EMERGENCE FROM CHAPTER 11, PLAN OF REORGANIZATION AND EXIT FINANCING
In November 1996, the Company and Wellspring filed the Plan with the
Bankruptcy Court. The Plan set forth a plan for repaying or otherwise
compensating the Company's creditors in order of the relative seniority of their
respective claims while seeking to maintain the Company as a going concern. The
Plan provided, among other things, for (i) the payment in full of claims which
arose after the Petition Date, including the DIP Facility, (ii) conversion of
substantially all of the Company's pre-petition liabilities into equity
interests in the Company, and (iii) cancellation of all of the pre-petition
equity interests, including the Old Common Stock, in the Company. On July 18,
1997, the Plan was approved by the requisite percentage of creditors in each
class and confirmed by the Bankruptcy Court. The Plan became effective and the
Company emerged from Chapter 11 on the Effective Date.
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Upon emerging from Chapter 11, the Company issued $15.0 million in
convertible preferred stock, par value $0.01 per share (the "Convertible
Preferred Stock") to an affiliate of the Wafra Investment Advisory Group, Inc.
The Company also issued units (the "Units") consisting of $85.0 million
aggregate principal amount of 13 1/2% Senior Secured Notes due 2002 (the
"Private Notes") and warrants (the "Warrants") to purchase shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"), at an
exercise price of $0.01 per share. The Private Notes were exchanged for an equal
aggregate principal amount of 13 1/2% Senior Secured Notes due 2002 (the
"Exchange Notes" and, together with the Private Notes, the "Notes") on March 11,
1998. The net proceeds of the offerings of the Units and Convertible Preferred
Stock totaled $93.8 million. Of that amount, the Company (i) repaid borrowings,
claims and expenses incurred while under Chapter 11 of $45.5 million, (ii)
purchased an aggregate of $21.6 million of securities, consisting of U.S.
Treasury Securities, that were placed in escrow and pledged as security for
scheduled interest payments on the Notes through August 1, 1999, and (iii)
applied $26.7 million to finance capital expenditures, and provide for working
capital and capital for other general corporate purposes. The Company also
recently entered into a new $10.0 million Senior Secured Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
COST REDUCTION PROGRAM
In connection with the Company's reorganization, the Company has closed or
sold 130 underperforming stores that were largely unprofitable and were unlikely
to contribute to the Company's profitability. Most of these locations had
above-market rents, were in markets that already had one or more profitable
FunCenters or were poorly located.
The Company also implemented several initiatives to reduce annual selling,
general and administrative expenses, including: (i) a substantial reduction in
the Company's corporate and regional management personnel; (ii) a reduction in
expenditures for corporate support functions; and (iii) the elimination of
expenses related to certain discontinued operations. In addition, the Company
further reduced costs through changes in labor planning, food and beverage
operations, a revised birthday party reservation system and renegotiated store
lease terms. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Comparison of Years Ended December 31, 1997 and
1996."
The Company also established an incentive-based compensation plan tied to
store profitability and service quality measures for its FunCenter and regional
managers in order to create a stronger sense of ownership and accountability and
to build support for the Company's business strategy among such managers.
PRODUCT IMPROVEMENTS
In 1997, the Company began implementing several programs designed to
increase attendance and in-store spending.
During the fourth quarter of 1997, the Company began an extensive FunCenter
renovation program, designed to broaden their entertainment offerings, upgrade
their facilities and give them a "new look" consistent with the Company's brand
repositioning campaign (see below). These renovations typically include the
addition of designated areas for laser tag, arts and crafts, stage events and
promotional activities. During the first phase of this program, the Company has
renovated approximately 60% of its FunCenters through March 1998 and expects,
during the next phase, to complete renovations of an additional 15% of its
FunCenters by the end of 1998.
The Company intends to create a series of regularly changing activities and
events tied in with major entertainment properties and consumer products that
appeal to children using the new venues in the renovated FunCenters ("DZ Live,"
"Laser Adventure," the "Art Factory" and the "Cage"), as well as open space in
unrenovated FunCenters. Laser tag is currently themed to "Men in Black," a hit
motion picture
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and an animated television series. See "-- Current FunCenter Operations." The
Company began 1998 with a hockey skills promotion with the National Hockey
League and CCM, a leading hockey equipment brand. In April 1998, the promotion
theme will change to tie into New Line Cinema's major motion picture release of
"Lost in Space." During the second half of 1998, the Company expects to begin a
series of promotions with Fox Kids Worldwide. See "-- New Marketing Strategy."
In April and June 1997, the Company entered into marketing and product
agreements with Pizza Hut, Inc. ("Pizza Hut") and the Pepsi-Cola Company
("Pepsi"), respectively. These agreements provide for joint promotions and, the
Company believes, increase the appeal and quality of its food service
operations. Through March 1998, approximately 80% of the FunCenters have been
converted to permit the sale of Pizza Hut menu items. During 1998, the Company
expects to complete conversion of additional FunCenters to permit the sale of
Pizza Hut and/or other branded food menu items.
The Company has also sought to increase revenue by better utilizing DZ's
existing facilities. To increase weekday visits, the Company developed
interactive parent-child play programs for preschoolers in 1997. These programs
offer tumbling, climbing, exercising and singing and are now being offered under
the "Discovery Zone University" and "DZU" brand names. In September 1997, 24
FunCenters began offering these weekday programs and 26 additional FunCenters
began offering these programs in January 1998. Due to the start-up nature of
these programs, the Company does not currently intend to expand these program to
additional locations in 1998. In the future, the Company may consider expanding
these programs to additional FunCenters and to include after school programs for
older children.
NEW MARKETING AND ENTERTAINMENT STRATEGY
Since mid-year 1997, the Company has developed and begun to implement a new
marketing strategy consisting of several components:
- Reposition and relaunch "New DZ" brand -- building on its revamped product
offerings, the Company is reintroducing itself as the "New DZ." Through a
combination of local and national public relations and a new advertising
campaign, the Company is repositioning itself from a children's indoor
playground venue to a children's entertainment center. The Company
initiated its "relaunch" advertising campaign during the first quarter of
1998.
- Reorient marketing to regional and local focus -- the Company has begun to
reorient its marketing efforts to focus on local and regional marketing
and advertising programs with a national "overlay."
- Form strategic marketing partnerships -- the Company is establishing
cross-promotional alliances with local and regional businesses, such as
supermarkets, convenience stores and malls, as well as national
advertisers.
As part of its ongoing marketing efforts, the Company's strategy is to
target two subsegments of the Kids Markets; kids ages six to 12 ("Core Target")
and pre-schoolers ("DZ Jr. Target"). The Core Target will be the primary focus
of in-store entertainment programs. Separately, a specific programming calendar
will be aimed at the younger children, called DZ "Jr." Given the strong interest
and efforts of entertainment companies in both these areas, the Company believes
this strategy will create even broader tie-in opportunities.
Due to its national market presence and the strength of its brand name, the
Company believes that it is well positioned to act as a platform for other
promotional and product "tie-ins" with children's entertainment and consumer
product companies, which should give the Company access to a wide variety of
joint marketing, cross-promotional and in-store entertainment opportunities. In
addition to the Pizza Hut and Pepsi agreements referred to above, during 1997
and the first quarter of 1998, the Company entered into promotional arrangements
with Fox Kids Worldwide, Cartoon Network, Hasbro, Columbia Tri-Star, New Line
Cinema, the National Hockey League, CCM, the Worldwide Wrestling Federation and
the Nabisco Foods Group.
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The Company has begun negotiations with a number of other possible
promotional partners in the toy, television, film and consumer product
industries and expects to continue to pursue such arrangements in the future.
The Company believes that such alliances will provide significant marketing
support and theme-based promotions to periodically refresh its product offerings
and to stimulate repeat customer visits on a cost-effective basis.
INDUSTRY OVERVIEW
DEMOGRAPHICS
There are more than 54 million children under the age of 13, with
approximately 35 million children between the ages of five and 13. "Baby Boomer"
families (parents born between 1946 and 1965) are expected to contribute to an
increase in DZ's target market over the next four years. By the year 2000, there
are expected to be approximately 55 million children under the age of 13,
including approximately 36 million between the age of five and 13 (representing
annualized growth rates for these groups of approximately 0.2% and 0.4%,
respectively).
U.S. POPULATION BY AGE GROUP
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNDER 5 5-13 TOTAL UNDER 13
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<S> <C> <C> <C>
1995..................................................... 19,591 34,384 53,975
2000..................................................... 18,987 36,043 55,030
2005..................................................... 19,127 35,850 54,977
2010..................................................... 20,012 35,605 55,617
</TABLE>
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Source: Mid-range of U.S. Bureau of the Census estimates.
COMPETITION
The Company competes against a wide variety of concepts vying for family
leisure time and entertainment spending. These competing concepts encompass a
broad spectrum of entertainment opportunities, including family entertainment
centers, theme parks, movie theaters and other in-home and out of home
entertainment activities. DZ is part of the children's entertainment center
segment of the industry, which includes admissions-based, or pay-for-play,
recreational and soft play centers that target children ages two to 12.
The pay-for-play children's entertainment center industry is highly
fragmented and consists largely of local "mom and pop" stores, small regional
chains and local non-profit organizations that provide pay-for-play indoor soft
play facilities. The Company believes that it pioneered this concept when it
built its first FunCenter in 1989. While several national competitors, such as
Leaps and Bounds, subsequently emerged, the Company purchased many such
competitors in an attempt to consolidate the market. The Company's future
revenues will depend to a significant extent upon its ability to respond to
changes in consumer tastes. The performance of individual FunCenters may be
affected by a variety of local factors such as the location of competing
facilities, labor and employee benefit costs and the availability of experienced
management and hourly employees.
New competitors may include The Walt Disney Company, which has a family
entertainment concept in two locations and has announced plans to open
additional store locations. DZ also competes to some extent against certain
children's themed restaurant chains, which provide ancillary entertainment
offerings and merchandise in addition to food and do not charge admission fees.
Such competitors include ShowBiz Pizza Time, Inc., the operator and franchiser
of approximately 300 "Chuck E. Cheese" restaurants in the
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United States, and, to a lesser extent, certain franchisees of McDonald's
Corporation that operate indoor playgrounds at a number of locations. These
restaurants differ from DZ in that they do not charge for admission and focus on
food as their primary attraction and source of revenue. Certain of these
competitors have longer operating histories, substantially greater name
recognition and/or more extensive financial, technical, marketing, sales and
distribution resources.
To a more limited extent, the Company competes against indoor/outdoor family
entertainment centers, including theme parks and other themed restaurant chains.
These destinations offer an entertainment experience centered around attractions
such as miniature golf, water rides, go-carts and video arcade games. Theme
parks provide a variety of thrill rides, redemption games and other
entertainment attractions. Such facilities generally require more travel and
have higher prices than FunCenters. Themed restaurants have grown in popularity
in recent years and include chains such as Planet Hollywood and Rainforest Cafe.
The generally older and/or broader age group focus of each of these concepts and
the differing nature of their product offerings limit the extent to which they
compete against the Company.
CURRENT FUNCENTER OPERATIONS
The current FunCenters are indoor pay-for-play entertainment centers for
children. Adults are not permitted entry without a child. The Company encourages
the participation of parents and other accompanying adults, and play equipment
is constructed to allow them to play along with their children.
A typical FunCenter is approximately 12,000 to 17,000 square feet and
contains the following special features:
- An indoor playground composed of a series of tubes, slides, ball bins,
climbing mountains, air trampolines, obstacle courses, ramps, stairs and
other devices for crawling, jumping, running, swinging and climbing.
- A separate area for toddlers but on a smaller scale. In renovated
FunCenters, this area is called the "DZ Jr." play area. Access to this
play area is limited to children under a specified height, which provides
younger children their own, less boisterous play area.
- Food and beverage operations which, in most cases, feature a selection of
Pizza Hut menu items and Pepsi beverage products.
- A game zone, featuring activities and games which children are awarded
tickets for play and, to a more limited extent, video games. Tickets can
be redeemed for a variety of small toys and prizes.
- Three to five party rooms, which can be reserved for birthdays or other
group events. FunCenters offer a variety of packages that combine a
celebration in the party room, including cake and beverage services, with
access to the entire FunCenter and tokens for use in the game zone for
each child attending a party.
- A redemption counter where awards for games are redeemed, as well as
Discovery Zone apparel, toys and products are sold.
Renovated FunCenters also contain the following features:
- A laser tag area called "Laser Adventure" featuring a maze of interactive
targets which will be themed to major entertainment properties.
- An arts and craft room called the "Art Factory" featuring regularly
changing arts and crafts projects.
- A 1,000 to 1,400 square foot promotional area called the "Cage," featuring
a series of changing activities and events.
- A stage area called "DZ Live," featuring custom DZ Video programming and
kid KARAOKE. The stage area represents a FunCenter focal point where the
Company can present public relation
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appearances, costume characters, storytelling, puppet shows, a talent
contest and other appearances.
DZ currently targets children 12-years old and younger, with the highest
concentration of visitors being one to eight-years old. With its revamped
product offerings, the Company hopes to attract a larger portion of the eight-to
twelve-year-old market population.
FunCenters are designed and constructed with an emphasis on safety and
security. At each FunCenter, an identification bracelet is attached to each
child and matched at the exit with an identical bracelet given to the
accompanying adult. In addition, the entrance and exit at each FunCenter are
monitored for security purposes. At all FunCenters, play area equipment is
equipped with protective cushions and padding, and "coaches" are available to
assist children through play activities. All FunCenters prohibit smoking and
maintain high cleanliness standards.
FunCenters charge a general admission fee for each child, with prices, since
the Effective Date, ranging from $4.99 to $8.99, depending on age, location and
whether the FunCenter has been renovated. The Company also offers discounted
admission fees for groups and birthday parties. Adults accompanying children are
admitted without charge. Typical hours of operation for FunCenters extend from
11:00 a.m. to 7:00 p.m., Sunday to Thursday, and 10:00 a.m. to 9:00 p.m. on
Friday and Saturday. The Company generates most of its weekly revenue on
weekends.
INTELLECTUAL PROPERTY
The names "Discovery Zone" and "DZ" and the Company's logo are registered
trademarks and service marks in the United States for a variety of goods and
services offered at the FunCenters. The Company has registered and/or is in the
process of registering its names and/or logo in the following foreign countries:
Australia, Belgium, Brazil, Canada, France, Germany, Hong Kong, Italy, Japan,
Mexico, South Korea, Spain and the United Kingdom. The Company considers these
intellectual property rights material to its business and actively defends and
enforces them.
INSURANCE
The Company carries customary insurance coverages, including primary
commercial liability insurance with limits of $1 million per occurrence and $2
million in the aggregate, and umbrella and excess policies aggregating $100
million per occurrence and in the aggregate, which policies are available after
the Company has paid or become legally obligated to pay $100,000 or $250,000 per
claim, depending upon the policy year. When the Company's aggregate indemnity
and expense amounts in any policy year exceed an aggregate of $2.5 million, the
Company's trailing self-insured retention is reduced to $10,000 or $25,000 per
occurrence, depending upon the policy year. The Company believes that it carries
adequate insurance coverage for its business activities. However, there can be
no assurance that such coverage will prove to be adequate or will continue to be
available to the Company, and, in the event that such coverage proves to be
inadequate, such event may have a material adverse effect on the financial
condition or results of operations of the Company. Claims paid to date have been
within amounts accrued by the Company using historical data based on prior
experience.
REGULATION
The Company is subject to various federal, state and local laws and
regulations affecting operations, including those relating to the use of video
and arcade games, the preparation and sale of food and beverages and those
relating to building and zoning requirements. The Company is also subject to
laws governing its relationship with employees, including minimum wage
requirements, overtime, working and safety conditions and citizenship
requirements. Difficulties or failures in obtaining required licenses or other
regulatory approvals could delay or prevent the opening of a new FunCenter, and
the suspension of, or inability to renew, a license or permit could interrupt
operations at an existing FunCenter.
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EMPLOYEES
At March 31, 1998, the Company had approximately 5,900 full and part-time
employees, including those employed at its corporate headquarters, regional
offices and Company-owned FunCenters. A typical Discovery Zone FunCenter has a
staff of between 20 and 40 employees, including managers, counter attendants,
coaches and party hosts, most of whom are part-time. The Company's employees are
not represented by any labor union or covered by a collective bargaining
agreement. The Company believes its relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company currently operates 205 FunCenters in 39 states, Canada and
Puerto Rico. The Company also operates two Block Party stores. Pursuant to the
Plan, the Company terminated the franchise agreements related to seven
franchised FunCenters. These stores continue to operate using the Company's
trademarks pending completion of alternative operating arrangements with the
franchisees. Approximately 80% of the Company's FunCenters are located adjacent
to, or are part of, major shopping centers or strip shopping centers with large
parking capacity. The following chart shows a breakdown of the Company's
FunCenters by location:
<TABLE>
<CAPTION>
NUMBER OF
LOCATION FUN CENTERS
- ----------------------------------------- ---------------
<S> <C>
Alabama.................................. 4
Arizona.................................. 1
California............................... 20
Colorado................................. 4
Connecticut.............................. 2
Delaware................................. 1
Florida.................................. 11
Georgia.................................. 6
Hawaii................................... 1
Idaho.................................... 1
Illinois................................. 6
Indiana.................................. 8
Iowa..................................... 1
Kansas................................... 2
Kentucky................................. 2
Louisiana................................ 4
Maryland................................. 6
Massachusetts............................ 7
Michigan................................. 5
Minnesota................................ 2
Mississippi.............................. 1
Missouri................................. 5
Nevada................................... 1
<CAPTION>
NUMBER OF
LOCATION FUN CENTERS
- ----------------------------------------- ---------------
<S> <C>
New Jersey............................... 9
New Mexico............................... 1
New York................................. 16
North Carolina........................... 2
Ohio..................................... 10
Oklahoma................................. 3
Oregon................................... 2
Pennsylvania............................. 10
Rhode Island............................. 1
South Carolina........................... 2
Tennessee................................ 4
Texas.................................... 20
Utah..................................... 1
Virginia................................. 8
Washington............................... 2
Wisconsin................................ 5
---
Total United States...................... 197
Canada................................... 5
Puerto Rico.............................. 3
Total.................................... 205
---
---
The Block Party Stores are located in
Indiana and New Mexico.
</TABLE>
Fourteen of the sites on which the FunCenters operate are owned by the
Company and are subject to mortgages and security interests held by McDonald's
(the McDonald's Rent Deferral Secured Notes and the McDonald's Note
(collectively, the "McDonald's Indebtedness")) which were delivered in
settlement of damages suffered by McDonald's as a result of the rejection, in
Chapter 11, of certain leases. The Company currently leases all but one of the
remaining FunCenter sites. The Company believes that it could find alternative
space at competitive market rates if it were unable to renew the lease on any of
the
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Company-owned FunCenter sites. In the future, the Company may from time to time
purchase real estate for sites for the construction of new FunCenters.
The Company currently holds four parcels of undeveloped land which it
intends to sell, of which three parcels secure the McDonald's Indebtedness. The
proceeds of sales of collateral securing the McDonald's Indebtedness, if any,
will be applied first to interest, then to a reduction of principal on the
McDonald's Notes and then to principal of the McDonald's Rent Deferral Secured
Notes. Future principal payments on the McDonald's Note will be reduced to the
extent of the reduction of the outstanding principal balance (I.E., a 50%
reduction in the outstanding principal balance would reduce future principal
payments by 50%).
During the first quarter of 1998, the Company entered into a contract for
the sale of property in Littleton, Colorado. The Littleton property consists of
two parcels, of which one parcel is improved with a FunCenter and the other is
unimproved land. This contract provides for the sale of such property for $4.2
million and allows the Company to lease the FunCenter located thereon at an
annual rental of $188,250, plus scheduled escalations, for up to five years.
This $4.2 million will reduce the outstanding principal balance of the
McDonald's Note to approximately $800,000, and reduce the annual debt service on
the McDonald's Note to approximately $130,000 per year. The Littleton sale is
scheduled to close in July 1998. There can be no assurances that this sale will
ultimately close or close on the aforementioned terms or time period.
Through January 31, 1998, the Company subleased approximately 30,000 square
feet of office space from Blockbuster (the "Blockbuster Space") at an annual
cost of $600,000. A division of Blockbuster occupied approximately 7,500 square
feet of this space, thereby mitigating a portion of the Company's cost. In 1997,
Blockbuster informed the Company that it planned to relocate and would terminate
its lease no later than June 30, 1998. Pursuant to an agreement with Viacom and
Blockbuster, Blockbuster agreed to allow the Company to remain in such space on
a month-to-month basis through June 30, 1998.
The Company entered into a lease, commencing October 1, 1997, for
approximately 10,000 square feet of office space in the Plantation, Florida area
to relocate its finance, purchasing, management information systems and other
administrative functions from the Blockbuster Space. The Company relocated to
this space in January 1998 and terminated its sublease with Blockbuster. On
October 31, 1997, the Company entered into a sublease for approximately 6,500
square feet of office space for its executive offices in Elmsford, New York and
relocated to this space in November 1997.
ITEM 3. LEGAL PROCEEDINGS
On March 25, 1996, Discovery Zone, Inc. and all of its domestic subsidiaries
filed voluntary petitions for relief under Chapter 11 with the Bankruptcy Court.
In November 1996, the Company filed the Plan with the Bankruptcy Court and a
related disclosure statement. The Plan was confirmed by the Bankruptcy Court on
July 18, 1997 and became effective on July 29, 1997, at which time the Company
emerged from Chapter 11. Substantially all of the claims against the Company
relating to pre-petition causes of action were discharged on the Effective Date.
The Company is involved in litigation from time to time in the ordinary
course of its business. In the opinion of the Company, any liability that may be
incurred upon the resolution of certain claims and lawsuits in which the Company
is involved at this time will not, in the aggregate, exceed the limits of the
Company's insurance policies or otherwise have a material adverse effect upon
the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the
fourth quarter of 1997.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Old Common Stock began trading on the Nasdaq National Market
on June 4, 1993. Prior to that date, there was no established public trading
market for the Old Common Stock. On May 22, 1996, the Old Common Stock was
delisted from the Nasdaq National Market. The Company did not pay any dividends
on its Old Common Stock in 1996 or in 1997. Pursuant to the Plan, all of the
Company's Old Common Stock was canceled.
In connection with the Company's emergence from Chapter 11, the Company
issued units (the "Equity Units"), each consisting of nine shares of Common
Stock and one warrant to purchase one share of Common Stock at an exercise price
of $17.55 per share (the "Ten Year Warrants"). In offerings closing on or about
the Effective Date, the Company issued the Convertible Preferred Stock and
offered and sold the Units, consisting of the Notes and the Warrants. See
"Business -- Recent Developments."
At December 31, 1997, there were approximately 1,000 record holders of the
Common Stock. As of March 31, 1998, there was no established public trading
market for the Common Stock. The Company did not pay any dividends on its Common
Stock in 1997 and does not expect to pay any dividends on the Common Stock in
1998. The Company's ability to pay dividends is limited under the Indenture (as
defined herein).
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(SUCCESSOR
(PREDECESSOR COMPANY) COMPANY)
--------------------------------------------------------- -------------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
------------------------------------------ JULY 31, DECEMBER 31,
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND LOCATION
DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.............................. $ 61,585 $ 180,573 $ 259,490 $ 181,725 $ 82,537 $ 48,485
Cost of goods sold......................... 15,131 36,858 50,227 34,276 14,136 7,311
Store operating expenses(1)(2)............. 32,010 97,631 185,587 140,486 60,192 44,189
Selling, general and administrative
expense(2)............................... 6,300 36,451 58,201 40,779 10,235 10,244
Depreciation and amortization.............. 4,670 16,183 31,972 21,876 11,920 9,314
Restructuring and other charges............ -- 14,024 372,160 -- -- --
--------- --------- --------- --------- ------------- -------------
Operating income (loss).................... 3,474 (20,574) (438,657) (55,692) (13,946) (22,573)
Interest expense........................... (1,667) (5,137) (12,226) (6,277) (3,249) (6,076)
Other income (expense), net................ 1,499 2,331 476 (580) 159 683
Minority interest.......................... -- 256 5,162 -- -- --
Reorganization items....................... -- -- -- (21,285) 11,583 --
--------- --------- --------- --------- ------------- -------------
Income (loss) before income tax,
extraordinary item and cumulative effect
of change in accounting method........... 3,306 (23,124) (445,245) (83,834) (5,453) (27,966)
Income tax provision (benefit)............. -- (4,000) 4,000 -- -- --
Extraordinary item-gain on discharge of
debt..................................... -- -- -- -- 332,165 --
Cumulative effect of change in accounting
method................................... -- 5,773 -- -- -- --
Accretion of Convertible Redeemable
Preferred Stock to redemption value...... -- -- -- -- -- (97)
--------- --------- --------- --------- ------------- -------------
Net income (loss) applicable to common
shareholders............................. $ 3,306 $ (24,897) $(449,245) $ (83,834) $ 326,712 $ (28,063)
--------- --------- --------- --------- ------------- -------------
--------- --------- --------- --------- ------------- -------------
Per common share--basic and diluted(3):
Income (loss) before extraordinary item
and cumulative effect of change in
method of accounting................... $ 0.11 $ (0.45) $ (8.30) $ (1.45) $ (0.09) $ (7.02)
Extraordinary gain....................... -- -- -- -- 5.75 --
Cumulative effect of change in accounting
method................................. -- (0.13) -- -- -- --
--------- --------- --------- --------- ------------- -------------
Net income (loss)........................ $ 0.11 $ (0.58) $ (8.30) $ (1.45) $ 5.66 $ (7.02)
--------- --------- --------- --------- ------------- -------------
--------- --------- --------- --------- ------------- -------------
Weighted average number of common shares
outstanding.............................. 31,054 42,696 54,139 57,691 57,705 4,000
OTHER DATA:
Cash provided by (used in) operations...... $ 19,860 $ (4,481) $ (59,103) $ (39,888) $ (10,959) $ (22,457)
Cash provided by (used in) investing
activities............................... (95,868) (121,972) (64,562) 3,805 (468) (10,642)
Cash provided by financing activities...... 185,496 16,162 121,729 33,460 51,493 (1,686)
--------- --------- --------- --------- ------------- -------------
Net cash flows............................. $ 109,488 $(110,291) $ (1,936) $ (2,623) $ 40,066 $ (34,785)
Capital expenditures....................... $ 88,336 $ 119,134 $ 51,732 $ 2,672 $ 567 $ 10,642
STORE DATA:
Company-owned stores at period-end(4)...... 111 318 321 212 210 205
Franchised stores at period-end(5)......... 57 29 15 7 -- --
--------- --------- --------- --------- ------------- -------------
Total stores at period-end................. 168 347 336 219 210 205
OPERATING RATIO:
Ratio of earnings to fixed charges(6)........ 3 -- -- -- -- --
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
(PREDECESSOR COMPANY)
----------------------------------------------------- (SUCCESSOR
COMPANY)
AS OF DECEMBER 31, -------------
----------------------------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996(7) 1997
--------- --------- --------- --------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Restricted cash and investments...................... $ 437 $ -- $ -- $ -- $ -- $ 19,017
Total assets......................................... 24,804 252,550 474,686 171,571 125,786 176,591
Total debt........................................... 5,557 2,728 18,400 113,404 350,072 88,193
Total stockholders' equity (deficit)................. 10,636 98,091 238,963 (180,173) (263,572) 42,255
</TABLE>
- ------------------------------
(1) Excludes depreciation and amortization and certain unallocated expenses.
(2) Net of $13.6 million, $200,000 and $251,000 of capitalized costs related to
the Company's expansion for the years 1995, 1996 and 1997, respectively.
(3) Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, was adopted by the Company in 1997. All periods presented have been
restated to conform with the provisions of SFAS No. 128.
(4) Includes the Block Party Stores.
(5) The Company rejected or terminated its arrangements with all franchises on
or prior to the Effective Date. The Company currently receives no royalties
from its franchised stores.
(6) For purposes of this item, "fixed charges" represent interest, the interest
element of rental expense, capitalized interest and amortization of debt
issuance costs, and "earnings" represent income (loss) before income taxes,
extraordinary items, cumulative effect of change in accounting method and
fixed charges. Earnings were insufficient to cover fixed charges by $445.4
million, $83.8 million, $5.5 million and $28.0 million, in each of 1995,
1996, the seven months ended July 31, 1997, and the five months ended
December 31, 1997, respectively.
(7) Includes certain claims and other liabilities totaling $344.1 million as of
December 31, 1996, which were restricted or extinguished in connection with
the Plan.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is the leading owner and operator of pay-for-play children's
entertainment centers in North America, with a national network of 205
FunCenters in 39 states, Puerto Rico and Canada targeted at children ages two to
12 and two Block Party Stores which target adult customers.
The Company generates revenue primarily from the operation of the
FunCenters. FunCenter revenues are derived from: (i) admission charges; (ii)
food and beverage sales; (iii) redemption game and other concession revenue; and
(iv) birthday party fees. The Company's revenues are subject to significant
quarterly variations based upon several factors, including seasonal changes in
weather, holidays and the school calendar. The Company experienced negative
comparable store sales while operating in Chapter 11 and this trend continued
through December 1997. Among other factors, comparable store revenues declined
because the Company (i) shortened FunCenter operating hours by approximately 18%
to curtail operations during unprofitable time periods, (ii) reduced its
marketing expenditures (see below), and (iii) did not update its product
offering while in Chapter 11. The Company also experienced a decline in sales
during the recent renovation of the FunCenters and expects future renovation to
temporarily reduce sales during the renovation period.
The Company has undertaken a series of initiatives to increase revenues,
including offering new products, improving food and beverage offerings and
increasing utilization of FunCenters during weekdays and other off-peak times.
Since initiating new marketing and advertising programs during the first quarter
of 1998, the Company has experienced favorable comparable store sales compared
to the same period in
13
<PAGE>
1997. Further, per customer spending on food has increased in those FunCenters
offering Pizza Hut menu items since conversion.
The Company's operating expenses at the store level consist primarily of
food and beverage costs, the cost of game merchandise, labor costs, occupancy
and maintenance expense. As a substantial portion of store operating expenses,
including occupancy costs, facility maintenance and core staffing requirements
are fixed, the Company has a high degree of operating leverage. The Company has
reduced its rent expense through renegotiation of certain store leases and,
since the Effective Date, has generated additional annual cost savings at the
store level through cost containment measures and improved financial controls.
The Company's selling, general and administrative expenses include salaries,
corporate and regional management expenses and other administrative, promotional
and advertising expenses. Interest expense after the Effective Date declined
substantially from prior years as a result of the discharge or restructuring of
substantially all of the Company's pre-petition indebtedness in connection with
the Plan.
The Company incurred substantial restructuring costs, including the costs of
relocating the Company's headquarters, terminating certain managers and
employees and the rejecting of certain store leases. A portion of these costs
were discharged in connection with the Plan and other amounts were repaid with
the proceeds of the offering of the Units and the Convertible Preferred Stock.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Upon emergence from its Chapter 11 proceeding, the Company adopted Fresh
Start Accounting. See "-- Fresh Start Reporting." Thus the Company's balance
sheets and statements of operations and cash flows after the Effective Date
reflect a new reporting Company (the "Successor Company") and are not comparable
to periods prior to the Effective Date (the "Predecessor Company").
The twelve months ended December 31, 1997 include the results of the
Predecessor Company for the seven months ended July 31, 1997 and the Successor
Company for the five months ended December 31, 1997. The principal differences
between these periods relate to reporting changes regarding the Company's
capital structure and indebtedness and the revaluation of the Company's
long-term assets, which primarily affect depreciation and amortization expense
and interest expense in the Company's results of operations.
REVENUE. The Company had revenue of $131.0 million in 1997, a decrease of
28% from $181.7 million in 1996. This decrease resulted primarily from a
decrease in the number of FunCenters in operation and a reduction in average
sales per FunCenter. In connection with the Company's reorganization, the
Company has closed or sold 130 underperforming stores. See "Business -- Cost
Reduction Program." The decrease in same store average sales per FunCenter of
approximately 15% was due primarily to disruptions in the business associated
with the Company's bankruptcy, and a lack of new attractions at the FunCenters.
During the fourth quarter of 1997, revenues were also negatively impacted as the
Company temporarily closed stores and discounted admission prices as part of its
renovation program.
COST OF GOODS SOLD. Cost of goods sold, which consists primarily of the
cost of food, redemption merchandise and other product sales, was $21.4 million
in 1997 and $34.3 million in 1996. As a percentage of revenue, cost of goods
sold declined from 18.9% in 1996 to 16.3% in 1997. This percentage reduction was
primarily attributable to simplified product offerings, better cost management
and, beginning in the fourth quarter of 1997, lower costs associated with
conversion to a new food and supply vender. The decline in actual dollars also
was due, in part, to a lower number of FunCenters operating in 1997.
STORE OPERATING EXPENSE. Store operating expenses, which consist primarily
of compensation and benefits for FunCenter operating personnel, occupancy
expenses and facility repair and maintenance expenses, were $104.4 million,
compared with $140.5 million in 1996. As a percentage of total revenues,
14
<PAGE>
store operating expenses increased from 77% in 1996 to 80% in 1997. The increase
as a percentage of revenue was attributable to the decline in revenues during
1997. The $36.1 million reduction in store operating expenses is primarily
attributable to the implementation of labor planning, lower rent from
renegotiated leases, reductions in central reservation expenses and other cost
savings generated through the Company's cost reduction program and store
closings. During the five-months ended December 31, 1997, store operating
expenses included certain non-recurring costs resulting from training and
start-up expenses for new product offerings and renovation program disruptions
to FunCenter operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses were $20.5 million in 1997, a decrease of 49.8% from
$40.8 million in 1996. As a percentage of revenue, selling, general and
administrative expenses declined from 22% in 1996 to 16% in 1997 despite a 28%
reduction in revenue. This decrease reflected a reduction in corporate staff and
related expenses, and marketing expenses as part of the Company's cost reduction
program, combined with a general reduction in spending due to the lower number
of FunCenters in operation during 1997.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense was $21.2 million in 1997, a decrease of 3% from $21.9 million in 1996.
The decline resulted primarily from the reduction in the number of FunCenters in
operation, offset by an increase during the five-months ended December 31, 1997
attributable to an increase in the carrying value of the Company's plant and
equipment as a result of adopting Fresh Start Accounting for the Successor
Company.
INTEREST EXPENSE. Interest expense was $6.1 million during the five-months
ended December 31, 1997 for the Successor Company and $3.2 and $6.3 million,
respectively, for the Predecessor Company during the seven-months ended July 31,
1997 and the year ended December 31, 1996. Reported interest for the Predecessor
Company did not include interest on the pre-petition indebtedness, which was
suspended during the Company's reorganization under Chapter 11. Had these
interest costs been accrued, reported interest expenses would have been $12.4
and $18.2 million, respectively, for the seven-months ended July 31, 1997 and
the year ended December 31, 1996.
INTEREST INCOME. The Company reported interest income of $1.1 million
during 1997 and $0 in 1996. The increase was due to investment earnings from the
Interest Escrow Account and short-term investments of the proceeds of the
Company's offering of Units and Convertible Preferred Stock in the exit
financing.
REORGANIZING ITEMS. Reorganization items of $11.6 million (increase to
income) and $21.3 million (decrease to income) were incurred by the Company
during its reorganization under Chapter 11 for the years ended December 31, 1997
and 1996, respectively, including $6.2 million and $7.1 million incurred for
professional fees in the 1997 and 1996 periods, respectively. Included in
reorganization items for the year ended 1997 was an increase in net income of
$24,829,000 which resulted from the difference between the Company's reorganized
value and a revaluation of the Company's assets and liabilities. See Note 4 to
the Financial Statements. The remainder was primarily attributable to losses on
asset disposals associated with the closing of FunCenters, the write-off of
deferred financing costs on certain pre-petition indebtedness and expenses
associated with the Plan of Reorganization.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE. The Company had revenue of $181.7 million in 1996, a decrease of
30% from $259.5 million in 1995. This decrease resulted primarily from a
decrease in the number of FunCenters in operation and a reduction in average
sales per FunCenter. The 17% decrease in same store average sales per FunCenter
was due primarily to disruptions in the business associated with the Company's
bankruptcy filing, reduced and ineffective marketing programs in 1996 as
compared to 1995 and a lack of new attractions.
15
<PAGE>
COST OF GOODS SOLD. Cost of goods sold was $34.3 million in 1996 and $50.2
million. Cost of goods sold as a percentage of revenues was 19% in 1996,
unchanged from 1995.
STORE OPERATING EXPENSE. Store operating expense was $140.5 million, or 77%
of revenue, compared with $185.6 million, or 72% of revenue in 1995. The
increase in store operating expense as a percentage of revenue resulted largely
from an increase in the number of leases requiring above market rental payments
and reduced oversight of store expenses related to the Company's rapid
expansion. In addition, the Company experienced lower than anticipated revenue
in 1996 due to disruptions related to the Company's Chapter 11 filing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses were $40.8 million in 1996, a decrease of 30% from $58.2
million in 1995. Selling, general and administrative expenses as a percentage of
revenue remained steady in 1996 and 1995 at 22%. The decrease of 30% in the
amount of selling, general and administrative expenses in 1996 from 1995
reflects a reduction in corporate staff, the elimination of regional offices and
a decrease in spending due to a reduction in the number of FunCenters.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense was $21.9 million in 1996, a decrease of 32% from $32.0 million in 1995.
This decrease resulted primarily from a reduction in the number of Company-owned
stores and in the value of property and equipment subject to depreciation, which
resulted from a decrease in the number of FunCenters in 1996. In addition, the
Company recorded increased goodwill amortization in 1995 related to the
acquisitions of certain businesses in 1994 and 1995. The carrying value of such
goodwill was written off at the end of 1995.
INTEREST EXPENSE. Interest expense was $6.3 million in 1996, a decrease of
48% from $12.2 million in 1995. This decrease resulted primarily from a
suspension of interest payments on indebtedness while the Company reorganized
under Chapter 11.
OTHER INCOME (EXPENSE), NET. The Company recorded other income (expense),
net, of ($600,000) in 1996 and $500,000 in 1995. The decline in 1996 was
primarily attributable to a decrease in interest income associated with a lower
value of funds available for investment.
RESTRUCTURING AND OTHER CHARGES. In 1995, the Company incurred
restructuring and other charges of $372.2 million, resulting primarily from a
write-down of $306.2 million of intangibles, leasehold improvements and
equipment in accordance with the implementation of SFAS No. 121. In 1995, the
Company also recognized charges related to a reduction in the carrying value of
certain assets. Such reductions were not materially different from the charges
that would have resulted from the application of SFAS No. 121. Such charges,
which totaled $44.0 million, resulted primarily from the write-down of certain
entertainment facility equipment and from the write-down of property and
equipment related to a relocation of the Company's headquarters.
REORGANIZATION ITEMS. Reorganization items of $21.3 million incurred by the
Company in 1996 resulted from the Company's reorganization under Chapter 11.
These costs included $7.1 million for professional fees and $8.9 million for
losses on asset disposals.
LIQUIDITY AND CAPITAL RESOURCES
Because it does not have significant receivables or inventory and utilizes
trade credit in purchasing food products and other supplies, the Company does
not require significant working capital to operate. The Company requires cash
primarily to finance capital expenditures to maintain and upgrade existing
stores and to fund operating losses and debt service. Following the
implementation of its business strategy, the Company will also need cash to
build new stores. Historically, the Company has met these liquidity requirements
primarily through external financings, including through the issuance of debt
and equity securities and borrowings under revolving credit facilities, as well
as through cash flow generated by operating activities.
16
<PAGE>
In connection with the Plan of Reorganization, substantially all of the
Company's pre-petition debt facilities and other obligations to creditors were
restructured, repaid or eliminated including certain pre-petition tax claims,
the McDonald's Note and the McDonald's Rent Deferral Secured Notes. Upon
emerging from Chapter 11, the Company issued (a) Units consisting of $85.0
million aggregate principal amount of Notes and Warrants and (b) $15.0 million
of Convertible Redeemable Preferred Stock. The net proceeds of the offerings of
the Units and Convertible Redeemable Preferred Stock totaled $93.8 million. Of
that amount, the Company (i) repaid borrowings, claims and expenses incurred
while under Chapter 11 of $45.5 million, (ii) purchased an aggregate of $21.6
million of securities, consisting of U.S. Treasury Securities, that were placed
in escrow and pledged as security for scheduled interest payments on the Notes
through August 1, 1999, and (iii) applied $26.7 million to finance capital
expenditures, and provide for working capital and capital for other general
corporate purposes.
The Company holds for sale certain parcels of undeveloped land which secure
the McDonald's Notes. To the extent such sales occur prior to the due date for
debt services, the net proceeds for such sales would be available to be applied
to such payments.
During 1997 and 1996, the Company used cash of $27.8 million and $36.2
million, respectively, in operations before reorganizations items. These uses
included losses from operations before interest, taxes, depreciation and
amortization of $15.3 million in 1997 and $33.8 million in 1996, net interest
and other expenses of $8.5 million in 1997 and $6.9 million in 1996 (excluding
suspended interest on prepetition indebtedness during bankruptcy), payment of
$6.5 million in 1997 for plan administrative expenses, and other changes in
working capital including approximately $5 million of payables and accruals in
1997 attributable to the Company's renovation program.
During the fourth quarter of 1997, the Company began an extensive FunCenter
renovation program which, on a per store basis, was much broader in scope and
costlier than originally planned, designed to broaden their entertainment
offerings, upgrade their facilities and give them a "new look." During the first
phase of this program, through March 31, 1998, the Company has renovated
approximately 60% of its FunCenters, and expects, during the next phase, to
complete renovations for an additional 15% of its FunCenters by the end of 1998.
Through March 31, 1998, the Company also completed the conversion of
approximately 80% of its FunCenters to permit the sale of Pizza Hut menu items
and renovated approximately 25% of its locations to offer new weekday programs
under the "DZU" brand name. The estimated costs of these renovations, and
advance purchases, through March 31, 1998, were approximately $21 million and $3
million, respectively, of which approximately $15 million had been paid or
accrued as of December 31, 1997. These costs exclude approximately $3 million of
excess billings from general contractors which the Company intends to dispute.
See Note 14 to the Consolidated Financial Statements. The Company estimates that
the cost to complete the renovation of an additional 15% of its FunCenters, an
excluding advanced purchases referred to above will be approximately $2 million.
If the Company's renovation program is delayed or costs more than expected,
or if results of operations do not improve sufficiently to generate positive
cash flow from operations, later phases of the Company's renovation program
would be delayed and the Company could require additional financing for working
capital and to complete its renovation program. The cash necessary to complete
the Company's capital expenditure program, fund operating losses, if any, and
working capital has been provided by the Company's financing activities,
including from the proceeds from the sale of Units and Convertible Preferred
Stock, and equipment financing and is now also being provided under the
Company's Senior Facility (as described below). Should operating cash flow of
existing FunCenters increase to a level beyond that which is needed to maintain
its operations, the Company also expects to use such cash to fund capital
expenditures at existing FunCenters or to build new FunCenters. If operating
cash flows do not so increase, or additioanl capital is not raised, it is
unlikely that additional FunCenters beyond those anticipated to be renovated in
1998, will be renovated.
17
<PAGE>
If the Company continues to generate negative operating cash flow, less
capital will be available for its renovation program, which may, in turn,
adversely impact implementation of the Company's business strategy and thus,
future operating results. In the event that the results of its business strategy
are not sufficient for the Company to generate positive cash flow from
operations, or take longer than expected to realize, or if the Company's
renovation program is delayed or costs more than expected, the Company is likely
to need additional financing for debt service, working capital and later phases
of the renovation program. See "Risk Factors Affecting Future Operating
Performance -- Successful Execution of Turnaround Plan."
The Company is also permitted under the Indenture to incur up to $5.0
million of new indebtedness under sale and leaseback transactions, capital lease
obligations or purchase money obligations. If the Company was unable to generate
sufficient operating funds to pay the interest on the Exchange Notes and to fund
its other capital requirements, including current and future operating losses,
if any, there can be no assurance that alternative sources of financing would be
available to the Company or, if available, that such financing would be on
commercially reasonable terms. If it becomes necessary for the Company to raise
additional capital, the Company would be limited by the terms of the indenture
with respect to the Exchange Notes to issuing additional equity. There can be no
assurance that capital would be available from any of the sources permitted
under such indenture.
On December 31, 1997, the Company had an unrestricted cash balance of
approximately $8.6 million. The Company also had $19.0 million in cash and
investments in the Escrowed Interest Account as of December 31, 1997, which
amount is dedicated to making scheduled payments of interest on the Exchange
Notes through August 1, 1999. Subject to the Company's ability to generate
positive cash flow from operations, and availability of funds under the
Company's Senior Secured Revolving Credit Facility, the Company believes that
its existing capital resources will provide sufficient funds during 1998 to
finance the Company's operations in the ordinary course and to fund its debt
service requirements and the phases of its renovation program contemplated to be
completed in 1998, and other capital expenditures.
On March 31, 1998, the Company entered into a $10.0 million Senior Secured
Revolving Credit Facility (the "Senior Facility") as permitted under the
Indenture dated July 22, 1997 (the "Indenture"), among the Company, the
guarantors named therein and State Street Bank and Trust Company, trustee. The
Senior Facility bears interest at prime plus 1% plus certain fees and allows the
Company to borrow 133% of the 12-month trailing FunCenter contribution (as
defined therein) for its 100 top performing FunCenters up to a maximum principal
amount of $10.0 million. On April 3, 1998, the Company had the ability to borrow
the full $10.0 million available under this Senior Facility, subject to a $2.0
million reserve for certain contractor disputes. See Note 15 to the Consolidated
Financial Statements.
SEASONALITY
The Company's FunCenters experience seasonal fluctuations in their revenues,
with higher revenues occurring in the first quarter of the year due to the fact
that many FunCenters are located in cold weather regions where children are
unable to play outside during this time of year. In 1997, the FunCenters
generated 30% of their revenue in the first quarter versus 25%, 24% and 22% in
the second, third and fourth quarters, respectively. These fluctuations in
revenues are primarily related to the school year and the weather.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No.
109"), issued in February 1992. Deferred income tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws in
effect when the differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates
18
<PAGE>
is recognized in income in the period that includes the enactment date. A
valuation allowance must be established for deferred tax assets if it is "more
likely than not" that all or a portion of the deferred tax assets will not be
realized. At December 31, 1997, the Company's deferred tax valuation allowance
was equal to its net deferred tax assets because, in management's judgment, it
is "more likely than not" that all of the net deferred tax assets will not be
realized.
As a result of its reorganization under Chapter 11, the Company realized
discharge of indebtedness income of $332,165,000. Although this income is not
taxable to the Company for federal or state purposes due to the Company's
insolvency, the Company's net operating loss carryforwards ("NOLs") are reduced
by a corresponding amount. In addition, as a result of the reorganization, the
Company is treated as having experienced an "ownership change" under Internal
Revenue Code Section 382. Accordingly, the Company's ability to offset income in
each post-reorganization taxable year by its then remaining NOLs and certain
built-in losses (including depreciation and amortization deductions of any
portion of the Company's basis in assets with built-in-losses) is limited to an
amount not to exceed the aggregate value of the Company's common stock
immediately before the change in control (taking into account the increase in
value resulting from the cancellation of creditors' claims under the Plan of
Reorganization) multiplied by the long-term tax-exempt rate published monthly by
the Internal Revenue Service. At December 31, 1997, the Company's NOLs were
approximately $178.0 million and the use of approximately $137.0 million of
those NOLs was limited to approximately $4.0 million per year.
FRESH START REPORTING
The effects of the Company's reorganization under Chapter 11 have been
accounted for in the Company's financial statements using the principles
required by the American Institute of Certified Public Accountants' Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("Fresh Start Accounting"). Pursuant to such principles, the
Company's assets and liabilities have been restated at "reorganization value,"
which is defined as the value of the entity before considering liabilities on a
going-concern basis following the reorganization and approximates the amount a
willing buyer would pay for the assets of the Company immediately after the
reorganization. The reorganization value for the Company has been determined by
reference to liabilities remaining after the Effective Date plus the estimated
value of total stockholders' equity of the outstanding shares of the New Common
Stock. The reorganization value of the Company has been allocated to the assets
of the Company in conformity with the procedures specified by Accounting
Principles Board Opinion No. 16, Business Combinations, for transactions
reported on the basis of the purchase method of accounting.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," and
SFAS No. 129, "Disclosure of Information about Capital Structure," which are
effective for fiscal years ending after December 15, 1997. SFAS No. 128
simplifies the current required calculation of earnings per share ("EPS") under
Accounting Principles Board No. 15, "Earnings Per Share," by replacing the
existing calculation of primary EPS with a basic EPS calculation. It requires a
dual presentation, for complex capital structures, of basic and diluted EPS on
the face of the income statement and requires a reconciliation of basic EPS
factors to diluted EPS factors. SFAS No. 129 requires disclosing information
about an entity's capital structure. The Company adopted SFAS No. 128 in 1997
and experienced no material impact to the Company's EPS calculation or
disclosure information.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
This statement established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The new rule requires that the Company (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
balance
19
<PAGE>
sheet. The Company plans to adopt SFAS No. 130 in 1998 and expects no material
impact to the Company's financial statement presentation.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement requires annual financial
statements to disclose information about products, services and geographic
areas. This statement management approach requires disclosing financial and
descriptive information about an enterprise's reportable operating segments
based on reporting information the way management organizes the segments for
making business decisions and assessing performance. It also eliminates the
requirement to disclose additional information about subsidiaries that are not
consolidated. This statement may result in more information being disclosed than
presently presented and require new interim information not previously
presented. The Company plans to adopt SFAS No. 131 in 1998 and expects that such
adoption will affect only the Company's disclosure information and not its
results of operation.
IMPACT OF YEAR 2000
The Company's computer programs were written using two digits rather than
four to define the applicable year. As a result, they recognize a date using
'00" as the year 1900 rather than the year 2000. If not changed by January 1,
2000, certain programs may not be able to function or there could be system
failures.
The Company has made a preliminary assessment of this situation and has
concluded that it will have to modify or replace certain portions of its
software so that the Company's computer systems will function properly with
respect to dates in the year 2000 and thereafter. Certain software used by the
Company is licensed from third party vendors who have planned releases to
address this issue. Other software has been internally generated by the Company.
The Company believes that with modifications to existing software and
conversions to new software, the year 2000 issue will not pose significant
operational problems for its computer systems. However, if such modifications
are not made, or are not completed timely, the year 2000 issue may have an
impact on the Company's ability to operate. The Company does not believe that
the costs of addressing this issue will be material to the Company's operations.
RISK FACTORS AFFECTING FUTURE OPERATING PERFORMANCE
SUCCESSFUL EXECUTION OF TURNAROUND PLAN
The Company is implementing a new business strategy, which consists of a
number of cost-cutting and revenue enhancing initiatives. The Company is
undertaking a significant renovation program at a majority of its FunCenter
locations. Although the Company has not experienced any material delays to date,
there is a risk that such renovations will not be completed in a timely manner
and that such capital expenditures will exceed expected amounts. The
implementation of the Company's business strategy will require successful
repositioning of the Company's brand image with its target customers, which will
depend, in part upon successful marketing and promotional campaigns, as well as
customer acceptance of the product changes. Finally, the success of the
Company's strategy will depend upon its ability to attract and retain qualified
FunCenter managers capable of implementing the Company's revised operating
strategy.
Prior to implementing the Turnaround Plan and commencing renovations, the
Company experienced negative comparable store sales while operating in Chapter
11. If the Company is not successful in attracting additional customers and
reversing this trend, it will not be able to fully implement its strategy
without additional financing (which may not be available) and the improvement in
the Company's results of operation would not materialize. If such strategy is
not fully implemented, it is less likely that the trends of negative comparable
store sales and/or earnings will be reversed which, in turn would have an
adverse affect on the availability of cash and other financial resources
necessary for the implementation of the
20
<PAGE>
Company's business strategy. Further, if the implementation of the such strategy
is not successful and the Company is unable to generate sufficient operating
funds to pay the interest on the Notes and fund its other capital requirements,
there can be no assurance that alternative sources of financing would be
available to the Company or, if available, that such financing would be on
commercially reasonable terms. If it becomes necessary for the Company to raise
capital in addition to the amounts permitted to be raised by the Indenture, the
Company would be limited by the terms of the Indenture to issuing additional
equity which may not be available. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NONCOMPARABILITY OF FINANCIAL INFORMATION
Information reflecting the results of operations and financial condition of
the Company since the Effective Date is not comparable to prior periods due to:
(i) store closings undertaken during the Company's reorganization; (ii) the
replacement of the management team and the restructuring of the Company's store
operations and general and administrative activities; (iii) the costs and
expenses relating to the Company's bankruptcy case and the impact of the
restructuring or extinguishment of certain interests and liabilities; and (iv)
the application of Fresh Start Accounting, pursuant to which the Company's
assets have been stated at "reorganization value," which is defined as the value
of the entity (before considering liabilities) on a going-concern basis
following the reorganization and approximates the amount a willing buyer would
pay for the assets of the Company immediately after the reorganization.
Accordingly, there is only limited financial and operating history of the
Company for a potential investor to evaluate. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's success is highly dependent upon Scott W. Bernstein, the
President and Chief Executive Officer. The Company's success is also dependent
upon its other senior managers, Robert G. Rooney, Senior Vice President and
Chief Financial and Administrative Officer, and Sharon L. Rothstein, Senior Vice
President, Marketing and Entertainment. Each of Mr. Bernstein, Mr. Rooney and
Ms. Rothstein is subject to an employment agreement; however, the loss of the
services of any such individuals could have a material adverse effect upon the
Company.
CONTROL BY PRINCIPAL STOCKHOLDERS
The Company's executive officers and directors (and their respective
affiliates) (collectively, the "Principal Stockholders") beneficially own 67.9%
of the Common Stock (after giving effect to Stock Options granted under the
Stock Incentive Plan, the Convertible Preferred Stock and the Ten Year
Warrants). See "Principal Stockholders." The Principal Stockholders, if voting
together, have sufficient voting power to elect a majority of the Company's
directors, exercise control over the business, policies and affairs of the
Company and, in general, determine the outcome of any corporate transaction or
other matters submitted to the stockholders for approval, such as any proposed
amendment to the certificate of incorporation of the Company, the authorization
of additional shares of capital stock, and any merger, consolidation, sale of
all or substantially all of the assets of the Company, and could prevent or
cause a Change of Control of the Company, all of which may adversely affect the
Company.
SEASONALITY
The Company's FunCenters typically experience seasonal fluctuations in their
revenues, with generally higher revenues occurring in the first quarter of the
year due to the fact that many of the Company's facilities are located in cold
weather regions where children are unable to play outside during this time of
year. In 1997, the Company's FunCenters generated 30% of their revenue in the
first quarter versus 25%, 24% and 22% in the second, third and fourth quarters,
respectively. These fluctuations in revenues are primarily influenced by the
school year and the weather.
21
<PAGE>
INDUSTRY CONDITIONS/COMPETITION
The Company competes against a wide variety of concepts vying for family
leisure time and entertainment spending. These competing concepts encompass a
broad spectrum of entertainment opportunities, including family entertainment
centers, theme parks, movie theaters and other in-home and out-of-home
entertainment activities. In particular, the Company competes in the
pay-for-play children's entertainment center industry by targeting its
activities and programming to children ages two to twelve. This industry is
affected by general and local economic conditions, demographic trends and
consumer tastes over which the Company has no control. Consumer tastes, in
particular, are subject to rapid changes which could result in the Company's
activities falling out of favor with its target customers, requiring it to
invest in new equipment for FunCenters. The Company's future revenues will
depend to a significant extent upon its ability to respond to changes in
consumer tastes. The performance of individual FunCenters may be affected by a
variety of factors such as the location of competing facilities, increased labor
and employee benefit costs and the availability of experienced management and
hourly employees.
Competitive market conditions, including the emergence of significant new
competitors, could materially adversely affect the Company's ability to improve
its results of operations. Such new competitors, which may include The Walt
Disney Company (which has a family entertainment concept in two locations and
has announced plans to open additional store locations), and certain existing
competitors have or may have longer operating histories, substantially greater
name recognition and more extensive financial, technical, marketing, sales and
distribution resources. There can be no assurance that the Company will be able
to compete successfully against existing and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results and financial condition.
LIMITATION ON USE OF NET OPERATING LOSSES AND BUILT-IN LOSSES
The Company was required to reduce its net operating loss carryforwards
("NOLs") as a result of the cancellation of indebtedness pursuant to the
confirmation of the Plan.
At December 31, 1997, the Company's NOLs were approximately $178.0 million
(after taking into account the reduction due to the cancellation of
indebtedness). As a result of its reorganization under Chapter 11, the Company
is treated as having experienced an ownership change under Internal Revenue Code
Section 382. Under Section 382, the Company's ability to offset income in each
post-reorganization taxable year by its remaining NOLs and built-in losses
(including depreciation and amortization deductions of any portion of the
Company's basis in assets with built-in losses) is limited to an amount not to
exceed the aggregate value of the Company's common stock immediately before such
change in control (taking into account in such calculation, however, any
increase in value resulting from any surrender or cancellation of creditors'
claims in connection with the Plan) multiplied by the long-term tax-exempt rate
published monthly by the Internal Revenue Service. Based on this calculation,
the Company's use of approximately $137.0 million of these NOLs is limited to
approximately $4.0 million per year.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Certified Public Accountants for the years
ended December 31, 1997 and 1996........................................................................ 24
Report of Independent Certified Public Accountants for the year
ended December 31, 1995................................................................................. 25
Consolidated Statements of Operations for the five month period
ended December 31, 1997, the seven month period
ended July 31, 1997, and the two years in the period
ended December 31, 1996................................................................................. 26
Consolidated Balance Sheets as of December 31, 1997 and 1996.............................................. 27
Consolidated Statements of Cash Flows for the five month period
ended December 31, 1997, the seven month period
ended July 31, 1997, and the two years in the period
ended December 31, 1996................................................................................. 28
Consolidated Statements of Equity (Deficit) for the five month period
ended December 31, 1997, the seven month period
ended July 31, 1997, and the two years in the period
ended December 31, 1996................................................................................. 30
Notes to Consolidated Financial Statements................................................................ 31
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and
Stockholders
Discovery Zone, Inc.
We have audited the accompanying consolidated balance sheet of Discovery
Zone, Inc. and subsidiaries as of December 31, 1997 (Successor Company) and the
related consolidated statements of operations, equity (deficit), and cash flows
for the seven-month period ended July 31, 1997 (Predecessor Company) and the
five-month period ended December 31, 1997 (Successor Company). We have also
audited the consolidated balance sheet of Discovery Zone, Inc. as of December
31, 1996 and the related consolidated statements of operations, equity
(deficit), and cash flows for the year then ended (Predecessor Company). Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Discovery Zone,
Inc. and subsidiaries at December 31, 1997 (Successor Company) and the
consolidated results of their operations and their cash flows for the
seven-month period ended July 31, 1997 (Predecessor Company) and the five-month
period ended December 31, 1997 (Successor Company) as well as the consolidated
financial position at December 31, 1996 and the consolidated results of their
operations and their cash flows for the year then ended (Predecessor Company),
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
West Palm Beach, Florida
April 3, 1998
24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Discovery Zone, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the results of
operations and cash flows of Discovery Zone, Inc. and its subsidiaries (the
"Company") for the year ended December 31, 1995 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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 of
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Notes 10 and 16 (Note
references are to previously issued December 31, 1995 financial statements) to
the financial statements, the Company has suffered increasing operating cash
flow losses, is in default of certain indebtedness and has on March 25, 1996
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code. These events and circumstances raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 16 (Note reference is to
previously issued December 31, 1995 financial statements). The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 3 to the financial statements, in 1995, the Company
adopted Statement of Financial Accounting Standards No. 121, "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF".
PRICE WATERHOUSE LLP
Miami, Florida
April 13, 1996
25
<PAGE>
DISCOVERY ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR
----------- COMPANY
FIVE MONTHS ---------------------------------------
ENDED SEVEN MONTHS YEAR ENDED YEAR ENDED
DECEMBER ENDED JULY DECEMBER DECEMBER
31, 31, 31, 31,
1997 1997 1996 1995
----------- ------------- ----------- -----------
REVENUE:
<S> <C> <C> <C> <C> <C>
Company location sales..................... $ 48,485 $ 82,537 $ 181,699 $ 257,839
Franchise related revenue.................. -- -- 26 1,651
-
----------- ------------- ----------- -----------
Total revenue............................ 48,485 82,537 181,725 259,490
COST OF GOODS SOLD........................... 7,311 14,136 34,276 50,227
STORE OPERATING EXPENSE...................... 44,189 60,192 140,486 185,587
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE.................................... 10,244 10,235 40,779 58,201
DEPRECIATION AND AMORTIZATION................ 9,314 11,920 21,876 31,972
OTHER CHARGES................................ -- -- -- 360,803
RESTRUCTURING CHARGES........................ -- -- -- 11,357
-
----------- ------------- ----------- -----------
OPERATING LOSS............................... (22,573) (13,946) (55,692) (438,657)
OTHER INCOME (EXPENSE):
Interest expense (Note 1).................. (6,076) (3,249) (6,277) (12,226)
Interest income............................ 1,010 86 -- 323
Minority interest.......................... -- -- -- 5,162
Other, net................................. (327) 73 (580) 153
-
----------- ------------- ----------- -----------
Total other expense, net................. (5,393) (3,090) (6,857) (6,588)
-
----------- ------------- ----------- -----------
LOSS BEFORE REORGANIZATION ITEMS, INCOME TAX
PROVISION, AND EXTRAORDINARY ITEM.......... (27,966) (17,036) (62,549) (445,245)
REORGANIZATION ITEMS:
Professional fees.......................... -- (6,164) (7,076) --
Loss on asset disposals.................... -- -- (8,867) --
Unallocated reorganization value........... -- 24,829 -- --
Other, net................................. -- (7,082) (5,342) --
-
----------- ------------- ----------- -----------
Total reorganization items............... -- 11,583 (21,285) --
-
----------- ------------- ----------- -----------
LOSS BEFORE INCOME TAX PROVISION AND
EXTRAORDINARY ITEM......................... (27,966) (5,453) (83,834) (445,245)
INCOME TAX PROVISION......................... -- -- -- 4,000
-
----------- ------------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM............... (27,966) (5,453) (83,834) (449,245)
EXTRAORDINARY ITEM-GAIN ON DISCHARGE OF
DEBT....................................... -- 332,165 -- --
-
----------- ------------- ----------- -----------
NET INCOME (LOSS)............................ (27,966) 326,712 (83,834) (449,245)
ACCRETION OF CONVERTIBLE REDEEMABLE PREFERRED
STOCK TO REDEMPTION VALUE.................. (97) -- -- --
-
----------- ------------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS............................... $ (28,063) $ 326,712 $ (83,834) $(449,245)
-
-
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Per common share -- basic and diluted:
Loss before extraordinary item............. $ (7.02) $ (0.09) $ (1.45) $ (8.30)
Extraordinary item-gain on discharge of
debt..................................... -- 5.75 -- --
-
----------- ------------- ----------- -----------
Net income (loss).......................... $ (7.02) $ 5.66 $ (1.45) $ (8.30)
-
-
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Weighted average number of common shares
outstanding.............................. 4,000 57,705 57,691 54,139
-
-
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
DISCOVERY ZONE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
-------------- --------------
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,607 $ 3,326
Restricted cash and investments........................... 13,036 --
Receivables, net.......................................... 750 1,338
Inventories............................................... 1,739 2,038
Prepaid expenses.......................................... 2,289 1,085
Current deposits.......................................... 2,804 1,699
-------------- --------------
TOTAL CURRENT ASSETS.................................... 29,225 9,486
RESTRICTED CASH AND INVESTMENTS............................. 5,981 --
PROPERTY AND EQUIPMENT, net (Note 3)........................ 131,352 110,381
LAND HELD FOR SALE.......................................... 3,635 3,635
OTHER ASSETS, net........................................... 6,398 2,284
-------------- --------------
TOTAL ASSETS.......................................... $ 176,591 $ 125,786
-------------- --------------
-------------- --------------
LIABILITIES & EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable........................................ $ 13,657 $ 7,518
Accrued liabilities..................................... 9,049 7,780
Due to affiliate........................................ -- 903
Accrued interest........................................ 2,371 637
Current portion of long-term debt....................... 1,102 --
Debtor-in-possession credit facility.................... -- 22,448
-------------- --------------
TOTAL CURRENT LIABILITIES............................... 26,179 39,286
LONG-TERM DEBT............................................ 87,091 4,666
OTHER LONG-TERM LIABILITIES............................... 7,169 498
LIABILITIES SUBJECT TO COMPROMISE........................... -- 344,908
SERIES A CONVERTIBLE PREFERRED STOCK -- 1,000 shares
authorized, issued and outstanding, redemption value of
$15,000................................................... 13,897 --
COMMITMENTS AND CONTINGENCIES
NON-REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
EQUITY (DEFICIT):
Preferred stock (Predecessor Company) -- $.01 par value;
10,000,000 shares authorized, no shares outstanding... -- --
Common stock (Predecessor Company) -- $.01 par value;
100,000,000 shares authorized, 57,705,470 shares
issued and 57,645,925 shares outstanding at December
31, 1996.............................................. -- 577
Common stock (Successor Company) -- $.01 par value;
10,000,000 shares authorized, 4,000,000 shares issued
and outstanding at December 31, 1997.................. 40 --
Treasury stock (Predecessor Company) -- 59,545 shares at
cost.................................................. -- (588)
Additional paid-in capital.............................. 70,063 291,925
Cumulative translation adjustment....................... 118 62
Accumulated deficit..................................... (27,966) (555,548)
-------------- --------------
TOTAL NON-REDEEMABLE PREFERRED STOCK, COMMON STOCK AND
OTHER EQUITY (DEFICIT)................................ 42,255 (263,572)
-------------- --------------
TOTAL LIABILITIES AND EQUITY (DEFICIT)................ $ 176,591 $ 125,786
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
DISCOVERY ZONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------- -------------------------------------
SEVEN
FIVE MONTHS MONTHS YEAR ENDED YEAR ENDED
ENDED ENDED DECEMBER DECEMBER
DECEMBER JULY 31, 31, 31,
31, 1997 1997 1996 1995
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ (27,966) $ 326,712 $ (83,834) $(449,245)
Adjustments to reconcile net income (loss)
to net cash used in operating activities
before reorganization items:
Reorganization items.................. -- (11,583) 21,285 --
Plan administrative payments.......... (5,391) (1,109) -- --
Extraordinary item-gain on discharge
of debt............................. -- (332,165) -- --
Depreciation and amortization......... 9,314 11,920 21,876 31,972
Amortization of debt discount and
other noncash interest charges...... 398 -- 1,383 5,863
Provision for bad debts............... -- -- 1,093 2,149
Other charges......................... -- -- -- 360,803
Restructuring costs................... -- -- -- 11,357
Provision for deferred taxes.......... -- -- -- 4,000
Loss on asset disposals............... -- -- 1,010 --
Changes in operating assets and
liabilities, net of effects from
purchase transactions:
Receivables........................... (42) 630 (831) 6,463
Inventories........................... (425) 724 1,998 254
Prepaid expenses and current assets... (1,825) (484) (3,757) (3,830)
Accounts payable...................... 4,779 814 8,792 (17,703)
Accrued liabilities................... 812 (3,182) (5,193) (9,954)
Other................................. 375 (108) -- (1,232)
------------- ----------- ----------- -----------
Net cash used in operating activities
before reorganization items............. (19,971) (7,831) (36,178) (59,103)
Reorganization items...................... -- 11,583 (21,285) --
Adjustments to reconcile reorganization
items to cash used by reorganization
items:
Unallocated reorganization value...... -- (24,829) -- --
Loss on asset disposals............... -- -- 8,867 --
Write-off of deferred debt items...... -- -- 4,340 --
Accrued reorganization expenses....... (2,486) 10,118 2,615 --
Proceeds from sale of property and
equipment........................... -- -- 1,753 --
------------- ----------- ----------- -----------
Net cash used in reorganization items..... (2,486) (3,128) 3,710 --
------------- ----------- ----------- -----------
Net cash used in operating activities
after reorganization costs.............. (22,457) (10,959) (39,888) (59,103)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisitions and investments,
net..................................... -- -- -- (5,300)
Expenditures for intangible and other
assets, net............................. -- -- -- (4,344)
</TABLE>
CONTINUED ON NEXT PAGE
28
<PAGE>
DISCOVERY ZONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------- -------------------------------------
SEVEN
FIVE MONTHS MONTHS YEAR ENDED YEAR ENDED
ENDED ENDED DECEMBER DECEMBER
DECEMBER JULY 31, 31, 31,
31, 1997 1997 1996 1995
------------- ----------- ----------- -----------
Minority interest in subsidiaries......... $ -- $ -- $ -- $ (3,186)
<S> <C> <C> <C> <C>
Purchases of property and equipment....... (10,642) (567) (2,672) (51,732)
Proceeds from sale of property and
equipment............................... -- 99 6,477 --
------------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. (10,642) (468) 3,805 (64,562)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock................ -- -- -- (511)
Proceeds from issuance of long-term
obligations............................. -- -- -- 626,200
Repayment of long-term obligations........ -- -- -- (544,411)
Net proceeds from debtor-in-possession
credit facilities....................... -- -- 22,448 --
Net repayment of debtor-in-possession
credit facilities....................... -- (22,448) -- --
Proceeds from Senior Secured Notes with
Warrants................................ -- 85,000 -- --
Proceeds from Redeemable Convertible
Preferred Stock......................... -- 15,000 -- --
Payment of financing costs................ (1,800) (4,569) -- --
Escrow of restricted cash................. -- (21,608) -- --
Proceeds from short-term borrowings....... 276 276 7,500 --
Repayment of short-term borrowings........ (162) (158) (7,500) --
Advances from Birch Holdings LLC.......... -- 2,500 -- --
Repayment of advances from Birch Holdings
LLC..................................... -- (2,500) -- --
Advances from affiliate, net.............. -- -- 10,730 11,028
Proceeds from the exercise of options and
warrants................................ -- -- 282 29,423
------------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. (1,686) 51,493 33,460 121,729
------------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................. (34,785) 40,066 (2,623) (1,936)
Cash and cash equivalents, beginning of
period.................................. 43,392 3,326 5,949 7,885
------------- ----------- ----------- -----------
Cash and cash equivalents, end of
period.................................. $ 8,607 $ 43,392 $ 3,326 $ 5,949
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................... $ 3,194 $ 3,340 $ 844 $ 3,021
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Cash paid for professional fees in
connection with Chapter 11
Proceedings............................. $ 1,331 $ 3,128 $ 5,461 $ --
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE>
DISCOVERY ZONE, INC.
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON TREASURY ADDITIONAL EARNINGS
----------------------- ---------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS DEFICIT)
---------- ----------- --------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994.................. 48,723,115 $ 487 (5,058) $ (77) $ 260,282 $ 715 $ (22,469)
Stock issued in
acquisitions.......... 200,000 2 -- -- 1,311 -- --
Stock issued on exercise
of nonqualified stock
options............... 1,377,855 14 -- -- 3,387 -- --
Stock issued on exercise
of warrants........... 7,234,500 72 -- -- 26,566 (616) --
Treasury shares
acquired.............. -- -- (54,487) (511) -- -- --
Cumulative translation
adjustment............ -- -- -- -- -- -- --
Net loss................ -- -- -- -- -- -- (449,245)
---------- ----- --------- --- ----------- ----- -------------
Balance at December 31,
1995.................. 57,535,470 575 (59,545) (588) 291,546 99 (471,714)
Stock issued on exercise
of nonqualified stock
options............... 170,000 2 -- -- 280 -- --
Cumulative translation
adjustment............ -- -- -- -- -- -- --
Net loss................ -- -- -- -- -- -- (83,834)
---------- ----- --------- --- ----------- ----- -------------
Balance at December 31,
1996.................. 57,705,470 577 (59,545) (588) 291,826 99 (555,548)
Cumulative translation
adjustment............ -- -- -- -- -- -- --
Cancellation of old
common shares and
elimination of
existing stockholders'
equity upon emergence
from bankruptcy....... (57,705,470) (577) 59,545 588 (228,716) (99) 228,836
Issuance of new common
shares................ 4,000,000 40 -- -- -- -- --
Record value of warrants
issued in connection
with exit financing... -- -- -- -- 7,050 -- --
Net income.............. -- -- -- -- -- -- 326,712
---------- ----- --------- --- ----------- ----- -------------
Balance at July 31,
1997.................. 4,000,000 40 -- -- 70,160 -- --
Accretion of convertible
redeemable preferred
stock to redemption
value................. -- -- -- -- (97) -- --
Cumulative translation
adjustment............ -- -- -- -- -- -- --
Net loss................ -- -- -- -- -- -- (27,966)
---------- ----- --------- --- ----------- ----- -------------
Balance at December 31,
1997.................. 4,000,000 $ 40 -- $ -- $ 70,063 $ -- $ (27,966)
---------- ----- --------- --- ----------- ----- -------------
---------- ----- --------- --- ----------- ----- -------------
<CAPTION>
CUMULATIVE TOTAL
TRANSLATION EQUITY
ADJUSTMENT (DEFICIT)
--------------- ---------
<S> <C> <C>
Balance at December 31,
1994.................. $ 25 $ 238,963
Stock issued in
acquisitions.......... -- 1,313
Stock issued on exercise
of nonqualified stock
options............... -- 3,401
Stock issued on exercise
of warrants........... -- 26,022
Treasury shares
acquired.............. -- (511)
Cumulative translation
adjustment............ (116) (116)
Net loss................ -- (449,245)
--- ---------
Balance at December 31,
1995.................. (91) (180,173)
Stock issued on exercise
of nonqualified stock
options............... -- 282
Cumulative translation
adjustment............ 153 153
Net loss................ -- (83,834)
--- ---------
Balance at December 31,
1996.................. 62 (263,572)
Cumulative translation
adjustment............ (30) (30)
Cancellation of old
common shares and
elimination of
existing stockholders'
equity upon emergence
from bankruptcy....... (32) --
Issuance of new common
shares................ -- 40
Record value of warrants
issued in connection
with exit financing... -- 7,050
Net income.............. -- 326,712
--- ---------
Balance at July 31,
1997.................. -- 70,200
Accretion of convertible
redeemable preferred
stock to redemption
value................. -- (97)
Cumulative translation
adjustment............ 118 118
Net loss................ -- (27,966)
--- ---------
Balance at December 31,
1997.................. $ 118 $ 42,255
--- ---------
--- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
30
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
Discovery Zone, Inc. (the "Company") is the leading owner and operator of
pay-for-play children's entertainment centers ("FunCenters") in North America
with a national network of 205 FunCenters in 39 states, Puerto Rico and Canada.
The Company also operates two entertainment centers targeting adult customers,
under the "Block Party" name. The accompanying financial statements present the
consolidated financial position of the Company and its wholly-owned
subsidiaries. All material intercompany transactions and balances have been
eliminated in consolidation.
Discovery Zone, Inc. and its nineteen domestic subsidiaries (collectively,
the "Group") emerged from bankruptcy on July 29, 1997. The Group had originally
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court") on March 25, 1996 (the
"Petition Date"). While under Chapter 11, certain claims against the Group at
the Petition Date were stayed while the Company continued its operations as a
Debtor-in-Possession. These claims are reflected in the Company's consolidated
balance sheet as Liabilities Subject to Compromise as of December 31, 1996. On
July 18, 1997, the Bankruptcy Court approved the Company's Joint Plan of
Reorganization with Birch Holdings LLC ("Birch"), an affiliate of Wellspring
Associates LLC ("Wellspring") which became effective on July 29, 1997 (the
"Effective Date" or "Emergence Date").
The consolidated financial statements reflect accounting principles and
practices set forth in American Institute of Certified Public Accountants
Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," which provides guidance for financial
reporting by entities that have filed voluntary petitions for relief under, and
have reorganized in accordance with, the Bankruptcy Code.
In accordance with SOP 90-7, the Company did not accrue interest on its
prepetition interest bearing obligations after the Petition Date as it was
unlikely such interest would be paid under the Plan. The amount of such
unaccrued contractual interest during the seven-month period ended July 31, 1997
and the year ended December 31, 1996 was approximately $9,176,000 and
$11,900,000, respectively.
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts in the 1995 and 1996 Consolidated Financial Statements have
been reclassified to conform with the 1997 presentation.
(2) JOINT PLAN OF REORGANIZATION, EXIT FINANCING AND NEW BUSINESS STRATEGY
In November 1996, the Company filed with the Bankruptcy Court a Joint Plan
of Reorganization (the "Plan") with Birch which set forth a plan for repaying or
otherwise compensating the Company's creditors in order of relative seniority of
their respective claims while seeking to maintain the Company as a going
concern. On July 18, 1997, the Plan was approved by the requisite number of
creditors and confirmed by the Bankruptcy Court. The Plan became effective on
July 29, 1997 and the Company emerged from bankruptcy as of that date.
31
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) JOINT PLAN OF REORGANIZATION, EXIT FINANCING AND NEW BUSINESS STRATEGY
(CONTINUED)
The Plan provided for (i) the payment in full of certain administrative
claims against the Company (those claims which arose after the Petition Date),
(ii) conversion of substantially all of the Company's liabilities subject to
compromise (excluding taxes payable, lease assumption payments and certain other
prepetition liabilities permitted under the Plan) to equity interests in the
Company and, (iii) cancellation of all of the prepetition equity interests in
the Company, as more fully described in the Plan. Birch had purchased certain of
these prepetition claims from the original banks providing a credit facility to
the Company, resulting in ownership of 55.7% of the common stock of the
reorganized Company ("Common Stock").
Pursuant to the Plan, substantially all the Company's prepetition unsecured
liabilities were converted to equity in exchange for units consisting of nine
shares of Common Stock and a ten-year warrant to purchase one share of Common
Stock at a price of $17.55 (the "Ten Year Warrants"). Such unsecured creditors
will receive 4,000,000 shares of Common Stock and Ten Year Warrants exercisable
for 444,444 shares of Common Stock. As a result of the transactions which
occurred on the Effective Date, indebtedness of $332,165,000 was discharged,
resulting in a gain, reflected as an extraordinary item in the accompanying
consolidated statements of operations. This gain is not recognized for tax
purposes to the extent the Company was insolvent at the date of discharge.
However, the Company's net operating loss carryforwards were reduced by the
amount of the gain.
In connection with its emergence from bankruptcy, the Company raised $100
million through the issuance of $15 million of Convertible Redeemable Preferred
Stock ("Preferred Stock") and $85 million of 13.5% Senior Secured Notes with
Warrants, resulting in approximately $93.8 million of net proceeds to the
Company after deducting related offering costs (the "Exit Financing"). The
proceeds were used to repay the Company's debtor-in-possession credit facilities
(See Note 5) and certain bankruptcy administrative claims and reorganization
costs incurred in connection with the Company's emergence from bankruptcy and to
fund the Bond Interest Escrow Account, which is reflected as Restricted Cash and
Investments in the accompanying consolidated financial statements. The Senior
Secured Note holders also received warrants (the "Warrants") to purchase 805,154
shares of Common Stock at an exercise price of $.01 per share exercisable
through August 1, 2007, which represent approximately 12.5% of the diluted
shares of Common Stock after giving effect to the exercise of the Warrants and
the Ten Year Warrants and conversion of the Preferred Stock. A portion of the
proceeds from the Senior Secured Notes was allocated to the Warrants. (See Note
6).
The Preferred Stock is convertible at any time into 1,191,626 shares of
Common Stock at an effective conversion price of $12.59 per common share,
representing approximately 18.5% of the diluted shares of Common Stock after
giving effect to the exercise of the Warrants and the Ten Year Warrants and
conversion of the Preferred Stock. The terms of the Preferred Stock include a
liquidation preference, the right to receive dividends, if paid, voting rights,
Board of Directors representation and redemption upon (i) the earlier to occur
of a merger, the sale of substantially all the Common Stock or assets of the
Company or other change of control, or (ii) 180 days prior written notice from
any holder at any time 62 months after the Effective Date.
Approximately 3,157,000 shares of Common Stock are reserved for issuance for
the exercise of all warrants, and options and conversion of the Preferred Stock.
32
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) JOINT PLAN OF REORGANIZATION, EXIT FINANCING AND NEW BUSINESS STRATEGY
(CONTINUED)
During 1997 the Company implemented a broad cost reduction program and,
since the Effective Date, has begun implementing an extensive store renovation
program and brand repositioning strategy designed to increase attendance and
in-store spending. The Company intends to reposition the Company from an indoor
playground concept to an entertainment venue for children and families that
includes the addition of designated areas for laser tag, arts and crafts, stage
events and promotions with regularly changing activities and events tied in to
major entertainment properties and consumer products.
Subject to the Company's ability to generate positive cash flow from
operations, and availability of funds under the Company's Senior Secured Credit
Facility (See Note 15), the Company believes that its existing capital resources
will provide sufficient funds during 1998 to finance the Company's operations in
the ordinary course and to fund its debt service requirements and the initial
phase of its renovation program and other capital expenditures. However, if the
Company continues to generate negative operating cash flow, less capital will be
available for its renovation program, which may, in turn, adversely impact
implementation of the Company's business strategy and thus, future operating
results. In the event that the results of its business strategy are not
sufficient for the Company to generate positive cash flow from operations, or
take longer than expected to realize, or if the Company's renovation program is
delayed or costs more than expected, the Company is likely to need additional
financing for debt service, working capital and later phases of the renovation
program.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of ninety days or less to be cash and cash equivalents. Such investments are
valued at quoted market prices.
RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consists of U.S. treasury securities
purchased to fund the Bond Interest Escrow Account (See Note 2). The securities
are stated at cost plus accrued interest which approximates fair value.
RECEIVABLES
The Company has recorded a reserve for uncollectible accounts of
approximately $974,000 at December 31, 1996. There is no reserve for
uncollectible accounts at December 31, 1997. The Company believes that the
carrying amount of accounts receivable at December 31, 1997 and 1996
approximates the fair value at such date.
INVENTORIES
Inventories, consisting primarily of facility operating supplies, food and
apparel items, are valued at lower of cost (first in, first out) or market.
33
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The Company is in the process of
finalizing the allocation of its reorganization value (see Note 4) to property
and equipment and identifiable intangible assets in accordance with SOP 90-7,
which provides for reorganization value to be allocated to the Company's assets
in conformity with the procedures specified by Accounting Principles Board
Opinion No. 16, "Business Combinations," for transactions reported on the basis
of the purchase method. Depreciation and amortization expense is provided using
the straight-line method over the lesser of the estimated useful life of the
related assets or the lease term, excluding renewal options. Property and
equipment at December 31, 1997 and 1996 consists of the following (in
thousands):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
---------- -----------
LIFE IN YEARS 1997 1996
------------- ---------- -----------
<S> <C> <C> <C>
Land....................................................................... -- $ 8,164 $ 8,164
Building and improvements.................................................. 20-40 8,811 9,190
Equipment, furniture and fixtures.......................................... 3-12 51,318 74,533
Leasehold improvements..................................................... 1-14 29,563 42,094
Computer equipment and software............................................ 3-5 3,778 7,705
Unallocated reorganization value (Note 4).................................. -- 24,829 --
Construction in progress................................................... -- 14,203 --
----- ---------- -----------
-- 140,666 141,686
Less accumulated depreciation and amortization............................. -- (9,314) (31,305)
----- ---------- -----------
Property and equipment, net................................................ -- $ 131,352 $ 110,381
----- ---------- -----------
----- ---------- -----------
</TABLE>
Depreciation and amortization expense related to property and equipment was
approximately $9,314,000 for the five months ended December 31, 1997,
$11,920,000 for the seven months ended July 31, 1997, $21,876,000 for the year
ended December 31, 1996 and $28,466,000 for the year ended December 31, 1995.
Additions to property and equipment are capitalized and include cost to design,
acquire and install property and equipment, costs incurred in the location,
development and construction of new facilities, major improvements to existing
property and direct incremental costs incurred in the development of management
information systems.
In 1995, the Company elected early adoption of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of." This statement requires that long-lived
assets and certain identifiable intangibles, to be held and used by an entity,
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In addition, this
statement requires that long-lived assets and certain identifiable intangibles
to be disposed of be reported at the lower of carrying amount or fair value less
cost to sell. The Company completed its review of property and other assets in
accordance with SFAS No. 121 and adjusted the carrying values of those assets in
the fourth quarter of 1995. No further adjustments were made in 1996 or 1997.
Concurrent with the adoption of SFAS No. 121, the Company changed the useful
lives of its leasehold improvements to the lesser of the useful life or term of
the lease, excluding renewal options, effective in the fourth quarter of 1995.
Effective January 1, 1996, the Company reduced the period of depreciation for
34
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
certain equipment, furniture and fixtures from its useful life to the lesser of
its useful life or the term of leases for locations at which these items are
placed. This change is an accounting change in the estimate of the useful lives
of property and equipment and is accounted for on a prospective basis beginning
January 1, 1996. The effect of this change was to increase 1996 depreciation
expense by approximately $6,096,000.
LAND HELD FOR SALE
The classification of land held for sale at December 31, 1997 and 1996 is
based upon management's decision to dispose of certain parcels of undeveloped
land. The land is stated at the lower of historical cost or fair value less
costs to sell.
In February 1998, the Company entered into a contract for the sale of
property in Littleton, Colorado.
The Littleton property consists of two parcels, of which one is improved with a
FunCenter and the other is unimproved land. This contract provides for the sale
of such property for $4.2 million and allows the Company to lease the FunCenter
located thereon at an annual rental of $188,250, plus scheduled escalations, for
up to five years. This sale will reduce the outstanding principal balance of the
McDonald's Note to approximately $800,000, and reduce the annual debt service on
the McDonald's Note to approximately $130,000 per year. The Littleton sale is
scheduled to close in July 1998. There can be no assurances that this sale will
ultimately close or close on the aforementioned terms or time period.
INTANGIBLE ASSETS
Prior to December 31, 1995, intangible assets consisted of the cost of
acquired businesses in excess of the market value of net intangible and
identifiable intangible assets acquired and the cost of territory rights
acquired. Territory rights included amounts paid to former franchises to
reacquire development rights in market areas previously granted to them under
area development agreements. The reacquisition of these territories gave the
Company the exclusive right to develop the markets with Company-owned facilities
or grant development rights to others, at its discretion. The cost in excess of
the market value of net tangible and identifiable intangibles and the cost of
territory rights were being amortized on a straight-line basis over 40 years.
Subsequent to an acquisition, the Company periodically evaluates whether
later events and circumstances have occurred that indicated the remaining
estimated useful life or cost of acquired businesses in excess of the market
value of net tangible and identifiable intangible assets acquired may warrant
revision or that the remaining balance of such costs may not be recoverable. The
Company uses an estimate of the Company's undiscounted net income over the
remaining life of the costs of acquired businesses in excess of the market value
of net tangible and identifiable intangible assets acquired in measuring whether
the costs are recoverable. Certain events and circumstances occurred during 1995
that indicated that the carrying amounts of the cost of acquired businesses in
excess of the market value of net tangible and identifiable intangible assets
and the cost of territory rights acquired may not be recoverable. Accordingly,
the remaining carrying amounts relating to all of the Company's intangible
assets were written down to zero during the fourth quarter of 1995.
Amortization expense related to intangible assets was approximately
$3,506,000 in 1995.
35
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCRUED LIABILITIES
Accrued liabilities included in current liabilities at December 31, 1997 and
1996 consists of the following (in thousands):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------- -----------
1997 1996
----------- -----------
<S> <C> <C>
Accrued bankruptcy administrative claims and reorganization costs....... $ 4,180 $ --
Accrued payroll and employee benefits................................... 1,961 851
Other................................................................... 2,908 6,929
----------- -----------
Total................................................................... $ 9,049 $ 7,780
----------- -----------
----------- -----------
</TABLE>
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
in banks and credit card receivables from credit card transaction processing
companies. The credit risk associated with cash and cash equivalents is
considered low due to the credit quality of the financial institutions.
REVENUE RECOGNITION
Revenue from Company-owned facilities is recognized at the time of sale.
Revenue from franchises is recognized when all material services or conditions
required under the Company's franchise agreement have been performed by the
Company.
CAPITALIZED INTEREST
Interest costs have been capitalized on facility expenditures during the
construction period in accordance with SFAS No. 34, "Capitalization of Interest
Costs". Interests costs capitalized as an offset to interest expense were
approximately $197,000 in 1995.
EARNINGS (LOSS) PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share" (EPS). EPS
amounts for all periods presented have been restated, where appropriate, to
conform to the SFAS No. 128 requirements. Earnings (loss) per common share is
calculated based on the weighted average number of common shares outstanding
during the period. Common equivalents outstanding, common shares issuable upon
assumed conversion of the Preferred Stock and other potentially dilutive
securities have not been included in the computation of diluted earnings (loss)
per share as their effect is antidilutive for all relevant periods presented.
Shares of Common Stock to be issued to unsecured creditors pursuant to the Plan
have been reflected as outstanding as of the Effective Date for purposes of
calculating the weighted average common shares outstanding in the accompanying
consolidated statement of operations for the five-month period ended December
31, 1997.
36
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income" is effective in 1998. SFAS
No. 130 establishes standards for reporting and displaying comprehensive income.
The adoption of this statement is not expected to result in a significant change
from the current required disclosures.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" is effective in 1998. This statement abandons the "Industry Segment
Approach" in favor of the "Management Approach" for segment disclosure purposes.
Adoption of this statement will only effect the Company's disclosures.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments included in the following categories:
Receivables consist primarily of credit card receivables which are
converted to cash within a short time after sales transactions are completed
and therefore are reported at approximate fair value.
Interest rates and terms for the 13.5% Senior Secured Notes, Secured
Rejection Note, and Secured Rent Deferral Notes were recently negotiated
(see Note 6). No significant events have occurred which would indicate the
reported amounts of these debt instruments would differ from fair value.
CONVERTIBLE REDEEMABLE PREFERRED STOCK
Convertible Redeemable Preferred Stock (see Note 2) is carried at the net
consideration to the Company a time of issuance (fair value), increased by
periodic accretion to redemption value using the interest method. Redemption
accretion is effected by charges against retained earnings, or, in the absence
of retained earnings, paid-in capital.
ADVERTISING EXPENSE
The Company expenses costs of advertisements at the time the advertisements
are first shown or published. Advertising expense for the years ended December
31, 1997 and 1996 was approximately $7,116,000 and $18,095,000, respectively.
(4) FRESH START REPORTING
Upon emergence from its Chapter 11 proceedings, the Company adopted fresh
start reporting pursuant to the provisions of SOP 90-7. Although the Emergence
Date was July 29, 1997, the Company has recorded the effects of fresh start
reporting as of July 31, 1997. In accordance with SOP 90-7, assets and
liabilities have been restated as of July 31, 1997 to reflect the reorganization
value of the Company, which approximates their fair value at the Emergence Date.
In addition, the accumulated deficit of the Company through the Emergence Date
has been eliminated and the debt and capital structure of the Company has been
recast pursuant to the provisions of the Plan. Thus, the balance sheet as of
December 31, 1997 reflects a new reporting entity (the "Successor Company") and
is not comparable to prior periods (the "Predecessor Company"). Furthermore, the
accompanying consolidated statements of operations and cash flows of the
Predecessor Company reflect operations prior to the Emergence Date and the
effect of
37
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) FRESH START REPORTING (CONTINUED)
adopting fresh start reporting and are thus not comparable with the results of
operations and cash flows of the Successor Company.
The reorganization value of the Company's common equity of approximately
$70,200,000 was determined by the Company with the assistance of financial
advisors. These advisors (1) received certain historical information for recent
years and interim periods; (2) reviewed certain internal financial and operating
data including financial projections; (3) met with senior management to discuss
operations and future prospects; (4) reviewed publicly available financial data
and considered the market values of public companies deemed generally comparable
to the operating business of the Company; (5) considered certain economic and
industry information relevant to the operating business; (6) reviewed on five
year forecast prepared by the Company; and, (7) conducted such other analyses as
appropriate. Based upon the foregoing, the financial advisors developed a range
of values for the Company as of the Effective Date. In developing this valuation
estimate the advisors, using rates of 30% to 35%, discounted the Company's five
year forecasted free cash flows and an estimate of sales proceeds assuming the
Company would be sold at the end of the five year period within a range of
comparable Company multiples.
The difference between the Company's reorganized value and a revaluation of
the Company's assets and liabilities resulted in a reorganization item of
approximately $24,829,000 which is included as an increase in net income in the
accompanying consolidated statement of operations for the seven month period
ended July 31, 1997 and as an increase in property and equipment in the balance
sheet at July 31, 1997. This reorganization item is included in property and
equipment at December 31, 1997, net of recorded amortization, as unallocated
reorganization value. This reorganization item will be allocated to specific
property and equipment assets and certain intangible assets after the Company
obtains appraisals of certain assets and completes a review of property and
equipment, all of which are currently in process.
The accumulated deficit of the Company at July 31, 1997 of approximately
$243,234,000, which included the effects of the reorganization items and the
extraordinary gain on discharge of debt, was reclassified to additional paid-in
capital.
38
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) FRESH START REPORTING (CONTINUED)
The effects of the Plan, the Exit Financing, and fresh start reporting on
the Company's condensed consolidated balance sheet at July 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
PRE- DISCHARGE EXIT FRESH START REORGANIZED
EMERGENCE OF FINANCING ADJUSTMENTS BALANCE
BALANCE SHEET DEBT (1) (2) (3) SHEET
------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 2,678 $ (33,811) $ 74,525 $ -- $ 43,392
Restricted cash and investments....................... 134 -- 10,414 -- 10,548
Receivables, net...................................... 708 -- -- -- 708
Inventories........................................... 1,314 -- -- -- 1,314
Prepaid expenses and other current assets............. 3,140 -- (569) 697 3,268
------------- ---------- ---------- ----------- -----------
TOTAL CURRENT ASSETS............................ 7,974 $ (33,811) 84,370 697 59,230
RESTRICTED CASH AND INVESTMENTS......................... -- -- 11,060 -- 11,060
PROPERTY AND EQUIPMENT, net............................. 98,929 -- -- 24,829 123,758
LAND HELD FOR SALE...................................... 3,635 -- -- -- 3,635
OTHER ASSETS, net....................................... 2,468 443 5,000 (1,592) 6,319
------------- ---------- ---------- ----------- -----------
TOTAL ASSETS.................................... $ 113,006 $ (33,368) $ 100,430 $ 23,934 $ 204,002
------------- ---------- ---------- ----------- -----------
------------- ---------- ---------- ----------- -----------
LIABILITIES AND EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable...................................... $ 7,119 $ -- $ -- $ -- $ 7,119
Accrued liabilities................................... 10,506 (925) 1,630 8,341 19,552
Debtor-in-possession credit facility.................. 30,895 (30,895) -- -- --
------------- ---------- ---------- ----------- -----------
TOTAL CURRENT LIABILITIES....................... 48,520 (31,820) 1,630 8,341 26,671
LONG-TERM DEBT........................................ 4,682 5,000 77,950 6 87,632
OTHER LONG-TERM LIABILITIES........................... (813) -- -- 6,512 5,699
LIABILITIES SUBJECT TO COMPROMISE....................... 344,070 (338,713) -- (5,357) --
CONVERTIBLE REDEEMABLE PREFERRED STOCK.................. -- -- 13,800 -- 13,800
COMMON STOCK AND OTHER EQUITY (DEFICIT):
Common stock (Predecessor Company).................... 577 -- -- (577) --
Common stock (Successor Company)...................... -- -- -- 40 40
Treasury stock (Predecessor Company).................. (588) -- -- 588 --
Additional paid-in capital............................ 291,925 -- 7,050 (228,815) 70,160
Cumulative translation adjustment..................... 32 -- -- (32) --
Accumulated deficit................................... (575,399) 332,165 -- 243,234 --
------------- ---------- ---------- ----------- -----------
TOTAL COMMON STOCK AND OTHER EQUITY (DEFICIT)......... (283,453) 332,165 7,050 14,438 70,200
------------- ---------- ---------- ----------- -----------
TOTAL LIABILITIES AND EQUITY (DEFICIT)................ $ 113,006 $ (33,368) $ 100,430 $ 23,934 $ 204,002
------------- ---------- ---------- ----------- -----------
------------- ---------- ---------- ----------- -----------
</TABLE>
- ------------------------
(1) To record the discharge or reclassification of prepetition obligations
(liabilities subject to compromise) and debtor-in-possession credit
facilities pursuant to the Plan.
39
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) FRESH START REPORTING (CONTINUED)
(2) To record the Exit Financing and related issuance costs.
(3) To record assets and liabilities at their fair value pursuant to fresh start
reporting and eliminate the existing accumulated deficit.
(5) DEBTOR-IN-POSSESSION CREDIT FACILITIES
Pursuant to a final Order of the Bankruptcy Court dated May 20, 1996, the
Group was authorized to enter into a Revolving Credit Agreement dated April 30,
1996 (the "Revolving Credit Agreement") among Discovery Zone, Inc., as borrower,
the other members of the Group, as guarantors, and Madeleine LLC ("Madeleine"),
as lender. Under the Revolving Credit Agreement, Madeleine agreed to lend
Discovery Zone up to the aggregate principal amount of $17,000,000, inclusive of
a $7,000,000 subfacility for the issuance of letters of credit. Under the
Revolving Credit Agreement, Madeleine was granted (i) superpriority
administrative expense claim status over administrative expenses of the Group,
(ii) first priority liens on and security interests in all of the Group's owned
and subsequently acquired unencumbered assets, (iii) liens on and security
interests senior to any liens on or security interests in all owned or
subsequently acquired unencumbered assets, other than collateral securing
certain permitted liens, and (iv) junior liens on and security interests in
collateral for such permitted liens. The Revolving Credit Agreement was amended
by the First Amendment, dated as of May 28, 1996, which changed certain of the
financial covenants contained in the Revolving Credit Agreement.
In August 1996, the Group requested that Madeleine make available additional
funds to insure the Group sufficient liquidity to timely satisfy their
postpetition obligations during the months of September and October, 1996. By
motion dated August 16, 1996, the Discovery Zone Group requested authority from
the Bankruptcy Court to enter into a Second Amendment to the Revolving Credit
Agreement (the "Proposed Second Amendment"), which provided for, among other
things, an increase from $17,000,000 to $20,000,000 in the aggregate principal
amount of the loans available under the Revolving Credit Agreement and an
adjustment to certain of the financial covenants therein.
Both prior to and following the filing of the motion requesting authority to
enter into the Proposed Second Amendment, the Group conducted discussions with
other prospective lenders regarding the provision of additional financing. These
negotiations resulted in a commitment from Perry Partners L.P. ("Perry
Partners") to provide financing on substantially the same terms as the Revolving
Credit Agreement, as amended by the Proposed Second Amendment, but up to the
aggregate principal amount of $25,000,000. Because of this opportunity to obtain
additional credit, the Group, with consent of Madeleine, withdrew the motion
requesting authority to enter into the Proposed Second Amendment.
By Order dated October 25, 1996, the Group obtained authority from the
Bankruptcy Court to enter into a Replacement Revolving Credit Agreement (the
"Replacement Credit Agreement"), among Discovery Zone Inc., as borrower, the
other members of the Group, as guarantors, and Perry Partners, as lender. Under
the Replacement Credit Agreement, Perry Partners agreed to lend Discovery Zone
up to the aggregate principal amount of $25,000,000, inclusive of a $7,000,000
subfacility for the issuance of letters of credit. Perry Partners was granted
(i) superpriority administrative expense claim status over administrative
expenses of the Group, (ii) first priority liens on and security interests in
all of the Group's owned or subsequently acquired unencumbered assets, (iii)
liens on and security interests senior to any liens on or security interests in
all owned or subsequently acquired unencumbered assets, other than collateral
for certain permitted liens, and (iv) junior liens on and security interests in
collateral for such permitted liens.
40
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) DEBTOR-IN-POSSESSION CREDIT FACILITIES (CONTINUED)
The Replacement Credit Agreement contained covenants similar to those
contained in the Revolving Credit Agreement, as amended by the Proposed Second
Amendment, including, among other things, the maintenance of certain financial
ratios, prohibition against the incurrence of certain additional indebtedness,
and prohibition against dividends. The Group used proceeds made available under
the Replacement Credit Agreement to repay in full all outstanding obligations
under the Revolving Credit Agreement, as amended by the First Amendment, and the
Revolving Credit Agreement, as amended, was terminated. Approximately
$16,250,000 of the $25,000,000 was used to satisfy all obligations under the
Revolving Credit Agreement.
During the fourth quarter of 1996, the Group determined that it would
require an additional $5,000,000 in postpetition financing to satisfy
obligations which would become due and payable during the first quarter of 1997.
By motion dated December 27, 1996, the Group requested authority from the
Bankruptcy Court to enter into a First Amendment to the Replacement Credit
Agreement (the "First Replacement Amendment") pursuant to which the aggregate
principal amount to be advanced to the Group by Perry Partners would be
increased from $25,000,000 to $30,000,000. By interim Order dated December 31,
1996, the amount which the Group was authorized to borrow from Perry Partners
was increased from $25,000,000 to $28,500,000. By final Order dated March 4,
1997, this amount was increased to $30,000,000.
At December 31, 1996, the Company had outstanding borrowings under the
Replacement Credit Facility of approximately $22,448,000, bearing interest at
prime plus 3.5% (11.75% at December 31, 1996) payable monthly. The Replacement
Credit Facility also required payment of certain fees as defined in the
agreement plus an amount to be determined such that Perry Partners earned an
internal rate of return, determined on an annualized basis, of 21% on all
borrowings (which return took into account all interest and fees). This
additional interest of approximately $364,000 over fees and interest accrued at
the stated rate was included as a post petition liability at December 31, 1996,
and was due and payable upon repayment of the loan.
At July 29, 1997, the Company had outstanding borrowings under the
Replacement Credit Facility of $28,395,000. Interest on those borrowings accrued
at prime plus 3.5% (11.75% at July 29, 1997) payable monthly. At the Effective
Date, additional fees and interest of $821,000 over interest accrued at the
stated rate were owed. Outstanding borrowings under the facility were repaid
upon the Company's emergence from bankruptcy with the proceeds of the Exit
Financing (See Note 2) and the facility was eliminated.
In June and July 1997, the Bankruptcy Court issued orders permitting the
Company to borrow $5,000,000 from Birch as permitted under the existing
Replacement Credit Facility. The facility bore interest at prime plus 3.5% and
required the payment of certain additional fees to Birch at such time as the
Company exited bankruptcy protection. The loan was unsecured; however,
borrowings under the loan agreement had superpriority administrative claim
status with respect to payment of administrative expenses under the Plan. The
Company borrowed $2,500,000 under this facility, which was repaid with interest
and fees of approximately $82,000 upon the Company's emergence from bankruptcy
with the proceeds from the Exit Financing and the facility was eliminated.
41
<PAGE>
(6) LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following (in
thousands):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------- -----------
<S> <C> <C>
1997 1996
----------- -----------
13.5% Senior Secured Notes due 2002, net of unamortized
discount of $6,652 (1).................................................................. $ 78,348 $ --
Secured Rejection Note (2)................................................................ 4,416 4,666
Secured Rent Deferral Notes (2)........................................................... 429 --
Prepetition tax claims (3)................................................................ 5,000 --
----------- -----------
88,193 4,666
Less current portion...................................................................... (1,102) --
----------- -----------
Long-term debt............................................................................ $ 87,091 $ 4,666
----------- -----------
----------- -----------
</TABLE>
At December 31, 1997, maturities of the Company's long-term debt are as
follows: $1,102,000 in 1998; $1,663,000 in 1999; $1,663,000 in 2000; $1,663,000
in 2001; $86,708,000 in 2002; and $2,046,000 thereafter.
- ------------------------
(1) In connection with its exit financing to emerge from bankruptcy, the Company
issued $85,000,000 of 13.5% Senior Secured Notes due August 1, 2002 (the
"Notes") and the Warrants. A value of $7,050,000 was allocated to the
Warrants based upon their estimated fair value at the time of the issuance,
representing the original issue discount on the Notes and resulting in an
effective interest rate on the Notes of approximately 15.9%. The Notes are
secured by substantially all the assets of the Company and interest is
payable quarterly in arrears beginning November 1, 1997. A separate interest
escrow account was established with the trustee to fund interest payments on
the Notes through August 1, 1999. The interest escrow account balance
totaled approximately $19,017,000 at December 31, 1997, consisting of
treasury securities and accrued interest thereon, and is reflected as
restricted cash and investments in the Company's consolidated balance sheet.
The Notes contain restrictions on payment of dividends, additional
indebtedness, and cross-default provisions with other obligations of the
Company. Among other things, the Company is permitted to have outstanding up
to $10 million of senior secured indebtedness and up to $5 million of new
indebtedness arising from sale and leaseback transactions, capital lease
obligations, or purchase money obligations.
(2) In connection with the 1994 acquisition of Leaps & Bounds, Inc. ("Leaps &
Bounds") from the McDonald's Corporation ("McDonald's") (see Note 8), the
Company, through a wholly owned subsidiary, received fee simple ownership of
certain parcels of real property. Each parcel of real property is encumbered
by a mortgage or deed of trust in favor of McDonald's, which serves to
secure certain indemnity obligations owed by the Company to McDonald's.
By Order dated November 16, 1996, the Group was granted authority by the
Bankruptcy Court to enter into, and perform under, a stipulation with
McDonald's (the "McDonald's Stipulation") which provides for a global
resolution of issues relating to, among other things, the assumption and
rejection of leases of property where McDonald's is the sublessor and Leaps
& Bounds is the sublessee (the "L&B" Subleases"); rent deferrals which
McDonald's will grant to Leaps & Bounds in respect of certain assumed L&B
Subleases; the treatment of secured claims which McDonald's holds against
the Group arising from the rejection and assumption of the L&B Subleases,
and future rent deferrals to be granted in respect of certain of the L&B
Subleases.
42
<PAGE>
(6) LONG-TERM DEBT (CONTINUED)
The McDonald's Stipulation provided that Leaps & Bounds assume L&B Subleases
with respect to 21 FunCenters (the "Assumption Locations") and reject the
L&B Subleases with respect to 17 FunCenters, which the Group also requested
the Bankruptcy Court's authority to close. The Group, upon Leaps & Bounds
assuming the L&B Subleases for the Assumption Locations, cured all unpaid
rent and other charges under these subleases pursuant to section 365(b) of
the Bankruptcy Code, which cure payments totaled approximately $528,000.
McDonald's rejection claims related to the 17 closed FunCenters currently
totals $4,416,000, and is evidenced by a six-year note payable requiring
annual principal payments of approximately $736,000 (the "Secured Rejection
Note"). The Secured Rejection Note bears interest at 11% payable annually
and matures in the year 2003.
McDonald's also granted the Company rent deferrals (the "Rent Deferrals")
under the L&B Subleases, which are evidenced by nine notes due upon the
expiration of each initial sublease term (the "Secured Rent Deferral
Notes"). The Rent Deferrals currently total approximately $398,000 per year
and, when combined with the initial Emergence Date principal balance of
approximately $266,000, will total approximately $2,840,000 over the next
seven years. The notes bear interest at 11% per annum payable at maturity
and have maturity dates ranging from August 31, 2002 to December 31, 2004.
The Secured Rejection Note and the Secured Rent Deferral Notes are secured by
first mortgages or deeds of trust on fourteen properties owned by the
Company, including three undeveloped parcels of land with a book value of
$2,747,000 at December 31, 1997, which are included in Land Held for Sale in
the Company's Consolidated Balance Sheet, one of which is under contract for
sale for $4.2 million (See Note 3). The notes contain certain cross-default
provisions including cross-defaults among themselves, with the McDonald's
subleases and with other indebtedness of the Company in excess of $2.5
million.
(3) The prepetition tax claims (the "Tax Claims") represent taxes assessed prior
to the Company filing for bankruptcy and have an estimated aggregate
principal amount of $5,000,000. The Tax Claims have maturities of up to six
years from the original date of assessment and require payment of principal
amounts in equal annual installments. The majority of the Tax Claims accrue
simple interest at 10% per annum payable with each annual principal
installment. The remainder accrue interest at 12% per annum.
(7) LIABILITIES SUBJECT TO COMPROMISE
Under the Bankruptcy Code, certain claims against the Company arising prior
to the Petition Date were stayed. These prepetition claims were compromised
under the Plan (See Note 2). At December 31, 1996, these prepetition liabilities
were separately classified in the consolidated balance sheet as liabilities
subject to compromise and included the following (in thousands):
<TABLE>
<S> <C>
Accounts payable.................................................. $ 27,213
Accrued liabilities............................................... 27,446
Lease rejection claims............................................ 18,767
Note payable to affiliate (See Note 8)............................ 13,215
Other amounts payable to affiliate (See Note 9)................... 22,724
Priority tax claims (See Note 6).................................. 5,000
Payable under credit agreement with banks......................... 101,900
Subordinated convertible debt..................................... 128,643
---------
Total liabilities subject to compromise........................... $ 344,908
---------
---------
</TABLE>
43
<PAGE>
(7) LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
Accrued liabilities include amounts accrued for claims related to lawsuits
and other legal matters.
In accordance with the Bankruptcy Code, the members of the Group sought
court approval for the rejection of certain prepetition executory contracts and
real property leases. Such lease rejections give rise to prepetition claims for
damages pursuant to the Bankruptcy Code. The Group rejected 91 real property
leases during 1996 and 4 during 1997.
The Company entered into a $175,000,000 credit agreement on December 22,
1994 (the "Credit Facility") with a consortium of banks. On September 15, 1995,
the Company became in default under the Credit Facility as a result of the
expiration of an amendment/waiver agreement entered into between the Company and
the lenders on June 30, 1995 which waived until September 15, 1995 certain
financial covenants contained in the credit agreement. As a result of the
expiration of the amendment/waiver agreement on September 15, 1995, the Company
became in default under certain financial covenants contained in the Credit
Facility and such default continued as of December 31, 1995.
Another event of default occurred under the Credit Facility on the Petition
Date when the Group filed voluntary petitions for relief under the Bankruptcy
Code with the Bankruptcy Court. Consequently, all unpaid principal of, and
accrued prepetition interest on, amounts outstanding under the Credit Facility
became immediately due and payable. The payment of such debt and accrued but
unpaid interest thereon was prohibited during the pendency of the Group's
bankruptcy cases other than pursuant to a court order. At the Petition Date,
these amounts totaled $101,900,000 and were classified as liabilities subject to
compromise at December 31, 1996.
In October and November, 1993, the Company issued $293,250,000 aggregate
principal amount at maturity of Liquid Yield Option Notes ("LYONs"), a form of
subordinated convertible debt, due October 14, 2013. Net proceeds, after the
underwriting discount, amounted to approximately $111,000,000. No periodic
interest payments were required on the LYONs. Each LYON had an issued price of
$391.06 and had principal amount due at maturity of $1,000 (representing a yield
to maturity of 4.75% per annum computed on a semiannual bond equivalent basis).
Each LYON was convertible into 13,845 shares of Common Stock, at the option of
the holder, at any time on or prior to maturity, was subordinated to all
existing and future Senior Indebtedness (as defined in the LYONs indenture
agreement, "Indenture") of the Company, and was redeemable on or after October
14, 1998, in whole or in part, at the option of the Company, for cash in an
amount equal to the issue price plus accrued original issue discount to the date
of redemption.
As a result of the Group's bankruptcy filing, the Company defaulted under
the Indenture governing the LYONs. Consequently, the original issue price of the
LYONs plus the accrued original issue discount of the LYONs (the "Accreted
Value") through the Petition Date was immediately payable. As of December 31,
1996, the Accreted Value was $128,643,000 and at the Petition Date this
obligation became subject to compromise.
(8) BUSINESS COMBINATIONS, SALES AND DISPOSALS
On May 24, 1995, the Company purchased from a subsidiary of Viacom, Inc.
("Viacom") substantially all assets pertaining to the operation of two family
entertainment centers operating under the name "Block Party". The purchase price
was $13,215,000 and was paid through the issuance of a subordinated promissory
note having a ten-year term (the "BFF Note"). Interest on such note accrued at
the one-month London Interbank Offered Rate ("LIBOR") plus .75% and was payable
quarterly. The principal of the note was payable in varying annual amounts
beginning in the fourth year. Under the purchase agreement, the Company was
assigned certain real and personal property leases related to the operations of
the
44
<PAGE>
(8) BUSINESS COMBINATIONS, SALES AND DISPOSALS (CONTINUED)
entertainment facilities and assumed all liabilities arising thereunder. See
Note 9, Related Party Transactions, for a further discussion of transactions
with Viacom.
During the year ended December 31, 1995, the Company also acquired
businesses that own and operate indoor recreational facilities for children for
an aggregate of $5,300,000 in cash and 200,000 shares of common stock. All
businesses acquired during the year ended December 31, 1995 were accounted for
under the purchase method of accounting and are included in the consolidated
financial statements since the dates of acquisition.
On February 8, 1996, the Company sold all issued and outstanding stock of
two wholly-owned subsidiaries, I&S Consultants and VLT, Inc., which together
owned and operated The Enchanted Castle, a family entertainment facility located
in Lombard, Illinois for $2,800,000.
On March 8, 1996, the Company sold all issued and outstanding stock of its
Wright Entertainment Group subsidiary for $2,000,000.
During 1996, the Company closed 101 of its indoor entertainment facilities
resulting in a loss on asset disposals of approximately $8,867,000. Proceeds
from sale of property and equipment at these locations totaled approximately
$1,753,000.
The Company's consolidated results of operations for the year ended December
31, 1995 prepared on an unaudited pro forma basis assuming businesses acquired
and accounted for as purchases in 1995 had occurred as of January 1, 1995 are as
follows:
<TABLE>
<S> <C>
Revenues as reported............................................. $ 259,490
Revenue of purchased businesses for the period prior to
acquisition, net of eliminations............................... 3,170
---------
Pro forma revenue................................................ $ 262,660
---------
---------
Net loss as reported............................................. (449,245)
Net loss of purchased businesses for period prior to
acquisition.................................................... (238)
Adjustment for interest and goodwill amortization................ (494)
---------
Pro forma loss................................................... $(449,977)
---------
---------
Loss per share as reported -- basic and diluted.................. $ (8.30)
Effect of purchased businesses prior to acquisition.............. (0.01)
---------
Pro forma loss per share -- basic and diluted.................... $ (8.31)
---------
---------
</TABLE>
Business acquisitions and investments during the year ended December 31,
1995 which included the use of cash were accounted for as follows:
<TABLE>
<S> <C>
Property and equipment............................................. $ 1,276
Intangibles........................................................ 31,657
Other assets....................................................... 16
Working capital deficiency, excluding cash acquired................ (956)
Long-term obligations.............................................. (13,215)
Other noncurrent liabilities....................................... (13,478)
---------
$ 5,300
---------
---------
</TABLE>
45
<PAGE>
(8) BUSINESS COMBINATIONS, SALES AND DISPOSALS (CONTINUED)
Business acquisitions during the year ended December 31, 1995 which involved
the issuance of the Company's common stock, $.01 par value were accounted for as
follows:
<TABLE>
<S> <C>
Intangibles..................................................... $ 1,313
Common stock issuance allocated to:
Common stock.................................................... $ 2
Additional paid-in capital...................................... $ 1,311
---------
$ 1,313
---------
---------
</TABLE>
(9) RELATED PARTY TRANSACTIONS
On September 2, 1994, the Company acquired Blockbuster Children's Amusement
Corporation, Tumble For Fun Limited Partnership and Blockbuster Children's
Amusement Canada Corporation (collectively, the "Blockbuster Entities") from
Blockbuster Fun & Fitness Holding Corporation, an indirect wholly-owned
subsidiary of Blockbuster Entertainment Corporation ("BEC"), prior to BEC's
merger with Viacom. The Company paid to BEC as consideration for the acquisition
4,624,597 shares of common stock. At the time of acquisition, the Blockbuster
Entities owned 60 franchised Discovery Zone facilities and certain franchised
territories in the United States and Canada. Separately, on September 2, 1994,
BEC, through its indirect wholly-owned subsidiary, Blockbuster Discovery
Investment, Inc., exercised its option to purchase from the former partners of
DKB Investments, L.P. (which was at the time the largest stockholder of the
Company, "DKB"), a number of shares of common stock sufficient to increase BEC's
indirect equity ownership in the Company to 49.9%. Pursuant to the merger of BEC
into Viacom, Viacom succeeded to BEC's equity ownership interest in the Company.
At the time of these transactions, Donald F. Flynn, who was then Chairman of the
Board and Chief Executive Officer of the Company, was a director of BEC, and H.
Wayne Huizenga, who was then Chairman of the Board and Chief Executive Officer
of BEC, and John J. Melk, who was then a director of BEC, were directors of the
Company.
On May 24, 1995 (the "MSA Effective Date"), a Management Services Agreement
("MSA") between the Company and Viacom became effective, providing for the
services of Viacom's division, Blockbuster Entertainment Group ("Blockbuster"),
in connection with the overall coordination and supervision of the business of
the Company and the day-to-day operations and business affairs of the Company.
Responsibility for management of the Company beyond the scope of Viacom's
services under the MSA was placed with a Special Committee of the Board of
Directors of the Company (the "Special Committee"), consisting of the
independent directors, Messrs. McGrath and Muething. On the MSA Effective Date,
all members of the Board of Directors except Steven R. Berrard and Donald F.
Flynn resigned (including H. Wayne Huizenga, George D. Johnson, Jr., James R.
Jorgensen, John T. Melk, Peer Pedersen and Gerald F. Seegers). The MSA had an
initial term of five years and thereafter could be extended automatically for
one year renewal periods unless terminated by either party on six months' prior
notice. In payment for the management services to be provided under the MSA, the
Company was required to pay Viacom a quarterly fee equal to the actual costs,
fees, expenses, and reimbursements of the services provided, and a fair and
reasonable allocation of overhead expenses incurred by Viacom in providing such
services, during the preceding calendar quarter. In addition, on the MSA
Effective Date, the Company issued to Viacom 157,821 Series A Warrants, 157,821
Series B Warrants, and 157,821 Series C Warrants. See Note 13, Warrants and
Options, for further discussion.
Also on the MSA Effective Date, the Company purchased from a subsidiary of
Viacom substantially all assets pertaining to the operation of two family
entertainment centers operating under the name "Block Party". As of December 31,
1995, the Board of Directors of the Company was composed of Steven R. Berrard,
Frank J. Biondi, Jr., Phillippe P. Dauman, Donald F. Flynn, J. Brian McGrath,
John L. Muething and Sumner M. Redstone. Messrs Biondi, Dauman, McGrath,
Muething and Redstone were elected to the
46
<PAGE>
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
Board on May 24, 1995, pursuant to the MSA. As of December 31, 1995, Messrs.
Berrard, Biondi, Dauman and Redstone were officers and/or directors of Viacom,
which owned approximately 49% of the Company's outstanding common stock, and
Messrs. Berrard, Biondi, Dauman, McGrath, Muething and Redstone were directors
of Spelling Entertainment Group ("Spelling"), an affiliate of Viacom. In
connection with his resignation as Chief Executive Officer and a director of
Viacom and as a director of Spelling, Mr. Biondi resigned as a director of the
Company on January 17, 1996. Mr. Flynn resigned as Chairman of the Board of
Directors of the Company on February 27, 1996. In connection with his
resignation as the Chief Executive Officer of Blockbuster and as director of
Viacom and Spelling, Mr. Berrard resigned as the Chief Executive Officer and a
director of the Company on March 19, 1996. Messrs. Dauman and Redstone resigned
as directors of the Company on March 24, 1996 and Mr. McGrath resigned as a
director and as a member of the Special Committee on March 27, 1996.
Donna R. Moore, then President and Chief Operating Officer of the Company
and Adam D. Phillips, Senior Vice President and General Counsel of Blockbuster,
were appointed to the Board of Directors of the Company on March 24, 1996. Dr.
James M. Rippe was appointed to the Board of Directors of the Company on June
20, 1996. At March 31, 1997, Donna R. Moore, John Muething, Dr. James Rippe and
Adam Phillips were the Company's directors.
On January 12, 1996, the Company received an interim working capital loan of
up to $10,000,000. This loan was guaranteed by Viacom and matured on February 6,
1996. On February 6, 1996, the Company did not make its scheduled repayment of
the principal or accrued interest on the loan. The outstanding principal on the
loan was $7,500,000. On February 7, 1996, the principal amount of $7,500,000 and
accrued interest was paid to the lender by Viacom. As result of its performance
as guarantor, Viacom is subrogated to the lender's right to receive payments of
such amounts for the Company.
In summary, at December 31, 1996 the Company had a prepetition amount due to
Blockbuster/ Viacom, excluding the principal amount of the BFF Note, for
approximately $22,724,000, relating to $5,662,000 in reimbursements for
construction and other costs of certain subsidiaries of Blockbuster previously
incurred by Blockbuster, $6,998,000 in other operating costs paid by Blockbuster
on behalf of the Company, $7,527,000 in repayment of debt and accrued interest
thereon paid by Viacom on behalf of the Company, accrued interest of $748,000 on
the BFF Note and $1,789,000 due Blockbuster under the MSA. Viacom's ability to
receive such amounts was subject to the Group's bankruptcy proceedings.
Accordingly, these amounts were included in liabilities subject to compromise
and the Company's consolidated balance sheet at December 31, 1996.
In 1996, the Company incurred $3,724,000 of other obligations to Blockbuster
under the MSA including obligations to reimburse Blockbuster for insurance and
other costs on behalf of the Company, of which $1,424,000 was incurred and
$521,000 was paid after March 25, 1996.
On May 7, 1997, the Bankruptcy Court issued an order providing for the
settlement of all of Viacom's prepetition general unsecured claims against the
Group and all claims which the Group or any holders of claims against the Group
may hold against Viacom. Under the agreement and subsequent Bankruptcy Court
order, Viacom received no property for its prepetition unsecured claims under
the Plan. In exchange for this treatment, the Group agreed to (i) satisfy in
full a claim which Iwerks Studios, Inc. held against the Group, and which was
guaranteed by Blockbuster, in the amount of $61,500, (ii) assume approximately
30 leases of the Group, which were guaranteed by Viacom, and assign them to
Blockbuster and (iii) pay Viacom's postpetition administrative claims for
expenses advanced by Viacom on behalf of the Group of approximately $991,000 and
obligations incurred under the MSA, subject to any setoff paid on behalf of
Viacom. In connection with this settlement, the MSA was terminated.
47
<PAGE>
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
The Company subleased approximately 30,000 square feet of office space from
Blockbuster at an annual cost of approximately $600,000. A division of
Blockbuster occupied approximately 7,500 square feet of this space thereby
mitigating approximately $128,000 of the Company's cost. The Company terminated
its lease with Blockbuster and vacated the office space February 1, 1998.
The Company and a corporation owned by one of the Company's principal
stockholders were previously parties to a consulting arrangement, pursuant to
which the Company paid approximately $90,000 in 1995 for consulting and related
services. In addition, the Company paid to this corporation approximately
$59,000 in 1995 for the use of its private airplanes. Agreements between the
Company and this corporation for consulting services and use of airplanes were
terminated as of July 1, 1995. This principal stockholder is also a director of
Psychemedics Corporation ("Psychemedics"), a provider of drug testing services.
The Company entered into an agreement with Psychemedics for certain drug testing
services and paid Psychemedics approximately $186,000 and $468,000 during 1996
and 1995, respectively, for such services.
As required under the Plan, the Company reimbursed Birch approximately
$1,078,000 for its out-of-pocket expenses incurred in connection with sponsoring
the Plan.
An officer of Griffin Bacal, Inc. ("Griffin Bacal"), the Company's
advertising agency, serves as a director of the Successor Company. The Company
paid approximately $7,600,000 to Griffin Bacal for creative services and as
agent for the purchase of media from third parties during the year ended
December 31, 1997.
(10) INCOME TAXES
The federal statutory tax rate is reconciled to the Company's effective tax
rate for the noted periods as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------------- ---------------------------------------------------------
FIVE MONTHS SEVEN MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, 1997 JULY 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- --------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Federal statutory rate (benefit)......... (34.0)% (34.0)% (34.0)% (34.0)%
Change in valuation allowance............ 34.0% 34.0% 34.0% 35.0%
----- ----- ----- -----
Effective tax rate....................... -- -- -- 1.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Income tax provision for the following periods consists of (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY
COMPANY -----------------------------------------------------
--------------------- YEAR
FIVE MONTHS SEVEN MONTHS YEAR ENDED
ENDED ENDED ENDED DECEMBER 31,
DECEMBER 31, 1997 JULY 31, 1997 DECEMBER 31, 1996 1995
--------------------- --------------- --------------------- -------------
<S> <C> <C> <C> <C>
Current....................................... $ -- $ -- $ -- $ --
Deferred...................................... -- -- -- 4,000
--- --- --- ------
$ -- $ -- $ -- $ 4,000
--- --- --- ------
--- --- --- ------
</TABLE>
48
<PAGE>
(10) INCOME TAXES (CONTINUED)
The primary components that comprise the deferred tax assets and deferred
tax liabilities at December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
---------- -----------
<S> <C> <C>
1997 1996
---------- -----------
Net operating loss carryforwards..................................... $ 66,000 $ 170,000
Difference between book and tax bases of acquired net assets......... 12,000 18,500
Noncurrent asset reevaluations....................................... 85,000 86,500
Other assets......................................................... 10,000 6,000
Other liabilities.................................................... (16,000) (19,500)
---------- -----------
Net deferred tax asset before valuation allowance.................... 157,000 261,500
Valuation allowance.................................................. (157,000) (261,500)
---------- -----------
Net deferred tax asset............................................... $ -- $ --
---------- -----------
---------- -----------
</TABLE>
The valuation allowance totaled approximately $209,000,000 at December 31,
1995. The valuation allowance increased approximately $52,500,000 and
$164,800,000 in 1996 and 1995, respectively, and decreased approximately
$104,500,000 in 1997 due to a reduction in net operating loss carryovers related
to the cancellation of indebtedness of the Company upon emergence from
bankruptcy. The Company has net operating loss carryforwards for federal tax
purposes totaling approximately $178,000,000 which will expire as follows:
$127,000,000 in 2011 and $51,000,000 in 2012. As a result of its reorganization
under Chapter 11, the Company is treated as having experienced an ownership
change under Internal Revenue Code Section 382. Under Section 382, the Company's
ability to offset income in each post-reorganization taxable year by its
remaining NOLs and built-in losses (including depreciation and amortization
deductions of any portion of the Company's basis in assets with built-in losses)
is limited to an amount not to exceed the aggregate value of the Company's
common stock immediately before such change in control (taking into account in
such calculation, however, any increase in value resulting from any surrender or
cancellation of creditors' claims in connection with the Plan) multiplied by the
long-term tax-exempt rate published monthly by the Internal Revenue Service.
Based on this calculation, the Company's use of approximately $137,000,000 of
NOLs is limited to approximately $4,000,000 per year.
The federal income tax net operating loss carryforwards described above are
not binding on the Internal Revenue Service and may be subject to adjustments
which may be substantial in magnitude. In accordance with SOP 90-7, any
realization of the benefit from tax net operating loss carryforwards subsequent
to the effective date of the Company's Plan of Reorganization will result in an
increase to equity.
(11) OTHER CHARGES
Certain of the Company's FunCenters generated increasing operating cash flow
losses or marginal operating cash flows during 1995 and in the first quarter of
1996. These circumstances, in addition to the circumstances requiring the Group
to file voluntary petitions for relief under Chapter 11 of the Bankruptcy Code,
indicated that the carrying amounts related to these FunCenters may not be
recoverable. Accordingly, management reviewed the intangibles, property and
equipment related to these FunCenters for recoverability in accordance with SFAS
No. 121 and determined that certain assets were impaired. For each FunCenter,
the Company tested for impairment by computing the sum of the estimated future
operating cash flows (undiscounted and without interest charges) and comparing
that result to its carrying value. If such sum was less than the carrying value
of the FunCenter's assets, an impairment condition was
49
<PAGE>
(11) OTHER CHARGES (CONTINUED)
considered to exist and an impairment loss was recognized. The impairment loss
recognized was measured as the amount by which the carrying amount exceeded the
fair value of the FunCenter's assets.
The estimate of fair value was determined using the present values of each
FunCenter's estimated future operating cash flows. The Company recognized
impairment losses in the fourth quarter of 1995 of approximately $306,212,000
resulting primarily from the write down of intangibles, leasehold improvements,
and equipment. Management's judgment is necessary to estimate future operating
cash flows. Accordingly, actual results could vary from such estimates.
In the second quarter of 1995, the Company recognized other charges relating
to the reduction in carrying values of certain assets that management believed
would not have continuing benefit under its new business plan. Such reduction
would not have been materially different from the charges that would have
resulted from the application of SFAS No. 121. These charges, which totaled
approximately $44,002,000, resulted primarily from the write down of certain
entertainment facility equipment and, to a lesser extent, the write down of
property and equipment related to the relocation of the Company's headquarters.
Additionally, in the second quarter of 1995, the Company recognized other
charges of approximately $10,589,000 related to the provision of additional
lease commitment reserves on certain previously closed entertainment facilities
because of the inability to terminate leases on favorable terms.
(12) RESTRUCTURING COSTS
In connection with the change in management effected by the MSA and the
relocation of its headquarters offices from Chicago, Illinois to Fort
Lauderdale, Florida, the Company recognized certain restructuring costs in the
second quarter of 1995. These restructuring costs consisted of employee
termination benefits of approximately $7,903,000 and facility lease termination
costs of approximately $3,454,000. The Company expected, and accrued the cost
of, the termination of approximately 300 management and administrative employees
in this regard. At December 31, 1995, the majority of such employees had been
terminated and costs of approximately $6,579,000 had been paid and charged
against the accrued liability. The Company completed all material aspects of the
aforementioned restructuring by March 31, 1996.
(13) WARRANTS AND OPTIONS
On May 11, 1995, the Company received approximately $26,700,000 from the
Company's former Chairman and certain members of his family in connection with
the exercise of warrants, which were exchanged for an aggregate of 7,234,500
shares of common stock. The Company used the proceeds from the exercise of these
warrants to reduce debt.
On the MSA Effective Date, the Company issued to Viacom 157,821 Series A
Warrants, 157,821 Series B Warrants and 157,821 Series C Warrants. The Series A,
Series B and Series C Warrants were to vest on the first, second and third
anniversaries of the MSA Effective Date, respectively. All such vested warrants
were to become exercisable on or after December 16, 1998, although such
exercisability was to be accelerated in certain circumstances. Each warrant
entitled Viacom to purchase one share of Series A Preferred Stock of the
Company. The exercise prices for the Series A, Series B and Series C Warrants
per share of the common stock into which the Series A Preferred Stock was
convertible were $10.375, $11.931 and $14.317, respectively.
In April 1993, the Company adopted a stock option plan (the "1993 Plan"),
whereby up to 6,000,000 shares of common stock may be granted to key employees,
consultants and directors of the Company. In addition, in July 1995, the Company
adopted the 1995 Long-Term Management Incentive Plan (the "1995
50
<PAGE>
(13) WARRANTS AND OPTIONS (CONTINUED)
Plan") pursuant to which up to 3,000,000 shares of common stock may be granted
to certain key employees and consultants of the Company. Options granted under
the 1993 Plan and the 1995 Plan are nonqualified and were granted at a price
equal to the fair market value at the date of grant. No options were granted
under the 1995 Plan.
In connection with the MSA, all shares available for future grant and all
options granted and outstanding relating to the Company's directors under the
1993 Plan were canceled if not exercised prior to the MSA Effective Date.
Additionally, the vesting of all non-director employee options outstanding at
the MSA Effective Date was accelerated to a date not later than November 24,
1995.
Pursuant to the Plan all options and warrants and the 1993 Plan and 1995
Plan were canceled as of the Effective Date.
As part of the Plan, a new stock option plan was established. Pursuant to
certain executive employment contracts, options to purchase 536,845 shares of
Common Stock have been granted to senior executives of the Company at an
exerciseable price of $11.88 per share. One third of the options presently
granted vest on each January 1 of 1998, 1999 and 2000. In addition, such options
vest in their entirety upon the occurrence of a "Change in Control" as defined
in the Plan. A total of 715,692 shares of Common Stock have been reserved for
issuance under the Company's new stock option plan.
The following summarizes stock option activity for the following periods:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ --------------------------------------------------
FIVE MONTHS SEVEN MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
------------ ----------------- ----------------- ------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of period.... -- 2,754,802 2,924,802 3,805,191
Granted....................................... 536,845 -- -- 794,861
Exercised..................................... -- -- (170,000) (1,377,855)
Canceled...................................... -- (2,754,802) -- (297,395)
------------ ----------------- ----------------- ------------
Options outstanding at end of period.......... 536,845 -- 2,754,802 2,924,802
------------ ----------------- ----------------- ------------
------------ ----------------- ----------------- ------------
Weighted average exercise price of options at
beginning of period......................... $ -- $ -- $ 10.47 $ 7.92
Weighted average exercise price of options
exercised................................... $ -- $ -- $ 1.66 $ 2.47
Range of exercise prices of options $1.67 to
outstanding at end of period................ $ 11.88 $ -- $1.67 to $24.63 $24.63
Weighted average exercise price of options
outstanding at end of period................ $ 11.88 $ -- $ 11.01 $ 10.47
Vested options at end of period............... -- -- 2,754,802 2,924,802
Options available for future grants at end of
period...................................... 178,847 -- 129,351 129,351
</TABLE>
51
<PAGE>
(14) COMMITMENTS AND CONTINGENCIES
Future minimum lease payments, under noncancelable operating leases as of
December 31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................................. $ 25,555
1999.............................................................. 24,567
2000.............................................................. 23,478
2001.............................................................. 22,488
2002.............................................................. 21,804
Thereafter........................................................ 38,123
---------
$ 156,015
---------
---------
</TABLE>
The Company is also obligated under a three-year operating lease agreement
to pay a per capita license fee for laser tag equipment. This agreement requires
the Company to pay 20 cents per attendee at its FunCenters for the first 9
million attendees; 18 cents per attendee for the next 9 million attendees; and
16 cents for each attendee thereafter. Because the agreement is based upon
attendance, the exact payment in each of the three years cannot be determined.
Rental expense for operating leases during the years ended December 31,
1997, 1996, and 1995 amounted to approximately $34,455,000, $41,137,000 and
$52,716,000, respectively.
During the fourth quarter of 1997 the Company began an extensive FunCenter
renovation program designed to broaden their entertainment offerings, upgrade
their facilities and give a "new look." During the first phase of this program,
the Company renovated approximately 60% of its FunCenters through March 1998 and
expects during the next phase, to complete renovations of an additional 15% of
its FunCenters by the end of 1998. Through March 31, 1998, the Company also
completed the conversion of approximately 80% of its FunCenters to permit the
sale of Pizza Hut items and renovated approximately 25% of its locations to
offer new weekday programs under the "DZU" brand name. The estimated cost for
these renovations and advance purchases through March 31, 1998 is approximately
$24 million, of which approximately $15 million has been paid or accrued as of
December 31, 1997 and approximately $3 million relates to advance purchases for
future renovation. These costs exclude approximately $3 million of excess
billings from general contractors which the Company intends to dispute.
From time to time, the Company is a party to a number of lawsuits and other
legal matters, including claims relating to injuries which allegedly occurred at
the Company's facilities and to alleged employment discrimination. A portion of
these claims may be covered by insurance. Management has estimated the potential
liabilities resulting from such claims which arose subsequent to the Petition
Date and which are not covered by insurance to be approximately $3,347,000 at
December 31, 1997 and $1,849,000 at December 31, 1996. These amounts were
recorded in accrued liabilities and other long-term liabilities in the Company's
consolidated balance sheet based on management estimates of the tendering of
future payments. Because these amounts represent estimates, it is reasonably
possible that a change in these estimates may occur in the future.
(15) SUBSEQUENT EVENTS
During the first quarter of 1998, the Company substantially completed Phase
One of its capital plan to renovate its FunCenters, add new attractions, and
broaden their entertainment offerings, including the addition of designated
areas for lasertag, arts and crafts, stage events and promotional activities.
Approximately 60% of the Company's FunCenters were renovated pursuant to this
plan. The Company also completed the conversion of its food service operations
to offer Pizza Hut products in approximately 80% of its FunCenters (See Note
14).
52
<PAGE>
(15) SUBSEQUENT EVENTS (CONTINUED)
On March 31, 1998, the Company entered into a $10 million Senior Secured
Revolving Credit Facility (the "Facility") with Foothill Capital Corporation, as
permitted under the Notes. The Facility bears interest at prime plus 1% plus
certain fees, and allows for the Company to borrow 133% of trailing twelve month
FunCenter contribution (as defined therein) for its top 100 performing
FunCenters, up to a maximum loan principal amount of $10 million. The Facility
contains restrictions on additional indebtedness, capital expenditures,
dividends, is secured by substantially all of the Company's assets and has
cross-default provisions with other obligations of the Company. $2.0 million of
the Facility is reserved for resolution of certain disputes in connection with
the Company's renovation program (See Note 14).
(16) SUMMARIZED COMBINED FINANCIAL INFORMATION
The following sets forth summarized combined financial information of Discovery
Zone (Canada) Limited (formerly Discovery Zone Children's Amusement Canada
Corporation) and Discovery Zone (Puerto Rico), Inc., which are subsidiary
guarantors under the Senior Secured Note financing secured by the Company in
connection with its emergence from bankruptcy (See Notes 2 and 6). Separate
financial statements of these subsidiary guarantors are not included as the
subsidiaries guarantee the Senior Secured Notes on a full, unconditional, and
joint and several basis and are wholly-owned subsidiaries of the Company.
Non-guarantor subsidiaries under the financing are inconsequential.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
------------- -------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C> <C>
Current assets............................................................ $ 233 $ 682
Noncurrent assets......................................................... 3,124 3,925
Current liabilities....................................................... 257 144
Noncurrent liabilities.................................................... 8,158 9,627
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------- ------------- ---------
<S> <C> <C> <C>
Net revenue............................................................... $ 4,931 $ 6,637 $ 7,991
Operating expenses........................................................ 5,688 7,561 12,018
Net loss.................................................................. (542) (753) (4,001)
</TABLE>
53
<PAGE>
DISCOVERY ZONE, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS AMOUNTS BALANCE AT
BEGINNING CHARGED TO WRITTEN END
DESCRIPTION OF YEAR EXPENSE OFF OF YEAR
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
1995.............................................................. $ 36 $ 2,149 $ -- $ 2,185
1996.............................................................. 2,185 1,093 2,304 974
1997.............................................................. 974 -- 974 --
RESERVE FOR OBSOLESCENCE
1995.............................................................. 259 766 -- 1,025
1996.............................................................. 1,025 -- 1,025 --
1997.............................................................. -- -- -- --
</TABLE>
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
ACCOUNTING AND FINANCIAL DISCLOSURES
Reference is made to the Current Report on Form 8-K dated July 9, 1997, the
Current Report on Form 8-K dated June 10, 1996, the amendment to the Current
Report on Form 8-K dated June 11, 1996 and the Current Report on Form 8-K dated
August 15, 1995.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers and directors of the Company and the positions they hold.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Scott W. Bernstein................................... 37 Chief Executive Officer, President and Director
Sharon L. Rothstein.................................. 40 Senior Vice President, Marketing and Entertainment
Robert G. Rooney..................................... 40 Senior Vice President, Chief Financial and
Administrative Officer
Andrew M. Smith...................................... 45 Vice President, Real Estate, General Counsel and
Secretary
Leighton J. Weiss.................................... 46 Vice President and Controller
Martin S. Davis...................................... 71 Director
Greg S. Feldman...................................... 41 Director
Douglas W. Rotatori.................................. 37 Director
L.G. Schafran........................................ 59 Director
Christopher R. Smith................................. 33 Director
Paul D. Kurnit....................................... 49 Director
</TABLE>
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is a brief description of the business experience of the
executive officers and directors of the Company.
MR. BERNSTEIN has been Chief Executive Officer and President of the Company
since December 1996 and was elected as a director in July 1997. Mr. Bernstein
was hired by Wellspring in June of 1996 to assist with formulation of the Plan
of Reorganization and to assume the role of Chief Executive Officer of the
Company. From August 1994 until June 1996, Mr. Bernstein served as President of
the Northeast operations of Six Flags Theme Parks Inc. ("Six Flags"), which
included Six Flags Great Adventure and Six Flags Wild Safari Animal Park. From
April 1992 until August 1994, Mr. Bernstein served in the following roles: (i)
Senior Vice President of Time Warner Enterprises, a strategic business
development unit of Time Warner Inc.; (ii) Senior Vice President and General
Counsel of Six Flags; and (iii) Senior Vice President, chief administrative and
legal officer of Six Flags.
MS. ROTHSTEIN has been Senior Vice President, Marketing and Entertainment of
the Company since March 1997. From April 1996 until March 1997, she was Vice
President -- New Business at Nabisco. From 1987 until April 1996, she held
several positions at Nabisco, including Senior Director -- New Business,
Director --Business Marketing, Product Manager -- Ritz, Product Manager -- New
Products and Product Manager --Snack Crackers.
MR. ROONEY has been Senior Vice President, Chief Financial and
Administrative Officer of the Company since February 1997. From March 1994 until
September 1996, Mr. Rooney served as Chief
55
<PAGE>
Financial Officer of Forschner Enterprises, a venture capital group, and from
September 1992 to February 1994, Mr. Rooney served as a director and consultant
on behalf of various investors and investment funds affiliated with Forschner
Enterprises. From 1989 through 1992, Mr. Rooney served as Managing Director and
Chief Financial Officer of The Signature Group, a merchant banking group
specializing in troubled real estate. From 1986 through 1989, he served as
Senior Vice President, Chief Financial Officer and Treasurer of Imagine
Entertainment, Inc., a publicly held film and television production company. Mr.
Rooney is a certified public accountant.
MR. SMITH joined the Company as Vice President--Real Estate and General
Counsel in October 1997 and has served as Secretary since November 1997. From
June 1996 to October 1997, Mr. Smith served as a Managing Director of Alpine
Consulting, a real estate consulting firm. From January 1995 to May 1996, he
served as the Vice President--Operations and as a director of Influence, Inc., a
medical device manufacturer. From 1986 to 1994, Mr. Smith was a real estate
partner with Weil, Gotshal & Manges LLP, an international law firm.
MR. WEISS has been Controller of the Company since 1996 and in 1997 he was
named Vice President of Finance. He joined the Company in July 1995, serving as
Assistant Controller. Mr. Weiss held various positions as a controller or
finance manager within the music division of Blockbuster Entertainment from
January 1994 through June 1995. Prior to that, he served as Controller and
Director of Accounting for Sound Warehouse, Inc. from October 1988 to January
1994. Prior to joining Sound Warehouse, Inc., Mr. Weiss held various positions
for Arthur Andersen LLP, where he achieved the position of manager in the audit
and financial consulting division.
MR. DAVIS was elected as a director of the Company in July 1997. Mr. Davis
has been a managing partner of Wellspring Associates L.L.C. since January 1995.
Prior to founding Wellspring, Mr. Davis served as Chairman and Chief Executive
Officer of Gulf + Western Industries, Inc. and its successor company, Paramount
Communications, Inc., from 1983 to 1994. Mr. Davis is a member of the Board of
Directors of Lionel L.L.C., National Amusements, Inc., the parent company of
Viacom Inc. and SLM International, Inc.
MR. FELDMAN was elected as a director of the Company in July 1997. Mr.
Feldman has been a managing partner of Wellspring since its inception in January
1995. From September 1990 until January 1995, he was a vice president in charge
of acquisitions at Exor America Inc. (formerly IFINT-USA Inc.), the U.S.
investment arm of the Agnelli Group. From September 1988 until September 1990,
Mr. Feldman was vice president and company-founder of Clegg Industries, Inc.,
and investment firm. Mr. Feldman is a member of the Board of Directors of Lionel
L.L.C. and Chartwell Re Corporation.
MR. ROTATORI was elected as a director of the Company in July 1997. Mr.
Rotatori is a partner and has been with Wellspring since September 1995. From
1991 until 1995, Mr. Rotatori was an Associate Director in the investment
banking department of Bear, Stearns & Company. Inc. Mr. Rotatori is a member of
the Board of Directors of SLM International, Inc.
MR. SCHAFRAN was elected as a director of the Company in July 1997. Mr.
Schafran has been a managing general partner of L.G. Schafran & Associates, a
real estate and development firm, since 1984. Mr. Schafran is a member of the
Board of Directors of several companies, including Comsat Corporation, Publicker
Industries, Inc., Capsure Holdings Corporation, Sassco Corp., Leslie Fay Inc.
and Glasstech, Inc., Chairman of the Executive Group of The Dart Group
Corporation, Chairman of the Board of Directors of Delta-Omega Technologies,
Inc. and a trustee of National Income Realty Trust.
MR. SMITH was elected as a director of the Company in July 1997. Mr. Smith
joined Wafra Investment Advisory Group, Inc. ("Wafra") in 1992, where he is a
Vice President. From 1990 until 1992, Mr. Smith served as a Vice President of
Kouri Capital Group, Inc., a merchant bank providing, among other things,
privatization advisory service. Prior to joining Kouri Capital Group, Mr. Smith
served as Assistant Vice
56
<PAGE>
President of Direct Equity Investment at Lambert Brussels Capital Corporation
and, prior to that, as a Corporate Loan Officer at First Union National Bank.
MR. KURNIT was appointed as director in accordance with the terms of the
Plan as representative of the committee of pre-petition unsecured creditors of
the Company. He will serve for a term of three years through July 2000. Mr.
Kurnit's appointment was approved by the Bankruptcy Court at the confirmation
hearing. Mr. Kurnit has been President of Griffin Bacal Inc. ("Griffin Bacal")
since 1988.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of securities ownership and
changes in such ownership with the Commission. Officers, directors and greater
than 10% shareholders also are required by rules promulgated by the Commission
to furnish the Company with copies of all Section 16(a) forms they file.
The Company is currently working with its officers, directors and greater
than 10% shareholders to ensure full current and future compliance with the
reporting requirements of Section 16(a). The Company has recently assisted each
of its officers and directors and Birch Holdings, L.L.C. in the filing of a
delinquent Form 3. In addition, the three executive officers granted stock
options in 1997 did not timely file a Form 5 to report such grants.
ITEM 11. EXECUTIVE COMPENSATION
The following table and discussion summarize the compensation earned by the
two individuals who have served as the Company's Chief Executive Officer during
the year ended December 31, 1997, and the other four most highly compensated
executive officers of the Company who earned more than $100,000 in salary and
bonuses (collectively, the "Named Executive Officers") for services rendered in
all capacities to the Company during the three years ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS NUMBER
-------------------------------------------------------------------- OF SECURITIES
OTHER ---------------
ANNUAL UNDERLYING
COMPENSATION OPTIONS/
NAME POSITION YEAR SALARY ($) BONUS ($) (1)$ SARS
- ------------------------------------------- ---------------- --------- ----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Scott W. Bernstein(2)...................... President/CEO 1997 416,667 200,000 37,862 357,845
1996 30,204 -- -- --
Donna R. Moore(3).......................... President/CEO 1997 115,962 -- 900 --
1996 412,500 -- -- --
1995 145,594 150,000 -- --
Robert G. Rooney(2)........................ SVP--CFO 1997 185,000 45,000 4,615 89,500
1996 8,538 -- -- --
Sharon L. Rothstein(2)..................... SVP--Marketing 1997 185,000 75,000 4,615 89,500
Leighton J. Weiss.......................... VP--Finance 1997 126,969 12,000 -- --
1996 115,987 23,356 -- --
1995 41,887 17,756 -- --
Stan Gerasimczyk........................... VP--Store 1997 147,115 12,500 2,400 --
<CAPTION>
ALL OTHER
COMPENSATION
NAME ($)
- ------------------------------------------- -------------
<S> <C>
Scott W. Bernstein(2)...................... --
--
Donna R. Moore(3).......................... 300,000
2,699(4)
26,224(4)
Robert G. Rooney(2)........................ 75,000(5)
--
Sharon L. Rothstein(2)..................... --
Leighton J. Weiss.......................... 50,000(5)
--
--
Stan Gerasimczyk........................... 30,000(5)
</TABLE>
- ------------------------
(1) Represents payments made by the Company for auto allowances and other
perquisites pursuant to employment contracts.
(2) Mr. Bernstein, Mr. Rooney and Ms. Rothstein became executive officers of the
Company in December 1996, February 1997 and April 1997, respectively.
57
<PAGE>
(3) Ms. Moore held a nominal title of President and Chief Executive Officer
through the Confirmation Date in order to avoid the need for Bankruptcy
Court approval in the event the Plan was not approved by the Company's
creditors, in which case Mr. Bernstein would have ceased to serve as
President and Chief Executive Officer of the Company. Ms. Moore was paid her
salary through February 1997 and received severance pay of $300,000 upon the
Company's emergence from Chapter 11.
(4) Represents reimbursement for relocation expenses.
(5) Represents a one-time bonus awarded by the Company in recognition of efforts
in connection with the reorganization of the Company and its successful
emergence from Chapter 11.
OPTION AND SAR GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL
RATES OF
STOCK
PRICE
INDIVIDUAL GRANTS APPRECIATION
NUMBER OF % OF TOTAL -------------------------- FOR
SECURITIES OPTIONS/SARS EXERCISE OR OPTION
UNDERLYING GRANTED TO BASE PRICE TERM (2)
OPTIONS/SARS EMPLOYEES IN ($/SH) EXPIRATION ----------
NAME GRANTED FISCAL YEAR (1) DATE 5%($)
- ------------------------------------------------------ ------------- --------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Scott W. Bernstein.................................... 357,845 66.7% 11.88 7/31/07 2,673,556
Robert G. Rooney...................................... 89,500 16.7% 11.88 7/31/07 668,678
Sharon L. Rothstein................................... 89,500 16.7% 11.88 7/31/07 668,678
<CAPTION>
NAME 10%($)
- ------------------------------------------------------ ----------
<S> <C>
Scott W. Bernstein.................................... 6,775,315
Robert G. Rooney...................................... 1,694,563
Sharon L. Rothstein................................... 1,694,563
</TABLE>
- ------------------------
(1) The exercise price of each of the Company's outstanding stock options equals
the fair market value of the Common Stock on the date of grant, which the
Company reasonably believed to be $11.88, based on the opening book value of
the total equity of the Company on a fully diluted basis as of July 31,
1997, as determined by Fresh Start Accounting.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the Company's stock options immediately prior to the
expiration of their terms assuming the specified compounded annual rates of
appreciation (5% and 10%) on the Common Stock over the term of the options.
These assumptions are based on rules promulgated by the Commission and do
not reflect the Company's estimate of future stock price appreciation.
Actual gains, if any, on the stock option exercises are dependent on the
timing of such exercise and the future performance of the underlying Common
Stock. There can be no assurance that the rates of appreciation assumed in
this table can be achieved or that the amounts reflected will be received by
the option holder.
OPTION AND SAR EXERCISES IN FISCAL 1997 AND YEAR-END OPTION AND SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
SHARES UNEXERCISED
ACQUIRED OPTIONS/SARS
ON VALUE AT FY-END 1997
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE
- ---------------------------------------------------- ------------- ----------- -----------------------
<S> <C> <C> <C>
Scott W. Bernstein.................................. -- -- 0/357,845
Robert G. Rooney.................................... -- -- 0/89,500
Sharon L. Rothstein................................. -- -- 0/89,500
Donna R. Moore...................................... -- -- --
Leighton J. Weiss................................... -- -- --
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS/SARS
AT FY-END 1997 ($)
EXERCISABLE/UNEXERCISABLE
NAME (1)
- ---------------------------------------------------- -----------------------------
<S> <C>
Scott W. Bernstein.................................. --
Robert G. Rooney.................................... --
Sharon L. Rothstein................................. --
Donna R. Moore...................................... --
Leighton J. Weiss................................... --
</TABLE>
- ------------------------
(1) The Company's Common Stock was not publicly traded on December 31, 1997. The
Company reasonably believes that the stock options granted to Mr. Bernstein,
Ms. Rothstein and Mr. Rooney in 1997 were not in-the-money at December 31,
1997.
58
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
None.
COMPENSATION OF DIRECTORS
The Directors do not receive any fee for their services; however, they are
reimbursed for all out-of-pocket expenses incurred in connection with attending
meetings of the Company's Board of Directors.
EMPLOYMENT AGREEMENTS
On July 21, 1997, the Company entered into an employment agreement with Mr.
Bernstein providing for his continued employment as Chief Executive Officer,
President and Director. The agreement with Mr. Bernstein expires on January 1,
2001. The agreement provides for an annual base salary of $440,000 per year,
with annual increases of $40,000 beginning January 1, 1998. In addition, the
agreement provides an annual bonus, equal to 2.0% of the Company's earnings
before interest, taxes, depreciation and amortization expenses. The agreement
also and provides for the reimbursement of certain other business related
expenses.
On August 1, 1997, the Company entered into an employment agreement with Ms.
Rothstein providing for her employment as Senior Vice President, Marketing and
Entertainment. The agreement with Ms. Rothstein expires on December 31, 2000.
The agreement provides for an annual base salary of $185,000 (plus performance
bonuses based on the achievement of certain objectives).
On August 1, 1997, the Company entered into an employment agreement with Mr.
Rooney providing for his employment as Senior Vice President, Chief Financial
Officer and Administrative Officer. The agreement with Mr. Rooney expires on
December 31, 2000. The agreement provides for an annual base salary of $185,000
(plus performance bonuses based on the achievement of certain objectives).
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not currently have a compensation
committee. The Company's Board of Directors determines all executive
compensation matters. Mr. Bernstein serves as a director on the Board of
Directors and as Chief Executive Officer and President of the Company.
STOCK INCENTIVE PLAN
All of the Company's option plans and equity securities in existence prior
to the Effective Date were canceled pursuant to the Plan. The Company adopted
the 1997 Stock Incentive Plan in connection with the Plan. Pursuant to their
respective employment agreements, the Company granted to Mr. Bernstein, Ms.
Rothstein and Mr. Rooney options to purchase 357,485 shares, 89,500 shares and
89,500 shares, respectively, of the Company's Common Stock at an exercise price
of $11.88 per share. One-third of such options vested on January 1, 1998.
One-third of such options will vest on January 1, 1999 and the remaining
one-third will vest on January 1, 2000. In addition, such options vest in their
entirety upon the incurrence of a "Change of Control." The Board of Directors of
the Company may amend or modify the Stock Incentive Plan at its discretion in
accordance with the Company's Certificate of Incorporation and By-laws. The
Stock Incentive Plan terminates ten years after the Effective Date. Shares of
Common Stock subject to the Stock Incentive Plan represent up to a maximum of
10% of the outstanding shares of Common Stock after giving effect to the
issuance of the Ten Year Warrants and the Warrants. The Company has reserved
715,692 shares of Common Stock for issuance under this Stock Option Plan. In the
first quarter of 1998, the Company awarded options to purchase approximately
150,000 shares to certain other management employees.
The Stock Incentive Plan is administered by the Board of Directors and
provides for the grants to eligible officers and employees of "Incentive Stock
Options" or "NonQualified Stock Options" (together, the "Stock Options"), or
both, to purchase shares of the Common Stock at no less than its fair market
value at the date of grant, in any such case subject to the discretion of the
Board of Directors. Pursuant to the Stock Incentive Plan, the Board of Directors
may also grant Stock Appreciation Rights (as defined therein). The Board of
Directors will fix the term of each Stock
59
<PAGE>
Option. However, no Incentive Stock Options will be exercisable more than ten
years after the date of grant. Stock Options may be exercised, in whole or in
part, at any time during the option term by giving written notice of exercise to
the Company and, for a limited time, upon the death, disability or retirement of
the optionee. No Stock Option will be transferable by the optionee other than by
will, by the laws of descent and distribution, or, in the case of a NonQualified
Stock Option, as permitted under the applicable option agreement. The Company
may repurchase a portion of the shares of Common Stock upon exercise of the
Stock Options. The Stock Incentive Plan allows an option holder to demand cash
for his or her option upon a Change of Control (as defined therein) of the
Company.
The Stock Incentive Plan also provides for grants of Restricted Stock (as
defined therein). The Board of Directors may designate an award of Restricted
Stock (an "Award") which vests upon the attainment of certain specified
performance goals set by the Board of Directors . Prior to the letter of
expiration of the applicable restricted period and attainment of such
performance goals, a participant may not sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock other than to pledge the
Restricted Stock as security for a loan to provide funds to pay the exercise
price for the Stock Options. Holders of Restricted Stock will have all of the
rights of a stockholder of the Common Stock. Any Restricted Stock must be
forfeited upon termination of employment.
The Stock Incentive Plan also provides for grants of Performance Units (as
defined therein). The Board of Directors may designate an award of Performance
Units and may condition any settlement thereof upon attainment of specified
performance goals. Performance Units may not be sold, assigned, transferred,
pledged or otherwise encumbered during the award cycle. Upon achievement of such
performance goals, the Board of Directors will deliver to the participant either
shares of Common Stock equal to the number of Performance Units or cash equal to
the fair market value of such number of shares of Common Stock.
60
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following tables set forth certain information concerning the beneficial
ownership of shares of Common Stock on March 31, 1998 (the "Table Date"), by:
(i) each stockholder known by the Company to beneficially own more than 5% of
the outstanding Common Stock; (ii) each of the Named Executive Officers; (iii)
each of the Company's directors; and (iv) all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF
BENEFICIALLY PERCENT
OWNED BENEFICIALLY
BENEFICIAL OWNER COMMON STOCK (1) OWNED (1)
- ---------------------------------------------------------------------------------------------- ----------------- -------------
<S> <C> <C>
Birch Holdings L.L.C. (2)..................................................................... 2,229,622 55.7%
Martin S. Davis (2)........................................................................... 2,229,622 55.7
Greg S. Feldman (2)........................................................................... -- --
Douglas W. Rotatori (2)....................................................................... -- --
Balfour Investors Incorporated (2)............................................................ 607,154 13.9
L.G. Schafran (2)............................................................................. -- --
Wafra Investment Advisory Group, Inc., or its designee (3).................................... 1,191,626 23.0
Christopher R. Smith (4)...................................................................... -- --
Paul D. Kurnit (5)............................................................................ 48,931 1.2
Scott W. Bernstein (6)........................................................................ 119,282 2.9
Robert G. Rooney (6).......................................................................... 29,833 .7
Sharon L. Rothstein (6)....................................................................... 29,833 .7
Directors and executive officers as a group (2)(4)(5)(6)...................................... 3,649,129 67.9
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of the Table Date are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Birch Acquisition L.L.C., an affiliate of Wellspring ("Birch Acquisition"),
beneficially owns approximately 98% of the economic interest and has voting
power over 100% of Birch Holdings. The remaining 2% of the economic interest
of Birch Holdings is held by affiliates of Balfour Investors Incorporated
("Balfour"). A separate affiliate of Balfour beneficially owns approximately
5% of the Common Stock (the "Balfour Shares"). Birch Acquisition is
company-managed by Mr. Davis and Greg S. Feldman. In his capacity as the
managing member of Birch Acquisition, Mr. Davis exercises voting and
dispositive power over the shares of Common Stock held by Birch Acquisition.
Birch Holdings and Mr. Davis disclaim beneficial ownership of the Balfour
Shares and neither Birch Holdings nor Mr. Davis have dispositive power over
the Balfour Shares. L.G. Schafran, a director of the Company nominated by
Balfour, disclaims voting, dispositive power and beneficial ownership over
the shares of Common Stock beneficially owned by Balfour, and Mr. Feldman
and Douglas W. Rotatori disclaim voting and dispositive power over the
shares of Common Stock beneficially owned by Birch Acquisition.
(3) Wafra owns the Convertible Preferred Stock which, by its terms, is
immediately convertible into 18.5% of the fully diluted shares of Common
Stock (after giving effect to the issuance of the Warrants and the Ten Year
Warrants, but before giving effect to Stock Options granted under the Stock
Incentive Plan).
(4) Christopher R. Smith, a director of the Company nominated by Wafra,
disclaims voting and dispositive power over the shares of Common Stock
beneficially owned by Wafra.
(5) Paul D. Kurnit is the director of the Company nominated by certain classes
of pre-petition creditors of the Company pursuant to the Plan of
Reorganization, including Griffin Bacal, a pre-petition creditor of the
Company, of which Mr. Kurnit is an officer. Mr. Kurnit, individually, is the
beneficial owner of less than 5.0% of the outstanding Common Stock.
(6) Represents the vested portion of Stock Options granted to Mr. Bernstein, Mr.
Rooney and Ms. Rothstein. The Company's Board of Directors has granted Stock
Options to Mr. Bernstein, Mr. Rooney and Ms. Rothstein with respect to
357,845, 89,500 and 89,500 shares of Common Stock, respectively, one-third
of which had vested as of January 1, 1998.
61
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As required under the Plan, the Company reimbursed Wellspring $1.1 million
for out-of-pocket expenses by Wellspring incurred in connection with its joint
sponsorship of the Plan. In addition, an officer of Griffin Bacal, the Company's
advertising agency, serves as a director of the Company. The Company paid $7.6
million to Griffin Bacal for media purchases on behalf of and creative services
provided to the Company in 1997. Management believes that the terms of its
agreement with Griffin Bacal are on terms at least as favorable to the Company
as the Company could have obtained from an independent third party.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1) Reference is made in the information set forth in Part II, Item 8 of this Report, which
information is incorporated herein by reference.
(a)(2) Financial Statement Schedules:
Financial Statement Schedule II, Valuation and Qualifying Accounts, for the years ended
December 31, 1997, 1996 and 1995 are submitted herewith.
(a)(3) The exhibits to this Report are listed in the Exhibit Index which appears elsewhere in this
Report and is incorporated herein by reference.
(b) Reports on Form 8-K: None
</TABLE>
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the undersigned Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York on April 15, 1998.
DISCOVERY ZONE, INC.
BY: /S/ SCOTT W. BERNSTEIN
-----------------------------------------
Name: Scott W. Bernstein
Title: Chief Executive Officer, President
and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Scott W. Bernstein and Robert G. Rooney,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to this report,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as full to all intents and
purposes as he might or could do in person, hereby ratifying and confirming that
each of said attorneys-in-fact and agents and/or either of them, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this has been signed by the following persons in the capacities
indicated on April 15, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------- ---------------------------
<C> <S> <C>
/s/ SCOTT W. BERNSTEIN Chief Executive Officer,
- ----------------------------- President and Director
Scott W. Bernstein
/s/ MARTIN S. DAVIS Director
- -----------------------------
Martin S. Davis
/s/ GREG S. FELDMAN Director
- -----------------------------
Greg S. Feldman
/s/ DOUGLAS W. ROTATORI Director
- -----------------------------
Douglas W. Rotatori
/s/ L.G. SCHAFRAN Director
- -----------------------------
L.G. Schafran
Director
- -----------------------------
Christopher R. Smith
/s/ PAUL D. KURNIT Director
- -----------------------------
Paul D. Kurnit
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------- ---------------------------
<C> <S> <C>
Senior Vice President,
/s/ ROBERT G. ROONEY Chief
- ----------------------------- Financial and
Robert G. Rooney Administrative Officer
Vice President and
/s/ LEIGHTON J. WEISS Controller
- ----------------------------- (Chief Accounting
Leighton J. Weiss Officer)
</TABLE>
64
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<C> <S>
+1.1 Purchase Agreement, dated July 15, 1997, between the Registrant and Jefferies & Company, Inc., as
the initial purchaser (the "Initial Purchaser").
++++2.1 The Third Amended Joint Plan of Reorganization of the Registrant, dated March 11, 1997.
+2.2 Agreement and Plan of Merger, dated as of July 28, 1997, between Discovery Zone Children's
Amusement Corp. and the subsidiaries of the Registrant listed therein.
+2.3 Agreement and Plan of Merger, dated as of July 29, 1997, between the Registrant and Discovery Zone
Children's Amusement Corporation.
+3.1 Amended and Restated Certificate of Incorporation of the Registrant.
+3.2 Amended and Restated By-laws of the Registrant.
+4.1 Indenture, dated as of July 22, 1997, among Registrant, as issuer, Discovery Zone Limited,
Discovery Zone (Puerto Rico), Inc. and Discovery Zone Licensing, Inc., as guarantors (the
"Guarantors") and State Street Bank and Trust Company, as trustee (the "Trustee").
4.2 Form of Exchange Note (included in Exhibit 4.1).
+4.3 Registration Rights Agreement, dated as of July 22, 1997, between the Registrant and the Initial
Purchaser.
+4.4 Warrant Agreement, dated as of July 22, 1997, between the Registrant and State Street Bank and
Trust Company, as warrant agent.
+4.5 Escrow and Security Agreement, dated as of July 22, 1997, among the Registrant, as pledgor, the
Initial Purchaser Inc. and the Trustee, as collateral agent.
+4.6 Pledge Agreement, dated as of July 22, 1997, between the Registrant and the Trustee, as collateral
agent.
+4.7 Security Agreement, dated as of July 22, 1997, between the Registrant and the Trustee, as
collateral agent.
+4.8 Subsidiary Pledge Agreement, dated as of July 22, 1997, between the Guarantors and the Trustee, as
collateral agent.
+4.9 Subsidiary Security Agreement, dated as of July 22, 1997, between the Guarantors and the Trustee,
as collateral agent.
+4.10 Collateral Assignment of Patents, Trademarks and Copyrights, dated as of July 22, 1997, among the
Registrant, as assignor, the Guarantors, as assignors and the Trustee, as assignee.
+4.11 Assignment and License Agreement, dated as of July 29, 1997, among the Registrant, as assignor,
the Guarantors, as assignors, and DZ Party, Inc., as assignee.
+++4.12 Form of Intercreditor Agreement, dated as of July 22, 1997, between a [lender] and the Trustee, as
collateral agent.
+4.13 The Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Company, as mortgagor and the Trustee, as mortgagee, related to
property located in Hamilton County, Ohio.
+4.14 The Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Company, as mortgagor and the Trustee, as mortgagee, related to
property located in Cook County, Illinois.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<C> <S>
+4.15 The Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Company, as mortgagor and the Trustee, as mortgagee, related to
property located in Cobb County, Georgia.
+4.16 The Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Company, as mortgagor and the Trustee, as mortgagee, related to
property located in Franklin County, Ohio.
+4.17 The Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Company, as mortgagor and the Trustee, as mortgagee, related to
property located in Macomb County, Michigan.
+4.18 The Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Company, as mortgagor and the Trustee, as mortgagee, related to
property located in Anoka County, Minnesota.
+4.19 The Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Company, as mortgagor and the Trustee, as mortgagee, related to
property located in Philadelphia County, Pennsylvania.
+4.20 The Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Company, as mortgagor and the Trustee, as mortgagee, related to
property located in Marion County, Indiana.
+4.21 The Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as
of July 29, 1997, among the Registrant, as grantor, Kenneth W. Pearson, as trustee and the
Trustee, as beneficiary, relating to property located in Dallas County, Texas.
+4.22 The Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as
of July 29, 1997, among the Registrant, as grantor, Kenneth W. Pearson, as trustee and the
Trustee, as beneficiary, relating to property, located in Bexar County (San Antonio), Texas.
+4.23 The Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as
of July 29, 1997, among the Registrant, as grantor, Kenneth W. Pearson, as trustee and the
Trustee, as beneficiary, relating to property located in Tarrant County, Texas.
+4.24 The Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as
of July 29, 1997, among the Registrant, as grantor, Kenneth W. Pearson, as trustee and the
Trustee, as beneficiary, relating to property located in Bexar County (Leon Valley), Texas.
+4.25 The Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as
of July 29, 1997, among the Registrant, as grantor, Kenneth W. Pearson, as trustee and the
Trustee, as beneficiary, relating to property located in Fort Bend County, Texas.
+4.26 The Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as
of July 29, 1997, among the Registrant, as grantor, Chicago Title Insurance Company, as trustee
and the Trustee, as beneficiary, relating to property located in Clark County, Washington.
+4.27 The Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as
of July 29, 1997, among the Registrant, as grantor, The Public Trustee of Arapahoe County,
Colorado, as trustee and the Trustee, as beneficiary, relating to property located in Arapahoe
County, Colorado.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<C> <S>
+4.28 The Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as
of July 29, 1997, among the Registrant, as grantor, The Public Trustee of Douglas County,
Colorado, as trustee and the Trustee, as beneficiary, relating to property located in Douglas
County, Colorado.
++4.29 Open-end Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (Amended
and Restated), dated as of July 29, 1997, among the Registrant, as mortgagor and McDonald's
Corporation, as mortgagee, relating to property located in Hamilton County, Ohio.
++4.30 Amended and Restated Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated as of July 29, 1997, among the Registrant, as mortgagor and McDonald's Corporation,
as mortgagee, relating to property located in Cook County, Illinois.
++4.31 Amended and Restated Deed to Secure Debt and Security Agreement, dated as of July 29, 1997, among
the Registrant, as mortgagor and McDonald's Corporation, as mortgagee, relating to property in
Cobb County, Georgia.
++4.32 Open-end Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (Amended
and Restated), dated as of July 29, 1997, among the Registrant, as mortgagor and McDonald's
Corporation, as mortgagee, relating to property located in Franklin County, Ohio.
++4.33 Amended and Restated Mortgage, dated as of July 29, 1997, among the Registrant, as mortgagor and
McDonald's Corporation, as mortgagee, relating to property located in Macomb County, Michigan.
++4.34 Amended and Restated Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated as of July 29, 1997, among the Registrant, as mortgagor and McDonald's Corporation,
as mortgagee, relating to property located in Anoka County, Minnesota.
++4.35 Amended and Restated Open-end Mortgage, Assignment of Leases and Rents, Security Agreement and
Fixture Filing, dated as of July 29, 1997, among the Registrant, as mortgagor and McDonald's
Corporation, as mortgagee, relating to property in Philadelphia County, Pennsylvania.
++4.36 Amended and Restated Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated as of July 29, 1997, among the Registrant, as mortgagor and McDonald's Corporation,
as mortgagee, relating to property in Marion County, Indiana.
++4.37 Amended and Restated Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated as of July 29, 1997, among the Registrant, as grantor, Kenneth W. Pearson, as
trustee and McDonald's Corporation, as beneficiary, relating to property located in Bexar County
(San Antonio), Texas.
++4.38 Amended and Restated Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated as of July 29, 1997, among the Registrant, as grantor, Kenneth W. Pearson, as
trustee and McDonald's Corporation, as beneficiary, relating to property located in Tarrant
County, Texas.
++4.39 Amended and Restated Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated as of July 29, 1997, among the Registrant, as grantor, Kenneth W. Pearson, as
trustee and McDonald's Corporation, as beneficiary, relating to property located in Bexar County
(Leon Valley), Texas.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<C> <S>
++4.40 Amended and Restated Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated as of July 29, 1997, among the Registrant, as grantor (borrower), McDonald's
Corporation, as grantee (lender) and Chicago Title Insurance Company, as grantee (trustee),
relating to property located in Clark County, Washington.
++4.41 Amended and Restated Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated as of July 29, 1997, among the Registrant, as grantor, The Public Trustee of
Arapahoe County, Colorado, as trustee and McDonald's Corporation, as beneficiary, relating to
property located in Arapahoe County, Colorado.
++4.42 Amended and Restated Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated as of July 29, 1997, among the Registrant, as grantor, The Public Trustee of Douglas
County, Colorado, as trustee and McDonald's Corporation, as beneficiary, relating to property
located in Douglas County, Colorado.
++4.43 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Hamilton
County, Ohio.
++4.44 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Cook County,
Illinois.
++4.45 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Cobb County,
Georgia.
++4.46 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Franklin
County, Ohio.
++4.47 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Macomb County,
Michigan.
++4.48 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Anoka County,
Minnesota.
++4.49 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Philadelphia
County, Pennsylvania.
++4.50 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Marion County,
Indiana.
++4.51 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Bexar County
(San Antonio), Texas.
++4.52 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Tarrant
County, Texas.
++4.53 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Bexar County
(Leon Valley), Texas.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<C> <S>
++4.54 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Clark County,
Washington.
++4.55 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Arapahoe
County, Colorado.
++4.56 Subordination Agreement, dated as of July 29, 1997, among the Registrant, the Trustee, for itself
and as collateral agent, and McDonald's Corporation, related to property located in Douglas
County, Colorado.
++4.57 Secured Rent Deferral Note of McDonald's Corporation, dated as of July 29, 1997, related to
property located in Independence, Missouri.
++4.58 Secured Rent Deferral Note of McDonald's Corporation, dated as of July 29, 1997, related to
property located in Royal Palm, Florida.
++4.59 Secured Rent Deferral Note of McDonald's Corporation, dated as of July 29, 1997, related to
property located in Cincinnati, Ohio.
++4.60 Secured Rent Deferral Note of McDonald's Corporation, dated as of July 29, 1997, related to
property located in Greenfield, Wisconsin.
++4.61 Secured Rent Deferral Note of McDonald's Corporation, dated as of July 29, 1997, related to
property located in Webster, Texas.
++4.62 Secured Rent Deferral Note of McDonald's Corporation, dated as of July 29, 1997, related to
property located in Houston, Texas.
++4.63 Secured Rent Deferral Note of McDonald's Corporation, dated as of July 29, 1997, related to
property located in Manchester, Missouri.
++4.64 Secured Rent Deferral Note of McDonald's Corporation, dated as of July 29, 1997, related to
property located in Rancho Cucomonga, California.
++4.65 Secured Rent Deferral Note of McDonald's Corporation, dated as of July 29, 1997, related to
property located in Amherst, New York.
++4.66 Secured Rejection Note of McDonald's Corporation, dated as of July 29, 1997.
4.67 Loan and Security Agreement, dated as of March 31, 1998, between the Registrant and Foothill
Capital Corporation ("Foothill").
4.68 General Continuing Guaranty, dated as of March 31, 1998, among Discovery Zone (Canada) Limited,
Discovery Zone (Puerto Rico), Inc. and Discovery Zone Licensing, Inc., as guarantors (the
"Guarantors"), in favor of Foothill.
4.69 Security Agreement, dated as of March 31, 1998, between the Guarantors and Foothill.
4.70 Stock Pledge Agreement, dated as of March 31, 1998, between the Registrant and Foothill.
4.71 Trademark Security Agreement, dated as of March 31, 1998, among the Registrant, Discovery Zone
Licensing, Inc. and Foothill.
4.72 Intercreditor Agreement, dated as of March 31, 1998, between Foothill and the Trustee, as
collateral agent.
++10.1 Employment Agreement, dated as of July 21, 1997, between the Registrant and Scott W. Bernstein.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<C> <S>
++10.2 Employment Agreement, dated as of August 1, 1997, between the Registrant and Robert G. Rooney.
++10.3 Employment Agreement, dated as of August 1, 1997, between the Registrant and Sharon L. Rothstein.
++10.4 1997 Stock Incentive Plan.
12.1 Statements re computation of ratios.
+++++16.1 Letter re change in certifying accountant.
+21.1 List of Subsidiaries of the Registrant.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule (December 31, 1997).
27.2 Restated Financial Data Schedule (July 31, 1997).
27.3 Restated Financial Data Schedule (1995).
</TABLE>
- ------------------------
<TABLE>
<S> <C>
+ Incorporated by reference from the Registration Statement on Form S-4 of the
Registrant, dated November 19, 1997.
++ Incorporated by reference from Amendment No. 1 to the Registration Statement on Form
S-4 of the Registrant, dated December 9, 1997.
+++ Incorporated by reference from Amendment No. 3 to the Registration Statement on Form
S-4 of the Registrant, dated January 28, 1998.
++++ Incorporated by reference from the Current Report on Form 8-K of the Registrant,
dated July 9, 1997.
+++++ Incorporated by reference from the Current Report on Form 8-K of the Registrant,
dated June 3, 1996.
</TABLE>
<PAGE>
Exhibit 4.67
LOAN AND SECURITY AGREEMENT
by and between
DISCOVERY ZONE, INC.
and
FOOTHILL CAPITAL CORPORATION
Dated as of March 31, 1998
<PAGE>
TABLE OF CONTENTS
Page(s)
1. DEFINITION AND CONSTRUCTION...........................................1
1.1 Definitions..................................................1
1.2 Accounting Terms............................................22
1.3 Code........................................................23
1.4 Construction................................................23
1.5 Schedules and Exhibits......................................23
2. LOAN AND TERMS OF PAYMENT............................................23
2.1 Revolving Advances..........................................23
2.2 Letters of Credit...........................................25
2.3 [Intentionally omitted].....................................27
2.4 [Intentionally omitted].....................................27
2.5 Overadvances................................................27
2.6 Interest and Letter of Credit Fees: Rates, Payments,
and Calculations..........................................27
2.7 Collection of Accounts......................................29
2.8 Crediting Payments; Application of Collections..............29
2.9 Designated Account..........................................30
2.10 Maintenance of Loan Account; Statements of Obligations......30
2.11 Fees........................................................30
2.12 Eurodollar Rate Loans.......................................31
2.13 Illegality..................................................33
2.14 Requirements of Law.........................................33
2.15 Taxes.......................................................35
2.16 Indemnity...................................................37
3. CONDITIONS; TERM OF AGREEMENT........................................38
3.1 Conditions Precedent to the Initial Advance and Letter of
Credit....................................................38
3.2 Conditions Precedent to all Advances and all Letters of
Credit....................................................40
3.3 Conditions Subsequent.......................................41
3.4 Term; Automatic Renewal.....................................41
3.5 Effect of Termination.......................................41
3.6 Early Termination by Borrower...............................42
3.7 Termination Upon Event of Default...........................42
4. CREATION OF SECURITY INTEREST........................................42
4.1 Grant of Security Interest..................................42
4.2 Negotiable Collateral.......................................42
4.3 Collection of Accounts, General Intangibles, and
Negotiable Collateral.....................................43
4.4 Delivery of Additional Documentation Required...............43
<PAGE>
ii
4.5 Power of Attorney...........................................43
4.6 Right to Inspect............................................44
5. REPRESENTATIONS AND WARRANTIES.......................................44
5.1 No Encumbrances.............................................44
5.2 [Intentionally omitted].....................................44
5.3 [Intentionally omitted].....................................44
5.4 Equipment...................................................44
5.5 Location of Inventory and Equipment.........................44
5.6 Inventory Records...........................................44
5.7 Location of Chief Executive Office; FEIN....................45
5.8 Due Organization and Qualification; Subsidiaries............45
5.9 Due Authorization; No Conflict..............................45
5.10 Litigation..................................................46
5.11 No Material Adverse Change..................................46
5.12 Solvency....................................................46
5.13 Employee Benefits...........................................47
5.14 Environmental Condition.....................................47
5.15 Brokerage Fees..............................................47
5.16 Renovation Disputes.........................................47
6. AFFIRMATIVE COVENANTS................................................47
6.1 Accounting System...........................................48
6.2 Collateral Reporting........................................48
6.3 Financial Statements, Reports, Certificates.................48
6.4 Tax Returns.................................................50
6.5 Guarantor Reports...........................................50
6.6 Permitted Acquisitions......................................50
6.7 Title to Equipment..........................................50
6.8 Maintenance of Equipment....................................50
6.9 Taxes.......................................................51
6.10 Insurance...................................................51
6.11 No Setoffs or Counterclaims.................................53
6.12 Location of Inventory and Equipment.........................53
6.13 Compliance with Laws........................................53
6.14 Employee Benefits...........................................53
6.15 Leases......................................................54
6.16 Brokerage Commissions.......................................54
7. NEGATIVE COVENANTS...................................................54
7.1 Indebtedness................................................54
7.2 Liens.......................................................55
7.3 Restrictions on Fundamental Changes.........................55
<PAGE>
iii
7.4 Disposal of Assets..........................................55
7.5 Change Name.................................................55
7.6 Guarantee...................................................55
7.7 Nature of Business..........................................55
7.8 Prepayments and Amendments..................................56
7.9 Change of Control...........................................56
7.10 Consignments................................................56
7.11 Distributions...............................................56
7.12 Accounting Methods..........................................56
7.13 Investments.................................................56
7.14 Transactions with Affiliates................................57
7.15 Suspension..................................................57
7.16 Use of Proceeds.............................................57
7.17 Change in Location of Chief Executive Office; Inventory
and Equipment with Bailees................................57
7.18 No Prohibited Transactions Under ERISA......................57
7.19 Financial Covenant..........................................58
7.20 Capital Expenditures........................................58
8. EVENTS OF DEFAULT....................................................59
9. FOOTHILL'S RIGHTS AND REMEDIES.......................................61
9.1 Rights and Remedies.........................................61
9.2 Remedies Cumulative.........................................63
10. TAXES AND EXPENSES...................................................63
11. WAIVERS; INDEMNIFICATION.............................................63
11.1 Demand; Protest; etc........................................63
11.2 Foothill's Liability for Collateral.........................64
11.3 Indemnification.............................................64
12. NOTICES..............................................................64
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER...........................65
14. DESTRUCTION OF BORROWER'S DOCUMENTS..................................66
15. GENERAL PROVISIONS...................................................66
15.1 Effectiveness...............................................66
15.2 Successors and Assigns......................................66
15.3 Section Headings............................................67
15.4 Interpretation..............................................67
<PAGE>
iv
15.5 Severability of Provisions..................................67
15.6 Amendments in Writing.......................................67
15.7 Counterparts; Telefacsimile Execution.......................67
15.8 Revival and Reinstatement of Obligations....................68
15.9 Integration.................................................68
15.10 Confidentiality.............................................68
SCHEDULES AND EXHIBITS
Schedule D-1 Renovation Disputes
Schedule 3.1 Taxes
Schedule 5.8 Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.12 Location of Inventory and Equipment
Exhibit C-1 Form of Compliance Certificate
Exhibit G-1 Form of Guaranty
Exhibit G-2 Form of Guarantor Security Agreement
Exhibit I-1 Form of Intercreditor Agreement
Exhibit S-1 Form of Stock Pledge Agreement
Exhibit T-1 Form of Trademark Security Agreement
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as
of March 31, 1998, between FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), with a place of business located at 11111 Santa Monica
Boulevard, Suite 1500, Los Angeles, California 90025-3333 and DISCOVERY ZONE,
INC., a Delaware corporation ("Borrower"), with its chief executive office
located at 565 Taxter Road, Fifth Floor, Elmsford, New York 10523.
The parties agree as follows:
1. DEFINITION AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the following
terms shall have the following definitions:
"Account Debtor" means any Person who is or who may
become obligated under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
an Obligor arising out of the sale or lease of goods or the rendition of
services by such Obligor, irrespective of whether earned by performance, and any
and all credit insurance, guaranties, or security therefor.
"Acquisition" means any purchase or other acquisition
by Borrower or its Subsidiaries of all or substantially all of the assets or
Stock of any other Person.
"Acquisition Lien" means in respect of the assets of
any Person that is the subject of a Permitted Acquisition, a Lien that attaches
solely to specific assets of such Person that are extant on the date of the
Acquisition, is in existence immediately prior to such Acquisition, and was not
created in connection with, or in anticipation of, the Acquisition of such
Person.
"Add-Back Credit" means, as of any date of
determination, an amount equal to (a) $10,000 multiplied by (b) the number of
store renovations commenced among Borrower's Top 100 Stores during the 12 month
period preceding the date of determination.
"Adjusted Aggregate Store Contribution" means, (a) as
of any date of determination occurring in each of the first 24 months following
the Closing Date, Aggregate Store Contribution for the relevant trailing 12
month period, plus the Add-Back Credit, and (b) as of any date of determination
occurring after the first 24 months following the Closing Date, Aggregate Store
Contribution for the relevant trailing 12 month period.
<PAGE>
"Adjusted Eurodollar Rate" means, with respect to
each Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded
upwards, if necessary, to the next 1/16%) determined by dividing (a) the
Eurodollar Rate for such Interest Period by (b) a percentage equal to (i) 100%
minus (ii) the Reserve Percentage. The Adjusted Eurodollar Rate shall be
adjusted on and as of the effective day of any change in the Reserve Percentage.
"Advances" has the meaning set forth in Section
2.1(a).
"Affiliate" of any specified Person means any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any specified Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management of
policies of such specified Person, whether through the ownership of voting
securities, by agreement or otherwise; provided, however, that beneficial
ownership of 10% or more of the aggregate voting power of the voting securities
of a Person shall be deemed to be control.
"Aggregate Store Contribution" means, as of any date
of determination, the sum of the individual Store Contribution of each of
Borrower's Top 100 Stores.
"Agreement" has the meaning set forth in the preamble
hereto.
"Authorized Person" means any officer or other
employee of Borrower.
"Average Unused Portion of Maximum Revolving Amount"
means, as of any date of determination, (a) the Maximum Revolving Amount, less
(b) the sum of (i) the average Daily Balance of Advances that were outstanding
during the immediately preceding month plus (ii) the average Daily Balance of
the Letter of Credit Usage during the immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy
Code (11 U.S.C. ss. 101 et seq.), as amended, and any successor statute.
"Benefit Plan" means a "defined benefit plan" (as
defined in Section 3(35) of ERISA) for which Borrower, any Subsidiary of
Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section
3(5) of ERISA) within the past six years.
"Borrower" has the meaning set forth in the preamble
to this Agreement.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records indicating, summarizing, or evidencing
Borrower's properties or assets
<PAGE>
(including the Borrower Collateral) or liabilities; all information relating to
Borrower's business operations or financial condition; and all computer
programs, disk or tape files, printouts, runs, or other computer prepared
information.
"Borrower Collateral" means all of Borrower's
interests in each of the following:
(a) the Accounts,
(b) Borrower's Books,
(c) the Equipment,
(d) the General Intangibles,
(e) the Inventory,
(f) the Negotiable Collateral,
(h) any money, or other assets of Borrower that now
or hereafter come into the possession, custody, or control of Foothill, and
(i) the proceeds and products, whether tangible or
intangible, of any of the foregoing, including proceeds of insurance covering
any or all of the Borrower Collateral, and any and all Accounts, Borrower's
Books, Equipment, General Intangibles, Inventory, Negotiable Collateral, real
property, money, deposit accounts, or other tangible or intangible property
resulting from the sale, exchange, collection, or other disposition of any of
the foregoing, or any portion thereof or interest therein, and the proceeds
thereof; provided, however, that anything in the foregoing to the contrary
notwithstanding, the Borrower Collateral shall not include the Escrowed Interest
Account or the McDonald's Collateral.
"Borrower's Top 100 Stores" means, as of any date of
determination, Borrower's 100 store locations (calculated to include any store
that would have been included but for the commencement of renovations) reporting
the highest levels of Store Contribution on a per-store basis, as compared to
Borrower's other store locations, computed on a trailing 12 month basis.
"Borrowing Base" has the meaning set forth in Section
2.1(a).
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which national banks are authorized or required to
close.
<PAGE>
"Capital Lease Obligation" means, as to any Person,
the obligations of such Person under a lease that are required to be classified
and accounted for as capital lease obligations under GAAP and, for purposes of
this definition, the amount of such obligations at any date shall be the
capitalized amount of such obligations at such date, determined in accordance
with GAAP.
"Change of Control" means the occurrence of one or
more of the following events:
(a) the Permitted Holder ceases to be the direct or
indirect beneficial owner (as defined below) of Voting Stock of Borrower
representing an amount of such Voting Stock greater than the amount beneficially
owned by any other Person or Group (as defined below);
(b) the Permitted Holder ceases to be the direct or
indirect beneficial owner of interests or participations in, or measured by the
profits of, Borrower representing an amount of such interests or participations
greater than the amount beneficially owned by any other Person or Group;
(c) any sale, lease, exchange or other transfer (in
one transaction or in a series of related transactions) of all or substantially
an of the assets of Borrower to any Person or Group, together with any
Affiliates thereof (whether or not otherwise in compliance with the provisions
of this Agreement) that is not beneficially owned or controlled, directly or
indirectly, by the Permitted Holder; or
(d) the Permitted Holder ceases to have the right or
ability, by voting power, control, contract or otherwise, to control a majority
of the Board of Directors of Borrower.
The terms "beneficially own", "beneficial owner" and
"Group" shall have the meanings ascribed to such terms in Sections 13(d) and
14(d) of the Exchange Act; provided, however, that, for the purposes of this
definition of "Change of Control" only, any Person or Group other than the
Permitted Holder shall be deemed to be the current beneficial owner of any
shares of Voting Stock of Borrower, or any interests or participations in, or
measured by the profits of, Borrower, that are issuable upon the exercise of any
option, warrant or similar right, or upon the conversion any convertible
security, in either case owned by such Person or Group without regard to whether
such option, warrant or convertible security is currently exercisable or
convertible.
"Closing Date" means the date of the first to occur
of (a) the making of the initial Advance, (b) the issuance of the initial Letter
of Credit, or (c) the acknowledgment, in writing, by Foothill that each of the
conditions contained in Section 3.1 have been fulfilled.
<PAGE>
"Code" means the New York Uniform Commercial Code.
"Collateral" means the Borrower Collateral and the
Guarantor Collateral.
"Collections" means all cash, checks, notes,
instruments, and other items of payment (including, insurance proceeds, proceeds
of cash sales, rental proceeds, and tax refunds).
"Compliance Certificate" means a certificate
substantially in the form of Exhibit C-1 and delivered by the chief accounting
officer of Borrower to Foothill.
"Concentration Account" means one or more accounts of
Borrower maintained with the Concentration Account Banks or such other deposit
accounts that have been established by Borrower at the Concentration Account
Banks and subject to a Concentration Account Agreement acceptable to Foothill.
"Concentration Account Agreement" means an agreement
in form and substance reasonably satisfactory to Foothill, among Foothill,
Borrower, and a Concentration Account Bank.
"Concentration Account Banks" means Harris Bank and
Trust Company or such other depository institutions that have been designated,
in writing, by Borrower to Foothill, and that have been approved by Foothill.
"Daily Balance" means the amount of an Obligation
owed at the end of a given day.
"deems itself insecure" means that the Person deems
itself insecure in accordance with the provisions of Section 1-208 of the Code.
"Default" means an event, condition, or default that,
with the giving of notice, the passage of time, or both, would be an Event of
Default.
"Designated Account" means an account of Borrower
maintained with Borrower's Designated Account Bank that has been designated, in
writing, by Borrower to Foothill, or such other deposit account of Borrower
(located within the United States) that has been designated, in writing and from
time to time, by Borrower to Foothill.
"Designated Account Bank" means Harris Bank and Trust
Company.
<PAGE>
"Disbursement Letter" means an instructional letter
executed and delivered by Borrower to Foothill regarding the extensions of
credit to be made on the Closing Date, the form and substance of which shall be
satisfactory to Foothill.
"Disputed Amount" means the total amount that is
being claimed as owed by Borrower to contractors, materialmen, laborers, or
suppliers identified on Schedule D-1 and in connection with the renovations of
Borrower's stores identified on Schedule D-1, which renovations were completed
after Borrower's emergence from Chapter 11 proceedings and before the Closing
Date.
"Disputed Amount Reserve" has the meaning set forth
in Section 2.1(e).
"Dollars or $" means United States dollars.
"Early Termination Premium" has the meaning set forth
in Section 3.6.
"Equipment" means all of the Obligors' present and
hereafter acquired machinery, machine tools, motors, equipment, furniture,
furnishings, fixtures, vehicles (including motor vehicles and trailers), tools,
parts, goods (other than consumer goods, farm products, or Inventory), wherever
located, including, (a) any interest of any Obligor in any of the foregoing, and
(b) all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing.
"Equity Acquisition Expenditures" means the Dollar
amount of expenditures made by Borrower in connection with the consummation of
Acquisitions by Borrower that, pursuant to the terms hereof, are allocated to
Equity Proceeds.
"Equity Capital Expenditures" means the Dollar amount
of capital expenditures made or incurred by Borrower that, pursuant to the terms
hereof, are allocated to Equity Proceeds.
"Equity Proceeds" means the aggregate Dollar amount
of Net Issuance Proceeds received by Borrower on or after the Closing Date.
"ERISA" means the Employee Retirement Income Security
Act of 1974, 29 U.S.C. ss.ss. 1000 et seq., amendments thereto, successor
statutes, and regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject
to ERISA whose employees are treated as employed by the same employer as the
employees of Borrower under IRC Section 414(b), (b) any trade or business
subject to ERISA whose employees are treated as employed by the same employer as
the employees of Borrower under IRC Section 414(c), (c)
<PAGE>
solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any
organization subject to ERISA that is a member of an affiliated service group of
which Borrower is a member under IRC Section 414(m), or (d) solely for purposes
of Section 302 of ERISA and Section 412 of the IRC, any party subject to ERISA
that is a party to an arrangement with Borrower and whose employees are
aggregated with the employees of Borrower under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with
respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of
Borrower, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during
a plan year in which it was a "substantial employer" (as defined in Section
4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a
Benefit Plan in a distress termination (as described in Section 4041(c) of
ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit
Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis
under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the
appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan,
or (ii) that may result in termination of a Multiemployer Plan pursuant to
Section 4041A of ERISA, (f) the partial or complete withdrawal within the
meaning of Sections 4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries
or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to
any Plan under Section 401(a)(29) of the IRC by Borrower or its Subsidiaries or
any of their ERISA Affiliates.
"Escrow Agreement" shall have the meaning assigned to
that term in the Subordinated Creditor Indenture, as such agreement is in effect
as of the Closing Date.
"Escrowed Interest Account" means one or more
accounts established with the Subordinated Creditor pursuant to the terms of the
Escrow Agreement for the deposit of the Escrow Funds and the Pledged Securities.
"Escrowed Funds" shall have the meaning assigned to
that term in the Subordinated Creditor Indenture, as such agreement is in effect
as of the Closing Date.
"Estimated Disputed Amount" means (a) as of the
Closing Date, $3,100,000, and (b) thereafter, the amount that Borrower most
recently has certified to Foothill as the amount that it in good faith,
reasonably estimates (based upon the advice of its professional advisors) to be
the Disputed Amount.
"Estimated Resolution Percentage" means, as of any
date of determination, an amount equal to 66-2/3%.
"Eurodollar Rate" means, with respect to the Interest
Period for a Eurodollar Rate Loan, the interest rate per annum at which United
States dollar deposits are offered to Foothill (or its Affiliates) by major
banks in the London interbank market (or other Eurodollar Rate market selected
by Foothill (or its Affiliates) if Foothill (or its Affiliates)
<PAGE>
reasonably determines that the London interbank market has ceased to be a
suitable interbank market for the designation of offshore United States dollar
deposit interest rates) on or about 2:00 p.m. (New York time) 2 Business Days
prior to the commencement of such Interest Period in amounts comparable to the
amount of the Eurodollar Rate Loans requested by and available to Borrower in
accordance with this Agreement, with a maturity of comparable duration to the
Interest Period selected by Borrower.
"Eurodollar Rate Loans" means any Advance (or any
portion thereof) made or outstanding hereunder during any period when interest
on such Advance (or portion thereof) is payable based on the Adjusted Eurodollar
Rate.
"Event of Default" has the meaning set forth in
Section 8.
"Exchange Act" means the Securities Exchange Act of
1934, as amended, or any successor statute or statutes thereto.
"FEIN" means Federal Employer Identification Number.
"Foothill" has the meaning set forth in the preamble
to this Agreement.
"Foothill Account" has the meaning set forth in
Section 2.7.
"Foothill Expenses" means all: costs or expenses
(including taxes, and insurance premiums) required to be paid by Borrower under
any of the Loan Documents that are paid or incurred by Foothill; fees or charges
paid or incurred by Foothill in connection with Foothill's transactions with
Borrower, including, fees or charges for photocopying, notarization, couriers
and messengers, telecommunication, public record searches (including tax lien,
litigation, and UCC searches and including searches with the patent and
trademark office, the copyright office, or the department of motor vehicles),
filing, recording, publication, appraisal (including periodic Collateral
appraisals); costs and expenses incurred by Foothill in the disbursement of
funds to Borrower (by wire transfer or otherwise); charges paid or incurred by
Foothill resulting from the dishonor of checks; costs and expenses paid or
incurred by Foothill to correct any default or enforce any provision of the Loan
Documents, or in gaining possession of, maintaining, handling, preserving,
storing, shipping, selling, preparing for sale, or advertising to sell the
Collateral, or any portion thereof, irrespective of whether a sale is
consummated; costs and expenses paid or incurred by Foothill in examining
Borrower's Books; costs and expenses of third party claims or any other suit
paid or incurred by Foothill in enforcing or defending the Loan Documents or in
connection with the transactions contemplated by the Loan Documents or
Foothill's relationship with Borrower or any guarantor; and Foothill's
reasonable attorneys fees and expenses incurred in advising, structuring,
drafting, reviewing, administering, amending, terminating, enforcing (including
attorneys fees and expenses incurred in connection with a "workout," a
"restructuring," or an Insolvency Proceeding concerning Borrower or any
guarantor
<PAGE>
of the Obligations), defending, or concerning the Loan Documents, irrespective
of whether suit is brought.
"GAAP" means generally accepted accounting principles
as in effect from time to time in the United States, consistently applied.
"General Intangibles" means all of the Obligors'
present and future general intangibles and other personal property (including
contract rights, rights arising under common law, statutes, or regulations,
chooses or things in action, goodwill, patents, trade names, trademarks,
servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists,
monies due or recoverable from pension funds, route lists, rights to payment and
other rights under any royalty or licensing agreements, infringement claims,
computer programs, information contained on computer disks or tapes, literature,
reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and
tax refund claims), other than goods, Accounts, and Negotiable Collateral.
"Governing Documents" means the certificate or
articles of incorporation, by-laws, or other organizational or governing
documents of any Person.
"Guaranty" means that certain General Continuing
Guaranty, dated as of even date herewith, executed by the Guarantors in favor of
Foothill in the form attached hereto as Exhibit G-1.
"Guarantor Collateral" means each and all of the
items of personal property collateral in which liens and security interests have
been granted to Foothill pursuant to the Loan Documents to which the Guarantors
are a party.
"Guarantor Security Agreement" means a security
agreement, dated as of even date herewith, entered into between Foothill on the
one hand and the Guarantors on the other hand, in the form attached hereto as
Exhibit G-2.
"Guarantors" means Discovery Zone (Canada), Limited,
a corporation organized under the laws of Canada, Discovery Zone (Puerto Rico)
Inc., a corporation organized under the laws of the Commonwealth of Puerto Rico,
and Discovery Zone Licensing, Inc., a Nevada corporation.
"Hazardous Materials" means (a) substances that are
defined or listed in, or otherwise classified pursuant to, any applicable laws
or regulations as "hazardous substances," "hazardous materials," "hazardous
wastes," "toxic substances," or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids,
<PAGE>
produced waters, and other wastes associated with the exploration, development,
or production of crude oil, natural gas, or geothermal resources, (c) any
flammable substances or explosives or any radioactive materials, and (d)
asbestos in any form or electrical equipment that contains any oil or dielectric
fluid containing levels of polychlorinated biphenyls in excess of 50 parts per
million.
"Indebtedness" means: (a) all obligations of Borrower
for borrowed money, (b) all obligations of Borrower evidenced by bonds,
debentures, notes, or other similar instruments and all reimbursement or other
obligations of Borrower in respect of letters of credit, bankers acceptances,
interest rate swaps, or other financial products, (c) all Capital Lease
Obligations, (d) any obligation of Borrower guaranteeing or intended to
guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with
recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or
other obligation of any other Person, and (e) any obligation of Borrower under
any Interest Swap Obligation.
"Insolvency Proceeding" means any proceeding
commenced by or against any Person under any provision of the Bankruptcy Code or
under any other bankruptcy or insolvency law, assignments for the benefit of
creditors, formal or informal moratoria, compositions, extensions generally with
creditors, or proceedings seeking reorganization, arrangement, or other similar
relief.
"Intangible Assets" means, with respect to any
Person, that portion of the book value of all of such Person's assets that would
be treated as intangibles under GAAP.
"Intercreditor Agreement" means an Intercreditor
Agreement between Foothill and Subordinated Creditor and acknowledged by
Borrower in the form attached hereto as Exhibit I-1.
"Interest Period" means, for any Eurodollar Rate
Loan, the period commencing on the Business Day such Eurodollar Rate Loan is
disbursed or continued, or on the Business Day on which a Reference Rate Loan is
converted to such Eurodollar Rate Loan, and ending on the date 1, 2, or 3 months
thereafter, as selected by Borrower pursuant to Section 2.1(c), and as further
provided in Section 2.12.
"Interest Swap Obligations" means the obligations of
any Person pursuant to any arrangement with any other Person, whereby, directly
or indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
<PAGE>
"Inventory" means all present and future inventory in
which any Obligor has any interest, including goods held for sale or lease or to
be furnished under a contract of service and all of the Obligors' present and
future raw materials, work in process, finished goods, and packing and shipping
materials, wherever located.
"Investment Property" means "investment property" as
that term is defined in Section 9-115 of the Code.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section
2.2(a).
"Letter of Credit" means an L/C or an L/C Guaranty,
as the context requires.
"Letter of Credit Usage" means the sum of (a) the
undrawn amount of outstanding Letters of Credit plus (b) the amount of
unreimbursed drawings under Letters of Credit.
"Lien" means any interest in property securing an
obligation owed to, or a claim by, any Person other than the owner of the
property, whether such interest shall be based on the common law, statute, or
contract, whether such interest shall be recorded or perfected, and whether such
interest shall be contingent upon the occurrence of some future event or events
or the existence of some future circumstance or circumstances, including the
lien or security interest arising from a mortgage, deed of trust, encumbrance,
pledge, hypothecation, assignment, deposit arrangement, security agreement,
adverse claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting real
property.
"Loan Account" has the meaning set forth in Section
2.10.
"Loan Documents" means this Agreement, the Letters of
Credit, the Stock Pledge Agreement, the Trademark Security Agreement, the
Guaranty, the Guarantor Security Agreement, the Intercreditor Agreement, the
Disbursement Letter, the Concentration Account Agreements, any note or notes
executed by Borrower and payable to Foothill, and any other agreement entered
into, now or in the future, in connection with this Agreement.
"Material Adverse Change" means (a) a material
adverse change in the business, prospects, operations, results of operations,
assets, liabilities or condition (financial or otherwise) of the Obligors taken
as a whole; (b) the material impairment of the ability of the
<PAGE>
Obligors taken as a whole to perform its obligations under the Loan Documents to
which it is a party or of Foothill to enforce the Obligations or realize upon
the Collateral, (c) a material adverse effect on the value of the Collateral or
the amount that Foothill would be likely to receive (after giving consideration
to delays in payment and costs of enforcement) in the liquidation of such
Collateral, or (d) a material impairment of the priority of Foothill's Liens
with respect to the Collateral.
"Maximum Revolving Amount" means $10,000,000.
"McDonald's" means McDonald's Corporation, a Delaware
corporation, and its successors and assigns.
"McDonald's Collateral" means those certain fourteen
parcels of real property and related fixtures, including, without limitation,
any identifiable proceeds thereof that are subject to McDonald's Senior Liens.
"McDonald's Documents" means the agreement to
indemnify as set forth in Section 10.3(f) and Section 11.2(a)(iii) of that
certain Agreement and Plan of Merger, dated as of August 30, 1994, by and among
Discovery Zone, Inc., Discovery Zone International, Inc., Leaps & Bounds, Inc.
and McDonald's; the McDonald's Secured Note; and the McDonald's Rent Deferral
Secured Notes.
"McDonald's Rent Deferral Secured Notes" means
secured promissory notes issued by Borrower in favor of McDonald's pursuant to
the Plan of Reorganization, which notes represent restructuring of rent
deferrals which McDonald's granted to Borrower during bankruptcy proceedings of
Borrower in an estimated aggregate principal amount of up to $265,000, which
rent deferrals will continue to accrue after the Closing Date and increase the
principal amount owing under such notes and the interest on which notes will be
capitalized and payable on maturity.
"McDonald's Secured Note" means a secured promissory
note issued by Borrower in favor of McDonald's pursuant to the Plan of
Reorganization, which note represents restructured secured claims against
Borrower in an estimated aggregate principal amount of up to $4,600,000.
"McDonald's Senior Liens" shall have the meaning
assigned to that term in the Subordinated Creditor Indenture, as such agreement
is in effect as of the Closing Date.
"Multiemployer Plan" means a "multiemployer plan" (as
defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its
Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to
contribute, within the past six years.
<PAGE>
"Negotiable Collateral" means all of the Obligors'
present and future letters of credit, notes, drafts, instruments, Investment
Property, documents, personal property leases (wherein an Obligor is the
lessor), chattel paper, and Books relating to any of the foregoing.
"Net Issuance Proceeds" means, in respect of any
issuance of equity securities by Borrower, cash proceeds received by Borrower in
connection therewith, net of reasonable out-of-pocket costs and expenses paid or
incurred in connection therewith in favor of any Person not an Affiliate of
Borrower.
"Obligations" means all loans, Advances, debts,
principal, interest (including any interest that, but for the provisions of the
Bankruptcy Code, would have accrued), contingent reimbursement obligations under
any outstanding Letters of Credit, premiums (including Early Termination
Premiums), liabilities (including all amounts charged to Borrower's Loan Account
pursuant hereto), obligations, fees, charges, costs, or Foothill Expenses
(including any fees or expenses that, but for the provisions of the Bankruptcy
Code, would have accrued), lease payments, guaranties, covenants, and duties
owing by Borrower to Foothill of any kind and description (whether pursuant to
or evidenced by the Loan Documents or pursuant to any other agreement between
Foothill and Borrower, and irrespective of whether for the payment of money),
whether direct or indirect, absolute or contingent, due or to become due, now
existing or hereafter arising, and including any debt, liability, or obligation
owing from Borrower to others that Foothill may have obtained by assignment or
otherwise, and further including all interest not paid when due and all Foothill
Expenses that Borrower is required to pay or reimburse by the Loan Documents, by
law, or otherwise.
"Obligor" means Borrower and the Guarantors, and each
of them or any one of them, as the context requires.
"Obligor Intellectual Property" means the General
Intangibles of the Obligors' consisting of: (a) all trademarks, service marks,
trade names, trade styles, trade dress, logos, other source or business
identifiers, designs and general intangibles of like nature; and (b) all the
goodwill of the Obligors' business symbolized by the foregoing or associated
therewith.
"Ordinary Course Dispositions" means dispositions
consisting of (a) sales or other dispositions of Inventory in the ordinary
course of the Obligors' business as currently conducted, (b) sales or other
dispositions of Equipment in the ordinary course of the Obligors' business, (c)
dispositions of cash and cash equivalents consistent with the provisions hereof,
(d) granting of license rights with respect to Obligor Intellectual Property in
connection with licenses or franchises entered into by the Obligors in the
ordinary course of business, and (e) sales of unimproved land.
"Overadvance" has the meaning set forth in Section
2.5.
<PAGE>
"PBGC" means the Pension Benefit Guaranty Corporation
as defined in Title IV of ERISA, or any successor thereto.
"Permitted Acquisition" means any Acquisition by
Borrower so long as:
(a) no Default or Event of Default shall have
occurred and be continuing or would result from the
consummation of the proposed Acquisition,
(b) the assets being acquired, or the Person whose
capital Stock is being acquired, are useful in or engaged in,
as applicable, the operation of family entertainment centers,
(c) after giving effect to the proposed Acquisition,
Borrower will not have made Permitted Acquisition Expenditures
(a) during the period comprised of Borrower's fiscal year 1998
and Borrower's fiscal year 1999, in excess of the Permitted
Acquisition Amount for such period plus the amount, if any, of
the Permitted Equity Proceeds Amount, (b) during Borrower's
fiscal year 2000, in excess of the Permitted Acquisition
Amount for such period plus the amount, if any, of the
Permitted Equity Proceeds Amount, (c) during Borrower's fiscal
year 2001, in excess of the Permitted Acquisition Amount for
such period plus the amount, if any, of the Permitted Equity
Proceeds Amount, and (d) during Borrower's fiscal year 2002,
in excess of the Permitted Acquisition Amount for such period
plus the amount, if any, of the Permitted Equity Proceeds
Amount. For purposes of the foregoing, any amounts expended in
connection with the consummation of an Acquisition in a given
period shall be allocated first, to the applicable Permitted
Acquisition Amount and, second, to the Permitted Equity
Proceeds Amount,
(d) in the case of an asset Acquisition, Borrower
shall be the party purchasing and acquiring such assets and
Borrower shall have executed and delivered any and all
security agreements, UCC-1 financing statements, fixture
filings, and other documentation requested by Foothill in
order to include the newly acquired assets within the
Collateral, subject to a perfected security interest in favor
of Foothill, and
(e) in the case of a Stock Acquisition, concurrent
with the consummation of such Acquisition, the acquired Person
shall have been merged with and into Borrower, with Borrower
as the survivor of such merger (provided, however, that, with
the consent of Foothill, which consent will not be
unreasonably withheld, the acquired Person need not be merged
with and into Borrower, but if the acquired Person is not
merged into Borrower it shall, concurrent with the
consummation of the Acquisition, execute and deliver a
<PAGE>
continuing guaranty of the Obligations, security agreements,
financings statements, and any other documents required by
Foothill in order to cause such acquired Person to be
obligated on account of the Obligations and to have granted
Foothill a perfected security interest in substantially all of
its property and assets) and Borrower shall have executed and
delivered any and all security agreements, UCC-1 financing
statements, fixture filings, and other documentation requested
by Foothill in order to include the assets of the acquired
Person within the Collateral, subject to a perfected security
interest in favor of Foothill.
"Permitted Acquisition Amount" means (a) for the
period comprised of Borrower's fiscal year 1998 and Borrower's fiscal year 1999,
an amount equal to $5,000,000 minus the amount of Permitted Acquisition
Expenditures made or incurred during such period, (b) for Borrower's fiscal year
2000, an amount equal to $2,500,000 minus the amount of Permitted Acquisition
Expenditures made or incurred during such period, (c) for Borrower's fiscal year
2001, an amount equal to $2,500,000 minus the amount of Permitted Acquisition
Expenditures made or incurred during such period, and (d) for Borrower's fiscal
year 2002, an amount equal to $2,500,000 minus the amount of Permitted
Acquisition Expenditures made or incurred during such period.
"Permitted Acquisition Expenditures" means, for any
period of determination, the Dollar amount expended by Borrower in connection
with the consummation of one or more Permitted Acquisitions during such period.
"Permitted Capital Expenditure Amount" means (a) for
the period comprised of Borrower's fiscal year 1998 and Borrower's fiscal year
1999, an amount equal to $24,000,000 minus the amount of Permitted Acquisition
Expenditures made or incurred during such period, (b) for Borrower's fiscal year
2000, an amount equal to (i) $4,000,000 plus (ii) the lesser of (y) the amount,
if any, remaining unutilized pursuant to clause (a), and (z) $2,000,000, minus
(iii) the amount of Permitted Acquisition Expenditures made or incurred during
such period, (c) for Borrower's fiscal year 2001, an amount equal to (i)
$4,000,000 plus (ii) the lesser of (y) the amount, if any, remaining unutilized
pursuant to clause (b), and (z) $2,000,000, minus (iii) the amount of Permitted
Acquisition Expenditures made or incurred during such period, and (d) for
Borrower's fiscal year 2002, an amount equal to (i) $4,000,000 plus (ii) the
lesser of (y) the amount, if any, remaining unutilized pursuant to clause (c),
and (z) $2,000,000, minus (iii) the amount of Permitted Acquisition Expenditures
made or incurred during such period.
"Permitted Disposition" means (a) Ordinary Course
Dispositions, (b) the sale or other disposition of the McDonald's Collateral if
and to the extent permitted by the McDonald's Documents, (c) subject to the
prior or concurrent satisfaction of the Release Condition with respect thereto,
the sale or other disposition of the Stock or assets of DZ Party, Inc., a
Delaware corporation, and (d) subject to the prior or concurrent satisfaction of
the Release Condition with respect thereto, sales of other dispositions by or on
behalf of the Obligors of
<PAGE>
properties or assets having a value of not more than $500,000 per sale or other
disposition, and having a value, in the aggregate in any one year, of not more
than $2,500,000 (of which, not more than $1,000,000 can be on account of the
sale or other disposition of stores (or their properties and assets) that
compose Borrower's Top 100 Stores).
"Permitted Equity Proceeds Amount" means, as of any
date of determination, the result of (a) 50% of the first $10,000,000 of Equity
Proceeds, plus (b) 100% of any Equity Proceeds in excess of $10,000,000, minus
(c) the sum of (i) the amount of Equity Capital Expenditures made or incurred
prior to the date of determination, plus (ii) the amount of Equity Acquisition
Expenditures made prior to the date of determination.
"Permitted Holder" means Birch Acquisition L.L.C. so
long as such entity is directly or indirectly controlled by Martin S. Davis or,
in the event of his death, by Greg S. Feldman.
"Permitted Indebtedness" means:
(a) Indebtedness incurred by the Obligors in
connection with or arising out of Capital Lease Obligations or Purchase Money
Obligations; provided that the aggregate principal amount at any one time
outstanding of all such Capital Lease Obligations and Purchase Money Obligations
does not exceed $5,000,000;
(b) Indebtedness owed by Borrower to any Subsidiary
of Borrower for so long as (i) any such Indebtedness is held by a Subsidiary of
Borrower, (ii) any such Indebtedness shall not be secured by a Lien on any asset
of Borrower or its Subsidiaries, and (iii) any such Indebtedness shall be
subordinated, pursuant to a written agreement, to Borrower's obligations under
this Agreement; provided, however, that, as of any date that (1) any Person
other than a Subsidiary of Borrower owns or holds any such Indebtedness of
Borrower or (2) any such Indebtedness of Borrower is secured by a Lien on any
asset of Borrower or its Subsidiaries, any such date shall be deemed the date of
incurrence of Indebtedness not constituting Permitted Indebtedness;
(c) Indebtedness of any Subsidiary of Borrower to
Borrower or to any other Subsidiary of Borrower for so long as (i) such
Indebtedness is held by Borrower or a Subsidiary of Borrower, (ii) any such
Indebtedness from any Subsidiary of Borrower to Borrower in excess of $500,000
in aggregate principal amount shall be evidenced by a written promissory note or
other instrument in form and substance reasonably satisfactory to Foothill, and
(iii) any such Indebtedness shall not be secured by a Lien on any asset of any
Subsidiary of Borrower held by a Person other than Borrower or a Subsidiary of
Borrower; provided, however, that, as of any date that (1) any Person other than
Borrower or a Subsidiary of Borrower owns or holds such Indebtedness or (2) any
such Indebtedness is secured by a Lien on any asset of Borrower or its
<PAGE>
Subsidiaries held by any Person other than Borrower or a Subsidiary of Borrower,
any such date shall be deemed the date of incurrence of Indebtedness not
constituting Permitted Indebtedness;
(d) Interest Swap Obligations of Borrower covering
Indebtedness of Borrower or any of its Subsidiaries and Interest Swap
Obligations of any Subsidiary covering Indebtedness of such Subsidiary;
provided, however, that such Interest Swap Obligations are entered into to
protect Borrower and its Subsidiaries from fluctuations in interest rates on
Indebtedness incurred in accordance with this Agreement to the extent the
notional principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(e) Indebtedness of Borrower outstanding on the
Closing Date pursuant to the McDonald's Secured Note, the McDonald's Rent
Deferral Secured Notes (including Indebtedness resulting from future rent
deferrals to the extent and in the manner contemplated by the McDonald's Rent
Deferral Secured Notes as in effect on the Closing Date) and the Pre-petition
Tax Payables, as reduced by the amount of any prepayments permitted by this
Agreement or scheduled amortization payments when actually paid or by any
permanent reductions thereof; and
(f) Indebtedness of Borrower outstanding on the
Closing Date incurred under the Subordinated Creditor Indenture.
"Permitted Investments" means investments in joint
ventures, corporations, limited liability companies, or partnerships formed by
Borrower, which joint ventures, corporations, limited liability companies, or
partnerships engage in businesses that are the same as, or similar or related
to, the business of Borrower as of the Closing Date; provided, however, that the
amount that may be invested pursuant hereto shall not exceed, in the period
commencing on July 22, 1997 and ending on July 21, 1998, $500,000 and in any
successive 12-month period thereafter, $500,000 plus any cumulative, unutilized
portion of such amounts that could have been invested pursuant hereto during any
of the prior 12-month periods.
"Permitted Liens" means:
(a) Liens held by Foothill;
(b) Liens for taxes, assessments or governmental
charges or claims either (i) not delinquent or (ii) are the subject of Permitted
Protests;
(c) Liens to secure Indebtedness of Borrower incurred
under the Subordinated Creditor Indenture and the McDonald's Senior Liens;
<PAGE>
(d) Liens arising by operation of law in favor of
warehousemen, landlords, carriers, mechanics, materialmen, laborers, or
suppliers, incurred in the ordinary course of business of any Obligor and not in
connection with the borrowing of money, and which Liens either, (i) are for sums
not yet delinquent, or (ii) are the subject of Permitted Protests;
(e) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security, including any Lien securing
letters of credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to see the performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the payment of
borrowed money);
(f) Liens or deposits to secure performance of bids,
tenders, or leases (to the extent permitted under this Agreement), incurred in
the ordinary course of business of any Obligor and not in connection with the
borrowing of money;
(g) Liens arising by reason of security for surety or
appeal bonds in the ordinary course of business of any Obligor;
(h) Liens of or resulting from any judgment or award
against any Obligor that reasonably could not be expected to result in a
Material Adverse Change and as to which the time for the appeal or petition for
rehearing of which has not yet expired, or in respect of which such Obligor is
in good faith prosecuting an appeal or proceeding for a review and in respect of
which a stay of execution pending such appeal or proceeding for review has been
secured;
(i) easements, rights-of-way, zoning restrictions and
other similar charges or encumbrances in respect of real property not
interfering in any material respect with the ordinary conduct of the business of
any Obligor, or impair the use or operation of the Collateral by any Obligor, or
impair the value of Foothill's Lien thereon or therein;
(j) any interest or title of a lessor under any
Capital Lease Obligation permitted to be incurred under this Agreement pursuant
to clause (a) of the definition of "Permitted Indebtedness;" provided that such
Liens do not extend to any property or assets which are not leased property
subject to such Capital Lease Obligation;
(k) Purchase Money Liens of any Obligor acquired in
the ordinary course of business; provided, however, that (i) the related
Purchase Money Obligation shall not exceed the cost of such property or assets
and shall not be secured by any property or assets of Borrower or any Subsidiary
of Borrower other than the property and assets so acquired and (ii) the Lien
securing such Indebtedness shall be created within 90 days of such acquisition;
<PAGE>
(l) Liens encumbering deposits made to secure
obligations arising from statutory, regulatory, contractual, or warranty
requirements of any Obligor, including rights of offset and set-off;
(m) Liens securing Interest Swap Obligations, which
Interest Swap Obligations relate to Indebtedness that is otherwise permitted
under this Agreement;
(n) Liens in favor of Borrower or any Subsidiary of
Borrower on assets of any other Subsidiary of Borrower; and
(o) Acquisition Liens.
"Permitted Protest" means the right of any Obligor to
protest any Lien other than any such Lien that secures the Obligations, tax
(other than payroll taxes or taxes that are the subject of a United States
federal tax lien), or rental payment, provided that (a) a reserve with respect
to such obligation is established on the books of such Obligor as may be
required in accordance with GAAP, and, if the aggregate amount of such
obligations is in excess of $2,000,000, then such reserve shall be in an amount
that is reasonably satisfactory to Foothill, (b) any such protest is instituted
and diligently prosecuted by such Obligor in good faith, and (c) Foothill is
satisfied that, while any such protest is pending, there will be no material
impairment of the enforceability, validity, or priority of any of the Liens of
Foothill in and to the Collateral.
"Person" means and includes natural persons,
corporations, limited liability companies, limited partnerships, general
partnerships, limited liability partnerships, joint ventures, trusts, land
trusts, business trusts, or other organizations, irrespective of whether they
are legal entities, and governments and agencies and political subdivisions
thereof.
"Plan" means any employee benefit plan, program, or
arrangement maintained or contributed to by any Obligor or with respect to which
it may incur liability.
"Plan of Reorganization" means the Third Amended
Joint Plan of Reorganization of Discovery Zone, Inc., dated March 11, 1997, as
amended.
"Pledged Securities" shall have the meaning assigned
to that term in the Subordinated Creditor Indenture, as such agreement is in
effect as of the Closing Date.
"Pre-petition Tax Payables" means pre-petition tax
claims restructured pursuant to the Plan of Reorganization as pre-petition tax
payables having an estimated aggregate maximum principal amount of up to
$5,000,000, which claims have maturities of up to six years from the original
date of assessment, require principal payments in equal installments and accrue
simple interest at not greater than 12% per annum.
<PAGE>
"Purchase Money Liens" means (i) Liens to secure or
securing Purchase Money Obligations permitted to be incurred under this
Agreement pursuant to clause (a) of the definition of "Permitted Indebtedness;"
and (ii) Liens to secure Indebtedness incurred solely to refinance Purchase
Money Obligations pursuant to the provisions of Section 7.1(c) and 7.2.
"Purchase Money Obligations" means Indebtedness,
representing, or incurred to finance, the cost of acquiring any assets; provided
that (i) the principal amount of such Indebtedness does not exceed 100% of such
cost, (ii) any Lien securing such Indebtedness does not extend to or cover any
other asset or property other than the asset or property being so acquired and
(iii) such Indebtedness is incurred, and any Liens with respect thereto are
granted, within 90 days of the acquisition of such property or asset.
"Reference Rate" means the variable rate of interest,
per annum, most recently announced by Norwest Bank Minnesota, National
Association, or any successor thereto, as its "base rate," irrespective of
whether such announced rate is the best rate available from such financial
institution.
"Reference Rate Loan" means any Advance (or any
portion thereof) made or outstanding hereunder during any period when interest
on such Advance (or portion thereof) is payable based on the Reference Rate.
"Release Condition" means that (a) no Default or
Event of Default has occurred and is continuing or would result therefrom, (b)
the applicable Obligor is receiving at least fair value for the property or
assets that are the subject of the disposition, and (c) at least 85% of the
consideration received by such Obligor shall be in the form of cash or cash
equivalents.
"Renewal Date" has the meaning set forth in Section
3.4.
"Reportable Event" means any of the events described
in Section 4043(c) of ERISA or the regulations thereunder other than a
Reportable Event as to which the provision of 30 days notice to the PBGC is
waived under applicable regulations.
"Requirement of Law" means, as to any Person: all (a)
(i) statutes and regulations and (ii) court orders and injunctions,
arbitrators's decisions, and/or similar rulings, in each instance by any
Governmental Authority, or other body which has jurisdiction over such Person,
or any property of such Person, or of any other Person whose conduct such Person
would be responsible; and (b) that Person's organizational documents, by-laws
and/or other instruments which deal with corporate or similar governance, as
applicable.
"Reserve Percentage" means and refers to, as of the
date of determination thereof, the maximum percentage (rounded upward, if
necessary to the nearest 1/100th of 1%), as
<PAGE>
determined by Foothill (or its Affiliates) in accordance with its (or their)
usual procedures (which determination shall be conclusive in the absence of
manifest error), that is in effect on such date as prescribed by the Federal
Reserve Board for determining the reserve requirements (including supplemental,
marginal, and emergency reserve requirements) with respect to eurocurrency
funding (currently referred to as "eurocurrency liabilities") by Foothill or its
Affiliates.
"Retiree Health Plan" means an "employee welfare
benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits
to individuals after termination of their employment, other than as required by
Section 601 of ERISA.
"Solvent" means, with respect to any Person on a
particular date, that on such date (a) at fair valuations, all of the properties
and assets of such Person are greater than the sum of the debts, including
contingent liabilities, of such Person, (b) the present fair salable value of
the properties and assets of such Person is not less than the amount that will
be required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
properties and assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, and does not believe that it will,
incur debts beyond such Person's ability to pay as such debts mature, and (e)
such Person is not engaged in business or a transaction, and is not about to
engage in business or a transaction, for which such Person's properties and
assets would constitute unreasonably small capital after giving due
consideration to the prevailing practices in the industry in which such Person
is engaged. In computing the amount of contingent liabilities at any time, it is
intended that such liabilities will be computed at the amount that, in light of
all the facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual or matured liability.
"Stock" means all shares, options, warrants,
interests, participations, or other equivalents (regardless of how designated)
of or in a corporation or equivalent entity, whether voting or nonvoting,
including common stock, preferred stock, or any other "equity security" (as such
term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
by the SEC under the Exchange Act).
"Stock Pledge Agreement" means a Stock Pledge
Agreement, dated as of even date herewith, in the form of Exhibit S-1, executed
and delivered by Borrower to Foothill, with respect to the Stock of the
Subsidiaries of Borrower.
"Store Contribution" means, for each of Borrower's
store locations as determined for any applicable period, an amount equal to
Store Net Revenues for such store location, minus Store Expenses for such store
location.
"Store Expenses" means, for any applicable period,
the sum of all direct operating expenses for each such store location, including
allocated property and liability
<PAGE>
insurance costs and central reservation costs excluding (a) sales, marketing,
and entertainment expenses, (b) general and administrative expenses, (c)
depreciation and amortization expenses, (d) interest expense, (e) losses on the
disposition of assets, (f) expenses associated with capital asset acquisitions,
(g) non-cash GAAP rental expense adjustments, and (h) other non-store operating
expenses with respect to such store location, in each case as determined in
accordance with GAAP for such period.
"Store Net Revenues" means, for any applicable
period, the aggregate amount of gross revenues for such store location minus (a)
discounts and allowances for uncollectible amounts, (b) interest income, and (c)
gains on the disposition of assets with respect to such store location, in each
case as determined in accordance with GAAP for such period.
"Subordinated Creditor" means State Street Bank and
Trust Company in its capacity as trustee and collateral agent.
"Subordinated Creditor Indenture" means that certain
Indenture, dated as of July 22, 1997 among Borrower, as issuer, the subsidiary
guarantor's named therein, and Subordinated Creditor, as such agreement may be
amended, modified, supplemented, refinanced, or replaced from time to time in
accordance with the provisions of this Agreement and the Intercreditor
Agreement.
"Subsidiary" of a Person means a corporation,
partnership, limited liability company, or other entity in which that Person
directly or indirectly owns or controls the shares of Stock having ordinary
voting power to elect a majority of the board of directors (or appoint other
comparable managers) of such corporation, partnership, limited liability
company, or other entity.
"Trademark Security Agreement" means a Trademark
Security Agreement, dated as of even date herewith, in the form of Exhibit T-1,
executed and delivered by Discovery Zone Licensing, Inc., a Nevada corporation,
to Foothill.
"Voidable Transfer" has the meaning set forth in
Section 15.8.
"Voting Stock" means, with respect to any Person, one
or more classes of the Stock of such Person having general voting power under
ordinary circumstances to elect at least a majority of the Board of Directors,
managers or trustees of such Person (irrespective of whether or not at the time
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency).
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein, the
term "financial statements" shall include the notes and schedules thereto.
Whenever the term "Borrower" is used in respect of
<PAGE>
a financial covenant or a related definition, it shall be understood to mean
Borrower on a consolidated basis unless the context clearly requires otherwise.
1.3 Code. Any terms used in this Agreement that are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.4 Construction. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the term "including" is not limiting, and the
term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. An Event of Default
shall "continue" or be "continuing" until such Event of Default has been waived
in writing by Foothill. Section, subsection, clause, schedule, and exhibit
references are to this Agreement unless otherwise specified. Any reference in
this Agreement or in the Loan Documents to this Agreement or any of the Loan
Documents shall include all alterations, amendments, changes, extensions,
modifications, renewals, replacements, substitutions, and supplements, thereto
and thereof, as applicable.
1.5 Schedules and Exhibits. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 Revolving Advances.
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to make advances ("Advances") to Borrower in an
amount outstanding not to exceed at any one time the lesser of (i) the Maximum
Revolving Amount less the Letter of Credit Usage, or (ii) the Borrowing Base
less (A) the Letter of Credit Usage. For purposes of this Agreement, "Borrowing
Base", as of any date of determination, shall mean the result of:
(x) 133% of Borrower's Adjusted Aggregate
Store Contribution, minus
(z) the aggregate amount of reserves, if
any, established and maintained by Foothill from time to
time pursuant to the Loan Documents, including such reserves
established under Sections 2.1(b), 2.1(e), 6.15, 8.8, or 10
or under the definition of Permitted Protest.
(b) Anything to the contrary in Section 2.1(a) above
notwithstanding, Foothill may create reserves against or reduce its advance rate
based upon Adjusted Aggregate
<PAGE>
Store Contribution if it determines in good faith that there has occurred a
Material Adverse Change.
(c) Foothill shall have no obligation to make
Advances hereunder to the extent they would cause the outstanding Obligations to
exceed the Maximum Revolving Amount. Each Advance shall be made upon Borrower's
request (pursuant to the terms of Section 2.12), which request shall be
irrevocable except as set forth in Section 2.12, specifying (i) the amount of
the requested Advance; (ii) the requested funding date of such Advance; (iii)
whether the Advance is to constitute a Eurodollar Rate Loan or a Reference Rate
Loan; and (iv) if such Advance is to constitute a Eurodollar Rate Loan, the
requested Interest Period therefor. If requested Advance constitutes a
Eurodollar Rate Loan, such request must be delivered to Foothill no later than
2:00 p.m. (New York time) two Business Days prior to the requested funding date
therefor.
(d) Amounts borrowed pursuant to this Section 2.1 may
be repaid and, subject to the terms and conditions of this Agreement, reborrowed
at any time during the term of this Agreement.
(e) Anything to the contrary in this Agreement
notwithstanding, Foothill shall have the right to establish and maintain a
reserve (the "Disputed Amount Reserve") against the Borrowing Base and the
Maximum Revolving Amount in an amount, at all times, equal to the Estimated
Resolution Percentage times the Estimated Disputed Amount; it being understood
and agreed that (i) Foothill will reduce the amount of the foregoing reserve at
the request of Borrower if the Estimated Dispute Amount has been reduced and if
Borrower has provided Foothill with a certificate detailing its calculations of
the Disputed Amount and setting forth the amount that it in good faith,
reasonably estimates (based upon the advice of its professional advisors) to be
the then extant Disputed Amount, (ii) in connection with the resolution of and
payment of amounts that compose the Disputed Amount, Foothill will reduce the
amount of the foregoing reserve and make Advances to Borrower (in an amount not
to exceed the Estimated Resolution Percentage times the amount of such reduction
plus the amount, if any, of additional Advances that otherwise may be available
under Section 2.1 without giving effect to the reduction of the reserve) if and
to the extent that, after giving effect to such reduction and Advance, the
Estimated Disputed Amount is not greater than 150% times the Disputed Amount
Reserve and so long as Borrower provides Foothill evidence satisfactory to
Foothill that, concurrent with such resolution and payment, all claims in favor
of the affected contractors, materialmen, laborers, or suppliers in respect of
the particular project will have been discharged and any liens in favor of them
will have been released, and (iii) in connection with the posting of a payment
bond concerning amounts that compose the Disputed Amount, Foothill will reduce
the amount of the foregoing reserve and issue Letters of Credit in favor of one
or more bonding companies (in an amount not to exceed the Estimated Resolution
Percentage times the amount of such reduction plus the amount, if any, of
additional Advances that otherwise may be available under Section 2.1 without
giving effect to the reduction of the reserve) if and to the
<PAGE>
extent that, after giving effect to such reduction and the issuance of such
Letter of Credit, the Estimated Disputed Amount is not greater than 150% times
the Disputed Amount Reserve and so long as Borrower provides Foothill evidence
that, concurrent with such resolution and issuance of the Letter of Credit, the
bonding company that is the beneficiary of the subject Letter of Credit will
have waived, in favor of Foothill, its rights of subrogation to the rights of
the affected contractors, materialmen, laborers, or suppliers in respect of the
particular project and will have agreed to look solely to the subject Letter of
Credit for payment of any amounts owed to it that are occasioned by payments
under the subject bond.
2.2 Letters of Credit.
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to issue letters of credit for the account of
Borrower (each, an "L/C") or to issue guarantees of payment (each such guaranty,
an "L/C Guaranty") with respect to letters of credit issued by an issuing bank
for the account of Borrower. Foothill shall have no obligation to issue a Letter
of Credit if any of the following would result:
(i) the Letter of Credit Usage would exceed
the Borrowing Base less the amount of outstanding Advances
less the aggregate amount of reserves established and
maintained from time to time pursuant to the Loan Documents,
including such reserves established under Sections 2.1(b),
2.1(e), 6.15, 8.8, or 10 or under the definition of Permitted
Protest; or
(ii) the Letter of Credit Usage would exceed
the lower of: (x) the Maximum Revolving Amount less the amount
of outstanding Advances less the aggregate amount of reserves
established and maintained from time to time pursuant to the
Loan Documents, including such reserves established under
Sections 2.1(b), 2.1(e), 6.15, 8.8, or 10 or under the
definition of Permitted Protest; or (y) $2,000,000; or
(iii) the outstanding Obligations would
exceed the Maximum Revolving Amount.
Borrower expressly understands and agrees that Foothill shall have no obligation
to arrange for the issuance by issuing banks of the letters of credit that are
to be the subject of L/C Guarantees. Borrower and Foothill acknowledge and agree
that certain of the letters of credit that are to be the subject of L/C
Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall
have an expiry date no later than 60 days prior to the date on which this
Agreement is scheduled to terminate under Section 3.4 (without regard to any
potential renewal term) and all such Letters of Credit shall be in form and
substance acceptable to Foothill in its sole discretion. If Foothill is
obligated to advance funds under a Letter of Credit, Borrower immediately shall
reimburse such amount to Foothill and, in the absence of such reimbursement, the
amount so
<PAGE>
advanced immediately and automatically shall be deemed to be an Advance
hereunder and, thereafter, shall bear interest at the rate then applicable to
Advances under Section 2.6.
(b) Borrower hereby agrees to indemnify, save,
defend, and hold Foothill harmless from any loss, cost, expense, or liability,
including payments made by Foothill, expenses, and reasonable attorneys fees
incurred by Foothill arising out of or in connection with any Letter of Credit.
Borrower agrees to be bound by the issuing bank's regulations and
interpretations of any Letters of Credit guarantied by Foothill and opened to or
for Borrower's account or by Foothill's interpretations of any L/C issued by
Foothill to or for Borrower's account, even though this interpretation may be
different from Borrower's own, and Borrower understands and agrees that Foothill
shall not be liable for any error, negligence, or mistake, whether of omission
or commission, in following Borrower's instructions or those contained in the
Letter of Credit or any modifications, amendments, or supplements thereto.
Borrower understands that the L/C Guarantees may require Foothill to indemnify
the issuing bank for certain costs or liabilities arising out of claims by
Borrower against such issuing bank. Borrower hereby agrees to indemnify, save,
defend, and hold Foothill harmless with respect to any loss, cost, expense
(including reasonable attorneys fees), or liability incurred by Foothill under
any L/C Guaranty as a result of Foothill's indemnification of any such issuing
bank.
(c) Borrower hereby authorizes and directs any bank
that issues a letter of credit guaranteed by Foothill to deliver to Foothill all
instruments, documents, and other writings and property received by the issuing
bank pursuant to such letter of credit, and to accept and rely upon Foothill's
instructions and agreements with respect to all matters arising in connection
with such letter of credit and the related application. Borrower may or may not
be the "applicant" or "account party" with respect to such letter of credit.
(d) Any and all charges, commissions, fees, and costs
incurred by Foothill relating to the letters of credit guaranteed by Foothill
shall be considered Foothill Expenses for purposes of this Agreement and
immediately shall be reimbursable by Borrower to Foothill.
(e) Immediately upon the termination of this
Agreement, Borrower agrees to either (i) provide cash collateral to be held by
Foothill in an amount equal to 105% of the maximum amount of Foothill's
obligations under Letters of Credit, or (ii) cause to be delivered to Foothill
releases of all of Foothill's obligations under outstanding Letters of Credit.
At Foothill's discretion, any proceeds of Collateral received by Foothill after
the occurrence and during the continuation of an Event of Default may be held as
the cash collateral required by this Section 2.2(e).
(f) If by reason of (i) any change in any applicable
law, treaty, rule, or regulation or any change in the interpretation or
application by any governmental authority of any such applicable law, treaty,
rule, or regulation, or (ii) compliance by the issuing bank or Foothill
<PAGE>
with any direction, request, or requirement (irrespective of whether having the
force of law) of any governmental authority or monetary authority including,
without limitation, Regulation D of the Board of Governors of the Federal
Reserve System as from time to time in effect (and any successor thereto):
(A) any reserve, deposit, or similar requirement is
or shall be imposed or modified in respect of any Letters of Credit issued
hereunder, or
(B) there shall be imposed on the issuing bank or
Foothill any other condition regarding any letter of credit, or Letter of
Credit, as applicable, issued pursuant hereto;
and the result of the foregoing is to increase, directly or indirectly, the cost
to the issuing bank or Foothill of issuing, making, guaranteeing, or maintaining
any letter of credit, or Letter of Credit, as applicable, or to reduce the
amount receivable in respect thereof by such issuing bank or Foothill, then, and
in any such case, Foothill may, at any time within a reasonable period after the
additional cost is incurred or the amount received is reduced, notify Borrower,
and Borrower shall pay on demand such amounts as the issuing bank or Foothill
may specify to be necessary to compensate the issuing bank or Foothill for such
additional cost or reduced receipt, together with interest on such amount from
the date of such demand until payment in full thereof at the rate set forth in
Section 2.6(a)(ii) or (c)(i), as applicable. The determination by the issuing
bank or Foothill, as the case may be, of any amount due pursuant to this Section
2.2(f), as set forth in a certificate setting forth the calculation thereof in
reasonable detail, shall, in the absence of manifest or demonstrable error, be
final and conclusive and binding on all of the parties hereto.
2.3 [Intentionally omitted].
2.4 [Intentionally omitted].
2.5 Overadvances. If, at any time or for any reason, the
amount of Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and
2.2 is greater than either the Dollar or percentage limitations set forth in
Sections 2.1 or 2.2 (an "Overadvance"), Borrower immediately shall pay to
Foothill, in cash, the amount of such excess to be used by Foothill first, to
repay Advances outstanding under Section 2.1 and, thereafter, to be held by
Foothill as cash collateral to secure Borrower's obligation to repay Foothill
for all amounts paid pursuant to Letters of Credit.
2.6 Interest and Letter of Credit Fees: Rates, Payments, and
Calculations.
(a) Interest Rate. Except as provided in clause (c)
below, (i) each Eurodollar Rate Loan shall bear interest at a per annum rate of
3.75 percentage points above the
<PAGE>
Adjusted Eurodollar Rate; and (ii) all other Obligations (except for undrawn
Letters of Credit) shall bear interest at a per annum rate of 1.00 percentage
points above the Reference Rate.
(b) Letter of Credit Fee. Borrower shall pay Foothill
a fee (in addition to the charges, commissions, fees, and costs set forth in
Section 2.2(d)) equal to 1.5% per annum times the aggregate undrawn amount of
all outstanding Letters of Credit.
(c) Default Rate. Upon the occurrence and during the
continuation of an Event of Default, (i) all Obligations (except for undrawn
Letters of Credit) shall bear interest at a per annum rate equal to 5.00
percentage points above the Reference Rate, and (ii) the Letter of Credit fee
provided in Section 2.6(b) shall be increased to 3.5% per annum times the
aggregate undrawn amount of all Letters of Credit.
(d) Minimum Interest. In no event shall the rate of
interest chargeable hereunder for any day be less than 6.50% per annum. To the
extent that interest accrued hereunder at the rate set forth herein would be
less than the foregoing minimum daily rate, the interest rate chargeable
hereunder for such day automatically shall be deemed increased to the minimum
rate. To the extent that interest accrued hereunder at the rate set forth herein
(including the minimum interest rate) would yield less than the foregoing
minimum amount, the interest rate chargeable hereunder for the period in
question automatically shall be deemed increased to that rate that would result
in the minimum amount of interest being accrued and payable hereunder.
(e) Payments. Interest and Letter of Credit fees
payable hereunder shall be due and payable, in arrears, on the first day of each
month during the term hereof. Borrower hereby authorizes Foothill, at its
option, without prior notice to Borrower, to charge such interest and Letter of
Credit fees, all Foothill Expenses (as and when incurred), the fees and charges
provided for in Section 2.11 (as and when accrued or incurred), and all
installments or other payments due under any Loan Document to Borrower's Loan
Account, which amounts thereafter shall accrue interest at the rate then
applicable to Advances hereunder. Any interest not paid when due shall be
compounded and shall thereafter accrue interest at the rate then applicable to
Advances hereunder.
(f) Computation. The Reference Rate as of the date of
this Agreement is 8.50% per annum. In the event the Reference Rate is changed
from time to time hereafter, the applicable rate of interest hereunder
automatically and immediately shall be increased or decreased by an amount equal
to such change in the Reference Rate. All interest and fees chargeable under the
Loan Documents shall be computed on the basis of a 360 day year for the actual
number of days elapsed.
(g) Intent to Limit Charges to Maximum Lawful Rate.
In no event shall the interest rate or rates payable under this Agreement, plus
any other amounts paid in connection herewith, exceed the highest rate
permissible under any law that a court of competent
<PAGE>
jurisdiction shall, in a final determination, deem applicable. Borrower and
Foothill, in executing and delivering this Agreement, intend legally to agree
upon the rate or rates of interest and manner of payment stated within it;
provided, however, that, anything contained herein to the contrary
notwithstanding, if said rate or rates of interest or manner of payment exceeds
the maximum allowable under applicable law, then, ipso facto as of the date of
this Agreement, Borrower is and shall be liable only for the payment of such
maximum as allowed by law, and payment received from Borrower in excess of such
legal maximum, whenever received, shall be applied to reduce the principal
balance of the Obligations to the extent of such excess.
2.7 Collection of Accounts. From and after the date on which
the initial Advance is made hereunder or the initial Letter of Credit is issued
hereunder, Borrower either (a) shall remit, on a daily basis, all of its
Collections to the Concentration Accounts, or (b) shall deposit, on a daily
basis, all of its Collections to a deposit account of Borrower all of the
proceeds of which are remitted, on a daily basis, to the Concentration Account.
To the extent that 10 or more of Borrower's stores deposit their Collections to
the same depositary bank, Borrower agrees that it shall provide Foothill with a
Concentration Account Agreement with respect to such deposit account. From and
after the date on which the initial Advance is made hereunder or the initial
Letter of Credit is issued hereunder, all amounts received in the Concentration
Accounts automatically shall be wire transferred each Business Day into an
account (the "Foothill Account") maintained by Foothill at a depositary selected
by Foothill.
2.8 Crediting Payments; Application of Collections. The
receipt of any Collections by Foothill (whether from transfers to Foothill by
the Concentration Account Banks pursuant to the Concentration Account Agreements
or otherwise) immediately shall be applied provisionally to reduce the
Obligations outstanding under Section 2.1, but shall not be considered a payment
on account unless such Collection item is a wire transfer of immediately
available federal funds and is made to the Foothill Account or unless and until
such Collection item is honored when presented for payment. From and after the
Closing Date, Foothill shall be entitled to charge Borrower for 1 Business Day
of 'clearance' or 'float' at the rate set forth in Section 2.6(a)(ii) or Section
2.6(c)(i), as applicable, on all Collections that are received by Borrower or
Foothill (regardless of whether forwarded by the Concentration Account Banks to
Foothill, whether provisionally applied to reduce the Obligations outstanding
under Section 2.1, or otherwise). This across-the-board 1 Business Day clearance
or float charge on all Collections is acknowledged by the parties to constitute
an integral aspect of the pricing of Foothill's financing of Borrower, and shall
apply irrespective of the characterization of whether receipts are owned by
Borrower or Foothill, and whether or not there are any outstanding Advances, the
effect of such clearance or float charge being the equivalent of charging 1
Business Days of interest on such Collections. Should any Collection item not be
honored when presented for payment, then Borrower shall be deemed not to have
made such payment, and interest shall be recalculated accordingly. Anything to
the contrary contained herein notwithstanding:
<PAGE>
(a) any Collection item shall be deemed received by
Foothill only if it is received into the Foothill Account on a Business Day on
or before 11:00 a.m. California time. If any Collection item is received into
the Foothill Account on a non-Business Day or after 11:00 a.m. California time
on a Business Day, it shall be deemed to have been received by Foothill as of
the opening of business on the immediately following Business Day; and
(b) so long as no Event of Default has occurred and
is continuing, Collections only will be applied to Obligations that are not
Eurodollar Rate Loans, and to the extent that all such Obligations other than
Eurodollar Rate Loans have been repaid, additional Collections will be, at
Borrower's direction, returned to Borrower or applied to such Eurodollar Rate
Loans subject to any required payments under Section 2.16(d).
2.9 Designated Account. Foothill is authorized to make the
Advances and the Letters of Credit under this Agreement based upon telephonic or
other instructions received from anyone purporting to be an Authorized Person,
or without instructions if pursuant to Section 2.6(e). Borrower agrees to
establish and maintain the Designated Account with the Designated Account Bank
for the purpose of receiving the proceeds of the Advances requested by Borrower
and made by Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any Advance requested by Borrower and made by Foothill hereunder shall
be made to the Designated Account.
2.10 Maintenance of Loan Account; Statements of Obligations.
Foothill shall maintain an account on its books in the name of Borrower (the
"Loan Account") on which Borrower will be charged with all Advances made by
Foothill to Borrower or for Borrower's account, including, accrued interest,
Foothill Expenses, and any other payment Obligations of Borrower. In accordance
with Section 2.8, the Loan Account will be credited with all payments received
by Foothill from Borrower or for Borrower's account, including all amounts
received in the Foothill Account from the Concentration Account Banks. Foothill
shall render statements regarding the Loan Account to Borrower, including
principal, interest, fees, and including an itemization of all charges and
expenses constituting Foothill Expenses owing, and such statements shall be
conclusively presumed to be correct and accurate and constitute an account
stated between Borrower and Foothill unless, within 30 days after receipt
thereof by Borrower, Borrower shall deliver to Foothill written objection
thereto describing the error or errors contained in any such statements.
2.11 Fees. Borrower shall pay to Foothill the following fees:
(a) Commitment Fee. On the Closing Date, a commitment
fee of $150,000;
<PAGE>
(b) Unused Line Fee. On the first day of each month
during the term of this Agreement, an unused line fee in an amount equal to
0.50% per annum times the Average Unused Portion of the Maximum Revolving
Amount.
(c) Annual Facility Fee. On each anniversary of the
Closing Date, an annual facility fee in an amount equal to 0.50% of the Maximum
Revolving Amount;
(d) Financial Examination, Documentation, and
Appraisal Fees. Foothill's customary fee of $650 per day per examiner, plus
out-of-pocket expenses for each financial analysis and examination (i.e.,
audits) of Borrower performed by personnel employed by Foothill; Foothill's
customary appraisal fee of $1,500 per day per appraiser, plus out-of-pocket
expenses for each appraisal of the Collateral performed by personnel employed by
Foothill; and, the actual charges paid or incurred by Foothill if it elects to
employ the services of one or more third Persons to perform such financial
analyses and examinations (i.e., audits) of Borrower or to appraise the
Collateral; and
(e) Servicing Fee. On the first day of each month
during the term of this Agreement, and thereafter so long as any Obligations are
outstanding, a servicing fee in an amount equal to $2,500.
2.12 Eurodollar Rate Loans. Any other provisions herein to the
contrary notwithstanding, the following provisions shall govern with respect to
Eurodollar Rate Loans as to the matters covered:
(a) Borrowing; Conversion; Continuation. Borrower may
from time to time, on or after the Closing Date, request in a written or
telephonic communication with Foothill: (i) that a proposed Advance constitute a
Eurodollar Rate Loan; (ii) that Reference Rate Loans be converted into
Eurodollar Rate Loans; or (iii) that existing Eurodollar Rate Loans continue for
an additional Interest Period. Any such request shall specify the aggregate
amount of the requested Eurodollar Rate Loans, the proposed funding date
therefor (which shall be a Business Day, and with respect to continued
Eurodollar Rate Loans shall be the last day of the Interest Period of the
existing Eurodollar Rate Loans being continued), and the proposed Interest
Period, in each case subject to the limitations set forth below). Eurodollar
Rate Loans may only be made, continued, or extended if, as of the proposed
funding date therefor each of the following conditions is satisfied:
(v) no Event of Default exists;
(w) no more than five Interest Periods may
be in effect at any one time;
<PAGE>
(x) the amount of each Eurodollar Rate Loan
borrowed, converted, or continued must be in an amount not
less than $1,000,000 and integral multiples of $500,000 in
excess thereof;
(y) Foothill shall have determined that the
Interest Period or Adjusted Eurodollar Rate is available to
Foothill and can be readily determined as of the date of the
request for such Eurodollar Rate Loan by Borrower; and
(z) Foothill shall have received such
request at least two Business Days prior to the proposed
funding date therefor.
Any request by Borrower to borrow Eurodollar Rate Loans, to
convert Reference Rate Loans to Eurodollar Rate Loans, or to continue any
existing Eurodollar Rate Loans shall be irrevocable, except to the extent that
Foothill shall determine under Sections 2.12(a), 2.13 or 2.14 that such
Eurodollar Rate Loans cannot be made or continued.
(b) Determination of Interest Period. By giving
notice as set forth in Section 2.12(a), Borrower shall have the option of
selecting a 1 month, 2 month, or 3 month Interest Period for such Eurodollar
Rate Loan. The determination of Interest Periods shall be subject to the
following provisions:
(i) in the case of immediately successive
Interest Periods, each successive Interest Period shall
commence on the day on which the next preceding Interest
Period expires;
(ii) if any Interest Period would otherwise
expire on a day which is not a Business Day, the Interest
Period shall be extended to expire on the next succeeding
Business Day; provided, however, that if the next succeeding
Business Day occurs in the following calendar month, then such
Interest Period shall expire on the immediately preceding
Business Day;
(iii) if any Interest Period begins on the
last Business Day of a month, or on a day for which there is
no numerically corresponding day in the calendar month at the
end of such Interest Period, then the Interest Period shall
end on the last Business Day of the calendar month at the end
of such Interest Period; and
(iv) Borrower may not select an Interest
Period which expires later than the Maturity Date.
(c) Automatic Conversion: Optional Conversion by
Foothill. Any Eurodollar Rate Loan shall automatically convert to a Reference
Rate Loan upon the last day of
<PAGE>
the applicable Interest Period, unless Foothill has received a request to
continue such Eurodollar Rate Loan at least two Business Days prior to the end
of such Interest Period in accordance with the terms of Section 2.12(a). Any
Eurodollar Rate Loan shall, at Foothill's option, upon notice to Borrower,
convert to a Reference Rate Loan in the event that (i) an Event of Default shall
have occurred and be continuing as of the last day of the Interest Period for
such Eurodollar Rate Loan, or (ii) this Agreement shall terminate, and Borrower
shall pay to Foothill any amounts required by Section 2.16 as a result thereof.
2.13 Illegality. Any other provision herein to the contrary
notwithstanding, if the adoption of or any change in any Requirement of Law or
in the interpretation or application thereof shall make it unlawful for Foothill
to make or maintain Eurodollar Rate Loans as contemplated by this Agreement, (a)
the obligation of Foothill hereunder to make Eurodollar Rate Loans, continue
Eurodollar Rate Loans as such, and convert Reference Rate Loans to Eurodollar
Rate Loans shall forthwith be suspended and (b) Foothill's then outstanding
Eurodollar Rate Loans, if any, shall be converted automatically to Reference
Rate Loans on the respective last days of the then current Interest Periods with
respect thereto or within such earlier period as required by law; provided,
however, that before making any such demand, Foothill agrees to use reasonable
efforts (consistent with its internal policy and legal and regulatory
restrictions and so long as such efforts would not be disadvantageous to it, in
its reasonable discretion, in any legal, economic, or regulatory manner) to
designate a different lending office if the making of such a designation would
allow Foothill or its lending office to continue to perform its obligations to
make Eurodollar Rate Loans. If any such conversion of a Eurodollar Rate Loan
occurs on a day which is not the last day of the then current Interest Period
with respect thereto, Borrower shall pay to such Lender such amounts, if any, as
may be required pursuant to Section 2.16. If circumstances subsequently change
so that Foothill shall determine that it is no longer so affected, Foothill will
promptly notify Borrower, and upon receipt of such notice, the obligations of
Foothill to make or continue Eurodollar Rate Loans or to convert Reference Rate
Loans into Eurodollar Rate Loans shall be reinstated.
2.14 Requirements of Law. (a) If the adoption of or any change
in any Requirement of Law or in the interpretation or application thereof or
compliance by Foothill with any request or directive (whether or not having the
force of law) from any central bank or other Governmental Authority made
subsequent to the date hereof
(i) shall subject Foothill to any tax, levy,
charge, fee, reduction, or withholding of any kind whatsoever
with respect to this Agreement or any Advances, or change the
basis of taxation of payments to Foothill in respect thereof
(except for taxes covered by Section 2.15 and the
establishment of a tax based on the net income of Foothill or
changes in the rate of tax on the net income of Foothill);
<PAGE>
(ii) shall impose, modify or hold applicable
any reserve, special deposit, compulsory loan, or similar
requirement against assets held by, deposits or other
liabilities in or for the account of, Advances or other
extensions of credit by, or any other acquisition of funds by,
any office of Foothill; or
(iii) shall impose on Foothill any other
condition with respect to this Agreement or any Advance;
and the result of any of the foregoing is to increase the cost to Foothill, by
an amount which Foothill in good faith deems to be material, of making,
converting into, continuing, or maintaining Eurodollar Rate Loans or to increase
the cost to Foothill, by an amount which Foothill deems to be material, or to
reduce any amount receivable hereunder in respect of Eurodollar Rate Loans, or
to forego any other sum payable thereunder or make any payment on account
thereof, then, in any such case, Borrower shall promptly pay Foothill, upon its
demand, any additional amounts necessary to compensate Foothill for such
increased cost or reduced amount receivable; provided, however, that before
making any such demand, Foothill agrees to use reasonable efforts (consistent
with its internal policy and legal and regulatory restrictions and so long as
such efforts would not be disadvantageous to it, in its reasonable discretion,
in any legal, economic, or regulatory manner) to designate a different
Eurodollar lending office if the making of such designation would allow Foothill
or its Eurodollar lending office to continue to perform its obligations to make
Eurodollar Rate Loans or to continue to fund or maintain Eurodollar Rate Loans
and avoid the need for, or materially reduce the amount of, such increased cost.
If Foothill becomes entitled to claim any additional amounts pursuant to this
Section 2.14, Foothill shall promptly notify Borrower of the event by reason of
which it has become so entitled. A certificate as to any additional amounts
payable pursuant to this Section 2.14 submitted by Foothill to Borrower shall be
conclusive in the absence of manifest error. If Borrower so notifies Foothill
within 5 Business Days after Foothill notifies Borrower of any increased cost
pursuant to the foregoing provisions of this Section 2.14, Borrower may convert
all Eurodollar Rate Loans then outstanding into Reference Rate Loans in
accordance with Section 2.12 and, additionally, reimburse Foothill for any cost
in accordance with Section 2.16. This covenant shall survive the termination of
this Agreement and the payment of the Advances and all other amounts payable
hereunder for nine months following such termination and repayment.
(b) If Foothill shall have determined that the
adoption of or any change in any Requirement of Law regarding capital adequacy
or in the interpretation or application thereof or compliance by Foothill or any
Person controlling Foothill with any request or directive regarding capital
adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof does or shall have the effect of
increasing the amount of capital required to be maintained or reducing the rate
of return on Foothill's or such Person's capital as a consequence of its
obligations hereunder to a level below that which such Foothill or such Person
could have achieved but for such change or compliance (taking into consideration
Foothill's or such Person's policies with respect to capital adequacy) by an
amount
<PAGE>
deemed by Foothill to be material, then from time to time, after submission by
Foothill to Borrower of a prompt written request therefor, Borrower shall pay to
Foothill such additional amount or amounts as will compensate Foothill or such
Person for such reduction. This covenant shall survive the termination of this
Agreement and the payment of the Advances and all other amount payable hereunder
for nine months following such termination and repayment. If Borrower so
notifies Foothill within 30 days after Foothill provides Borrower with the
written request by Foothill for the payment of such amounts as will compensate
Foothill or any Person controlling Foothill for the reduction of the rate of
return on Foothill's or such Person's capital, Borrower may terminate this
Agreement within 90 days after such notice or written request in accordance with
Section 3.6 and, additionally, reimburse Foothill for any cost in accordance
with Section 2.16.
2.15 Taxes. (a) Except as provided below in this Section 2.15,
all payments made by Borrower under this Agreement and any other Loan Documents
shall be made free and clear of, and without deduction or withholding for or on
account of, any present or future income, stamp or other taxes, levies, imposts,
duties, charges, fees, deductions, or withholdings, now or hereafter imposed,
levied, collected, withheld, or assessed by any Governmental Authority,
excluding net income taxes and franchise taxes imposed in lieu of net income
taxes. If any such non-excluded taxes, levies, imposts, duties, charges, fees,
deductions or withholdings ("Non-Excluded Taxes") are required to be withheld
from any amounts payable to Foothill hereunder or under any other Loan
Documents, the amounts so payable to Foothill shall be increased to the extent
necessary to yield to Foothill (after payment of all Non-Excluded Taxes)
interest or any such other amounts payable hereunder at the rates or in the
amounts specified in this Agreement and any other Loan Documents, provided,
however, that Borrower shall be entitled to deduct and withhold any Non-Excluded
Taxes and shall not be required to increase any such amounts payable to Foothill
if Foothill fails or is unable to comply with the requirements of paragraph (b)
of this Section 2.15. Whenever any Non-Excluded Taxes are payable by Borrower,
as promptly as possible thereafter Borrower shall send to Foothill a certified
copy of an original official receipt received by Borrower showing payment
thereof. If Borrower fails to pay any Non-Excluded Taxes when due to the
appropriate taxing authority or fails to remit to Foothill the required receipts
or other required documentary evidence, Borrower shall indemnify Foothill for
any incremental taxes, interest or penalties that may become payable by Foothill
as a result of any such failure. The agreements in this Section 2.15 shall
survive the termination of this Agreement and the payment of the Advances and
all other amounts payable hereunder.
(b) Any participant or assignee of Foothill that is
not incorporated under the laws of the United States of America or a state
thereof (any such Person, a "Foreign Lender") shall:
(i) (x) on or before the date of any payment
by Borrower under this Agreement to such Foreign Lender,
deliver to Borrower and Foothill (A) two duly completed copies
of United States Internal Revenue Service Form 1001 or
<PAGE>
4224, or successor applicable form, as the case may be,
certifying that it is entitled to receive payments under this
Agreement without any deduction or withholding of any United
States federal income taxes and (B) a duly completed Internal
Revenue Service Form W-8 or W-9, or successor applicable form,
as the case may be, certifying that it is entitled to an
exemption from United States backup withholding tax;
(y) deliver to Borrower and Foothill
two further copies of any such form or certification on or
before the date that any such form or certification expires or
becomes obsolete and after the occurrence of any event
requiring a change in the most recent form previously
delivered by it to Borrower, and
(z) obtain such extensions of time
for filing and complete such forms or certifications as may
reasonably be requested by Borrower or Foothill;
or
(ii) in the case of any such Foreign Lender
that is not a "bank" within the meaning of Section
881(c)(3)(A) of the IRC and that does not comply with
subparagraph (i) of this paragraph (b),
(x) represent to Borrower
(for the benefit of Borrower and Foothill) that it is not a
bank within the meaning of Section 881(c)(3)(A) of the IRC,
(y) deliver to Borrower on or
before the date of any payment by Borrower, with a copy to
Foothill: (1) a certificate stating that such Foreign Lender
(A) is not a "bank" under Section 881(c)(3)(A) of the IRC, is
not subject to regulatory or other legal requirements as a
bank in any jurisdiction, and has not been treated as a bank
for purposes of any tax, securities law, or other filing or
submission made to any Governmental Authority, any application
made to a rating agency or qualification for any exemption
from tax, securities law or other legal requirements, (B) is
not a 10-percent shareholder within the meaning of Section
881(c)(3)(B) of the IRC, and (C) is not a controlled foreign
corporation receiving interest from a related person within
the meaning of Section 881(c)(3)(C) of the IRC (any such
certificate a "U.S. Tax Compliance Certificate"); and (2) two
duly completed copies of Internal Revenue Service Form W-8, or
successor applicable form, certifying to such Foreign Lender's
legal entitlement at the date of such certificate to an
exemption from U.S. withholding tax under the provisions of
Section 881(c) of the IRC with respect to payments to
<PAGE>
be made under this Agreement (and to deliver to Borrower and
Foothill two further copies of Form W-8 on or before the date
it expires or becomes obsolete and after the occurrence of any
event requiring a change in the most recently provided form
and, if necessary, obtain any extensions of time reasonably
requested by Borrower or Foothill for filing and completing
such forms), and
(z) agree, to the extent legally
entitled to do so, upon reasonable request by Borrower, to
provide to Borrower (for the benefit of Borrower and Foothill)
such other forms as may be reasonably required in order to
establish the legal entitlement of such Foreign Lender to an
exemption from withholding with respect to payments under this
Agreement;
(c) Foothill and each Foreign Lender shall, upon the
reasonable request by Borrower, deliver to Borrower or the applicable
Governmental Authority, as the case may be, any form or certificate required in
order that any payment by Borrower under this Agreement may be made free and
clear of, and without deduction or withholding for or on Non-Excluded Taxes (or
to allow any such deduction or withholding to be at a reduced rate) imposed on
such payment under the laws of any jurisdiction, provided that Foothill or such
Foreign Lender, as the case may be, is legally entitled to complete, execute and
deliver such form or certificate and such completion, execution or submission
would not materially prejudice the legal position of Foothill or such Foreign
Lender, as the case may be,
unless in any such case any change in treaty, law, or regulation has occurred
after the date such Person becomes a Foreign Lender hereunder which renders all
such forms and certificates inapplicable or which would prevent such Foreign
Lender from duly completing and delivering any such form or certificate with
respect to it and such Foreign Lender so advises Borrower and Foothill. Each
Person that shall become an assignee or a participant shall, upon the
effectiveness of the related transfer, be required to provide all of the forms,
certifications, and statements required pursuant to this Section 2.15; provided,
however, that in the case of a participant the obligations of such participant
pursuant to this paragraph (b) shall be determined as if such participant were
an assignee except that such participant shall furnish all such required forms,
certifications, and statements to Foothill.
2.16 Indemnity. Borrower agrees to indemnify Foothill and to
hold Foothill harmless from any loss or expense which Foothill may sustain or
incur as a consequence of (a) default by Borrower in payment when due of the
principal amount of or interest on any Eurodollar Rate Loan, (b) default by
Borrower in making a borrowing of, conversion into, or continuation of
Eurodollar Rate Loans after Borrower has given a notice requesting the same in
accordance with the provisions of this Agreement, (c) default by Borrower in
making any prepayment after Borrower has given a notice thereof in accordance
with the provisions of this Agreement, or (d) the making of a prepayment of
Eurodollar Rate Loans on a day which is not the last day of an Interest Period
with respect thereto (whether due to the termination of this
<PAGE>
Agreement upon an Event of Default or otherwise), including, in each case, any
such loss or expense (but excluding loss of margin) arising from the
reemployment of funds obtained by it or from fees payable to terminate the
deposits from which such funds were obtained. Calculation of all amounts payable
to Foothill under this Section 2.16 shall be made as though Foothill had
actually funded the relevant Eurodollar Rate Loan through the purchase of a
deposit bearing interest at the Eurodollar Rate in an amount equal to the amount
of such Eurodollar Rate Loan and having a maturity comparable to the relevant
Interest Period; provided, however, that Foothill may fund each of the
Eurodollar Rate Loans in any manner it sees fit, and the foregoing assumption
shall be utilized only for the calculation of amounts payable under this Section
2.16. This covenant shall survive the termination of this Agreement and the
payment of the Loans and all other amounts payable hereunder for a period of
nine months thereafter.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 Conditions Precedent to the Initial Advance and Letter of
Credit. The obligation of Foothill to make the initial Advance or to issue the
initial Letter of Credit is subject to the fulfillment, to the satisfaction of
Foothill and its counsel, of each of the following conditions on or before the
Closing Date:
(a) the Closing Date shall occur on or before April
30, 1998;
(b) Foothill shall have received searches reflecting
the filing of its financing statements and fixture filings;
(c) Foothill shall have received each of the
following documents, duly executed, and each such document shall be in full
force and effect:
i. the Disbursement Letter;
ii. the Stock Pledge Agreement;
iii. the Trademark Security Agreement;
iv. the Guaranty;
v. the Guarantor Security Agreement; and
vi. the Intercreditor Agreement;
(d) Foothill shall have received a certificate from
the Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution,
<PAGE>
delivery, and performance of this Agreement and the other Loan Documents to
which Borrower is a party and authorizing specific officers of Borrower to
execute the same;
(e) Foothill shall have received copies of Borrower's
Governing Documents, as amended, modified, or supplemented to the Closing Date,
certified by the Secretary of Borrower;
(f) Foothill shall have received a certificate of
status with respect to Borrower, dated within 30 days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of Borrower, which certificate shall indicate that Borrower is in
good standing in such jurisdiction;
(g) Foothill shall have received a certificate from
the Secretary of each Guarantor attesting to the resolutions of each such
Guarantor's Board of Directors authorizing its execution, delivery, and
performance of each Loan Document to which such Guarantor is a party and
authorizing specific officers of such Guarantor to execute the same;
(h) Foothill shall have received copies of each
Guarantor's Governing Documents, as amended, modified, or supplemented to the
Closing Date, certified by the Secretary of such Guarantor;
(i) Foothill shall have received a certificate of
status with respect to each Guarantor, dated within 30 days of the Closing Date,
such certificate to be issued by the appropriate officer of the jurisdiction of
organization of such Guarantor, which certificate shall indicate that such
Guarantor is in good standing in such jurisdiction;
(j) Foothill shall have received a certificate of
insurance, together with the endorsements thereto, as are required by Section
6.10, the form and substance of which shall be satisfactory to Foothill and its
counsel;
(k) Foothill shall have received duly executed
certificates of title with respect to that portion of the Collateral that is
subject to certificates of title;
(l) Foothill shall have received confirmation from
Subordinated Creditor that (a) it is in possession of the certificates
representing all applicable shares of stock, together with duly executed stock
powers with respect to that portion of the Collateral that is subject to the
Stock Pledge Agreement, and (b) it is holding such certificates as a bailee for
Foothill subject to the terms and conditions of the Intercreditor Agreement;
(m) Foothill shall have received an opinion of
Borrower's counsel in form and substance satisfactory to Foothill in its sole
discretion;
<PAGE>
(n) Foothill shall have received satisfactory
evidence that all tax returns required to be filed by Borrower have been timely
filed and all taxes upon Borrower or its properties, assets, income, and
franchises (including real property taxes and payroll taxes) have been paid
prior to delinquency, except such taxes that are the subject of a Permitted
Protest, and except such taxes that are set forth on Schedule 3.1; provided,
however, that with respect to such taxes that are set forth on Schedule 3.1, the
amount and nature of such taxes are satisfactory to Foothill in its business
credit judgment.
(o) Foothill shall have completed its reference
checks with respect to the senior management of Borrower, the results of which
shall be satisfactory to Foothill;
(p) Foothill shall have received a certificate from
the Secretary of Borrower attesting that Marcel Corporation d/b/a Discovery
Zone, DZDO, Inc. dba Discovery Zone, and Koven Financial Services, Inc., are not
Borrower or a Subsidiary of Borrower and that the certain financing in favor of
Evansville Associates against Marcel Corporation d/b/a/ Discovery Zone filed
with the Indiana Secretary of State's Office, filing number 1884698, the certain
financing statement in favor of Star Bank, N.A. against DZDO, Inc. filed with
the Ohio Secretary of State's Office, filing number AH0099546, and the certain
financing statement in favor of Atlanta Baking Co. against Koven Financial
Services, Inc. DBA Discovery Zone filed with the Cobb County, Georgia Office of
the Clerk, Superior Court, filing number 93-3444, in each case, are not filed
against any Obligor;
(q) all other documents and legal matters in
connection with the transactions contemplated by this Agreement shall have been
delivered, executed, or recorded and shall be in form and substance satisfactory
to Foothill and its counsel.
3.2 Conditions Precedent to all Advances and all Letters of
Credit. The following shall be conditions precedent to all Advances and all
Letters of Credit hereunder:
(a) the representations and warranties contained in
this Agreement and the other Loan Documents shall be true and correct in all
material respects on and as of the date of such extension of credit, as though
made on and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date);
(b) no Default or Event of Default shall have
occurred and be continuing on the date of such extension of credit, nor shall
either result from the making thereof; and
(c) no injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the extending of such
credit shall have been issued and remain in force by any governmental authority
against Borrower, Foothill, or any of their Affiliates.
<PAGE>
3.3 Conditions Subsequent. As conditions subsequent to the
Closing Date hereunder, Borrower shall perform or cause to be performed the
following (the failure by Borrower to so perform or cause to be performed
constituting an Event of Default):
(a) the initial Advance or Letter of Credit shall be
made or issued on or before April 30, 1998;
(b) within 30 days of the Closing Date, deliver to
Foothill the certified copies of the policies of insurance, together with the
endorsements thereto, as are required by Section 6.10, the form and substance of
which shall be satisfactory to Foothill and its counsel;
(c) within 30 days of the Closing Date, deliver to
Foothill certificates of status with respect to Borrower, each dated within 30
days of the Closing Date, such certificates to be issued by the appropriate
officer of the jurisdictions of California, Texas, Pennsylvania, Ohio, Florida,
and New York, which certificates shall indicate that Borrower is in good
standing in such jurisdictions; and
(d) within 30 days of the Closing Date, deliver to
Foothill a fully executed counterpart of the Concentration Account Agreements;
provided, however, that until such Concentration Account Agreements have been
executed and delivered to Foothill, Borrower expressly acknowledges and agrees
that Foothill shall not be obligated to make any Advances or issue any Letters
of Credit under this Agreement.
3.4 Term; Automatic Renewal. This Agreement shall become
effective upon the execution and delivery hereof by Borrower and Foothill and
shall continue in full force and effect for a term ending on the date (the
"Renewal Date") that is 4 years from the Closing Date and automatically shall be
renewed for successive 1 year periods thereafter, unless sooner terminated
pursuant to the terms hereof. Either party may terminate this Agreement
effective on the Renewal Date or on any 1 year anniversary of the Renewal Date
by giving the other party at least 90 days prior written notice. The foregoing
notwithstanding, Foothill shall have the right to terminate its obligations
under this Agreement immediately and without notice upon the occurrence and
during the continuation of an Event of Default.
3.5 Effect of Termination. On the date of termination of this
Agreement, all Obligations (including contingent reimbursement obligations of
Borrower with respect to any outstanding Letters of Credit) immediately shall
become due and payable without notice or demand. No termination of this
Agreement, however, shall relieve or discharge Borrower of Borrower's duties,
Obligations, or covenants hereunder, and Foothill's continuing security
interests in the Collateral shall remain in effect until all Obligations have
been fully and finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated. If Borrower has sent a notice of
termination pursuant to the provisions of Section 3.4, but fails to
<PAGE>
pay the Obligations in full on the date set forth in said notice, then Foothill
may, but shall not be required to, renew this Agreement for an additional term
of 1 year.
3.6 Early Termination by Borrower. The provisions of Section
3.4 that allow termination of this Agreement by Borrower only on the Renewal
Date and certain anniversaries thereof notwithstanding, Borrower has the option,
at any time upon 90 days prior written notice to Foothill, to terminate this
Agreement by paying to Foothill, in cash, the Obligations (including either (a)
providing cash collateral to be held by Foothill in an amount equal to 105% of
the maximum amount of Foothill's obligations under outstanding Letters of
Credit, or (b) causing the original Letters of Credit to be returned to
Foothill), in full, together with a premium (the "Early Termination Premium")
equal $5,000 times the total number of whole and partial months remaining from
the date of any such early termination through the Renewal Date; provided,
however, that Borrower shall have the right to terminate this Agreement,
pursuant to the terms of Section 2.14(b) without the obligation to pay the Early
Termination Premium.
3.7 Termination Upon Event of Default. If, prior to the
Renewal Date, Foothill terminates this Agreement upon the occurrence of an Event
of Default, in view of the impracticability and extreme difficulty of
ascertaining actual damages and by mutual agreement of the parties as to a
reasonable calculation of Foothill's lost profits as a result thereof, Borrower
shall pay to Foothill upon the effective date of such termination, a premium in
an amount equal to the Early Termination Premium. The Early Termination Premium
shall be presumed to be the amount of damages sustained by Foothill as the
result of the early termination and Borrower agrees that it is reasonable under
the circumstances currently existing. The Early Termination Premium provided for
in this Section 3.7 shall be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower hereby grants to
Foothill a continuing security interest in all currently existing and hereafter
acquired or arising Borrower Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by Borrower of
each of its covenants and duties under the Loan Documents. Foothill's security
interests in all of the Collateral shall attach to all of the Collateral without
further act on the part of Foothill or any Obligor. Anything contained in this
Agreement or any other Loan Document to the contrary notwithstanding, except for
Permitted Dispositions, no Obligor has any authority, express or implied, to
dispose of any item or portion of the Collateral.
4.2 Negotiable Collateral. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
immediately upon the request of Foothill, Borrower shall, and shall cause its
Subsidiaries to either (a) endorse and deliver physical possession of such
Negotiable Collateral to Foothill, or (b) cause any third Person in possession
<PAGE>
of such Negotiable Collateral to acknowledge that it is holding such item of
Collateral as the representative of Foothill.
4.3 Collection of Accounts, General Intangibles, and
Negotiable Collateral. At any time, Foothill or Foothill's designee may (a)
notify customers or Account Debtors of Borrower and each Subsidiary of Borrower
that the Accounts, General Intangibles, or Negotiable Collateral have been
assigned to Foothill or that Foothill has a security interest therein, and (b)
collect the Accounts, General Intangibles, and Negotiable Collateral directly
and charge the collection costs and expenses to the Loan Account. Borrower
agrees that it will hold in trust for Foothill, as Foothill's trustee, and shall
cause each of its Subsidiaries to hold in trust for Foothill, as Foothill's
trustee, any Collections that Borrower or any Subsidiary of Borrower receives
and immediately will deliver said Collections to Foothill in their original form
as received by Borrower or any such Subsidiary of Borrower.
4.4 Delivery of Additional Documentation Required. At any time
upon the request of Foothill, Borrower shall execute and deliver to Foothill,
and shall cause each of its Subsidiaries to execute and deliver to Foothill, all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
accounts, letters of authority, and all other documents that Foothill reasonably
may request, in form satisfactory to Foothill, to perfect and continue perfected
Foothill's security interests in the Collateral, and in order to fully
consummate all of the transactions contemplated hereby and under the other Loan
Documents.
4.5 Power of Attorney. Borrower hereby irrevocably makes,
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents designated by Foothill) as Borrower's true and lawful attorney, with
power to (a) if Borrower refuses to, or fails timely to execute and deliver any
of the documents described in Section 4.4, sign the name of Borrower on any of
the documents described in Section 4.4, (b) at any time that an Event of Default
has occurred and is continuing or Foothill deems itself insecure, sign
Borrower's name on any invoice or bill of lading relating to any Account, drafts
against Account Debtors, schedules and assignments of Accounts, verifications of
Accounts, and notices to Account Debtors, (c) send requests for verification of
Accounts, (d) at any time that an Event of Default has occurred and is
continuing, endorse Borrower's name on any Collection item that may come into
Foothill's possession, (e) at any time that an Event of Default has occurred and
is continuing, notify the post office authorities to change the address for
delivery of Borrower's mail to an address designated by Foothill, to receive and
open all mail addressed to Borrower, and to retain all mail relating to the
Collateral and forward all other mail to Borrower, (f) at any time that an Event
of Default has occurred and is continuing, make, settle, and adjust all claims
under Borrower's policies of insurance and make all determinations and decisions
with respect to such policies of insurance, and (g) at any time that an Event of
Default has occurred and is continuing or Foothill deems itself insecure, settle
and adjust disputes and claims respecting the Accounts directly with Account
<PAGE>
Debtors, for amounts and upon terms that Foothill determines to be reasonable,
and Foothill may cause to be executed and delivered any documents and releases
that Foothill determines to be necessary. The appointment of Foothill as
Borrower's attorney, and each and every one of Foothill's rights and powers,
being coupled with an interest, is irrevocable until all of the Obligations have
been fully and finally repaid and performed and Foothill's obligation to extend
credit hereunder is terminated.
4.6 Right to Inspect. Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter to
inspect Borrower's Books and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, quality, value,
condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement,
Borrower makes, and shall cause each of its each of its Subsidiaries to make,
the following representations and warranties which shall be true, correct, and
complete in all respects as of the date hereof, and shall be true, correct, and
complete in all respects as of the Closing Date, and at and as of the date of
the making of each Advance or Letter of Credit made thereafter, as though made
on and as of the date of such Advance or Letter of Credit (except to the extent
that such representations and warranties relate solely to an earlier date) and
such representations and warranties shall survive the execution and delivery of
this Agreement:
5.1 No Encumbrances. Each Obligor has good and indefeasible
title to the Collateral, free and clear of Liens except for Permitted Liens.
5.2 [Intentionally omitted].
5.3 [Intentionally omitted].
5.4 Equipment. All of the Equipment is used or held for use in
each Obligor's business and is fit for such purposes.
5.5 Location of Inventory and Equipment. The Inventory and
Equipment are not stored with a bailee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on Schedule 6.12 or otherwise permitted by Section 6.12.
5.6 Inventory Records. Each Obligor keeps correct and accurate
records itemizing and describing the kind, type, quality, and quantity of the
Inventory, and such Obligor's cost therefor.
<PAGE>
5.7 Location of Chief Executive Office; FEIN. The chief
executive office of Borrower is located at the address indicated in the preamble
to this Agreement and Borrower's FEIN is 65-0408845.
5.8 Due Organization and Qualification; Subsidiaries.
(a) Each Obligor is duly organized and existing and
in good standing under the laws of the jurisdiction of its incorporation and
qualified and licensed to do business in, and in good standing in, any state
where the failure to be so licensed or qualified reasonably could be expected to
constitute a Material Adverse Change.
(b) Set forth on Schedule 5.8, is a complete and
accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the
jurisdiction of their incorporation; (ii) the number of shares of each class of
common and preferred Stock authorized for each of such Subsidiaries; and (iii)
the number and the percentage of the outstanding shares of each such class owned
directly or indirectly by Borrower. All of the outstanding Stock of each such
Subsidiary has been validly issued and is fully paid and non-assessable.
(c) Except as set forth on Schedule 5.8, no Stock (or
any securities, instruments, warrants, options, purchase rights, conversion or
exchange rights, calls, commitments or claims of any character convertible into
or exercisable for Stock) of any direct or indirect Subsidiary of Borrower is
subject to the issuance of any security, instrument, warrant, option, purchase
right, conversion or exchange right, call, commitment or claim of any right,
title, or interest therein or thereto.
5.9 Due Authorization; No Conflict.
(a) The execution, delivery, and performance by each
Obligor of this Agreement and the Loan Documents to which it is a party have
been duly authorized by all necessary corporate action.
(b) The execution, delivery, and performance by each
Obligor of this Agreement and the Loan Documents to which it is a party do not
and will not (i) violate any provision of federal, state, or local law or
regulation (including Regulations G, T, U, and X of the Federal Reserve Board)
applicable to such Obligor, the Governing Documents of such Obligor, or any
order, judgment, or decree of any court or other Governmental Authority binding
on such Obligor, (ii) conflict with, result in a breach of, or constitute (with
due notice or lapse of time or both) a default under any material contractual
obligation or material lease of such Obligor, (iii) result in or require the
creation or imposition of any Lien of any nature whatsoever upon any properties
or assets of such Obligor, other than Permitted Liens, or (iv) require any
approval of stockholders or any approval or consent of any Person under any
material contractual obligation of such Obligor.
<PAGE>
(c) Other than the filing of appropriate financing
statements, fixture filings, and mortgages, the execution, delivery, and
performance by Borrower of this Agreement and the Loan Documents to which
Borrower and each other Obligor is a party do not and will not require any
registration with, consent, or approval of, or notice to, or other action with
or by, any federal, state, foreign, or other Governmental Authority or other
Person.
(d) This Agreement and the Loan Documents to which
Borrower and any other Obligor is a party, and all other documents contemplated
hereby and thereby, when executed and delivered by Borrower and any other such
Obligor will be the legally valid and binding obligations of Borrower and each
other such Obligor, enforceable against Borrower and each such other Obligor in
accordance with their respective terms, except as enforcement may be limited by
equitable principles or by bankruptcy, insolvency, reorganization, moratorium,
or similar laws relating to or limiting creditors' rights generally.
(e) The Liens granted by each Obligor to Foothill in
and to its properties and assets pursuant to this Agreement and the other Loan
Documents are validly created, perfected, and first priority Liens, subject only
to Permitted Liens.
5.10 Litigation. There are no actions or proceedings pending
by or against any Obligor before any court or administrative agency and each
Obligor does not have knowledge or belief of any pending, threatened, or
imminent litigation, governmental investigations, or claims, complaints,
actions, or prosecutions involving such Obligor, any other Obligor, or any other
guarantor of the Obligations, except for: (a) ongoing collection matters in
which such Obligor is the plaintiff; (b) matters disclosed on Schedule 5.10; and
(c) matters arising after the date hereof that, if decided adversely to any
Obligor, reasonably could not be expected to result in a Material Adverse
Change.
5.11 No Material Adverse Change. All financial statements
relating to Borrower, each other Obligor, or any guarantor of the Obligations
that have been delivered by Borrower to Foothill have been prepared in
accordance with GAAP (except, in the case of unaudited financial statements, for
the lack of footnotes, the absence of a statement of changes in cash flows, and
being subject to year-end audit adjustments) and fairly present such Obligor's
(or such guarantor's, as applicable) financial condition as of the date thereof
and such Obligor's results of operations for the period then ended. There has
not been a Material Adverse Change with respect to the Obligors taken as a whole
since the date of the latest financial statements submitted to Foothill on or
before the Closing Date.
5.12 Solvency. The Obligors' taken as a whole are Solvent. No
transfer of property is being made by Borrower or any other Obligor and no
obligation is being incurred by Borrower or any other Obligor in connection with
the transactions contemplated by this Agreement or the other Loan Documents with
the intent to hinder, delay, or defraud either present or future creditors of
Borrower or any other Obligor.
<PAGE>
5.13 Employee Benefits. None of Borrower, any of its
Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any
Benefit Plan, other than those listed on Schedule 5.13. Borrower, each of its
Subsidiaries and each ERISA Affiliate have satisfied the minimum funding
standards of ERISA and the IRC with respect to each Benefit Plan to which it is
obligated to contribute. No ERISA Event has occurred nor has any other event
occurred that may result in an ERISA Event that reasonably could be expected to
result in a Material Adverse Change. None of Borrower or its Subsidiaries, any
ERISA Affiliate, or any fiduciary of any Plan is subject to any direct or
indirect liability with respect to any Plan under any applicable law, treaty,
rule, regulation, or agreement. None of Borrower or its Subsidiaries or any
ERISA Affiliate is required to provide security to any Plan under Section
401(a)(29) of the IRC.
5.14 Environmental Condition. None of any Obligor's properties
or assets has ever been used by any Obligor or, to the best of any Obligor's
knowledge, by previous owners or operators in the disposal of, or to produce,
store, handle, treat, release, or transport, any Hazardous Materials. None of
any Obligor's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a Hazardous Materials
disposal site, or a candidate for closure pursuant to any environmental
protection statute. No Lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned or
operated by any Obligor. No Obligor has received a summons, citation, notice, or
directive from the Environmental Protection Agency or any other federal or state
governmental agency concerning any action or omission by any Obligor resulting
in the releasing or disposing of Hazardous Materials into the environment.
5.15 Brokerage Fees. Except for the fees payable to Jeffries &
Company, the payment of which fees are the sole responsibility of Borrower, no
brokerage commission or finders fees has or shall be incurred or payable in
connection with or as a result of Borrower's obtaining financing from Foothill
under this Agreement, and Borrower has not utilized the services of any broker
or finder in connection with Borrower's obtaining financing from Foothill under
this Agreement.
5.16 Renovation Disputes. As of the date of the delivery of
each certificate regarding the Disputed Amount required by Section 6.2(c), such
certificate represents Borrower's good faith, reasonable estimate (based upon
the advice of its professional advisors) of the Disputed Amount.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, and unless Foothill shall otherwise consent in writing, Borrower
shall do, and shall cause each of its Subsidiaries to do, all of the following:
<PAGE>
6.1 Accounting System. Maintain a standard and modern system
of accounting that enables each Obligor to produce financial statements in
accordance with GAAP, and maintain records pertaining to the Collateral that
contain information as from time to time may be requested by Foothill. Each
Obligor also shall keep a modern inventory reporting system that shows all
additions, sales, claims, returns, and allowances with respect to the Inventory.
6.2 Collateral Reporting. Provide Foothill with the following
documents at the following times in form satisfactory to Foothill:
(a) a detailed calculation of Aggregate Store
Contribution and a detailed report of the Store Contribution of each of
Borrower's individual stores measured on a trailing 12-month basis as of the
last day of each fiscal month, by no later than the reporting date shown below
for the period corresponding thereto:
================================================================================
Period Ending Reporting Date
December 31, 1998 Closing Date
January 31, 1998 April 15, 1998
February 28, 1998 April 30, 1998
March 31, 1998 May 15, 1998
June 30, 1998 August 15, 1998
July 31, 1998 and monthly the date which is 30 days after the end of
thereafter such period.
================================================================================
(b) concurrent with the reporting delivered pursuant
to clause (a) above during the first 24 months following the Closing Date, a
detailed calculation of the Add-Back Credit and a report detailing each store
renovation completed during the last 12 month period;
(c) concurrent with the reporting delivered pursuant
to clause (a) above during the first 24 months following the Closing Date, a
certificate representing Borrower's good faith, reasonable estimate (based upon
the advice of its professional advisors) of the Disputed Amount; and
(d) such other reports as to the Collateral or the
financial condition of each Obligor as Foothill may reasonably request from time
to time.
6.3 Financial Statements, Reports, Certificates. Deliver to
Foothill: (a)(i) for the 3 month period ending March 31, 1998, as soon as
available, but in any event, by no later
<PAGE>
than May 15, 1998, a company prepared balance sheet, and income statement
covering Borrower's operations during such period; (ii) for the 3 month period
ending June 30, 1998, as soon as available, but in any event, by no later than
August 15, 1998, a company prepared balance sheet and income statement covering
Borrower's operations during such period; and (iii) for the fiscal monthly
period ending July 31, 1998 and each fiscal monthly period thereafter during
each of Borrower's fiscal years, as soon as available, but in any event within
30 days after the end of such period, a company prepared balance sheet and
income statement covering Borrower's operations during such period; (b) upon
request, a detailed aging, per vendor, of Borrower's accounts payable, (c) upon
request, a schedule of rents payable, per store, specifying each store for which
rent is past due, (d) upon request, a schedule of federal payroll taxes payable,
including a certification by the Secretary of Borrower that such taxes are not
past due, (e) upon request, a schedule of ad valorem taxes payable and (f) as
soon as available, but in any event within 105 days after the end of each of
Borrower's fiscal years, financial statements of Borrower for each such fiscal
year, audited by independent certified public accountants reasonably acceptable
to Foothill (it being understood that Ernst & Young LLP is acceptable to
Foothill) and certified, without any qualifications (except for a "going
concern" qualification that is the proximate result of Borrower's financial
condition as of the Closing Date), by such accountants to have been prepared in
accordance with GAAP, together with a certificate of such accountants addressed
to Foothill stating that such accountants do not have knowledge of the existence
of any Default or Event of Default. Such audited financial statements shall
include a balance sheet, profit and loss statement, and statement of cash flow
and, if prepared, such accountants' letter to management. If Borrower is a
parent company of one or more Subsidiaries, or Affiliates, or is a Subsidiary or
Affiliate of another company, then, in addition to the financial statements
referred to above, Borrower agrees to deliver unaudited financial statements
prepared on a consolidating basis so as to present Borrower and each such
related entity separately, and on a consolidated basis.
Together with the above, Borrower also shall deliver to
Foothill Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and
Form 8-K Current Reports, and any other filings made by Borrower with the
Securities and Exchange Commission, if any, as soon as the same are filed, or
any other information that is provided by Borrower to its shareholders, and any
other report reasonably requested by Foothill relating to the financial
condition of Borrower.
Each month, together with the financial statements provided
pursuant to Section 6.3(a), Borrower shall deliver to Foothill a certificate
signed by its chief financial officer to the effect that: (i) all financial
statements delivered or caused to be delivered to Foothill hereunder have been
prepared in accordance with GAAP (except, in the case of unaudited financial
statements, for the lack of footnotes and being subject to year-end audit
adjustments) and fairly present the financial condition of Borrower, (ii) the
representations and warranties of Borrower contained in this Agreement and the
other Loan Documents are true and correct in all material respects on and as of
the date of such certificate, as though made on and as of such date (except to
the extent that such representations and warranties relate solely to an earlier
date), (iii) for each month that also is the date on which a financial covenant
in Section 7.19 is to be tested, a
<PAGE>
Compliance Certificate demonstrating in reasonable detail compliance at the end
of such period with the applicable financial covenants contained in Section
7.19, and (iv) on the date of delivery of such certificate to Foothill there
does not exist any condition or event that constitutes a Default or Event of
Default (or, in the case of clauses (i), (ii), or (iii), to the extent of any
non-compliance, describing such non-compliance as to which he or she may have
knowledge and what action Borrower has taken, is taking, or proposes to take
with respect thereto).
Borrower shall have issued written instructions to its
independent certified public accountants authorizing them to communicate with
Foothill and to release to Foothill whatever financial information concerning
Borrower Foothill may request that such accountants may have in their possession
from Borrower's books and records. Borrower hereby irrevocably authorizes and
directs all auditors, accountants, or other third parties to deliver to
Foothill, at Borrower's expense, copies of Borrower's financial statements and
other accounting records of any nature in their possession.
6.4 Tax Returns. Deliver to Foothill copies of each of
Borrower's future federal income tax returns, and any amendments thereto, within
30 days of the filing thereof with the Internal Revenue Service.
6.5 Guarantor Reports. Cause any guarantor of any of the
Obligations to deliver its annual financial statements at the time when Borrower
provides its audited financial statements to Foothill and copies of all federal
income tax returns as soon as the same are available and in any event no later
than 30 days after the same are required to be filed by law.
6.6 Permitted Acquisitions. Deliver to Foothill, not less than
20 Business Days prior to the closing of any proposed Permitted Acquisition each
of the following (a) a detailed description of the assets or Stock that is the
subject of such proposed Permitted Acquisition, (b) a term sheet or other
description setting forth the essential terms and basic structure of the
proposed Permitted Acquisition (including, purchase consideration), and (c) a
sources and uses calculation showing the proposed amount of funds, the source
thereof, and the uses therefor in connection with the consummation of the
proposed Permitted Acquisition.
6.7 Title to Equipment. Upon Foothill's request, each Obligor
immediately shall deliver to Foothill, properly endorsed, any and all evidences
of ownership of, certificates of title, or applications for title to any items
of Equipment.
6.8 Maintenance of Equipment. Maintain the Equipment in good
operating condition and repair (ordinary wear and tear excepted), and make all
necessary replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Other than those items
of Equipment that constitute fixtures on the Closing Date, no Obligor shall
permit any item of Equipment to become a fixture to real estate or an accession
to other property, and such Equipment shall at all times remain personal
property.
<PAGE>
6.9 Taxes. Cause all assessments and taxes, whether real,
personal, or otherwise, due or payable by, or imposed, levied, or assessed
against any Obligor or any of its property to be paid in full, before
delinquency or before the expiration of any extension period, except to the
extent that the validity of such assessment or tax shall be the subject of a
Permitted Protest. Each Obligor shall make due and timely payment or deposit of
all such federal, state, and local taxes, assessments, or contributions required
of it by law, and will execute and deliver to Foothill, on demand, appropriate
certificates attesting to the payment thereof or deposit with respect thereto.
Each Obligor will make timely payment or deposit of all tax payments and
withholding taxes required of it by applicable laws, including those laws
concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal
income taxes, and will, upon request, furnish Foothill with proof satisfactory
to Foothill indicating that such Obligor has made such payments or deposits.
6.10 Insurance.
(a) At its expense, keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as are ordinarily insured against by
other owners in similar businesses. Borrower also shall maintain business
interruption, public liability, product liability, and property damage insurance
relating to each Obligor's ownership and use of the Collateral, as well as
insurance against larceny, embezzlement, and criminal misappropriation.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as may be reasonably satisfactory
to Foothill. All insurance required herein shall be written by companies which
are authorized to do insurance business in the State of California. All hazard
insurance and such other insurance as Foothill shall specify, shall contain a
Form 438BFU (NS) mortgagee endorsement, or an equivalent endorsement
satisfactory to Foothill, showing Foothill as loss payee thereof, as its
interests may appear, and shall contain a waiver of warranties. Every policy of
insurance referred to in this Section 6.10 shall contain an agreement by the
insurer that it will not cancel such policy except after 30 days prior written
notice to Foothill and that any loss payable thereunder shall be payable
notwithstanding any act or negligence of any Obligor or Foothill which might,
absent such agreement, result in a forfeiture of all or a part of such insurance
payment. Borrower shall deliver to Foothill certified copies of such policies of
insurance and evidence of the payment of all premiums therefor.
(c) Each Obligor shall give Foothill prompt notice of
any loss or damage to its properties and assets by fire, lightning, windstorm,
hail, explosion, aircraft, smoke damage, vehicle damage, earthquake, elevator
collision, and other risks included under an "extended coverage" endorsement
covered by such insurance. Upon the occurrence and during the continuance of an
Event of Default, Foothill shall have the exclusive right to adjust all losses
payable under the applicable insurance policies without any liability to any
Obligor whatsoever in respect of such adjustments. Any monies received as
payment for any loss or damage to their
<PAGE>
properties and assets by fire, lightning, windstorm, hail, explosion, aircraft,
smoke damage, vehicle damage, earthquake, elevator collision, and other risks
included under an "extended coverage" endorsement under the applicable insurance
policy (exclusive of any casualty loss wherein the insurance proceeds are less
than $100,000), shall be paid over to Foothill, and Borrower shall have the
right to designate in writing to Foothill within 30 days of such payment whether
such payment shall be (i) applied to the prepayment of the Obligations without
premium, in such order or manner as Foothill may elect (together with a
commensurate reduction of the Maximum Revolving Amount), or (ii) disbursed to
Borrower under staged payment terms satisfactory to Foothill for application to
the cost of repairs, replacements, or restorations and subject to the conditions
set forth in this Section 6.10(c). In the event Foothill fails to receive timely
such written designation or the conditions set forth in the following sentence
are not satisfied, the payment shall be applied in the manner set forth in
clause (i) of the immediately preceding sentence. If Borrower elects to cause
Foothill to disburse any monies received as payment for any loss pursuant to
this Section 6.10(c), Foothill only shall be obligated to disburse such money
for the repair, replacement, or restoration of the affected property or assets
if all of the following conditions are satisfied: (A) no Default or Event of
Default has occurred and is continuing or would result from the disbursement or
application of such monies; (B) Borrower has cash, cash equivalents, borrowing
availability under Section 2.1 and/or business interruption insurance proceeds
in amounts sufficient, in Foothill's reasonable judgment, to ensure that
Borrower will be able to make payment as and when due of each of its Obligations
that will be payable during the period of such repair, replacement, or
restoration; (C) Foothill is reasonably satisfied that the amount of such cash,
cash equivalents, borrowing availability, and/or insurance proceeds will be
sufficient fully to repair, replace, or restore the affected property or assets;
(D) construction, completion of the repair, replacement, or restoration of the
affected property or assets shall be completed in accordance with plans,
specifications, and drawings submitted to and approved by Foothill, which
approval shall not be unreasonably withheld or delayed; (E) all construction and
completion of the repair, replacement, or restoration shall be effected with
reasonable promptness and shall be of a value (the "Replaced Value") (i) at
least equal to the replacement value (the "Destroyed Value") of such items of
property destroyed or condemned prior to such destruction or condemnation, or
(ii) of a value less than the Destroyed Value so long as the difference between
the Destroyed Value and the Replaced Value is applied to the prepayment of the
Obligations without premium, in such order or manner as Foothill may elect
(together with a commensurate reduction of the Maximum Revolving Amount); and
(f) all monies paid by Borrower to Foothill may be commingled with other funds
of Foothill and will not bear interest pending disbursement hereunder. Upon the
occurrence and during the continuance of an Event of Default, Foothill shall
have the right to apply all prepaid premiums to the payment of the Obligations
in such order or form as Foothill shall determine.
(d) Borrower shall not take out separate insurance
concurrent in form or contributing in the event of loss with that required to be
maintained under this Section 6.10, unless Foothill is included thereon as named
insured with the loss payable to Foothill under a standard 438BFU (NS) Mortgagee
endorsement, or its local equivalent. Borrower immediately
<PAGE>
shall notify Foothill whenever such separate insurance is taken out, specifying
the insurer thereunder and full particulars as to the policies evidencing the
same, and originals of such policies immediately shall be provided to Foothill.
6.11 No Setoffs or Counterclaims. Make payments hereunder and
under the other Loan Documents by or on behalf of each Obligor without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.
6.12 Location of Inventory and Equipment. Keep the Inventory
and Equipment only at the locations identified on Schedule 6.12; provided,
however, that (a) Borrower may amend Schedule 6.12 so long as such amendment
occurs by written notice to Foothill not less than 30 days prior to the date on
which the Inventory or Equipment is moved to such new location, so long as such
new location is within the continental United States, and so long as, at the
time of such written notification, each Obligor provides any financing
statements or fixture filings necessary to perfect and continue perfected
Foothill's security interests in such assets, and (b) except for bill and hold
Inventory or Equipment, the foregoing shall not apply to any Inventory or
Equipment that has not been delivered to Borrower.
6.13 Compliance with Laws. Comply with the requirements of all
applicable laws, rules, regulations, and orders of any governmental authority,
including the Fair Labor Standards Act and the Americans With Disabilities Act,
other than laws, rules, regulations, and orders the non-compliance with which,
individually or in the aggregate, would not result in and reasonably could not
be expected to result in a Material Adverse Change.
6.14 Employee Benefits.
(a) Cause to be delivered to Foothill, each of the
following: (i) promptly, and in any event within 10 Business Days after Borrower
or any of its Subsidiaries knows or has reason to know that an ERISA Event has
occurred that reasonably could be expected to result in a Material Adverse
Change, a written statement of the chief financial officer of Borrower
describing such ERISA Event and any action that is being taking with respect
thereto by Borrower, any such Subsidiary or ERISA Affiliate, and any action
taken or threatened by the IRS, Department of Labor, or PBGC. Borrower or such
Subsidiary, as applicable, shall be deemed to know all facts known by the
administrator of any Benefit Plan of which it is the plan sponsor, (ii)
promptly, and in any event within 3 Business Days after the filing thereof with
the IRS, a copy of each funding waiver request filed with respect to any Benefit
Plan and all communications received by Borrower, any of its Subsidiaries or, to
the knowledge of Borrower, any ERISA Affiliate with respect to such request, and
(iii) promptly, and in any event within 3 Business Days after receipt by
Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA
Affiliate, of the PBGC's intention to terminate a Benefit Plan or to have a
trustee appointed to administer a Benefit Plan, copies of each such notice.
<PAGE>
(b) Cause to be delivered to Foothill, upon
Foothill's request, each of the following: (i) a copy of each Plan (or, where
any such plan is not in writing, complete description thereof) (and if
applicable, related trust agreements or other funding instruments) and all
amendments thereto, all written interpretations thereof and written descriptions
thereof that have been distributed to employees or former employees of Borrower
or its Subsidiaries; (ii) the most recent determination letter issued by the IRS
with respect to each Benefit Plan; (iii) for the three most recent plan years,
annual reports on Form 5500 Series required to be filed with any governmental
agency for each Benefit Plan; (iv) all actuarial reports prepared for the last
three plan years for each Benefit Plan; (v) a listing of all Multiemployer
Plans, with the aggregate amount of the most recent annual contributions
required to be made by Borrower or any ERISA Affiliate to each such plan and
copies of the collective bargaining agreements requiring such contributions;
(vi) any information that has been provided to Borrower or any ERISA Affiliate
regarding withdrawal liability under any Multiemployer Plan; and (vii) the
aggregate amount of the most recent annual payments made to former employees of
Borrower or its Subsidiaries under any Retiree Health Plan.
6.15 Leases. Pay when due all rents and other amounts payable
under any leases to which Borrower is a party or by which Borrower's properties
and assets are bound, unless such payments are the subject of a Permitted
Protest.
6.16 Brokerage Commissions. Pay any and all brokerage
commission or finders fees incurred by in connection with or as a result of
Borrower's obtaining financing from Foothill under this Agreement.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, Borrower will not do any of the following, and shall cause each of
its Subsidiaries not to do any of the following, without Foothill's prior
written consent:
7.1 Indebtedness. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(a) Indebtedness evidenced by this Agreement,
together with Indebtedness to issuers of letters of credit that are the subject
of L/C Guarantees;
(b) Permitted Indebtedness; and
(c) refinancings, renewals, or extensions of
Indebtedness permitted under clause (b) of this Section 7.1 (and continuance or
renewal of any Permitted Liens associated
<PAGE>
therewith) so long as: (i) the terms and conditions of such refinancings,
renewals, or extensions do not materially impair the prospects of repayment of
the Obligations by Borrower, (ii) the net cash proceeds of such refinancings,
renewals, or extensions do not result in an increase in the aggregate principal
amount of the Indebtedness so refinanced, renewed, or extended, (iii) such
refinancings, renewals, refundings, or extensions do not result in a shortening
of the average weighted maturity of the Indebtedness so refinanced, renewed, or
extended, and (iv) to the extent that Indebtedness that is refinanced was
subordinated in right of payment to the Obligations, then the subordination
terms and conditions of the refinancing Indebtedness must be at least as
favorable to Foothill as those applicable to the refinanced Indebtedness.
7.2 Liens. Create, incur, assume, or permit to exist, directly
or indirectly, any Lien on or with respect to any of its property or assets, of
any kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(c) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).
7.3 Restrictions on Fundamental Changes. Except for Permitted
Acquisitions, enter into any merger, consolidation, reorganization, or
recapitalization, or reclassify its Stock, or liquidate, wind up, or dissolve
itself (or suffer any liquidation or dissolution), or convey, sell, assign,
lease, transfer, or otherwise dispose of, in one transaction or a series of
transactions, all or any substantial part of its property or assets.
7.4 Disposal of Assets. Except for Permitted Dispositions, and
except for the relocation of assets as permitted by Section 6.12, sell, lease,
assign, transfer, or otherwise dispose of any Obligor's properties or assets.
7.5 Change Name. Change any Obligor's name, FEIN, corporate
structure (within the meaning of Section 9-402(7) of the Code), or identity, or
add any new fictitious name; provided, however, that Borrower may change its or
any other Obligor's name upon 30 days prior written notification thereof to
Foothill and so long as, at the time of such written notification, the
applicable Obligor provides any financing statements necessary to perfect and
continue perfected Foothill's security interests.
7.6 Guarantee. Guarantee or otherwise become in any way liable
with respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of any Obligor or
which are transmitted or turned over to Foothill.
7.7 Nature of Business. Make any change in the principal
nature of any Obligor's business.
<PAGE>
7.8 Prepayments and Amendments.
(a) Except in connection with a refinancing permitted
by Section 7.1(c), except as may be required by the McDonalds Rent Deferral
Secured Notes or the McDonalds Secured Note with respect to the proceeds of the
McDonalds Collateral, except as may be required by Section 4.15 or Section 5.01
of the Subordinated Creditor Indenture (but subject to the terms and conditions
of the Intercreditor Agreement), and except for the prepayment of Indebtedness
of a Person that is the subject of a Permitted Acquisition contemporaneously
with the consummation of such Permitted Acquisition, prepay, redeem, retire,
defease, purchase, or otherwise acquire any Indebtedness owing to any third
Person, other than the Obligations in accordance with this Agreement, and
(b) Directly or indirectly, amend, modify, alter,
increase, or change any of the terms or conditions of any agreement, instrument,
document, indenture, or other writing evidencing or concerning Indebtedness
permitted under Sections 7.1(b) or (c).
7.9 Change of Control. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10 Consignments. Consign any Inventory or sell any Inventory
on bill and hold, sale or return, sale on approval, or other conditional terms
of sale.
7.11 Distributions. Make any distribution or declare or pay
any dividends (in cash or other property, other than Stock) on, or purchase,
acquire, redeem, or retire any of Borrower's Stock, of any class, whether now or
hereafter outstanding.
7.12 Accounting Methods. Modify or change its method of
accounting or enter into, modify, or terminate any agreement currently existing,
or at any time hereafter entered into with any third party accounting firm or
service bureau for the preparation or storage of any Obligor's accounting
records without said accounting firm or service bureau agreeing to provide
Foothill information regarding the Collateral or each Obligor's financial
condition. Each Obligor waives the right to assert a confidential relationship,
if any, it may have with any accounting firm or service bureau in connection
with any information requested by Foothill pursuant to or in accordance with
this Agreement, and agrees that Foothill may contact directly any such
accounting firm or service bureau in order to obtain such information.
7.13 Investments. Except for the consummation of Permitted
Acquisitions and except for Permitted Investments, directly or indirectly make,
acquire, or incur any liabilities (including contingent obligations) for or in
connection with (a) the acquisition of the securities (whether debt or equity)
of, or other interests in, a Person, (b) loans, advances, capital contributions,
or transfers of property to a Person, or (c) the acquisition of all or
substantially all of the properties or assets of a Person.
<PAGE>
7.14 Transactions with Affiliates. Directly or indirectly
enter into or permit to exist any material transaction with any Affiliate of any
Obligor except for transactions that are in the ordinary course of such
Obligor's business, upon fair and reasonable terms, that are fully disclosed to
Foothill, and that are no less favorable to such Obligor than would be obtained
in an arm's length transaction with a non-Affiliate.
7.15 Suspension. Suspend or go out of a substantial portion of
any Obligor's business.
7.16 Use of Proceeds. Use the proceeds of the Advances made
hereunder for any purpose other than (a) on the Closing Date, to pay
transactional costs and expenses incurred in connection with this Agreement, and
(b) thereafter, consistent with the terms and conditions hereof, for its lawful
and permitted corporate purposes.
7.17 Change in Location of Chief Executive Office; Inventory
and Equipment with Bailees. Relocate its chief executive office to a new
location without providing 30 days prior written notification thereof to
Foothill and so long as, at the time of such written notification, each Obligor
provides any financing statements or fixture filings necessary to perfect and
continue perfected Foothill's security interests. The Inventory and Equipment
shall not at any time now or hereafter be stored with a bailee, warehouseman, or
similar party without Foothill's prior written consent.
7.18 No Prohibited Transactions Under ERISA. Directly or
indirectly:
(a) engage, or permit any Subsidiary of Borrower to
engage, in any prohibited transaction which is reasonably likely to result in a
civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the
IRC for which a statutory or class exemption is not available or a private
exemption has not been previously obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan
any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412
of the IRC), whether or not waived;
(c) fail, or permit any Subsidiary of Borrower to
fail, to pay timely required contributions or annual installments due with
respect to any waived funding deficiency to any Benefit Plan;
(d) terminate, or permit any Subsidiary of Borrower
to terminate, any Benefit Plan where such event would result in any liability of
Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of
ERISA;
<PAGE>
(e) fail, or permit any Subsidiary of Borrower to
fail, to make any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of Borrower to
fail, to pay any required installment or any other payment required under
Section 412 of the IRC on or before the due date for such installment or other
payment;
(g) amend, or permit any Subsidiary of Borrower to
amend, a Plan resulting in an increase in current liability for the plan year
such that either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate
is required to provide security to such Plan under Section 401(a)(29) of the
IRC; or
(h) withdraw, or permit any Subsidiary of Borrower to
withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely
to result in any liability of any such entity under Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $1,000,000.
7.19 Financial Covenant. Fail to maintain:
Minimum Aggregate Store Contribution. Aggregate Store
Contribution of (1) as of the end of each of the first 12 months following the
Closing Date in an amount equal to or greater than $5,000,000 minus the lesser
of (i.) the Add-Back Credit or (ii.) $1,000,000, and (2) thereafter, equal to or
greater than $5,000,000, in each case measured as of the end of each calendar
month on a trailing 12 month basis.
7.20 Capital Expenditures. Make or incur, in the aggregate,
capital expenditures (a) during the period comprised of Borrower's fiscal year
1998 and Borrower's fiscal year 1999, in excess of the Permitted Capital
Expenditure Amount for such period plus the amount, if any, of the Permitted
Equity Proceeds Amount, (b) during Borrower's fiscal year 2000, in excess of the
Permitted Capital Expenditure Amount for such period plus the amount, if any, of
the Permitted Equity Proceeds Amount, (c) during Borrower's fiscal year 2001, in
excess of the Permitted Capital Expenditure Amount for such period plus the
amount, if any, of the Permitted Equity Proceeds Amount, and (d) during
Borrower's fiscal year 2002, in excess of the Permitted Capital Expenditure
Amount for such period plus the amount, if any, of the Permitted Equity Proceeds
Amount. For purposes of the foregoing, any capital expenditure made or incurred
in a given period shall be allocated first, to the applicable Permitted Capital
Expenditure Amount and, second, to the Permitted Equity Proceeds Amount.
<PAGE>
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an
event of default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when
declared due and payable, any portion of the Obligations (whether of principal,
interest (including any interest which, but for the provisions of the Bankruptcy
Code, would have accrued on such amounts), fees and charges due Foothill,
reimbursement or Foothill Expenses, or other amounts constituting the
Obligations);
8.2 (a) If any Obligor fails or neglects to perform, keep, or
observe any term, provision, condition, covenant, or agreement applicable to
such Obligor contained in Sections 6.2 (Collateral Reporting), 6.3 (Financial
Statements, Reports, Certificates), 6.4 (Tax Returns), 6.7 (Title to Equipment),
6.12 (Location of Equipment), 6.13 (Compliance with Laws), 6.14 (Employee
Benefits), or 6.15 (Leases) of this Agreement and such failure continues for a
period of 5 Business Days; (b) If any Obligor fails or neglects to perform,
keep, or observe any term, provision, condition, covenant, or agreement
contained in Sections 6.1 (Accounting System) or 6.8 (Maintenance of Equipment)
of this Agreement and such failure continues for a period of 15 Business Days;
or (c) If any Obligor fails or neglects to perform, keep, or observe any other
term, provision, condition, covenant, or agreement applicable to such Obligor
contained in this Agreement, or in any of the other Loan Documents (giving
effect to any grace periods, cure periods, or required notices, if any,
expressly provided for in such Loan Documents); in each case, other than any
such term, provision, condition, covenant, or agreement that is the subject of
another provision of this Section 8, in which event such other provision of this
Section 8 shall govern); provided that, during any period of time that any such
failure or neglect of any Obligor referred to in this paragraph exists, even if
such failure or neglect is not yet an Event of Default by virtue of the
existence of a grace or cure period or the pre-condition of the giving of a
notice, Foothill shall be relieved of its obligation to extend credit hereunder;
8.3 If there is a Material Adverse Change;
8.4 If any material portion of the properties or assets of the
Obligors taken as a whole is attached, seized, subjected to a writ or distress
warrant, or is levied upon, or comes into the possession of any third Person;
8.5 If an Insolvency Proceeding is commenced by any Obligor;
8.6 If an Insolvency Proceeding is commenced against any
Obligor and any of the following events occur: (a) any Obligor consents to the
institution of the Insolvency Proceeding against it; (b) the petition commencing
the Insolvency Proceeding is not timely controverted; (c) the petition
commencing the Insolvency Proceeding is not dismissed within 60
<PAGE>
calendar days of the date of the filing thereof; provided, however, that, during
the pendency of such period, Foothill shall be relieved of its obligation to
extend credit hereunder; (d) an interim trustee is appointed to take possession
of all or a substantial portion of the properties or assets of, or to operate
all or any substantial portion of the business of, any Obligor; or (e) an order
for relief shall have been issued or entered therein;
8.7 If one or more Obligors is enjoined, restrained, or in any
way prevented by court order from continuing to conduct all or any material part
of the business affairs of the Obligors, taken as a whole;
8.8 (a) If a notice of Lien, levy, or assessment is filed of
record with respect to any of the Obligors' properties or assets by the United
States, or if any taxes or debts owing at any time hereafter to the United
States becomes a Lien, whether choate or otherwise, upon any of the Obligors'
properties or assets;
(b) If one or more notice of Lien, levy, or
assessment with respect to taxes or debts owing is filed of record with respect
to any of the Obligors' properties or assets by any state, county, municipal, or
other non-federal governmental agency, or if any taxes or debts owing at any
time hereafter to any one or more of such entities becomes a lien, whether
choate or otherwise, upon any of the Obligors' properties or assets and the
Lien, levy, or assessment is not (i) released, discharged, or bonded against
before the earlier of 30 days of the date it first arises or 5 days of the date
when such property or asset is subject to being forfeited, or (ii) the subject
of a Permitted Protest; or
8.9 If a judgment or other claim becomes a Lien or encumbrance
upon any material portion of the properties or assets of the Obligors taken as a
whole;
8.10 If there is a default in any agreement, material to the
Obligors taken as a whole, to which any Obligor is a party with one or more
third Persons and such default (a) occurs at the final maturity of the
obligations thereunder, or (b) results in a right by such third Person(s),
irrespective of whether exercised, to accelerate the maturity of such Obligor's
obligations thereunder;
8.11 If any Obligor makes any payment on account of
Indebtedness that has been contractually subordinated in right of payment to the
payment of the Obligations, except to the extent such payment is permitted by
the terms of this Agreement or the subordination provisions applicable to such
Indebtedness;
8.12 If any material misstatement or misrepresentation exists
now or hereafter in any warranty, representation, statement, or report made to
Foothill by any Obligor or any officer, employee, agent, or director of any
Obligor, or if any such warranty or representation is withdrawn; or
<PAGE>
8.13 If the obligation of any guarantor under its guaranty or
other third Person under any Loan Document is limited or terminated by operation
of law or by the guarantor or other third Person thereunder, or any such
guarantor or other third Person becomes the subject of an Insolvency Proceeding.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable;
(b) Cease advancing money or extending credit to or
for the benefit of Borrower under this Agreement, under any of the Loan
Documents, or under any other agreement between Borrower and Foothill;
(c) Terminate this Agreement and any of the other
Loan Documents as to any future liability or obligation of Foothill, but without
affecting Foothill's rights and security interests in the Collateral and without
affecting the Obligations;
(d) Settle or adjust disputes and claims directly
with Account Debtors for amounts and upon terms which Foothill considers
advisable, and in such cases, Foothill will credit Borrower's Loan Account with
only the net amounts received by Foothill in payment of such disputed Accounts
after deducting all Foothill Expenses incurred or expended in connection
therewith;
(e) Cause Borrower to hold all returned Inventory in
trust for Foothill, segregate all returned Inventory from all other property of
Borrower or in Borrower's possession and conspicuously label said returned
Inventory as the property of Foothill;
(f) Without notice to or demand upon any Obligor or
any guarantor, make such payments and do such acts as Foothill considers
necessary or reasonable to protect its security interests in the Collateral.
Borrower agrees to assemble the Collateral if Foothill so requires, and to make
the Collateral available to Foothill as Foothill may designate. Borrower
authorizes Foothill to enter the premises where the Collateral is located, to
take and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest, or compromise any encumbrance, charge, or Lien that in
Foothill's determination appears to conflict with its security interests and to
pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned or leased premises, Borrower hereby grants Foothill a license
to enter into
<PAGE>
possession of such premises and to occupy the same, without charge, for up to
120 days in order to exercise any of Foothill's rights or remedies provided
herein, at law, in equity, or otherwise;
(g) Without notice to Borrower (such notice being
expressly waived), and without constituting a retention of any collateral in
satisfaction of an obligation (within the meaning of Section 9-505 of the Code),
set off and apply to the Obligations any and all (i) balances and deposits of
Borrower held by Foothill (including any amounts received in the Concentration
Account), or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Foothill;
(h) Hold, as cash collateral, any and all balances
and deposits of Borrower held by Foothill, and any amounts received in the
Concentration Accounts, to secure the full and final repayment of all of the
Obligations;
(i) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Foothill is hereby granted a license or other right
to use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and Borrower's rights under all licenses and all franchise agreements shall
inure to Foothill's benefit;
(j) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as
Foothill determines is commercially reasonable. It is not necessary that the
Collateral be present at any such sale;
(k) Foothill shall give notice of the disposition of
the Collateral as follows:
(1) Foothill shall give Borrower and each
holder of a security interest in the Collateral who has filed with Foothill a
written request for notice, a notice in writing of the time and place of public
sale, or, if the sale is a private sale or some other disposition other than a
public sale is to be made of the Collateral, then the time on or after which the
private sale or other disposition is to be made;
(2) The notice shall be personally delivered
or mailed, postage prepaid, to Borrower as provided in Section 12, at least 5
days before the date fixed for the sale, or at least 5 days before the date on
or after which the private sale or other disposition is to be made; no notice
needs to be given prior to the disposition of any portion of the Collateral that
is perishable or threatens to decline speedily in value or that is of a type
customarily sold on a recognized market. Notice to Persons other than Borrower
claiming an interest in the Collateral shall be sent to such addresses as they
have furnished to Foothill;
<PAGE>
(3) If the sale is to be a public sale,
Foothill also shall give notice of the time and place by publishing a notice one
time at least 5 days before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held;
(l) Foothill may credit bid and purchase at any
public sale; and
(m) Any deficiency that exists after disposition of
the Collateral as provided above will be paid immediately by Borrower. Any
excess will be returned, without interest and subject to the rights of third
Persons, by Foothill to Borrower.
9.2 Remedies Cumulative. Foothill's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Foothill shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by
Foothill of one right or remedy shall be deemed an election, and no waiver by
Foothill of any Event of Default shall be deemed a continuing waiver. No delay
by Foothill shall constitute a waiver, election, or acquiescence by it.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes,
assessments, insurance premiums, or, in the case of leased properties or assets,
rents or other amounts payable under such leases) due to third Persons, or fails
to make any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement (including any right to Permitted
Protest), then, to the extent that Foothill determines that such failure by
Borrower could result in a Material Adverse Change, in its discretion and
without prior notice to Borrower, Foothill may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves in
Borrower's Loan Account as Foothill deems necessary to protect Foothill from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type described in Section 6.10, and take any action with respect to such
policies as Foothill deems prudent. Any such amounts paid by Foothill shall
constitute Foothill Expenses. Any such payments made by Foothill shall not
constitute an agreement by Foothill to make similar payments in the future or a
waiver by Foothill of any Event of Default under this Agreement. Foothill need
not inquire as to, or contest the validity of, any such expense, tax, or Lien
and the receipt of the usual official notice for the payment thereof shall be
conclusive evidence that the same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 Demand; Protest; etc. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, nonpayment at maturity, release, compromise, settlement, extension,
or renewal of accounts, documents,
<PAGE>
instruments, chattel paper, and guarantees at any time held by Foothill on which
Borrower may in any way be liable.
11.2 Foothill's Liability for Collateral. So long as Foothill
complies with its obligations, if any, under Section 9-207 of the Code, Foothill
shall not in any way or manner be liable or responsible for: (a) the safekeeping
of the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee, forwarding agency,
or other Person. All risk of loss, damage, or destruction of the Collateral
shall be borne by Borrower.
11.3 Indemnification. Borrower shall pay, indemnify, defend,
and hold Foothill, and any participants, and each of their respective officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all reasonable attorneys fees and disbursements
and other costs and expenses actually incurred in connection therewith (as and
when they are incurred and irrespective of whether suit is brought), at any time
asserted against, imposed upon, or incurred by any of them in connection with or
as a result of or related to the execution, delivery, enforcement, performance,
and administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any Indemnified Person is a party thereto), or any act, omission, event
or circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person under this Section 11.3 with respect to any Indemnified
Liability that a court of competent jurisdiction finally determines to have
resulted from gross negligence or willful misconduct of such Indemnified Person.
This provision shall survive the termination of this Agreement and the repayment
of the Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other Loan Document shall
be in writing and (except for financial statements and other informational
documents which may be sent by first-class mail, postage prepaid) shall be
personally delivered or sent by registered or certified mail (postage prepaid,
return receipt requested), overnight courier, or telefacsimile to Borrower or to
Foothill, as the case may be, at its address set forth below:
<PAGE>
If to Borrower: DISCOVERY ZONE, INC.
565 Taxter Road, Fifth Floor
Elmsford, New York 10523
Attn: Robert G. Rooney
Fax No. 914.345.4516
with copies to: SHERMAN & STERLING
599 Lexington Avenue
New York, New York 10022
Attn: Steven T. Giove, Esq.
Fax No. 212.848.7179
If to Foothill: FOOTHILL CAPITAL CORPORATION
1111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310.478.9788
with copies to: BROBECK, PHLEGER & HARRISON LLP
550 South Hope Street
Los Angeles, California 90071
Attn: John Francis Hilson, Esq.
Fax No. 213.745.3345
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
the other. All notices or demands set in accordance with this Section 12, other
than notices by Foothill in connection with Sections 9-504 or 9-505 of the Code,
shall be deemed received on the date of actual receipt or, in the case of
registered mail only, three days after the deposit thereof in the mail. Borrower
acknowledges and agrees that notices sent by Foothill in connection with
Sections 9-504 or 9-505 of the Code shall be deemed sent when deposited in the
mail or personally delivered, or, where permitted by law, transmitted by
telefacsimile or other similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
(UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN AN ANOTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS
OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER
OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE
<PAGE>
DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS
ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER
COURT IN WHICH FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND THAT
HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF BORROWER
AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT
EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO
VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION
13. BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL
OR ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED
THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers
delivered to Foothill may be destroyed or otherwise disposed of by Foothill four
months after they are delivered to or received by Foothill, unless Borrower
requests, in writing, the return of said documents, schedules, or other papers
and makes arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 Effectiveness. This Agreement shall be binding and deemed
effective when executed by Borrower and Foothill.
15.2 Successors and Assigns. This Agreement shall bind and
inure to the benefit of the respective successors and assigns of each of the
parties; provided, however, that Borrower may not assign this agreement or any
rights or duties hereunder without Foothill's prior written consent and any
prohibited assignment shall be absolutely void. No consent to an assignment by
Foothill shall release Borrower from its Obligations. Foothill reserves the
right to sell, assign, transfer, negotiate, or grant participations in all or
any part of, or any interest in
<PAGE>
Foothill's rights and benefits hereunder and no consent of Borrower shall be
required in connection therewith so long as (a) in each case (except in
connection with the sale of all or any substantial portion of Foothill's loan
portfolio and except if an Event of Default has occurred and is continuing),
after giving effect thereto, Foothill or its Affiliates shall retain commitments
(and the related votes) of not less than 51% of the Maximum Revolving Amount,
(b) Foothill shall not assign or participate all or any part of its rights and
benefits hereunder to any Person know to Foothill to be a direct competitor of
Borrower, and (c) in connection with any such assignment or participation,
Foothill may disclose all documents and information which Foothill now or
hereafter may have relating to Borrower or Borrower's business so long as the
potential assignee or participant agrees to maintain the confidentiality thereof
in accordance with the provisions of Section 15.10 as if it were a signatory
hereto. To the extent that Foothill assigns its rights and obligations hereunder
to a third Person, Foothill thereafter shall be released from such assigned
obligations to Borrower and such assignment shall effect a novation between
Borrower and such third Person.
15.3 Section Headings. Headings and numbers have been set
forth herein for convenience only. Unless the contrary is compelled by the
context, everything contained in each section applies equally to this entire
Agreement.
15.4 Interpretation. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Foothill
or Borrower, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by all parties and shall be construed
and interpreted according to the ordinary meaning of the words used so as to
fairly accomplish the purposes and intentions of all parties hereto.
15.5 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
15.6 Amendments in Writing. This Agreement can only be amended
by a writing signed by both Foothill and Borrower.
15.7 Counterparts; Telefacsimile Execution. This Agreement may
be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not effect the validity, enforceability, and binding of this
Agreement.
<PAGE>
15.8 Revival and Reinstatement of Obligations. If the
incurrence or payment of the Obligations by Borrower or any guarantor of the
Obligations or the transfer by either or both of such parties to Foothill of any
property of either or both of such parties should for any reason subsequently be
declared to be void or voidable under any state or federal law relating to
creditors' rights, including provisions of the Bankruptcy Code relating to
fraudulent conveyances, preferences, and other voidable or recoverable payments
of money or transfers or property (collectively, a "Voidable Transfer"), and if
Foothill is required to repay or restore, in whole or in part, any such Voidable
Transfer, or elects to do so upon the reasonable advice of its counsel, then, as
to any such Voidable Transfer, or the amount thereof that Foothill is required
or elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys' fees of Foothill related thereto, the liability of Borrower or such
guarantor automatically shall be revived, reinstated, and restored and shall
exist as through such Voidable Transfer had never been made.
15.9 Integration. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
15.10 Confidentiality. Foothill agrees that material,
nonpublic information regarding Borrower and its Subsidiaries, their operations,
assets, and existing and contemplated business plans shall be treated by
Foothill in a confidential manner, and shall not be disclosed by it to Persons
who are not parties to this Agreement, except: (a) to counsel for and other
advisors, accountants, and auditors to Foothill, (b) as may be required by
statute, decision, or judicial or administrative order, rule, or regulation, (c)
as may be agreed to in advance by Borrower, (d) as to any such information that
is or generally becomes available to the public (other than as a result of
prohibited disclosure by Foothill), and (e) in connection with any assignment,
prospective assignment, sale, prospective sale, participation or prospective
participation, or pledge or prospective pledge of Foothill's interests under
this Agreement, provided, that any such counsel, advisors, accountants, auditors
and any such assignee, prospective assignee, purchaser, prospective purchaser,
participant, prospective participant, pledgee, or prospective pledgee shall have
agreed in writing to take its interest hereunder subject to the terms hereof.
[Signature page to follow.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first written above.
DISCOVERY ZONE, INC.,
a Delaware corporation
By /s/ Robert Rooney
----------------------------------
Title: Senior Vice President-
Chief Financial Officer
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Bryan Duffy
----------------------------------
Title: AVP
<PAGE>
GENERAL CONTINUING GUARANTY
THIS GENERAL CONTINUING GUARANTY ("Guaranty"), dated as of
March 31, 1998, is executed and delivered by each of the undersigned
Subsidiaries of Discovery Zone, Inc. (each a "Guarantor" and collectively
"Guarantors"), in favor of Foothill Capital Corporation, a California
corporation ("Guarantied Party"), in light of the following:
WHEREAS, Debtor and Guarantied Party are, contemporaneously
herewith, entering into the Loan Agreement; and
WHEREAS, in order to induce Guarantied Party to extend
financial accommodations to Debtor pursuant to the Loan Agreement, and in
consideration thereof, and in consideration of any loans or other financial
accommodations heretofore or hereafter extended by Guarantied Party to Debtor,
whether pursuant to the Loan Agreement or otherwise, each Guarantor has agreed,
jointly and severally, to guaranty the Guarantied Obligations.
NOW, THEREFORE, in consideration of the foregoing, each
Guarantor hereby agrees, in favor of Guarantied Party, as follows:
1. Definitions and Construction.
(a) Definitions. Capitalized terms used herein and
not otherwise defined herein shall have the meanings ascribed to them in the
Loan Agreement. The following terms, as used in this Guaranty, shall have the
following meanings:
"Debtor" shall mean Discovery Zone, Inc., a
Delaware corporation.
"Guarantied Obligations" shall mean: (a) the
due and punctual payment of the principal of, and interest (including, any and
all interest which, but for the application of the provisions of the Bankruptcy
Code, would have accrued on such amounts) on, and premium, if any, on the
Indebtedness owed by Debtor to Guarantied Party pursuant to the terms of the
Loan Documents; and (b) the due and punctual payment of all other present or
future Indebtedness owing by Debtor to Guarantied Party.
"Guarantied Party" shall have the meaning
set forth in the preamble to this Guaranty.
"Guarantor" shall have the meaning set forth
in the preamble to this Guaranty.
<PAGE>
"Guarantors" shall have the meaning set
forth in the preamble to this Guaranty.
"Guaranty" shall have the meaning set forth
in the preamble to this Guaranty.
"Indebtedness" shall mean any and all
obligations, indebtedness, or liabilities of any kind or character owed by
Debtor to Guarantied Party and arising directly or indirectly out of or in
connection with the Loan Agreement or the other Loan Documents, including all
such obligations, indebtedness, or liabilities, whether for principal, interest
(including any and all interest which, but for the application of the provisions
of the Bankruptcy Code, would have accrued on such amounts), premium,
reimbursement obligations, fees, costs, expenses (including attorneys fees), or
indemnity obligations, whether heretofore, now, or hereafter made, incurred, or
created, whether voluntarily or involuntarily made, incurred, or created,
whether secured or unsecured (and if secured, regardless of the nature or extent
of the security), whether absolute or contingent, liquidated or unliquidated, or
determined or indeterminate, whether Debtor is liable individually or jointly
with others, and whether recovery is or hereafter becomes barred by any statute
of limitations or otherwise becomes unenforceable for any reason whatsoever,
including any act or failure to act by Guarantied Party.
"Loan Agreement" shall mean that certain
Loan and Security Agreement, dated as of March 31, 1998, entered into between
Debtor and Guarantied Party.
(b) Construction. Unless the context of this Guaranty
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the part includes the whole, the
terms "include" and "including" are not limiting, and the term "or" has the
inclusive meaning represented by the phrase "and/or." The words "hereof,"
"herein," "hereby," "hereunder," and other similar terms refer to this Guaranty
as a whole and not to any particular provision of this Guaranty. Any reference
in this Guaranty to any of the following documents includes any and all
alterations, amendments, restatements, extensions, modifications, renewals, or
supplements thereto or thereof, as applicable: the Loan Agreement; this
Guaranty; and the other Loan Documents. Neither this Guaranty nor any
uncertainty or ambiguity herein shall be construed or resolved against
Guarantied Party or the Guarantors, whether under any rule of construction or
otherwise. On the contrary, this Guaranty has been reviewed by each Guarantor,
Guarantied Party, and their respective counsel, and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of Guarantied Party and the Guarantors.
2. Guarantied Obligations. Each Guarantor hereby irrevocably
and unconditionally guaranties to Guarantied Party, as and for its own debt,
until final and indefeasible payment thereof has been made, (a) the payment of
the Guarantied Obligations, in each case when and as the same shall become due
and payable, whether at maturity, pursuant to a mandatory prepayment
requirement, by acceleration, or otherwise; it being the intent of each
Guarantor that
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<PAGE>
the guaranty set forth herein shall be a guaranty of payment and not a guaranty
of collection; and (b) the punctual and faithful performance, keeping,
observance, and fulfillment by Debtor of all of the agreements, conditions,
covenants, and obligations of Debtor contained in the Loan Agreement, and under
each of the other Loan Documents.
3. Continuing Guaranty. This Guaranty includes Guarantied
Obligations arising under successive transactions continuing, compromising,
extending, increasing, modifying, releasing, or renewing the Guarantied
Obligations, changing the interest rate, payment terms, or other terms and
conditions thereof, or creating new or additional Guarantied Obligations after
prior Guarantied Obligations have been satisfied in whole or in part. To the
maximum extent permitted by law, each Guarantor hereby waives any right to
revoke this Guaranty as to future Indebtedness. If such a revocation is
effective notwithstanding the foregoing waiver, each Guarantor acknowledges and
agrees that (a) no such revocation shall be effective until written notice
thereof has been received by Guarantied Party, (b) no such revocation shall
apply to any Guarantied Obligations in existence on such date (including any
subsequent continuation, extension, or renewal thereof, or change in the
interest rate, payment terms, or other terms and conditions thereof), (c) no
such revocation shall apply to any Guarantied Obligations made or created after
such date to the extent made or created pursuant to a legally binding commitment
of Guarantied Party in existence on the date of such revocation, (d) no payment
by any Guarantor, Debtor, or from any other source, prior to the date of such
revocation shall reduce the maximum obligation of each Guarantor hereunder, and
(e) any payment by Debtor or from any source other than such Guarantor
subsequent to the date of such revocation shall first be applied to that portion
of the Guarantied Obligations as to which the revocation is effective and which
are not, therefore, guarantied hereunder, and to the extent so applied shall not
reduce the maximum obligation of such Guarantor hereunder.
4. Performance Under this Guaranty. In the event that Debtor
fails to make any payment of any Guarantied Obligations, on or before the due
date thereof, or if Debtor shall fail to perform, keep, observe, or fulfill any
other obligation referred to in clause (b) of Section 2 hereof in the manner
provided in the Loan Agreement or the other Loan Documents, as applicable, each
Guarantor immediately shall cause such payment to be made or each of such
obligations to be performed, kept, observed, or fulfilled.
5. Primary Obligations. This Guaranty is a primary and
original obligation of each Guarantor, is not merely the creation of a surety
relationship, and is an absolute, unconditional, and continuing guaranty of
payment and performance which shall remain in full force and effect without
respect to future changes in conditions. Each Guarantor agrees that it is
directly, jointly and severally with any other guarantor of the Guarantied
Obligations, liable to Guarantied Party, that the obligations of each Guarantor
hereunder are independent of the obligations of Debtor or any other guarantor,
and that a separate action may be brought against each Guarantor, whether such
action is brought against Debtor or any other guarantor or whether Debtor or any
other guarantor is joined in such action. Each Guarantor agrees that its
liability hereunder shall be immediate and shall not be contingent upon the
exercise or enforcement by
3
<PAGE>
Guarantied Party of whatever remedies it may have against Debtor or any other
guarantor, or the enforcement of any lien or realization upon any security
Guarantied Party may at any time possess. Each Guarantor agrees that any release
which may be given by Guarantied Party to Debtor or any other guarantor shall
not release such Guarantor. Each Guarantor consents and agrees that Guarantied
Party shall be under no obligation to marshal any property or assets of Debtor
or any other guarantor in favor of such Guarantor, or against or in payment of
any or all of the Guarantied Obligations.
6. Waivers.
(a) To the fullest extent permitted by applicable
law, each Guarantor hereby waives: (i) notice of acceptance hereof; (ii) notice
of any loans or other financial accommodations made or extended under the Loan
Agreement, or the creation or existence of any Guarantied Obligations; (iii)
notice of the amount of the Guarantied Obligations, subject, however, to such
Guarantor's right to make inquiry of Guarantied Party to ascertain the amount of
the Guarantied Obligations at any reasonable time; (iv) notice of any adverse
change in the financial condition of Debtor or of any other fact that might
increase such Guarantor's risk hereunder; (v) notice of presentment for payment,
demand, protest, and notice thereof as to any instrument among the Loan
Documents; (vi) notice of any unmatured Event of Default or Event of Default
under the Loan Agreement; and (vii) all other notices (except if such notice is
specifically required to be given to such Guarantor under this Guaranty or any
other Loan Documents to which such Guarantor is a party) and demands to which
such Guarantor might otherwise be entitled.
(b) To the fullest extent permitted by applicable
law, each Guarantor waives the right by statute or otherwise to require
Guarantied Party to institute suit against Debtor or to exhaust any rights and
remedies which Guarantied Party has or may have against Debtor. In this regard,
each Guarantor agrees that it is bound to the payment of each and all Guarantied
Obligations, whether now existing or hereafter arising, as fully as if such
Guarantied Obligations were directly owing to Guarantied Party by such
Guarantor. Each Guarantor further waives any defense arising by reason of any
disability or other defense (other than the defense that the Guarantied
Obligations shall have been fully and finally performed and indefeasibly paid)
of Debtor or by reason of the cessation from any cause whatsoever of the
liability of Debtor in respect thereof.
(c) To the fullest extent permitted by applicable
law, each Guarantor hereby waives: (i) any rights to assert against Guarantied
Party any defense (legal or equitable), set-off, counterclaim, or claim which
such Guarantor may now or at any time hereafter have against Debtor or any other
party liable to Guarantied Party; (ii) any defense, set-off, counterclaim, or
claim, of any kind or nature, arising directly or indirectly from the present or
future lack of perfection, sufficiency, validity, or enforceability of the
Guarantied Obligations or any security therefor; (iii) any defense arising by
reason of any claim or defense based upon an election of remedies by Guarantied
Party including any defense based upon an election of remedies by Guarantied
Party under the provisions of ss.ss. 580d and 726 of the California Code of
Civil
4
<PAGE>
Procedure, or any similar law of California or any other jurisdiction; (iv) the
benefit of any statute of limitations affecting such Guarantor's liability
hereunder or the enforcement thereof, and any act which shall defer or delay the
operation of any statute of limitations applicable to the Guarantied Obligations
shall similarly operate to defer or delay the operation of such statute of
limitations applicable to such Guarantor's liability hereunder.
(d) Until such time as all of the Guarantied
Obligations have been fully, finally, and indefeasibly paid in full in cash: (i)
each Guarantor hereby waives and postpones any right of subrogation such
Guarantor has or may have as against Debtor with respect to the Guarantied
Obligations; (ii) in addition, each Guarantor hereby waives and postpones any
right to proceed against Debtor or any other Person, now or hereafter, for
contribution, indemnity, reimbursement, or any other suretyship rights and
claims (irrespective of whether direct or indirect, liquidated or contingent),
with respect to the Guarantied Obligations; and (iii) in addition, each
Guarantor also hereby waives and postpones any right to proceed or to seek
recourse against or with respect to any property or asset of Debtor.
(e) If any of the Guarantied Obligations at any time
are secured by a mortgage or deed of trust upon real property, Guarantied Party
may elect, in its sole discretion, upon a default with respect to the Guarantied
Obligations, to foreclose such mortgage or deed of trust judicially or
nonjudicially in any manner permitted by law, before or after enforcing this
Guaranty, without diminishing or affecting the liability of each Guarantor
hereunder. Each Guarantor understands that (a) by virtue of the operation of
California's antideficiency law applicable to nonjudicial foreclosures, an
election by Guarantied Party nonjudicially to foreclose such a mortgage or deed
of trust probably would have the effect of impairing or destroying rights of
subrogation, reimbursement, contribution, or indemnity of such Guarantor against
Debtor or other guarantors or sureties, and (b) absent the waiver given by each
Guarantor herein, such an election would estop Guarantied Party from enforcing
this Guaranty against each Guarantor. Understanding the foregoing, and
understanding that each Guarantor is hereby relinquishing a defense to the
enforceability of this Guaranty, each Guarantor hereby waives any right to
assert against Guarantied Party any defense to the enforcement of this Guaranty,
whether denominated "estoppel" or otherwise, based on or arising from an
election by Guarantied Party nonjudicially to foreclose any such mortgage or
deed of trust. Each Guarantor understands that the effect of the foregoing
waiver may be that such Guarantor may have liability hereunder for amounts with
respect to which such Guarantor may be left without rights of subrogation,
reimbursement, contribution, or indemnity against Debtor or other guarantors or
sureties. Each Guarantor also agrees that the "fair market value" provisions of
Section 580a of the California Code of Civil Procedure shall have no
applicability with respect to the determination of such Guarantor's liability
under this Guaranty.
(f) WITHOUT LIMITING THE GENERALITY OF ANY OTHER
WAIVER OR OTHER PROVISION SET FORTH IN THIS GUARANTY, EACH GUARANTOR HEREBY
WAIVES, TO THE MAXIMUM EXTENT SUCH WAIVER IS PERMITTED BY LAW, ANY AND ALL
BENEFITS OR DEFENSES ARISING DIRECTLY
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OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE ss.ss.
2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, 2847,
2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE ss.ss. 580a, 580b,
580c, 580d, AND 726, AND CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE.
(g) WITHOUT LIMITING THE GENERALITY OF ANY OTHER
WAIVER OR OTHER PROVISION SET FORTH IN THIS GUARANTY, EACH GUARANTOR WAIVES ALL
RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF REMEDIES BY THE GUARANTIED
PARTY, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH AS A NONJUDICIAL FORECLOSURE
WITH RESPECT TO SECURITY FOR A GUARANTIED OBLIGATION, HAS DESTROYED SUCH
GUARANTOR'S RIGHTS OF SUBROGATION AND REIMBURSEMENT AGAINST THE DEBTOR BY THE
OPERATION OF SECTION 580d OF THE CALIFORNIA CODE OF CIVIL PROCEDURE OR
OTHERWISE.
7. Releases. Each Guarantor consents and agrees that, without
notice to or by such Guarantor and without affecting or impairing the
obligations of such Guarantor hereunder, Guarantied Party may, by action or
inaction, compromise or settle, extend the period of duration or the time for
the payment, or discharge the performance of, or may refuse to, or otherwise not
enforce, or may, by action or inaction, release all or any one or more parties
to, any one or more of the terms and provisions of the Loan Agreement or any of
the other Loan Documents or may grant other indulgences to Debtor in respect
thereof, or may amend or modify in any manner and at any time (or from time to
time) any one or more of the Loan Agreement or any of the other Loan Documents,
or may, by action or inaction, release or substitute any other guarantor, if
any, of the Guarantied Obligations, or may enforce, exchange, release, or waive,
by action or inaction, any security for the Guarantied Obligations or any other
guaranty of the Guarantied Obligations, or any portion thereof.
8. No Election. Guarantied Party shall have the right to seek
recourse against each Guarantor to the fullest extent provided for herein and no
election by Guarantied Party to proceed in one form of action or proceeding, or
against any party, or on any obligation, shall constitute a waiver of Guarantied
Party's right to proceed in any other form of action or proceeding or against
other parties unless Guarantied Party has expressly waived such right in
writing. Specifically, but without limiting the generality of the foregoing, no
action or proceeding by Guarantied Party under any document or instrument
evidencing the Guarantied Obligations shall serve to diminish the liability of
each Guarantor under this Guaranty except to the extent that Guarantied Party
finally and unconditionally shall have realized indefeasible payment by such
action or proceeding.
9. Indefeasible Payment. The Guarantied Obligations shall not
be considered indefeasibly paid for purposes of this Guaranty unless and until
all payments to Guarantied Party are no longer subject to any right on the part
of any person whomsoever, including Debtor, Debtor as a debtor in possession, or
any trustee (whether appointed under the Bankruptcy Code or
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otherwise) of Debtor's assets to invalidate or set aside such payments or to
seek to recoup the amount of such payments or any portion thereof, or to declare
same to be fraudulent or preferential. In the event that, for any reason, all or
any portion of such payments to Guarantied Party is set aside or restored,
whether voluntarily or involuntarily, after the making thereof, the obligation
or part thereof intended to be satisfied thereby shall be revived and continued
in full force and effect as if said payment or payments had not been made and
each Guarantor shall be liable for the full amount Guarantied Party is required
to repay plus any and all costs and expenses (including attorneys fees) paid by
Guarantied Party in connection therewith.
10. Financial Condition of Debtor. Each Guarantor represents
and warrants to Guarantied Party that it is currently informed of the financial
condition of Debtor and of all other circumstances which a diligent inquiry
would reveal and which bear upon the risk of nonpayment of the Guarantied
Obligations. Each Guarantor further represents and warrants to Guarantied Party
that it has read and understands the terms and conditions of the Loan Agreement
and the other Loan Documents. Each Guarantor hereby covenants that it will
continue to keep itself informed of Debtor's financial condition, the financial
condition of other guarantors, if any, and of all other circumstances which bear
upon the risk of nonpayment or nonperformance of the Guarantied Obligations.
11. Subordination. Each Guarantor hereby agrees that any and
all present and future indebtedness of Debtor owing to such Guarantor is
postponed in favor of and subordinated to payment, in full, in cash, of the
Guarantied Obligations. In this regard, no payment of any kind whatsoever shall
be made with respect to such indebtedness until the Guarantied Obligations have
been indefeasibly paid in full.
12. Payments; Application. All payments to be made hereunder
by each Guarantor shall be made in lawful money of the United States of America
at the time of payment, shall be made in immediately available funds, and shall
be made without deduction (whether for taxes or otherwise) or offset. All
payments made by each Guarantor hereunder shall be applied as follows: first, to
all reasonable costs and expenses (including attorneys fees) incurred by
Guarantied Party in enforcing this Guaranty or in collecting the Guarantied
Obligations; second, to all accrued and unpaid interest, premium, if any, and
fees owing to Guarantied Party constituting Guarantied Obligations; and third,
to the balance of the Guarantied Obligations.
13. Attorneys Fees and Costs. Each Guarantor agrees to pay, on
demand, all reasonable attorneys fees and all other reasonable costs and
expenses which may be incurred by Guarantied Party in the enforcement of this
Guaranty or in any way arising out of, or consequential to the protection,
assertion, or enforcement of the Guarantied Obligations (or any security
therefor), irrespective of whether suit is brought.
14. Notices. Unless otherwise specifically provided in this
Guaranty, any notice or other communication relating to this Guaranty or any
other agreement entered into in connection therewith shall be in writing and
shall be personally delivered or sent by registered or
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certified mail, postage prepaid, return receipt requested, or by prepaid telex,
TWX, telefacsimile, or telegram (with messenger delivery specified) to each
Guarantor or to Guarantied Party, as the case may be, at its addresses set forth
below:
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If to Guarantors: Discovery Zone (Canada) Limited
c/o Discovery Zone, Inc.
565 Taxter Road, Fifth Floor
Elmsford, New York 10523
Attn: Robert G. Rooney
Fax No. 914.345.4516
Discovery Zone (Puerto Rico), Inc.
c/o Discovery Zone, Inc.
565 Taxter Road, Fifth Floor
Elmsford, New York 10523
Attn: Robert G. Rooney
Fax No. 914.345.4516
Discovery Zone Licensing, Inc.
c/o Discovery Zone, Inc.
565 Taxter Road, Fifth Floor
Elmsford, New York 10523
Attn: Robert G. Rooney
Fax No. 914.345.4516
with a copy to: SHERMAN & STERLING
599 Lexington Avenue
New York, New York 10022
Attn: Stephen T. Giove, Esq.
Fax No. 212.848.7179
If to Guarantied Party: Foothill Capital Corporation
11111 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Telecopy No.: (310) 575-3435
with a copy to: Brobeck, Phleger & Harrison
550 South Hope Street
Los Angeles, California 90071
Attn: John Francis Hilson, Esq.
Telecopy No.: (213) 745-3345
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
the other. All notices or demands sent in accordance with this Section 14, other
than notices by Guarantied Party in
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connection with Sections 9-504 or 9-505 of the Code, shall be deemed received on
the earlier of the date of actual receipt or three (3) calendar days after the
deposit thereof in the mail. Each Guarantor acknowledges and agrees that notices
sent by Guarantied Party in connection with Sections 9-504 or 9-505 of the Code
shall be deemed sent when deposited in the mail or transmitted by telefacsimile
or other similar method set forth above.
15. Cumulative Remedies. No remedy under this Guaranty, under
the Loan Agreement, or any other Loan Document is intended to be exclusive of
any other remedy, but each and every remedy shall be cumulative and in addition
to any and every other remedy given under this Guaranty, under the Loan
Agreement, or any other Loan Document, and those provided by law. No delay or
omission by Guarantied Party to exercise any right under this Guaranty shall
impair any such right nor be construed to be a waiver thereof. No failure on the
part of Guarantied Party to exercise, and no delay in exercising, any right
under this Guaranty shall operate as a waiver thereof; nor shall any single or
partial exercise of any right under this Guaranty preclude any other or further
exercise thereof or the exercise of any other right.
16. Severability of Provisions. Any provision of this Guaranty
which is prohibited or unenforceable under applicable law shall be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
17. Entire Agreement; Amendments. This Guaranty constitutes
the entire agreement between the Guarantors and Guarantied Party pertaining to
the subject matter contained herein. This Guaranty may not be altered, amended,
or modified, nor may any provision hereof be waived or noncompliance therewith
consented to, except by means of a writing executed by both the Guarantors and
Guarantied Party. Any such alteration, amendment, modification, waiver, or
consent shall be effective only to the extent specified therein and for the
specific purpose for which given. No course of dealing and no delay or waiver of
any right or default under this Guaranty shall be deemed a waiver of any other,
similar or dissimilar, right or default or otherwise prejudice the rights and
remedies hereunder.
18. Successors and Assigns. This Guaranty shall be binding
upon each Guarantor and its successors and assigns and shall inure to the
benefit of the successors and assigns of Guarantied Party; provided, however,
such Guarantor shall not assign this Guaranty or delegate any of its duties
hereunder without Guarantied Party's prior written consent and any unconsented
to assignment shall be absolutely void. In the event of any assignment or other
transfer of rights by Guarantied Party, the rights and benefits herein conferred
upon Guarantied Party shall automatically extend to and be vested in such
assignee or other transferee.
19. No Third Party Beneficiary. This Guaranty is solely for
the benefit of Guarantied Party and its successors and assigns and may not be
relied on by any other Person.
20. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
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THE VALIDITY OF THIS GUARANTY, ITS CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH
RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED
UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK.
THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS
ARISING IN CONNECTION WITH THIS GUARANTY SHALL BE TRIED AND LITIGATED ONLY IN
THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW
YORK, OR AT THE SOLE OPTION OF GUARANTIED PARTY, IN ANY OTHER COURT IN WHICH
GUARANTIED PARTY SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS
SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF THE
GUARANTORS AND GUARANTIED PARTY WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE
LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR
TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH
THIS SECTION 20.
EACH OF THE GUARANTORS AND GUARANTIED PARTY HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS GUARANTY OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH GUARANTOR AND GUARANTIED PARTY REPRESENT
THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS
JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.
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IN WITNESS WHEREOF, the undersigned have executed and
delivered this Guaranty as of the date first written above.
DISCOVERY ZONE (CANADA) LIMITED,
a corporation organized under the laws of Canada
By /s/ Robert Rooney
---------------------------------------
Title: Vice President
DISCOVERY ZONE (PUERTO RICO), INC.,
a Puerto Rico corporation
By /s/ Robert Rooney
---------------------------------------
Title: Vice President
DISCOVERY ZONE LICENSING, INC.,
a Nevada corporation
By /s/ Robert Rooney
---------------------------------------
Title: Vice President
S-1
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Exhibit 4.69
SECURITY AGREEMENT
This SECURITY AGREEMENT (this "Agreement"), is entered into as
of March 31, 1998, between FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), with a place of business located at 11111 Santa Monica
Boulevard, Suite 1500, Los Angeles, California 90025-3333, and each of the
undersigned subsidiaries of DISCOVERY ZONE, INC., a Delaware corporation, (each
a "Guarantor", and collectively "Guarantors"), with its chief executive office
located at the address reflected on Schedule 3.2.
WHEREAS, Borrower and Foothill are, contemporaneously
herewith, entering into the Loan Agreement;
WHEREAS, Borrower owns one hundred percent (100%) of the
issued and outstanding stock of each Guarantor;
WHEREAS, each Guarantor has executed that certain General
Continuing Guaranty, of even date herewith, in favor of Foothill (the
"Guaranty"), respecting certain obligations of Borrower owing to Foothill under
the Loan Agreement;
WHEREAS, each Guarantor desires to collateralize its
obligations under the Guaranty by granting to Foothill a security interest in
certain of its assets; and
WHEREAS, each Guarantor will benefit by virtue of the loan
from Foothill to Borrower.
NOW THEREFORE, in consideration of the premises set forth
above, the terms and conditions contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
each intending to be bound hereby, Foothill and each Guarantor agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. All capitalized terms used herein
and not otherwise defined herein shall have the meanings ascribed to them in the
Loan Agreement. As used in this Agreement, the following terms shall have the
following definitions:
"Accounts" means all currently existing and
hereafter arising accounts, contract rights, and all other forms of obligations
owing to a Guarantor arising out of the sale, license, or lease of goods or
General Intangibles or the rendition of services by such Guarantor, irrespective
of whether earned by performance, and any and all credit insurance, guaranties,
or security therefor.
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"Agreement" means this Security Agreement and
any extensions, riders, supplements, notes, amendments, or modifications to or
in connection with this Security Agreement.
"Borrower" means Discovery Zone, Inc., a
Delaware corporation.
"Code" means the New York Uniform Commercial
Code.
"Collateral" means each of the following: the
Accounts; Guarantor's Books; the Equipment; the General Intangibles; the
Inventory; the Negotiable Collateral; any money, or other assets of each
Guarantor which now or hereafter come into the possession, custody, or control
of Foothill; and the proceeds and products, whether tangible or intangible, of
any of the foregoing, including proceeds of insurance covering any or all of the
Collateral, and any and all Accounts, Guarantor's Books, Equipment, General
Intangibles, Inventory, Negotiable Collateral, money, deposit accounts, or other
tangible or intangible property resulting from the sale, exchange, collection,
or other disposition of any of the foregoing, or any portion thereof or interest
therein, and the proceeds thereof.
"Equipment" means all of a Guarantor's
present and hereafter acquired machinery, machine tools, motors, equipment,
furniture, furnishings, fixtures, vehicles (including motor vehicles and
trailers), tools, parts, dies, jigs, goods (other than consumer goods, farm
products, or Inventory), wherever located, and any interest of a Guarantor in
any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions, and improvements to any of the
foregoing, wherever located.
"Event of Default" has the meaning ascribed
to it in Section 6.
"General Intangibles" means all of a
Guarantor's present and future general intangibles and other personal property
(including contract rights, rights arising under common law, statutes, or
regulations, choses or things in action, goodwill, patents, trade names,
trademarks, servicemarks, copyrights, source code, blueprints, drawings,
purchase orders, customer lists, monies due or recoverable from pension funds,
route lists, rights to payment and other rights under any royalty or licensing
agreements, infringements, claims, computer programs, computer discs, computer
tapes, literature, reports, catalogs, deposit accounts, insurance premium
rebates, tax refunds, and tax refund claims), other than goods, Accounts, and
Negotiable Collateral.
"Guarantied Obligations" shall have the
meaning ascribed to it in the Guaranty.
"Guarantor's Books" means all of a
Guarantor's books and records, including: ledgers; records indicating,
summarizing, or evidencing a Guarantor's properties or assets (including the
Collateral) or liabilities; all information relating to a Guarantor's business
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operations or financial condition; and all computer programs, disc or tape
files, printouts, runs, or other computer prepared information in respect of
such books and records.
"Guarantor" has the meaning ascribed thereto
in the preamble to this Agreement.
"Guaranty" means the General Continuing
Guaranty of the Guarantors to Foothill of even date herewith.
"Inventory" means all present and future
inventory in which a Guarantor has any interest, including goods held for sale,
license, or lease or to be furnished under a contract of service and all of a
Guarantor's present and future raw materials, work in process, finished goods,
and packing and shipping materials, wherever located, and any documents of title
representing any of the above.
"Investment Property" means "investment
property" as that term is defined in Section 9-115 of the Code.
"Loan Agreement" means that certain Loan and
Security Agreement, dated as of even date herewith, between Borrower and
Foothill.
"Negotiable Collateral" means all of a
Guarantor's present and future letters of credit, notes, drafts, instruments,
Investment Property, documents, personal property leases (wherein a Guarantor is
the lessor), chattel paper, and a Guarantor's Books relating to any of the
foregoing.
"Secured Obligations" means all liabilities,
obligations, or undertakings owing by Guarantor to Foothill of any kind or
description arising out of or outstanding under, advanced or issued pursuant to,
or evidenced by the Guaranty, any other Loan Document heretofore, herewith, or
hereafter executed by Guarantor, or this Agreement, irrespective of whether for
the payment of money, whether direct or indirect, absolute or contingent, due or
to become due, voluntary or involuntary, whether now existing or hereafter
arising, and including all interest (including interest that accrues after the
filing of a case under the Bankruptcy Code) and any and all costs, fees
(including attorneys fees), and expenses which Guarantor is required to pay
pursuant to any of the foregoing, by law, or otherwise.
1.2 Code. Any terms used in this Agreement which are
defined in the Code shall be construed and defined as set forth in the Code
unless otherwise defined herein.
1.3 Construction. Unless the context of this
Agreement clearly requires otherwise, references to the plural include the
singular, references to the singular include the plural, the term "including" is
not limiting, and the term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or." The words "hereof,"
"herein," "hereby,"
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"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. Section,
subsection, clause, schedule, and exhibit references are to this Agreement
unless otherwise specified. Any reference in this Agreement or in any of the
other Loan Documents to this Agreement or any of the other Loan Documents shall
include all alterations, amendments, restatements, changes, extensions,
modifications, renewals, replacements, substitutions, and supplements, thereto
and thereof, as applicable. In the event of a direct conflict between the terms
and provisions of this Agreement and the Loan Agreement, it is the intention of
the parties hereto that both such documents shall be read together and
construed, to the fullest extent possible, to be in concert with each other. In
the event of any actual, irreconcilable conflict that cannot be resolved as
aforesaid, the terms and provisions of the Loan Agreement shall control and
govern; provided, however, that the inclusion herein of additional obligations
on the part of each Guarantor and supplemental rights and remedies in favor of
Foothill, in each case in respect of the Collateral, shall not be deemed a
conflict with the Loan Agreement.
1.4 Schedules and Exhibits. All of the schedules and
exhibits attached to this Agreement shall be deemed incorporated herein by
reference.
2. CREATION OF SECURITY INTEREST.
2.1 Grant of Security Interest. Each Guarantor hereby
grants to Foothill a continuing security interest in all currently existing and
hereafter acquired or arising Collateral in order to secure its payment and
performance of the Secured Obligations. Foothill's security interests in the
Collateral shall attach to all Collateral without further act on the part of
Foothill or such Guarantor. Anything contained in this Agreement or any other
Loan Document to the contrary notwithstanding, except for the sale of Inventory
to buyers in the ordinary course of business, no Guarantor has the authority,
express or implied, to dispose of any item or portion of the Collateral.
2.2 Negotiable Collateral. In the event that any
Collateral, including proceeds, is evidenced by or consists of Negotiable
Collateral, each Guarantor shall, immediately upon the request of Foothill,
endorse and assign such Negotiable Collateral to Foothill and deliver physical
possession of such Negotiable Collateral to Foothill.
2.3 Collection of Accounts, General Intangibles,
Negotiable Collateral. At any time, Foothill or Foothill's designee may: (a)
notify customers or Account Debtors of each Guarantor that the Accounts, General
Intangibles, or Negotiable Collateral have been assigned to Foothill or that
Foothill has a security interest therein; and (b) collect the Accounts, General
Intangibles, and Negotiable Collateral directly and charge the collection costs
and expenses to Borrower's loan account. Each Guarantor agrees that it will hold
in trust for Foothill, as Foothill's trustee, any cash receipts, checks, and
other items of payment (including, insurance proceeds, proceeds of cash sales,
rental proceeds, and tax refunds) that it receives and immediately will deliver
said cash receipts, checks, and other items of payment to Foothill in their
original form as received by such Guarantor.
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2.4 Delivery of Additional Documentation Required.
Each Guarantor shall execute, and deliver to Foothill, prior to or concurrently
with such Guarantor's execution and delivery of this Agreement and at any time
thereafter at the request of Foothill, all financing statements, continuation
financing statements, fixture filings, security agreements, chattel mortgages,
pledges, mortgages, deeds of trust, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
accounts, letters of authority, and all other documents that Foothill may
reasonably request, in form satisfactory to Foothill, to perfect and continue
perfected Foothill's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
2.5 Power of Attorney. Each Guarantor hereby
irrevocably makes, constitutes, and appoints Foothill (and any of Foothill's
officers, employees, or agents designated by Foothill) as such Guarantor's true
and lawful attorney, with power to: (a) if such Guarantor refuses to, or fails
timely to execute and deliver any of the documents described in Section 2.4,
sign the name of such Guarantor on any of the documents described in Section
2.4; (b) at any time that an Event of Default has occurred and is continuing or
Foothill deems itself insecure (in accordance with Section 1-208 of the Code),
sign such Guarantor's name on any invoice or bill of lading relating to any
Account, drafts against Account Debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to Account Debtors; (c) send requests for
verification of Accounts; (d) at any time that an Event of Default has occurred
and is continuing or Foothill deems itself insecure (in accordance with Section
1-208 of the Code) endorse such Guarantor's name on any checks, notices,
acceptances, money orders, drafts, or other item of payment or security that may
come into Foothill's possession; (e) at any time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure (in accordance with
Section 1-208 of the Code), notify the post office authorities to change the
address for delivery of such Guarantor's mail to an address designated by
Foothill, to receive and open all mail addressed to such Guarantor, and to
retain all mail relating to the Collateral and forward all other mail to such
Guarantor; (f) at any time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure (in accordance with Section 1-208
of the Code), make, settle, and adjust all claims under such Guarantor's
policies of insurance and make all determinations and decisions with respect to
such policies of insurance; and (g) at any time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure (in accordance with
Section 1-208 of the Code), settle and adjust disputes and claims respecting the
Accounts directly with Account Debtors, for amounts and upon terms which
Foothill determines to be reasonable, and Foothill may cause to be executed and
delivered any documents and releases which Foothill determines to be necessary.
The appointment of Foothill as each Guarantor's attorney, and each and every one
of Foothill's rights and powers, being coupled with an interest, is irrevocable
until all of the Secured Obligations have been fully and finally repaid and
performed and Foothill's obligation to extend credit under the Loan Agreement is
terminated.
2.6 Right to Inspect. Foothill (through any of its
officers, employees, or agents) shall have the right, from time to time
hereafter to inspect each Guarantor's Books and to check, test, and appraise the
Collateral in order to verify each Guarantor's financial condition or the
amount, quality, value, condition of, or any other matter relating to, the
Collateral.
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3. REPRESENTATIONS AND WARRANTIES.
Each Guarantor represents and warrants as follows:
3.1 No Prior Encumbrances. Such Guarantor has good
and indefeasible title to the Collateral, free and clear of liens, claims,
security interests, or encumbrances except for Permitted Liens.
3.2 Place of Business/Chief Executive Office; FEIN.
Schedule 3.2 sets forth the address of the chief executive office of such
Guarantor, all other locations at which such Guarantor has a place of business,
and such Guarantor's FEIN.
3.3 Inventory. All Inventory is now and at all times
hereafter shall be of good and serviceable quality, free from defects.
3.4 Location of Inventory and Equipment. The
Inventory and Equipment are not stored with a bailee, warehouseman, or similar
party (without Foothill's prior written consent) and are located only at the
locations identified on Schedule 6.12 or otherwise permitted by Section 6.12 of
the Loan Agreement.
3.5 Inventory Records. Such Guarantor now keeps, and
hereafter at all times shall keep, correct and accurate records itemizing and
describing the kind, type, quality, and quantity of the Inventory, and such
Guarantor's cost therefor.
3.6 Due Organization and Qualification; Subsidiaries.
Such Guarantor is duly organized and existing and in good standing under the
laws of the jurisdiction of its incorporation and qualified and licensed to do
business in, and in good standing in, any state where the failure to be so
licensed or qualified reasonably could be expected to have a material adverse
effect on the business, operations, condition (financial or otherwise),
finances, or prospects of such Guarantor or on the value of the Collateral.
3.7 Due Authorization; No Conflict. The execution,
delivery, and performance of this Agreement, the Guaranty, and any other Loan
Document to which such Guarantor is a party are within such Guarantor's
corporate powers, have been duly authorized, and are not in conflict with nor,
constitute a breach of any provision contained in such Guarantor's Articles or
Certificate of Incorporation, By-laws, or any partnership or trust agreement
pertaining to such Guarantor, nor will they constitute an event of default under
any material agreement to which such Guarantor is now or may hereafter become a
party.
3.8 Litigation. There are no actions or proceedings
pending by or against such Guarantor before any court or administrative agency
and such Guarantor does not have knowledge or belief of any pending, threatened,
or imminent litigation, governmental investigations,
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or claims, complaints, actions, or prosecutions involving such Guarantor, except
for: (a) ongoing collection matters in which such Guarantor is the plaintiff;
(b) matters disclosed on Schedule 5.10; and (c) matters arising after the date
hereof that, if decided adversely to such Guarantor, would not materially impair
the prospect of repayment of the Secured Obligations or materially impair the
value or priority of Foothill's security interests in the Collateral.
3.9 Solvency. Such Guarantor is Solvent. No transfer
of property is being made by such Guarantor and no obligation is being incurred
by such Guarantor in connection with the transactions contemplated by this
Agreement or the other Loan Documents with the intent to hinder, delay, or
defraud either present or future creditors of such Guarantor.
3.10 Reliance by Foothill; Cumulative. The
warranties, representations, and agreements set forth herein shall be
conclusively presumed to have been relied upon by Foothill and shall be
cumulative and in addition to any and all other warranties, representations, and
agreements which such Guarantor shall now or hereinafter give, or cause to be
given, to Foothill.
4. AFFIRMATIVE COVENANTS.
Each Guarantor covenants and agrees that, until
payment in full of the Secured Obligations, and unless Foothill shall otherwise
consent in writing, such Guarantor shall do all of the following:
4.1 Schedules of Accounts. With such regularity as
Foothill shall require, provide Foothill with schedules describing all Accounts.
Foothill's failure to request such schedules or such Guarantor's failure to
execute and deliver such schedules shall not affect or limit Foothill's security
interests or other rights in and to the Accounts.
4.2 Inventory Reporting. From time to time hereafter,
but not less frequently than monthly, execute and deliver to Foothill a report
regarding such Guarantor's Inventory specifying such Guarantor's cost therefor
and further specifying such other information as Foothill may reasonably
request.
4.3 Title to Equipment. Upon Foothill's request,
deliver to Foothill, properly endorsed, any and all evidences of ownership of,
certificates of title, or applications for title to any items of Equipment.
4.4 Maintenance of Equipment. Keep and maintain the
Equipment in good operating condition and repair (ordinary wear and tear
excepted), and make all necessary replacements thereto so that the value and
operating efficiency thereof shall at all times be maintained and preserved.
Such Guarantor shall not permit any item of Equipment to become a fixture to
real estate or an accession to other property, and the Equipment is now and
shall at all times remain personal property.
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4.5 Taxes. All assessments and taxes, whether real,
personal, or otherwise, due or payable by, or imposed, levied, or assessed
against such Guarantor or any of its property have been paid, and shall
hereafter be paid in full, before delinquency or before the expiration of any
extension period. Such Guarantor shall make due and timely payment or deposit of
all taxes, assessments, or contributions required of it by law, and will execute
and deliver to Foothill, on demand, appropriate certificates attesting to the
payment or deposit thereof. Such Guarantor will make timely payment or deposit
of all tax payments and withholding taxes required of it by applicable laws, and
will, upon request, furnish Foothill with proof satisfactory to Foothill
indicating that such Guarantor has made such payments or deposits, other than
assessments or taxes that are the subject of a Permitted Protest.
4.6 Insurance.
(a) At its expense, keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as are ordinarily insured against
by other owners in similar businesses. Such Guarantor also shall maintain
business interruption, public liability, product liability, and property damage
insurance relating to their ownership and use of the Collateral, as well as
insurance against larceny, embezzlement, and criminal misappropriation.
(b) All such policies of insurance shall be
in such form, with such companies, and in such amounts as may be reasonably
satisfactory to Foothill. All such policies of insurance (except those of public
liability and property damage) shall contain a 438BFU lender's loss payable
endorsement, or an equivalent endorsement in a form satisfactory to Foothill,
showing Foothill as a loss payee thereof as its interest may appear, shall
contain a waiver of warranties, and shall specify that the insurer must give at
least ten (10) days prior written notice to Foothill before canceling its policy
for any reason. Such Guarantor shall deliver to Foothill certified copies of
such policies of insurance and evidence of the payment of all premiums therefor.
All proceeds payable under any such policy shall be payable to Foothill to be
applied on account of the Secured Obligations.
4.7 Foothill Expenses. Such Guarantor shall
immediately and without demand reimburse Foothill for all sums expended by
Foothill which constitute Foothill Expenses and such Guarantor hereby authorizes
and approves all advances and payments by Foothill for items constituting
Foothill Expenses.
5. NEGATIVE COVENANTS.
Each Guarantor covenants and agrees that until
payment in full of the Secured Obligations, it will not do any of the following
without Foothill's prior written consent:
5.1 Liens. Create, incur, assume, or permit to exist,
directly or indirectly, any lien on or with respect to any of its property or
assets, of any kind, whether now
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owned or hereafter acquired, or any income or profits therefrom, except for
Permitted Liens (including liens that are replacements of Permitted Liens to the
extent that the original indebtedness is refinanced under Section 7.1(f) of the
Loan Agreement and so long as the replacement liens secure only those assets or
property that secured the original indebtedness).
5.2 Restrictions on Fundamental Changes. Enter into
any acquisition, merger, consolidation, reorganization, or recapitalization, or
reclassify its capital stock, or liquidate, wind up, or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, assign, lease,
transfer, or otherwise dispose of, in one transaction or a series of
transactions, all or any substantial part of its business, property, or assets,
whether now owned or hereafter acquired, or acquire by purchase or otherwise all
or substantially all of the properties, assets, stock, or other evidence of
beneficial ownership of any Person.
5.3 Extraordinary Transactions and Disposal of
Assets. Enter into any transaction not in the ordinary and usual course of such
Guarantor's business, including the sale, lease, or other disposition of,
moving, relocation, or transfer, whether by sale or otherwise, of any of such
Guarantor's properties or assets.
5.4 Change Name. Change such Guarantor's name, FEIN,
corporate structure (within the meaning of Section 9-402(7) of the Code), or
identity, or add any new fictitious name; provided, however, that such Guarantor
may change its name upon 30 days prior written notification thereof to Foothill
and so long as, at the time of such written notification, such Guarantor
provides any financing statements necessary to perfect and continue perfected
Foothill's security interests.
5.5 Guarantee. Guarantee or otherwise become in any
way liable with respect to the obligations of any third Person except by
endorsement of instruments or items of payment for deposit to the account of
such Guarantor or which are transmitted or turned over to Foothill and except
for the guarantee of the payment and performance of the Guarantied Obligations.
5.6 Nature of Business; Fiscal Year. (a) Make any
change in the principal nature of such Guarantor's business, or (b) without the
prior written consent of Foothill, which consent shall not unreasonably be
withheld, change the date of its fiscal year.
5.7 Transactions with Affiliates. Such Guarantor will
not directly or indirectly enter into or permit to exist any material
transaction with any Affiliate of such Guarantor except for transactions which
are in the ordinary course of such Guarantor's business, upon fair and
reasonable terms and which are fully disclosed to Foothill and, no less
favorable to such Guarantor than would be obtained in arm's length transaction
with a non-Affiliate.
5.8 Suspension. Suspend or go out of business.
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5.9 Change in Location of Chief Executive Office;
Inventory and Equipment with Bailees. Without thirty (30) days prior written
notification to Foothill, relocate its chief executive office to a new location,
unless, at the time of such written notification, such Guarantor provides any
financing statements or fixture filings necessary to perfect and continue
perfected Foothill's security interests and also provides to Foothill a
landlord's waiver in form and substance satisfactory to Foothill. The Inventory
and Equipment shall not at any time now or hereafter be stored with a bailee,
warehouseman, or similar party without Foothill's prior written consent.
6. EVENTS OF DEFAULT.
Any one or more of the following events shall
constitute an event of default (each, an "Event of Default") under this
Agreement:
6.1 The occurrence of an Event of Default (as defined
in the Loan Agreement);
6.2 If any Guarantor fails or neglects to perform,
keep, or observe, in any material respect, any term, provision, condition,
covenant, or agreement contained in this Agreement or in the Guaranty, or in any
other present or future agreement between the Guarantors and Foothill;
6.3 If there is a material impairment of the prospect
of repayment of any portion of the Guarantied Obligations owing to Foothill or a
material impairment of the value or priority of Foothill's security interests in
the Collateral;
6.4 If a notice of lien, levy, or assessment is filed
of record with respect to any properties or assets of a Guarantor by the United
States Government, or any department, agency, or instrumentality thereof, or by
any state, county, municipal, or governmental agency, or if any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a lien,
whether choate or otherwise, upon any properties or assets of a Guarantor and
the same is not paid on the payment date thereof; and
6.5 If a judgment or other claim becomes a lien or
encumbrance upon any material portion of the properties or assets of the
Obligors taken as a whole;
6.6 If there is a default in any material agreement
to which a Guarantor is a party with one or more third Persons resulting in a
right by such third Persons, irrespective of whether exercised, to accelerate
the maturity of such Guarantor's obligations thereunder;
6.7 If a Guarantor makes any payment on account of
indebtedness that has been contractually subordinated in right of payment to the
payment of the Guarantied Obligations,
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except to the extent such payment is permitted by the terms hereof and by the
subordination provisions applicable to such indebtedness;
6.8 If any misstatement or misrepresentation exists
now or hereafter in any warranty, representation, statement, or report made to
Foothill by a Guarantor or any officer, employee, agent, or director of a
Guarantor, or if any such warranty or representation is withdrawn.
7. FOOTHILL'S RIGHTS AND REMEDIES.
7.1 Rights and Remedies. Upon the occurrence of an
Event of Default, the security hereby constituted shall become enforceable and,
in addition to all other rights and remedies available to Foothill as provided
hereafter, Foothill may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by each Guarantor:
(a) Proceed directly and at once, without
notice, against any Guarantor to collect and recover the full amount or any
portion of the Guarantied Obligations, without first proceeding against
Borrower, or against any security or collateral for the Guarantied Obligations.
(b) Without notice to the Guarantors and
regardless of the acceptance of any security or collateral for the payment
hereof, appropriate and apply toward the payment of the Guarantied Obligations
(i) any indebtedness due or to become due from Foothill to any Guarantor and
(ii) any moneys, credits or other property belonging to any Guarantor at any
time held by or coming into the possession of Foothill.
(c) May exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein and the
Guaranty or otherwise available to it, all the rights and remedies available to
it at law (including those of a secured party under the Code) or in equity.
(d) Settle or adjust disputes and claims
directly with Account Debtors for amounts and upon terms which Foothill
considers advisable, and in such cases, Foothill will credit Borrower's loan
account with only the net amounts received by Foothill in payment of such
disputed Accounts after deducting all Foothill Expenses incurred or expended in
connection therewith;
(e) [intentionally omitted];
(f) Without notice or demand, make such
payments and do such acts as Foothill considers necessary or reasonable to
protect its security interest in the Collateral. Each Guarantor agrees to
assemble the Collateral if Foothill so requires, and to make the Collateral
available to Foothill as Foothill may designate. Each Guarantor authorizes
Foothill to enter the premises where the Collateral is located, to take and
maintain possession of the Collateral, or any
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part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Foothill's determination appears to be prior or
superior to its security interest and to pay all expenses incurred in connection
therewith. With respect to any of each Guarantor's owned premises, such
Guarantor hereby grants Foothill a license to enter into possession of such
premises and to occupy the same, without charge, for up to one hundred twenty
(120) days in order to exercise any of Foothill's rights or remedies provided
herein, at law, in equity, or otherwise;
(g) Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. Foothill is hereby granted a license or
other right to use, without charge, each Guarantor's labels, patents,
copyrights, rights of use of any name, trade secrets, trade names, trademarks,
service marks, and advertising matter, or any property of a similar nature, as
it pertains to the Collateral, in completing production of advertising for sale
and selling any Collateral, and each Guarantor's rights under all licenses and
all franchise agreements shall inure to Foothill's benefit;
(h) Sell all or any part of the Collateral
at either a public or private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places (including
any Guarantor's premises) as Foothill determines is commercially reasonable. It
is not necessary that the Collateral be present at any such sale. Foothill shall
have the right upon any such public sale or sales, and, to the extent permitted
by law, upon any such private sale or sales, to purchase the whole or any part
of the Collateral so sold, free of any right or equity of redemption in any
Guarantor, which right or equity is hereby waived or released to the extent
permitted by law;
(i) By an instrument in writing, appoint a
receiver (which term shall include a receiver and manager) of all or any part of
the Collateral and may remove or replace such receiver from time to time or may
institute proceedings in any court of competent jurisdiction for the appointment
of such receiver;
(j) Require any Guarantor to establish a
lockbox or other restricted account satisfactory to Foothill for the collection
of Accounts of such Guarantor, General Intangibles, or Negotiable Collateral;
(k) Notify customers or Account Debtors of
any Guarantor that the Accounts of such Guarantor, General Intangibles, or
Negotiable Collateral have been assigned to Foothill or that Foothill has a
security interest therein;
(l) Collect the Accounts of each Guarantor,
General Intangibles, and Negotiable Collateral directly, and charge the
collection costs and expenses as Foothill Expenses; but, unless and until
Foothill does so or gives such Guarantor other written instructions, such
Guarantor shall collect all Accounts of such Guarantor, General Intangibles, and
Negotiable Collateral for Foothill, receive in trust all payments thereon as
Foothill's trustee, and immediately deliver said payments to Foothill in their
original form as received from such Account Debtor;
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(m) Any deficiency which exists after
disposition of the Collateral as provided above will be paid immediately by each
Guarantor up to the maximum amount, if any, of such Guarantor's liability under
the Guaranty. Any excess will be returned to each Guarantor, without interest
and subject to the rights of third parties, by Foothill.
Except as required by law, Foothill may take any or all of the foregoing action
without demand, presentment, protest, advertisement or notice of any kind to or
upon any Guarantor or any other person.
7.2 Remedies Cumulative. Foothill's rights and
remedies under this Agreement, the Loan Documents, and all other agreements
shall be cumulative. Foothill shall have all other rights and remedies not
inconsistent herewith as provided under the Code, by law, or in equity. No
exercise by Foothill of one right or remedy shall be deemed an election, and no
waiver by Foothill of any Event of Default on Borrower's part shall be deemed a
continuing waiver. No delay by Foothill shall constitute a waiver, election, or
acquiescence by it.
8. TAXES AND EXPENSES REGARDING THE COLLATERAL.
If any Guarantor fails to pay any monies (whether
taxes, rents, assessments, insurance premiums, or otherwise) due to third
persons or entities, or fails to make any deposits or furnish any required proof
of payment or deposit, all as required under the terms of this Agreement, then,
to the extent that Foothill determines that such failure, by such Guarantor
could have a material adverse effect on Foothill's interests in the Collateral,
in its discretion and without prior notice to such Guarantor, Foothill may do
any or all of the following: (a) make payment of the same or any part thereof;
(b) set up such reserves in Borrower's loan account as Foothill deems necessary
to protect Foothill from the exposure created by such failure; or (c) obtain and
maintain insurance policies insuring such Guarantor's ownership and use of the
Collateral, and take any action with respect to such policies as Foothill deems
prudent. Any amounts paid or deposited by Foothill shall constitute Foothill
Expenses, shall immediately become additional Secured Obligations, shall bear
interest at the applicable rate described in the Loan Document, and shall be
secured by the Collateral. Any payments made by Foothill shall not constitute an
agreement by Foothill to make similar payments in the future or a waiver by
Foothill of any Event of Default under this Agreement. Foothill need not inquire
as to, or contest the validity of, any such expense, tax, security interest,
encumbrance, or lien and the receipt of the usual official notice for the
payment thereof shall be conclusive evidence that the same was validly due and
owing. Foothill shall use its best efforts to provide notice to such Guarantor
of any action taken by it under this Section 8.
9. WAIVERS; INDEMNIFICATION.
9.1 Demand; Protest; etc. To the extent permitted by
law, each Guarantor waives demand, protest, notice of protest, notice of default
or dishonor, notice of payment and nonpayment, notice of any default, nonpayment
at maturity, release, compromise,
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settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees at any time held by Foothill on which such Guarantor may
in any way be liable.
9.2 Foothill's Liability for Collateral. So long as
Foothill complies with its obligations, if any, under Section 9-207 of the Code,
Foothill shall not in any way or manner be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the value
thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other Person. All risk of loss, damage, or destruction of
the Collateral shall be borne by the Guarantors.
9.3 Indemnification. Each Guarantor agrees to defend,
indemnify, save, and hold Foothill and its officers, employees, and agents
harmless against: (a) all obligations, demands, claims, and liabilities claimed
or asserted by any other Person, and (b) all losses (including attorneys fees
and disbursements) in any way suffered, incurred, or paid by Foothill as a
result of or in any way arising out of, following, or consequential to
transactions with Borrower or such Guarantor, whether under this Agreement, the
other Loan Documents or otherwise. This provision shall survive the termination
of this Agreement.
9.4 Waivers. (a) To the maximum extent permitted by
law, each Guarantor hereby waives: (i) notice of acceptance hereof; (ii) notice
of any loans or other financial accommodations made or extended under the Loan
Agreement, or the creation or existence of any Obligations; (iii) notice of the
amount of the Obligations, subject, however, to such Guarantor's right to make
inquiry of Foothill to ascertain the amount of the Obligations at any reasonable
time; (iv) notice of any adverse change in the financial condition of Borrower
or of any other fact that might increase such Guarantor's risk hereunder; (v)
notice of presentment for payment, demand, protest, and notice thereof as to any
instrument among the Loan Documents; (vi) notice of any unmatured Event of
Default or Event of Default under the Loan Agreement; and (vii) all other
notices (except if such notice is specifically required to be given to such
Guarantor under this Agreement) and demands to which such Guarantor might
otherwise be entitled.
(b) To the fullest extent permitted by applicable law, each
Guarantor waives the right by statute or otherwise to require Foothill to
institute suit against Borrower or to exhaust any rights and remedies which
Foothill has or may have against Borrower. Each Guarantor further waives any
defense arising by reason of any disability or other defense (other than the
defense that the Obligations shall have been fully and finally indefeasibly
paid) of Borrower or by reason of the cessation from any cause (other than that
the Obligations shall have been fully and finally indefeasibly paid) whatsoever
of the liability of Borrower in respect thereof.
(c) To the maximum extent permitted by law, each Guarantor
hereby waives: (i) any rights to assert against Foothill any defense (legal or
equitable), set-off, counterclaim, or claim which such Guarantor may now or at
any time hereafter have against Borrower or any other party liable to Foothill
on account of or with respect to the Obligations; (ii) any defense, set-off,
counterclaim, or claim, of any kind or nature, arising directly or indirectly
from the present or
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future sufficiency, validity, or enforceability of the Obligations; (iii) any
defense arising by reason of any claim or defense based upon an election of
remedies by Foothill including, to the extent applicable, the provisions of
ss.ss. 580d and 726 of the California Code of Civil Procedure, or any similar
law of California or any other jurisdiction; (iv) the benefit of any statute of
limitations affecting such Guarantor's liability hereunder or the enforcement
thereof.
(d) To the maximum extent permitted by law, each Guarantor
hereby waives any right of subrogation such Guarantor has or may have as against
Borrower with respect to the Obligations. In addition, each Guarantor hereby
waives any right to proceed against Borrower, now or hereafter, for
contribution, indemnity, reimbursement, or any other suretyship rights and
claims (irrespective of whether direct or indirect, liquidated or contingent),
with respect to the Obligations. Each Guarantor also hereby waives any right to
proceed or to seek recourse against or with respect to any property or asset of
Borrower. Each Guarantor hereby agrees that, in light of the waivers contained
in this Section, such Guarantor shall not be deemed to be a "creditor" (as that
term is defined in the Bankruptcy Code or otherwise) of Borrower, whether for
purposes of the application of Sections 547 or 550 of the United States
Bankruptcy Code or otherwise.
(e) If any of the Secured Obligations at any time are secured
by a mortgage or deed of trust upon real property, Foothill may elect, in its
sole discretion, upon a default with respect to the Secured Obligations, to
foreclose such mortgage or deed of trust judicially or nonjudicially in any
manner permitted by law, before or after enforcing this Agreement, without
diminishing or affecting the liability of each Guarantor hereunder. Each
Guarantor understands that (a) by virtue of the operation of California's
antideficiency law applicable to nonjudicial foreclosures, or any similar law of
California or any other jurisdiction, an election by Foothill nonjudicially to
foreclose such a mortgage or deed of trust probably would have the effect of
impairing or destroying rights of subrogation, reimbursement, contribution, or
indemnity of such Guarantor against Borrower or guarantors or sureties, and (b)
absent the waiver given by such Guarantor herein, such an election might estop
Foothill from enforcing this Agreement against such Guarantor. Understanding the
foregoing, and understanding that each Guarantor is hereby relinquishing a
defense to the enforceability of this Agreement, each Guarantor hereby waives
any right to assert against Foothill any defense to the enforcement of this
Agreement, whether denominated "estoppel" or otherwise, based on or arising from
an election by Foothill nonjudicially to foreclose any such mortgage or deed of
trust. Each Guarantor understands that the effect of the foregoing waiver may be
that such Guarantor may have liability hereunder for amounts with respect to
which such Guarantor may be left without rights of subrogation, reimbursement,
contribution, or indemnity against Borrower or guarantors or sureties. Each
Guarantor also agrees that the "fair market value" provisions of Section 580a of
the California Code of Civil Procedure, or any similar law of California or any
other jurisdiction, shall have no applicability with respect to the
determination of such Guarantor's liability under this Agreement.
(f) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER
OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, EACH GUARANTOR
HEREBY WAIVES, TO THE MAXIMUM EXTENT SUCH WAIVER IS PERMITTED BY
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LAW, ANY AND ALL DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE
OF CALIFORNIA CIVIL CODE ss.ss. 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2838,
2839, 2845, 2848, 2849, AND 2850, TO THE EXTENT APPLICABLE, CALIFORNIA CODE OF
CIVIL PROCEDURE ss.ss. 580a, 580b, 580c, 580d, AND 726, AND, TO THE EXTENT
APPLICABLE, CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE, OR ANY SIMILAR
LAWS OF CALIFORNIA OR ANY OTHER JURISDICTION.
(g) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR
OTHER PROVISION SET FORTH IN THIS AGREEMENT, EACH GUARANTOR HEREBY WAIVES ALL
RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF REMEDIES BY FOOTHILL, EVEN
THOUGH THAT ELECTION OF REMEDIES, SUCH AS A NONJUDICIAL FORECLOSURE WITH RESPECT
TO SECURITY FOR A SECURED OBLIGATION, HAS DESTROYED SUCH GUARANTOR'S RIGHTS OF
SUBROGATION AND REIMBURSEMENT AGAINST THE PRINCIPAL BY THE OPERATION OF SECTION
580d OF THE CODE OF CIVIL PROCEDURE OR OTHERWISE.
10. NOTICES.
All notices and other communications hereunder to
Foothill shall be in writing and shall be mailed, sent or delivered in
accordance with the Loan Agreement and all notices and other communications
hereunder to each Guarantor shall be in writing and shall be mailed, sent or
delivered in care of Borrower in accordance with the Loan Agreement.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE
AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK OR, AT
THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE
LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER
THE MATTER IN CONTROVERSY. EACH GUARANTOR AND FOOTHILL WAIVES, TO THE EXTENT
PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE
OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS
BROUGHT IN ACCORDANCE WITH THIS SECTION 11.
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EACH GUARANTOR AND FOOTHILL HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH GUARANTOR AND FOOTHILL REPRESENT THAT EACH
HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.
12. DESTRUCTION OF GUARANTORS' DOCUMENTS.
All documents, schedules, agings, or other papers
delivered to Foothill may be destroyed or otherwise disposed of by Foothill four
(4) months after they are delivered to or received by Foothill, unless a
Guarantor requests, in writing, the return of said documents, schedules or other
papers and makes arrangements, at such Guarantor's expense, for their return.
13. GENERAL PROVISIONS.
13.1 Effectiveness. This Agreement shall be binding
and deemed effective when executed by each Guarantor and accepted and executed
by Foothill.
13.2 Successors and Assigns. This Agreement shall
bind and inure to the benefit of the respective successors and assigns of each
of the parties; provided, however, that no Guarantor may assign this Agreement
or any rights or duties hereunder without Foothill's prior written consent and
any prohibited assignment shall be absolutely void. No consent to an assignment
by Foothill shall release any Guarantor from its Guarantied Obligations.
Foothill may assign this Agreement and its rights and duties hereunder and no
consent or approval by any Guarantor is required in connection with any such
assignment. Foothill reserves the right to sell, assign, transfer, negotiate, or
grant participations in all or any part of, or any interest in Foothill's rights
and benefits hereunder. In connection therewith, Foothill may disclose all
documents and information which Foothill now or hereafter may have relating to
any Guarantor or any Guarantor's business. To the extent that Foothill assigns
its rights and obligations to a third Person, Foothill thereafter shall be
released from such assigned obligations to any Guarantor and such assignment
shall effect a novation between the Guarantors and such third Person.
13.3 Section Headings. Headings and numbers have been
set forth herein for convenience only. Unless the contrary is compelled by the
context, everything contained in each section applies equally to this entire
Agreement.
13.4 Interpretation. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Foothill
or any Guarantor, whether under
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any rule of construction or otherwise. On the contrary, this Agreement has been
reviewed by all parties and shall be construed and interpreted according to the
ordinary meaning of the words used so as to fairly accomplish the purposes and
intentions of all parties hereto.
13.5 Severability of Provisions. Each provision of
this Agreement shall be severable from every other provision of this Agreement
for the purpose of determining the legal enforceability of any specific
provision.
13.6 Amendments in Writing. This Agreement can only
be amended by a writing signed by both Foothill and each of the Guarantors.
13.7 Counterparts. This Agreement may be executed in
any number of counterparts and by different parties on separate counterparts,
each of which, when executed and delivered, shall be deemed to be an original,
and all of which, when taken together, shall constitute but one and the same
Agreement.
13.8 Revival and Reinstatement of Obligations. If the
incurrence or payment of the Secured Obligations by any Guarantor or the
transfer by any Guarantor to Foothill of any property of such Guarantor should
for any reason subsequently be declared to be void or voidable under any state
or federal law relating to creditors' rights, including provisions of the
Bankruptcy Code relating to fraudulent conveyances, preferences, and other
voidable or recoverable payments of money or transfers of property
(collectively, a "Voidable Transfer"), and if Foothill is required to repay or
restore, in whole or in part, any such Voidable Transfer, or elects to do so
upon the reasonable advice of its counsel, then, as to any such Voidable
Transfer, or the amount thereof that Foothill is required or elects to repay or
restore, and as to all reasonable costs, expenses, and attorneys fees of
Foothill related thereto, the liability of each Guarantor automatically shall be
revived, reinstated, and restored and shall exist as though such Voidable
Transfer had never been made.
[Signature page to follow.]
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IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed as of the date first written above.
DISCOVERY ZONE (CANADA) LIMITED,
a corporation organized under the laws of Canada
By /s/ Robert Rooney
---------------------------------------
Title: Vice President
DISCOVERY ZONE (PUERTO RICO), INC.,
a Puerto Rico corporation
By /s/ Robert Rooney
---------------------------------------
Title: Vice President
DISCOVERY ZONE LICENSING, INC.,
a Nevada corporation
By /s/ Robert Rooney
---------------------------------------
Title: Vice President
FOOTHILL CAPITAL CORPORATION, a
California corporation
By /s/ Brian Duffy
---------------------------------------
Its: AVP
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SECURITY AGREEMENT
SCHEDULE 3.2
Discovery Zone (Canada) Limited
FEIN: 52-2074150
Chief Executive Office: 565 Taxter Road, Fifth Floor
Elmsford, New York 10523
Place(s) of Business: 150 W Dr., Unit 2A
Hwy 7 & 410
Brampton, Ontario L6T 4P9
Canada
360 Mayfield Common
Edmonton, Alberta T5P 4K9
Canada
3414 Calgary Trail South, #400
Edmonton, Alberta T6J 6RS
Canada
4380 Wellington Road South
London Ontario N6E 2Z6
Canada
1320 Elliee Avenue, #3
Winnipeg, Manitoba R36 0E9
Canada
Discovery Zone (Puerto Rico),Inc.
FEIN: 36-3892589
Chief Executive Office: 565 Taxter Road, Fifth Floor
Elmsford, New York 10523
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Place(s) of Business: 506 Truncado Street
Hatillo, Puerto Rico 00659
Munoz Marin Av. & Highway 30
Caguas, Puerto Rico 00725
9410 Los Romeros Ave.
San Juan, Puerto Rico 00927
Discovery Zone Licensing, Inc.
FEIN: 91-1878248
Chief Executive Office: 565 Taxter Road, Fifth Floor
Elmsford, New York 10523
Place(s) of Business:
21
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Exhibit 4.70
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of
March 31, 1998, is entered into between Discovery Zone, Inc., a Delaware
corporation ("Pledgor"), and Foothill Capital Corporation, a California
corporation ("Secured Party"), with reference to the following:
WHEREAS, Pledgor beneficially owns the specified number of
shares identified as Pledged Shares in the Persons identified as Issuers on
Schedule A attached hereto (or any addendum thereto);
WHEREAS, Pledgor and Secured Party are parties to that certain
Loan and Security Agreement (the "Loan Agreement"), of even date herewith,
pursuant to which Secured Party has agreed to make certain financial
accommodations to Pledgor;
WHEREAS, to induce Secured Party to make the financial
accommodations provided to Pledgor pursuant to the Loan Agreement, Pledgor
desires to pledge, grant, transfer, and assign to Secured Party a security
interest in the Collateral (as hereinafter defined) to secure the Secured
Obligations (as hereinafter defined), as provided herein.
NOW, THEREFORE, in consideration of the mutual promises,
covenants, representations, and warranties set forth herein and for other good
and valuable consideration, the parties hereto agree as follows:
1. Definitions and Construction.
(a) Definitions. All initially capitalized terms used
herein and not otherwise defined herein shall have the meaning ascribed thereto
in the Loan Agreement. As used in this Agreement:
"Agreement" shall mean this Stock Pledge
Agreement.
"Chief Executive Office" shall mean where
Pledgor is deemed located pursuant to ss.9-103(3)(d) of the Code.
"Collateral" shall mean the Pledged Shares,
the Future Rights, and the Proceeds, collectively.
"Future Rights" shall mean: (a) all shares
of stock (other than Pledged Shares) of the Issuers, and all securities
convertible or exchangeable into, and all warrants, options, or other rights to
purchase, shares of stock of the Issuers; (b)
<PAGE>
to the extent of Pledgor's interest therein, all shares of, all securities
convertible or exchangeable into, and all warrants, options, or other rights to
purchase shares of stock of any Person in which Pledgor, after the date of this
Agreement, acquires a direct equity interest, irrespective of whether such
Person is or becomes a Subsidiary of Pledgor; and (c) the certificates or
instruments representing such additional shares, convertible or exchangeable
securities, warrants, and other rights and all dividends, cash, options,
warrants, rights, instruments, and other property or proceeds from time to time
received, receivable, or otherwise distributed in respect of or in exchange for
any or all of such shares.
"Holder" and "Holders" shall have the
meanings ascribed thereto in Section 3 of this Agreement.
"Issuers" shall mean each of the Persons
identified as an Issuer on Schedule A attached hereto (or any addendum thereto),
and any successors thereto, whether by merger or otherwise.
"Lien" shall mean any lien, mortgage,
pledge, assignment (including any assignment of rights to receive payments of
money), security interest, charge, or encumbrance of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, or any agreement to give any security interest).
"Loan Agreement" shall have the meaning
ascribed thereto in the recitals to this Agreement.
"Pledged Shares" shall mean all of the
shares identified as Pledged Shares on Schedule A attached hereto (or any
addendum thereto).
"Pledgor" shall have the meaning ascribed
thereto in the preamble to this Agreement.
"Proceeds" shall mean all proceeds
(including proceeds of proceeds) of the Pledged Shares and Future Rights
including all: (a) rights, benefits, distributions, premiums, profits,
dividends, interest, cash, instruments, documents of title, accounts, contract
rights, inventory, equipment, general intangibles, deposit accounts, chattel
paper, and other property from time to time received, receivable, or otherwise
distributed in respect of or in exchange for, or as a replacement of or a
substitution for, any of the Pledged Shares, Future Rights, or proceeds thereof
(including any cash, stock, or other securities or instruments issued after any
recapitalization, readjustment, reclassification, merger or consolidation with
respect to the Issuers and any claims against financial intermediaries under
ss.8-313(2) of the Code or otherwise); (b) "proceeds," as such term is used in
ss.9-306 of the Code; (c) proceeds of any insurance,
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indemnity, warranty, or guaranty (including guaranties of delivery) payable from
time to time with respect to any of the Pledged Shares, Future Rights, or
proceeds thereof; (d) payments (in any form whatsoever) made or due and payable
to Pledgor from time to time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Pledged Shares,
Future Rights, or proceeds thereof; and (e) other amounts from time to time paid
or payable under or in connection with any of the Pledged Shares, Future Rights,
or proceeds thereof.
"Secured Obligations" shall mean all
liabilities, obligations, or undertakings owing by Pledgor to Secured Party of
any kind or description arising out of or outstanding under, advanced or issued
pursuant to, or evidenced by the Loan Agreement, the other Loan Documents, or
this Agreement, irrespective of whether for the payment of money, whether direct
or indirect, absolute or contingent, due or to become due, voluntary or
involuntary, whether now existing or hereafter arising, and including all
interest (including interest that accrues after the filing of a case under the
Bankruptcy Code) and any and all costs, fees (including attorneys fees), and
expenses which Pledgor is required to pay pursuant to any of the foregoing, by
law, or otherwise.
"Secured Party" shall have the meaning
ascribed thereto in the preamble to this Agreement, together with its successors
or assigns.
"Securities Act" shall have the meaning
ascribed thereto in Section 9(c) of this Agreement.
(b) Construction.
(i) Unless the context of this Agreement
clearly requires otherwise, references to the plural include the singular and to
the singular include the plural, the part includes the whole, the term
"including" is not limiting, and the term "or" has, except where otherwise
indicated, the inclusive meaning represented by the phrase "and/or." The words
"hereof," "herein," "hereby," "hereunder," and other similar terms in this
Agreement refer to this Agreement as a whole and not exclusively to any
particular provision of this Agreement. Article, section, subsection, exhibit,
and schedule references are to this Agreement unless otherwise specified. All of
the exhibits or schedules attached to this Agreement shall be deemed
incorporated herein by reference. Any reference to any of the following
documents includes any and all alterations, amendments, restatements,
extensions, modifications, renewals, or supplements thereto or thereof, as
applicable: this Agreement, the Loan Agreement, or any of the other Loan
Documents.
(ii) Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Secured
Party or Pledgor, whether under any rule of construction or otherwise. On the
contrary, this Agreement
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<PAGE>
has been reviewed by both of the parties and their respective counsel and shall
be construed and interpreted according to the ordinary meaning of the words used
so as to fairly accomplish the purposes and intentions of the parties hereto.
(iii) In the event of any direct conflict
between the express terms and provisions of this Agreement and of the Loan
Agreement, the terms and provisions of the Loan Agreement shall control.
2. Pledge. As security for the prompt payment and performance
of the Secured Obligations in full by Pledgor when due, whether at stated
maturity, by acceleration or otherwise (including amounts that would become due
but for the operation of the provisions of the Bankruptcy Code), Pledgor hereby
pledges, grants, transfers, and assigns to Secured Party a security interest in
all of Pledgor's right, title, and interest in and to the Collateral.
3. Delivery and Registration of Collateral.
(a) All certificates or instruments representing or
evidencing the Collateral shall be promptly delivered by Pledgor to Secured
Party or Secured Party's designee pursuant hereto at a location designated by
Secured Party and shall be held by or on behalf of Secured Party pursuant
hereto, and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to Secured Party.
(b) After the occurrence and during the continuance
of an Event of Default, Secured Party shall have the right, at any time in its
discretion and without notice to Pledgor, to transfer to or to register on the
books of the Issuers (or of any other Person maintaining records with respect to
the Collateral) in the name of Secured Party or any of its nominees any or all
of the Collateral. In addition, Secured Party shall have the right at any time
to exchange certificates or instruments representing or evidencing Collateral
for certificates or instruments of smaller or larger denominations.
(c) If, at any time and from time to time, any
Collateral (including any certificate or instrument representing or evidencing
any Collateral) is in the possession of a Person other than Secured Party or
Pledgor (a "Holder"), then Pledgor shall immediately, at Secured Party's option,
either cause such Collateral to be delivered into Secured Party's possession, or
execute and deliver to such Holder a written notification/instruction, and take
all other steps necessary to perfect the security interest of Secured Party in
such Collateral, including obtaining from such Holder a written acknowledgment
that such Holder holds such Collateral for Secured Party, all pursuant to
ss.9-115 of the Code or other applicable law governing the perfection of Secured
Party's security interest in the Collateral in the possession of such Holder.
Each such
4
<PAGE>
notification/instruction and acknowledgment shall be in form and substance
satisfactory to Secured Party.
(d) Any and all Collateral (including dividends,
interest, and other cash distributions) at any time received or held by Pledgor
shall be so received or held in trust for Secured Party, shall be segregated
from other funds and property of Pledgor and shall be forthwith delivered to
Secured Party in the same form as so received or held, with any necessary
endorsements; provided that cash dividends or distributions received by Pledgor,
if and to the extent they are not prohibited by the Loan Agreement, may be
retained by Pledgor in accordance with Section 4 and used in the ordinary course
of Pledgor's business.
(e) If at any time and from time to time any
Collateral consists of an uncertificated security or a security in book entry
form, then Pledgor shall immediately cause such Collateral to be registered or
entered, as the case may be, in the name of Secured Party, or otherwise cause
Secured Party's security interest thereon to be perfected in accordance with
applicable law.
4. Voting Rights and Dividends.
(a) So long as no Event of Default shall have
occurred and be continuing, Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Collateral or any part
thereof for any purpose not inconsistent with the terms of the Loan Documents
and shall be entitled to receive and retain any cash dividends or distributions
paid in respect of the Collateral.
(b) Upon the occurrence and during the continuance of
an Event of Default, all rights of Pledgor to exercise the voting and other
consensual rights or receive and retain cash dividends or distributions that it
would otherwise be entitled to exercise or receive and retain, as applicable
pursuant to Section 4(a), shall cease, and all such rights shall thereupon
become vested in Secured Party, who shall thereupon have the sole right to
exercise such voting or other consensual rights and to receive and retain such
cash dividends and distributions. Pledgor shall execute and deliver (or cause to
be executed and delivered) to Secured Party all such proxies and other
instruments as Secured Party may reasonably request for the purpose of enabling
Secured Party to exercise the voting and other rights which it is entitled to
exercise and to receive the dividends and distributions that it is entitled to
receive and retain pursuant to the preceding sentence.
5. Representations and Warranties. Pledgor represents,
warrants, and covenants as follows:
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(a) Pledgor has taken all steps it deems necessary or
appropriate to be informed on a continuing basis of changes or potential changes
affecting the Collateral (including rights of conversion and exchange, rights to
subscribe, payment of dividends, reorganizations or recapitalization, tender
offers and voting rights), and Pledgor agrees that Secured Party shall have no
responsibility or liability for informing Pledgor of any such changes or
potential changes or for taking any action or omitting to take any action with
respect thereto;
(b) All information herein or hereafter supplied to
Secured Party by or on behalf of Pledgor in writing with respect to the
Collateral is, or in the case of information hereafter supplied will be,
accurate and complete in all material respects;
(c) Pledgor is and will be the sole legal and
beneficial owner of the Collateral (including the Pledged Shares and all other
Collateral acquired by Pledgor after the date hereof) free and clear of any
adverse claim, Lien, or other right, title, or interest of any party;
(d) This Agreement, and the delivery to Secured Party
of the Pledged Shares representing Collateral (or the delivery to all Holders of
the Pledged Shares representing Collateral of the notification/instruction
referred to in Section 3 of this Agreement), creates a valid, perfected, and
first priority security interest in one hundred percent (100%) of the Pledged
Shares in favor of Secured Party securing payment of the Secured Obligations,
and all actions necessary to achieve such perfection have been duly taken;
(e) Schedule A to this Agreement is true and correct
and complete in all material respects; without limiting the generality of the
foregoing: (i) all the Pledged Shares are in certificated form, and, except to
the extent registered in the name of Secured Party or its nominee pursuant to
the provisions of this Agreement, are registered in the name of Pledgor; and
(ii) the Pledged Shares as to each of the Issuers constitute at least the
percentage of all the fully diluted issued and outstanding shares of stock of
such Issuer as set forth in Schedule A to this Agreement;
(f) There are no presently existing Future Rights or
Proceeds owned by Pledgor, except as set forth in Schedule C hereto;
(g) The Pledged Shares have been duly authorized and
validly issued and are fully paid and nonassessable; and
(h) Neither the pledge of the Collateral pursuant to
this Agreement nor the extensions of credit represented by the Secured
Obligations violates Regulation G, T, U or X of the Board of Governors of the
Federal Reserve System.
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6. Further Assurances.
(a) Pledgor agrees that from time to time, at the
expense of Pledgor, Pledgor will promptly execute and deliver all further
instruments and documents, and take all further action that may be necessary or
reasonably desirable, or that Secured Party may request, in order to perfect and
protect any security interest granted or purported to be granted hereby or to
enable Secured Party to exercise and enforce its rights and remedies hereunder
with respect to any Collateral. Without limiting the generality of the
foregoing, Pledgor will: (i) at the request of Secured Party, mark conspicuously
each of its records pertaining to the Collateral with a legend, in form and
substance reasonably satisfactory to Secured Party, indicating that such
Collateral is subject to the security interest granted hereby; (ii) execute and
file such financing or continuation statements, or amendments thereto, and such
other instruments or notices, as may be necessary or reasonably desirable, or as
Secured Party may request, in order to perfect and preserve the security
interests granted or purported to be granted hereby; (iii) allow inspection of
the Collateral by Secured Party or Persons designated by Secured Party; and (iv)
appear in and defend any action or proceeding that may affect Pledgor's title to
or Secured Party's security interest in the Collateral.
(b) Pledgor hereby authorizes Secured Party to file
one or more financing or continuation statements, and amendments thereto,
relative to all or any part of the Collateral without the signature of Pledgor
where permitted by law. A carbon, photographic, or other reproduction of this
Agreement or any financing statement covering the Collateral or any part thereof
shall be sufficient as a financing statement where permitted by law.
(c) Pledgor will furnish to Secured Party, upon the
request of Secured Party: (i) a certificate executed by an authorized officer of
Pledgor, and dated as of the date of delivery to Secured Party, itemizing in
such detail as Secured Party may request, the Collateral which, as of the date
of such certificate, has been delivered to Secured Party by Pledgor pursuant to
the provisions of this Agreement; and (ii) such statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as Secured Party may request.
7. Covenants of Pledgor. Pledgor shall:
(a) Perform each and every covenant in the Loan
Documents applicable to Pledgor;
(b) At all times keep at least one complete set of
its records concerning substantially all of the Collateral at its Chief
Executive Office as set forth in Schedule B hereto, and not change the location
of its Chief Executive Office or such records without giving Secured Party at
least thirty (30) days prior written notice thereof;
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(c) To the extent it may lawfully do so, use its best
efforts to prevent the Issuers from issuing Future Rights or Proceeds, except
for cash dividends and other distributions, if any, that are not prohibited by
the terms of the Loan Agreement to be paid by any Issuer to Pledgor; and
(d) Upon receipt by Pledgor of any material notice,
report, or other communication from any of the Issuers or any Holder relating to
all or any part of the Collateral, deliver such notice, report or other
communication to Secured Party as soon as possible, but in no event later than
five (5) days following the receipt thereof by Pledgor.
8. Secured Party as Pledgor's Attorney-in-Fact.
(a) Pledgor hereby irrevocably appoints Secured Party
as Pledgor's attorney-in-fact, with full authority in the place and stead of
Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to
time at Secured Party's discretion, to take any action and to execute any
instrument that Secured Party may reasonably deem necessary or advisable to
accomplish the purposes of this Agreement, including: (i) after the occurrence
and during the continuance of an Event of Default, to receive, endorse, and
collect all instruments made payable to Pledgor representing any dividend,
interest payment or other distribution in respect of the Collateral or any part
thereof to the extent permitted hereunder and to give full discharge for the
same and to execute and file governmental notifications and reporting forms;
(ii) to issue any notifications/instructions Secured Party deems necessary
pursuant to Section 3 of this Agreement; or (iii) after the occurrence and
during the continuance of an Event of Default, to arrange for the transfer of
the Collateral on the books of any of the Issuers or any other Person to the
name of Secured Party or to the name of Secured Party's nominee.
(b) In addition to the designation of Secured Party
as Pledgor's attorney-in-fact in subsection (a), Pledgor hereby irrevocably
appoints Secured Party as Pledgor's agent and attorney-in-fact to make, execute
and deliver any and all documents and writings which may be necessary or
appropriate for approval of, or be required by, any regulatory authority located
in any city, county, state or country where Pledgor or any of the Issuers engage
in business, in order to transfer or to more effectively transfer any of the
Pledged Shares or otherwise enforce Secured Party's rights hereunder.
9. Remedies upon Default. Upon the occurrence and during the
continuance of an Event of Default:
(a) Secured Party may exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party on
default under the Code (irrespective of whether the Code applies to the affected
items of Collateral), and Secured Party may also
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without notice (except as specified below) sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any exchange,
broker's board or at any of Secured Party's offices or elsewhere, for cash, on
credit or for future delivery, at such time or times and at such price or prices
and upon such other terms as Secured Party may deem commercially reasonable,
irrespective of the impact of any such sales on the market price of the
Collateral. To the maximum extent permitted by applicable law, Secured Party may
be the purchaser of any or all of the Collateral at any such sale and shall be
entitled, for the purpose of bidding and making settlement or payment of the
purchase price for all or any portion of the Collateral sold at any such public
sale, to use and apply all or any part of the Secured Obligations as a credit on
account of the purchase price of any Collateral payable at such sale. Each
purchaser at any such sale shall hold the property sold absolutely free from any
claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent
permitted by law) all rights of redemption, stay, or appraisal that it now has
or may at any time in the future have under any rule of law or statute now
existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale
shall be required by law, at least ten (10) calendar days notice to Pledgor of
the time and place of any public sale or the time after which a private sale is
to be made shall constitute reasonable notification. Secured Party shall not be
obligated to make any sale of Collateral regardless of notice of sale having
been given. Secured Party may adjourn any public or private sale from time to
time by announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned. To the maximum extent permitted by law, Pledgor hereby waives any
claims against Secured Party arising because the price at which any Collateral
may have been sold at such a private sale was less than the price that might
have been obtained at a public sale, even if Secured Party accepts the first
offer received and does not offer such Collateral to more than one offeree.
(b) Pledgor hereby agrees that any sale or other
disposition of the Collateral conducted in conformity with reasonable commercial
practices of banks, insurance companies, or other financial institutions in the
City of Los Angeles, California in disposing of property similar to the
Collateral shall be deemed to be commercially reasonable.
(c) Pledgor hereby acknowledges that the sale by
Secured Party of any Collateral pursuant to the terms hereof in compliance with
the Securities Act of 1933 as now in effect or as hereafter amended, or any
similar statute hereafter adopted with similar purpose or effect (the
"Securities Act"), as well as applicable "Blue Sky" or other state securities
laws may require strict limitations as to the manner in which Secured Party or
any subsequent transferee of the Collateral may dispose thereof. Pledgor
acknowledges and agrees that in order to protect Secured Party's interest it may
be necessary to sell the Collateral at a price less than the maximum price
attainable if a sale were delayed or were made in another manner, such as a
public offering under the Securities Act. Pledgor has no objection to sale in
such a manner and agrees that Secured
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Party shall have no obligation to obtain the maximum possible price for the
Collateral. Without limiting the generality of the foregoing, Pledgor agrees
that, upon the occurrence and during the continuation of an Event of Default,
Secured Party may, subject to applicable law, from time to time attempt to sell
all or any part of the Collateral by a private placement, restricting the
bidders and prospective purchasers to those who will represent and agree that
they are purchasing for investment only and not for distribution. In so doing,
Secured Party may solicit offers to buy the Collateral or any part thereof for
cash, from a limited number of investors deemed by Secured Party, in its
reasonable judgment, to be institutional investors or other responsible parties
who might be interested in purchasing the Collateral. If Secured Party shall
solicit such offers, then the acceptance by Secured Party of one of the offers
shall be deemed to be a commercially reasonable method of disposition of the
Collateral.
(d) If Secured Party shall determine to exercise its
right to sell all or any portion of the Collateral pursuant to this Section,
Pledgor agrees that, upon request of Secured Party, Pledgor will, at its own
expense:
(i) use its best efforts to execute and
deliver, and cause the Issuers and the directors and officers thereof to execute
and deliver, all such instruments and documents, and to do or cause to be done
all such other acts and things, as may be necessary or, in the opinion of
Secured Party, advisable to register such Collateral under the provisions of the
Securities Act, and to cause the registration statement relating thereto to
become effective and to remain effective for such period as prospectuses are
required by law to be furnished, and to make all amendments and supplements
thereto and to the related prospectuses which, in the opinion of Secured Party,
are necessary or advisable, all in conformity with the requirements of the
Securities Act and the rules and regulations of the Securities and Exchange
Commission applicable thereto;
(ii) use its best efforts to qualify the
Collateral under the state securities laws or "Blue Sky" laws and to obtain all
necessary governmental approvals for the sale of the Collateral, as requested by
Secured Party;
(iii) cause the Issuers to make available
to their respective security holders, as soon as practicable, an earnings
statement which will satisfy the provisions of Section 11(a) of the Securities
Act;
(iv) execute and deliver, or cause the
officers and directors of the Issuers to execute and deliver, to any person,
entity or governmental authority as Secured Party may choose, any and all
documents and writings which, in Secured Party's reasonable judgment, may be
necessary or appropriate for approval, or be required by, any regulatory
authority located in any city, county, state or country where Pledgor or the
Issuers engage in business, in order to transfer or to more
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effectively transfer the Pledged Shares or otherwise enforce Secured Party's
rights hereunder; and
(v) do or cause to be done all such other
acts and things as may be necessary to make such sale of the Collateral or any
part thereof valid and binding and in compliance with applicable law.
Pledgor acknowledges that there is no adequate remedy at law for failure by it
to comply with the provisions of this Section and that such failure would not be
adequately compensable in damages, and therefore agrees that its agreements
contained in this Section may be specifically enforced.
(e) PLEDGOR EXPRESSLY WAIVES TO THE
MAXIMUM EXTENT PERMITTED BY LAW: (i) ANY CONSTITUTIONAL OR OTHER RIGHT TO A
JUDICIAL HEARING PRIOR TO THE TIME SECURED PARTY DISPOSES OF ALL OR ANY PART OF
THE COLLATERAL AS PROVIDED IN THIS SECTION; (ii) ALL RIGHTS OF REDEMPTION, STAY,
OR APPRAISAL THAT IT NOW HAS OR MAY AT ANY TIME IN THE FUTURE HAVE UNDER ANY
RULE OF LAW OR STATUTE NOW EXISTING OR HEREAFTER ENACTED; AND (iii) EXCEPT AS
SET FORTH IN SUBSECTION (a) OF THIS SECTION, ANY REQUIREMENT OF NOTICE, DEMAND,
OR ADVERTISEMENT FOR SALE.
10. Application of Proceeds. After the occurrence and during
the continuance of an Event of Default, any cash held by Secured Party as
Collateral and all cash proceeds received by Secured Party in respect of any
sale of, collection from, or other realization upon all or any part of the
Collateral pursuant to the exercise by Secured Party of its remedies as a
secured creditor as provided in Section 9 shall be applied from time to time by
Secured Party as provided in the Loan Agreement.
11. Duties of Secured Party. The powers conferred on Secured
Party hereunder are solely to protect its interests in the Collateral and shall
not impose on it any duty to exercise such powers. Except as provided in Section
9-207 of the Code, Secured Party shall have no duty with respect to the
Collateral or any responsibility for taking any necessary steps to preserve
rights against any Persons with respect to any Collateral.
12. Choice of Law and Venue. THE VALIDITY OF THIS
AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF
THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE PARTIES AGREE THAT ALL
ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED
AND LITIGATED
11
<PAGE>
ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF
NEW YORK OR, AT THE SOLE OPTION OF SECURED PARTY, IN ANY OTHER COURT IN WHICH
SECURED PARTY SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS
SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF PLEDGOR AND
SECURED PARTY WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT
EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO
VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION
12.
13. Amendments; Etc. No amendment or waiver of any provision
of this Agreement nor consent to any departure by Pledgor herefrom shall in any
event be effective unless the same shall be in writing and signed by Secured
Party, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given. No failure on the part of
Secured Party to exercise, and no delay in exercising any right under this
Agreement, any other Loan Document, or otherwise with respect to any of the
Secured Obligations, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right under this Agreement, any other Loan Document, or
otherwise with respect to any of the Secured Obligations preclude any other or
further exercise thereof or the exercise of any other right. The remedies
provided for in this Agreement or otherwise with respect to any of the Secured
Obligations are cumulative and not exclusive of any remedies provided by law.
14. Notices. Unless otherwise specifically provided herein,
any notice or other communication herein required or permitted to be given shall
be in writing and shall be delivered in the manner set forth in the Loan
Agreement.
15. Continuing Security Interest. This Agreement shall create
a continuing security interest in the Collateral and shall: (i) remain in full
force and effect until the indefeasible payment in full of the Secured
Obligations, including the cash collateralization, expiration, or cancellation
of all Secured Obligations, if any, consisting of letters of credit, and the
full and final termination of any commitment to extend any financial
accommodations under the Loan Agreement; (ii) be binding upon Pledgor and its
successors and assigns; and (iii) inure to the benefit of Secured Party and its
successors, transferees, and assigns. Upon the indefeasible payment in full of
the Secured Obligations, including the cash collateralization, expiration, or
cancellation of all Secured Obligations, if any, consisting of letters of
credit, and the full and final termination of any commitment to extend any
financial accommodations under the Loan Agreement, the security interests
granted herein shall automatically terminate and all rights to the Collateral
shall revert to Pledgor. Upon any such termination, Secured Party will, at
Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor
shall reasonably request to evidence such termination. Such documents shall be
12
<PAGE>
prepared by Pledgor and shall be in form and substance reasonably satisfactory
to Secured Party.
16. Security Interest Absolute. To the maximum extent
permitted by law, all rights of Secured Party, all security interests hereunder,
and all obligations of Pledgor hereunder, shall be absolute and unconditional
irrespective of:
(a) any lack of validity or enforceability of any of
the Secured Obligations or any other agreement or instrument relating thereto,
including any of the Loan Documents;
(b) any change in the time, manner, or place of
payment of, or in any other term of, all or any of the Secured Obligations, or
any other amendment or waiver of or any consent to any departure from any of the
Loan Documents, or any other agreement or instrument relating thereto;
(c) any exchange, release, or non-perfection of any
other collateral, or any release or amendment or waiver of or consent to
departure from any guaranty for all or any of the Secured Obligations; or
(d) any other circumstances that might otherwise
constitute a defense available to, or a discharge of, Pledgor.
To the maximum extent permitted by law, Pledgor hereby waives any right to
require Secured Party to: (A) proceed against or exhaust any security held from
Pledgor; or (B) pursue any other remedy in Secured Party's power whatsoever.
17. Headings. Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement or be given any substantive effect.
18. Severability. In case any provision in or obligation under
this Agreement shall be invalid, illegal or unenforceable in any jurisdiction,
the validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction, shall
not in any way be affected or impaired thereby.
19. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same Agreement.
20. Waiver of Marshaling. Each of Pledgor and Secured Party
acknowledges and agrees that in exercising any rights under or with respect to
the
13
<PAGE>
Collateral: (i) Secured Party is under no obligation to marshal any Collateral;
(ii) may, in its absolute discretion, realize upon the Collateral in any order
and in any manner it so elects; and (iii) may, in its absolute discretion, apply
the proceeds of any or all of the Collateral to the Secured Obligations in any
order and in any manner it so elects. Pledgor and Secured Party waive any right
to require the marshaling of any of the Collateral.
21. Waiver of Jury Trial. PLEDGOR AND SECURED PARTY HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. PLEDGOR AND SECURED PARTY
REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE
EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT
TO A TRIAL BY THE COURT.
[Signature page to follow.]
14
<PAGE>
IN WITNESS WHEREOF, Pledgor and Secured Party have caused this
Agreement to be duly executed and delivered by their officers thereunto duly
authorized as of the date first written above.
FOOTHILL CAPITAL DISCOVERY ZONE, INC.,
CORPORATION, a Delaware corporation
a California corporation
By /s/ Brian Duffy By /s/ Robert Rooney
--------------------- -----------------------------
Title: AVP Title: Senior Vice President-Chief
Financial Officer
15
<PAGE>
SCHEDULE A
TO
STOCK PLEDGE AGREEMENT
Pledgor: Discovery Zone, Inc., a Delaware corporation
<TABLE>
<CAPTION>
Pledged Shares
--------------
Former Name, if Pledgor's
Number Certificate any, in which Percentage Jurisdiction of
Issuer of Shares Class Number(s) Certificate Issued Ownership Incorpration
- ------ --------- ----- --------- ------------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
DZ Party, Inc. 1 Common DZ 1 None 100% Delaware
Discover Zone 1 Common C-3 None 100% Canada
(Canada) Limited (Ontario)
Discovery Zone 1 Common DZ 1 None 100% Puerto Rico
(Puerto Rico,)
Inc.
Discovery Zone 1000 Common 1 None 100% Nevada
Licensing, Inc.
</TABLE>
<PAGE>
SCHEDULE B
TO
STOCK PLEDGE AGREEMENT
Pledgor: Discovery Zone, Inc., a Delaware corporation
Address of Chief Executive Office:
565 Taxter Road
Fifth Floor
Elmsford, New York 10523
<PAGE>
SCHEDULE C
TO
STOCK PLEDGE AGREEMENT
Existing Future Rights and Proceeds: [None.]
<PAGE>
Exhibit 4.71
TRADEMARK SECURITY AGREEMENT
This TRADEMARK SECURITY AGREEMENT (this "Agreement"), dated as
of March 31, 1998, is made by DISCOVERY ZONE LICENSING, INC., a Nevada
corporation ("Obligor"), in favor of FOOTHILL CAPITAL CORPORATION, a California
corporation, ("Foothill").
RECITALS
A. Discovery Zone, Inc., a Delaware corporation ("Borrower")
and Foothill are, contemporaneously herewith, entering into that certain Loan
and Security Agreement, of even date herewith (as amended, restated, modified,
renewed or extended from time to time, the "Loan Agreement"), pursuant to which
Foothill has agreed to make certain financial accommodations to Borrower.
B. Obligor, Discovery Zone (Canada) Limited, a corporation
organized under the laws of Canada, and Discovery Zone (Puerto Rico), Inc., a
corporation organized under the laws of the commonwealth of Puerto Rico (each a
"Guarantor", collectively "Guarantors"), have executed that certain General
Continuing Guaranty, of even date herewith, in favor of Foothill (the
"Guaranty").
C. The Guarantors and Foothill have entered into that certain
Security Agreement, of even date herewith (as amended, restated, modified,
renewed or extended from time to time, the "Security Agreement"), pursuant to
which each Guarantor has granted to Foothill a security interest in (among other
things) all of the general intangibles of such Guarantor.
D. Pursuant to the Security Agreement, and as one of the
conditions precedent to the obligations of Foothill under the Loan Agreement,
Obligor has agreed to execute and deliver this Agreement to Foothill for filing
with the PTO and with any other relevant recording systems in any domestic
jurisdiction, and as further evidence of and to effectuate Foothill's existing
security interests in the trademarks and other general intangibles described
herein.
ASSIGNMENT
NOW, THEREFORE, for valuable consideration, the receipt and
adequacy of which is hereby acknowledged, Obligor hereby agrees in favor of
Foothill as follows:
1. Definitions; Interpretation.
(a) Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings:
<PAGE>
"Event of Default" shall have the meaning ascribed thereto in
the Security Agreement.
"Lien" means any pledge, security interest, assignment, charge
or encumbrance, lien (statutory or other), or other preferential arrangement
(including any agreement to give any security interest).
"Obligor" shall have the meaning ascribed to such term in the
introductory paragraph of this Agreement.
"Proceeds" means whatever is receivable or received from or
upon the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Trademark Collateral, including
"proceeds" as defined at UCC Section 9-306, all insurance proceeds and all
proceeds of proceeds. Proceeds shall include (i) any and all accounts, chattel
paper, instruments, general intangibles, cash and other proceeds, payable to or
for the account of Obligor, from time to time in respect of any of the Trademark
Collateral, (ii) any and all proceeds of any insurance, indemnity, warranty or
guaranty payable to or for the account of Obligor from time to time with respect
to any of the Trademark Collateral, (iii) any and all claims and payments (in
any form whatsoever) made or due and payable to Obligor from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Trademark Collateral by any Person acting
under color of governmental authority, and (iv) any and all other amounts from
time to time paid or payable under or in connection with any of the Trademark
Collateral or for or on account of any damage or injury to or conversion of any
Trademark Collateral by any Person.
"PTO" means the United States Patent and Trademark Office and
any successor thereto.
"Secured Obligations" means all liabilities, obligations, or
undertakings owing by Obligor to Foothill of any kind or description arising out
of or outstanding under, advanced or issued pursuant to, or evidenced by the
Guaranty, any other Loan Document heretofore, herewith, or hereafter executed by
Obligor, or this Agreement, irrespective of whether for the payment of money,
whether direct or indirect, absolute or contingent, due or to become due,
voluntary or involuntary, whether now existing or hereafter arising, and
including all interest (including interest that accrues after the filing of a
case under the Bankruptcy Code) and any and all costs, fees (including attorneys
fees), and expenses which Obligor is required to pay pursuant to any of the
foregoing, by law, or otherwise.
"Trademark Collateral" has the meaning set forth in Section 2.
"Trademarks" has the meaning set forth in Section 2.
2
<PAGE>
"UCC" means the Uniform Commercial Code as in effect from time
to time in the State of New York.
"United States" and "U.S." each mean the United States of
America.
(b) Terms Defined in UCC. Where applicable and except
as otherwise defined herein, terms used in this Agreement shall have the
meanings assigned to them in the UCC.
(c) Interpretation. In this Agreement, except to the
extent the context otherwise requires:
(i) Any reference to a Section or a Schedule
is a reference to a section hereof, or a schedule hereto,
respectively, and to a subsection or a clause is, unless
otherwise stated, a reference to a subsection or a clause of
the Section or subsection in which the reference appears.
(ii) The words "hereof," "herein," "hereto,"
"hereunder" and the like mean and refer to this Agreement as a
whole and not merely to the specific Section, subsection,
paragraph or clause in which the respective word appears.
(iii) The meaning of defined terms shall be
equally applicable to both the singular and plural forms of
the terms defined.
(iv) The words "including," "includes" and
"include" shall be deemed to be followed by the words "without
limitation."
(v) References to agreements and other
contractual instruments shall be deemed to include all
subsequent amendments and other modifications thereto.
(vi) References to statutes or regulations
are to be construed as including all statutory and regulatory
provisions consolidating, amending or replacing the statute or
regulation referred to.
(vii) Any captions and headings are for
convenience of reference only and shall not affect the
construction of this Agreement.
(viii) Capitalized words not otherwise
defined herein shall have the respective meanings assigned to
them in the Loan Agreement.
3
<PAGE>
(ix) In the event of a direct conflict
between the terms and provisions of this Agreement and the
Loan Agreement, it is the intention of the parties hereto that
both such documents shall be read together and construed, to
the fullest extent possible, to be in concert with each other.
In the event of any actual, irreconcilable conflict that
cannot be resolved as aforesaid, the terms and provisions of
the Loan Agreement shall control and govern; provided,
however, that the inclusion herein of additional obligations
on the part of Obligor and supplemental rights and remedies in
favor of Foothill (whether under federal law or applicable New
York law), in each case in respect of the Trademark
Collateral, shall not be deemed a conflict with the Loan
Agreement.
2. Security Interest.
(a) Assignment and Grant of Security Interest.
To secure the Secured Obligations, Obligor hereby grants, assigns,
transfers and conveys to Foothill a continuing security interest in all
of Obligor's right, title and interest in and to the following
property, whether now existing or hereafter acquired or arising and
whether registered or unregistered (collectively, the "Trademark
Collateral"):
(i) all state (including common law),
federal trademarks, service marks and trade names, corporate
names, company names, business names, fictitious business
names, trade styles, trade dress, logos, other source or
business identifiers, designs and general intangibles of like
nature, now existing or hereafter adopted or acquired,
together with and including all licenses therefor held by
Obligor (unless otherwise prohibited by any license or related
licensing agreement under circumstances where the granting of
the security interest would have the effect under applicable
law of terminating or permitting termination of the license
for breach (unless the licensor has consented to such grant or
waived such termination remedy)), and all registrations and
recordings thereof, and all applications filed or to be filed
in connection therewith, including registrations and
applications in the PTO, any State of the United States and
all extensions or renewals thereof, including without
limitation any of the foregoing identified on Schedule A
hereto (as the same may be amended, modified or supplemented
from time to time), and the right (but not the obligation) to
register claims under any state or federal trademark law or
regulation and to apply for, renew and extend any of the same,
to sue or bring opposition or cancellation proceedings in the
name of Obligor or in the name of Foothill for past, present
or future infringement or unconsented use thereof, and all
rights arising therefrom throughout the world (collectively,
the "Trademarks");
(ii) all claims, causes of action and rights
to sue for past, present or future infringement or unconsented
use of any Trademarks and all rights arising therefrom and
pertaining thereto;
4
<PAGE>
(iii) all general intangibles related to or
arising out of any of the Trademarks and all the goodwill of
Obligor's business symbolized by the Trademarks or associated
therewith; and
(iv) all products and Proceeds of any and
all of the foregoing.
(b) Continuing Security Interest. Obligor agrees
that this Agreement shall create a continuing security interest in the
Trademark Collateral which shall remain in effect until terminated in
accordance with Section 17.
(c) Incorporation into Security Agreement. This
Agreement shall be fully incorporated into the Security Agreement and
all understandings, agreements and provisions contained in the Security
Agreement shall be fully incorporated into this Agreement. Without
limiting the foregoing, the Trademark Collateral described in this
Agreement shall constitute part of the Collateral in the Security
Agreement.
3. Further Assurances; Appointment of Foothill as
Attorney-in-Fact. Obligor at its expense shall execute and deliver, or
cause to be executed and delivered, to Foothill any and all documents
and instruments, in form and substance reasonably satisfactory to
Foothill, and take any and all action, which Foothill may reasonably
request from time to time, to perfect and continue perfected, maintain
the priority of or provide notice of Foothill's security interest in
the Trademark Collateral and to accomplish the purposes of this
Agreement. Foothill shall have the right, in the name of Obligor, or in
the name of Foothill or otherwise, without notice to or assent by
Obligor, and Obligor hereby irrevocably constitutes and appoints
Foothill (and any of Foothill's officers or employees or agents
designated by Foothill) as Obligor's true and lawful attorney-in-fact
with full power and authority, (i) to sign the name of Obligor on all
or any of such documents or instruments and perform all other acts that
Foothill reasonably deems necessary or advisable in order to perfect or
continue perfected, maintain the priority or enforceability of or
provide notice of Foothill's security interest in, the Trademark
Collateral, and (ii) to execute any and all other documents and
instruments, and to perform any and all acts and things for and on
behalf of Obligor, which Foothill reasonably may deem necessary or
advisable to maintain, preserve and protect the Trademark Collateral
and to accomplish the purposes of this Agreement, including (A) after
the occurrence and during the continuance of any Event of Default, to
defend, settle, adjust or institute any action, suit or proceeding with
respect to the Trademark Collateral, (B) to assert or retain any rights
under any license agreement for any of the Trademark Collateral, and
(C) after the occurrence and during the continuance of any Event of
Default, to execute any and all applications, documents, papers and
instruments for Foothill to use the Trademark Collateral, to grant or
issue any exclusive or non-exclusive license with respect to any
Trademark Collateral, and to assign, convey or otherwise transfer title
in or dispose of the Trademark Collateral. The power of attorney set
forth in this Section 3, being coupled
5
<PAGE>
with an interest, is irrevocable so long as this Agreement shall not
have terminated in accordance with Section 17.
4. Representations and Warranties. Obligor represents
and warrants to Foothill, in each case to the best of its knowledge,
information, and belief, as follows:
(a) No Other Trademarks. Schedule A sets forth,
as of the Closing Date, a true and correct list of all of the existing
Trademarks that are registered, or for which any application for
registration has been filed with the PTO or any corresponding or
similar trademark office of any other U.S. jurisdiction, and that are
owned or held (whether pursuant to a license or otherwise) and used by
Obligor.
(b) Trademarks Subsisting. Each of the
Trademarks listed in Schedule A is subsisting and has not been adjudged
invalid or unenforceable, in whole or in part, and, to the best of
Obligor's knowledge, each of the Trademarks is valid and enforceable.
(c) Ownership of Trademark Collateral; No
Violation. (i) Obligor has rights in and good and defensible title to
the existing Trademark Collateral (excluding "The Cage" and "The Art
Factory", as to which Obligor may or may not have defensible title),
(ii) with respect to the Trademark Collateral shown on Schedule A
hereto as owned by it, Obligor is the sole and exclusive owner thereof,
free and clear of any Liens and rights of others (other than the
security interest created hereunder and other than Permitted Liens),
including licenses, registered user agreements and covenants by Obligor
not to sue third persons, and (iii) with respect to any Trademarks for
which Obligor is either a licensor or a licensee pursuant to a license
or licensee agreement regarding such Trademark, each such license or
licensing agreement is in full force and effect, Obligor is not in
default of any of its obligations thereunder and, other than the
parties to such licenses or licensing agreements, no other Person has
any rights in or to any of the Trademark Collateral. To the best of
Obligor's knowledge, the past, present and contemplated future use of
the Trademark Collateral by Obligor has not, does not and will not
infringe upon or violate any right, privilege or license agreement of
or with any other Person.
(d) No Infringement. To the best of Obligor's
knowledge, no material infringement or unauthorized use presently is
being made of any of the Trademark Collateral by any Person.
(e) Powers. Obligor has the unqualified right,
power and authority to pledge and to grant to Foothill a security
interest in all of the Trademark Collateral pursuant to this Agreement,
and to execute, deliver and perform its obligations in accordance with
the terms of this Agreement, without the consent or approval of any
other Person except as already obtained.
6
<PAGE>
5. Covenants. So long as any of the Secured
Obligations remain unsatisfied, Obligor agrees that it will comply with
all of the covenants, terms and provisions of this Agreement, the
Security Agreement and the other Loan Documents, and Obligor will
promptly give Foothill written notice of the occurrence of any event
that could have a material adverse effect on any of the Trademarks or
the Trademark Collateral, including any petition under the Bankruptcy
Code filed by or against any licensor of any of the Trademarks for
which Obligor is a licensee.
6. Future Rights. For so long as any of the Secured
Obligations shall remain outstanding, or, if earlier, until Foothill
shall have released or terminated, in whole but not in part, its
interest in the Trademark Collateral, if and when Obligor shall obtain
rights to any new Trademarks, or any reissue, renewal or extension of
any Trademarks, the provisions of Section 2 shall automatically apply
thereto and Obligor shall give to Foothill prompt notice thereof.
Obligor shall do all things reasonably deemed necessary or advisable by
Foothill to ensure the validity, perfection, priority and
enforceability of the security interests of Foothill in such future
acquired Trademark Collateral. Obligor hereby authorizes Foothill to
modify, amend or supplement the Schedules hereto and to re-execute this
Agreement from time to time on Obligor's behalf and as its
attorney-in-fact to include any future Trademarks which are or become
Trademark Collateral and to cause such re-executed Agreement or such
modified, amended or supplemented Schedules to be filed with the PTO.
7. Foothill's Duties. Notwithstanding any provision
contained in this Agreement, Foothill shall have no duty to exercise
any of the rights, privileges or powers afforded to it and shall not be
responsible to Obligor or any other Person for any failure to do so or
delay in doing so. Except for the accounting for moneys actually
received by Foothill hereunder or in connection herewith, Foothill
shall have no duty or liability to exercise or preserve any rights,
privileges or powers pertaining to the Trademark Collateral.
8. Remedies. From and after the occurrence and during
the continuation of an Event of Default, Foothill shall have all rights
and remedies available to it under the Security Agreement and
applicable law (which rights and remedies are cumulative) with respect
to the security interests in any of the Trademark Collateral or any
other Collateral. Obligor agrees that such rights and remedies include
the right of Foothill as a secured party to sell or otherwise dispose
of its Collateral after default, pursuant to UCC Section 9-504. Obligor
agrees that Foothill shall at all times have such royalty-free
licenses, to the extent permitted by law, for any Trademark Collateral
that is reasonably necessary to permit the exercise of any of
Foothill's rights or remedies upon or after the occurrence of (and
during the continuance of) an Event of Default with respect to (among
other things) any tangible asset of Obligor in which Foothill has a
security interest, including Foothill's rights to sell inventory,
tooling or packaging which is acquired by Obligor (or its successor,
assignee or trustee in bankruptcy). In addition to and without
7
<PAGE>
limiting any of the foregoing, upon the occurrence and during the
continuance of an Event of Default, Foothill shall have the right but
shall in no way be obligated to bring suit, or to take such other
action as Foothill deems necessary or advisable, in the name of Obligor
or Foothill, to enforce or protect any of the Trademark Collateral, in
which event Obligor shall, at the request of Foothill, do any and all
lawful acts and execute any and all documents required by Foothill in
aid of such enforcement. To the extent that Foothill shall elect not to
bring suit to enforce such Trademark Collateral, Obligor, in the
exercise of its reasonable business judgment, agrees to use all
reasonable measures and its diligent efforts, whether by action, suit,
proceeding or otherwise, to prevent the infringement, misappropriation
or violation thereof by others and for that purpose agrees diligently
to maintain any action, suit or proceeding against any Person necessary
to prevent such infringement, misappropriation or violation.
9. Binding Effect. This Agreement shall be binding
upon, inure to the benefit of and be enforceable by Obligor and
Foothill and their respective successors and assigns.
10. Notices. All notices and other communications
hereunder shall be in writing and shall be mailed, sent or delivered in
accordance with the Guaranty.
11. Governing Law. This Agreement shall be governed
by, and construed and enforced in accordance with, the federal laws of
the United States of America and the laws of the State of New York.
12. Entire Agreement; Amendment. This Agreement,
together with the Schedules hereto, contains the entire agreement of
the parties with respect to the subject matter hereof and supersedes
all prior drafts and communications relating to such subject matter.
Neither this Agreement nor any provision hereof may be modified,
amended or waived except by the written agreement of the parties as
provided in the Guaranty. Notwithstanding the foregoing, Foothill may
re-execute this Agreement or modify, amend or supplement the Schedules
hereto as provided in Section 6 hereof.
13. Severability. If one or more provisions contained
in this Agreement shall be invalid, illegal or unenforceable in any
respect in any jurisdiction or with respect to any party, such
invalidity, illegality or unenforceability in such jurisdiction or with
respect to such party shall, to the fullest extent permitted by
applicable law, not invalidate or render illegal or unenforceable any
such provision in any other jurisdiction or with respect to any other
party, or any other provisions of this Agreement.
14. Counterparts. This Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute but one and
the same agreement.
8
<PAGE>
15. Security Agreement. Obligor acknowledges that the
rights and remedies of Foothill with respect to the security interest
in the Trademark Collateral granted hereby are more fully set forth in
the Security Agreement and all such rights and remedies are cumulative.
16. No Inconsistent Requirements. Obligor
acknowledges that this Agreement and the other Loan Documents may
contain covenants and other terms and provisions variously stated
regarding the same or similar matters, and Obligor agrees that all such
covenants, terms and provisions are cumulative and all shall be
performed and satisfied in accordance with their respective terms. To
the extent of any conflict between the provisions of this Agreement and
the Loan Agreement, however, the provisions of the Loan Agreement shall
govern.
17. Termination. Upon the payment in full of the
Secured Obligations, including the cash collateralization, expiration,
or cancellation of all Secured Obligations, if any, consisting of
letters of credit, and the full and final termination of any commitment
to extend any financial accommodations under the Loan Agreement, this
Agreement shall terminate, and Foothill shall execute and deliver such
documents and instruments and take such further action reasonably
requested by Obligor, at Obligor's expense, as shall be necessary to
evidence termination of the security interest granted by Obligor to
Foothill hereunder, including cancellation of this Agreement by written
notice from Foothill to the PTO.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as of the date first above written.
DISCOVERY ZONE LICENSING, INC.,
a Nevada corporation
By: /s/ Robert Rooney
------------------------------------------------
Title: Senior Vice President-Chief Financial Officer
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ Brian Duffy
------------------------------------------------
Title: AVP
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<PAGE>
STATE OF CALIFORNIA )
) ss
COUNTY OF LOS ANGELES )
On March 31, 1998, before me, Lena Ricci Prodan, Notary
Public, personally appeared Robert G. Rooney, personally known to me
(or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the
person(s) acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Lena Ricci Prodan
----------------------------
Signature
[SEAL]
<PAGE>
STATE OF CALIFORNIA )
) ss
COUNTY OF LOS ANGELES )
On March 31, 1998, before me, Lena Ricci Prodan, Notary
Public, personally appeared Brian G. Duffy, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s)
whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the
person(s) acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Lena Ricci Prodan
-------------------------
Signature
[SEAL]
<PAGE>
Exhibit 4.72
- --------------------------------------------------------------------------------
INTERCREDITOR AGREEMENT
between
FOOTHILL CAPITAL CORPORATION
and
STATE STREET BANK AND TRUST COMPANY
Dated as March 31, 1998
- --------------------------------------------------------------------------------
<PAGE>
INTERCREDITOR AGREEMENT
THIS INTERCREDITOR AGREEMENT dated as of March 31, 1998 (this
"Agreement") is made by and between State Street Bank and Trust Company (the
"Subordinated Creditor") solely in its capacity as trustee and collateral agent
under and pursuant to the Subordinated Creditor Indenture (as hereinafter
defined), and Foothill Capital Corporation, a California corporation (the
"Lender"), as senior secured lender under and pursuant to the Lender Credit
Agreement (as hereinafter defined).
RECITALS
A. Discovery Zone, Inc., a Delaware corporation (the "Borrower"),
certain subsidiaries of the Borrower, and the Subordinated Creditor entered into
an Indenture, dated July 22, 1997 (the "Subordinated Creditor Indenture"),
pursuant to which and upon the terms and conditions stated there in indebtedness
was incurred by the Borrower (the "Subordinated Indenture Indebtedness"), the
repayment of which is secured by security interests in and liens on the assets
and properties (the "Collateral") described in the Security Agreement (the
"Security Agreement") and the Collateral Assignment of Trademarks (the
"Trademark Assignment" and together with the Security Agreement and the
Subordinated Creditor Indenture, the "Subordinated Indenture Agreements"), each
dated July 22, 1997, and each by and between the Borrower and the Subordinated
Creditor.
B. As of March __, 1998, the Borrower and the Lender entered into a
Loan and Security Agreement (the "Lender Credit Agreement") pursuant to which
the Lender agreed, upon the terms and conditions stated therein, to make loans
and advances to or to issue letters of credit (or guaranties in respect thereof)
on account of the Borrower (and certain of its subsidiaries) in an aggregate
principal amount and undrawn amount, as the case may be, not to exceed in the
aggregate $10 million (such aggregate principal and undrawn amount, together
with all interest, fees, and expenses payable thereon or with respect thereto
being the "Maximum Senior Indebtedness"), secured by security interests in and
liens on the Collateral pursuant to the Lender Credit Agreement and the
collateral security documents executed and delivered in connection therewith
(the "Senior Security Agreements" and together with the Lender Credit Agreement,
the "Senior Loan Agreements")
C. One of the conditions of the Lender Credit Agreement is that the
priority of the security interests in and liens on the Collateral under the
Senior Loan Agreements be senior to the security interests in and liens on the
Collateral under the Subordinated Indenture Agreements, in the manner and to the
extent provided in this Agreement.
<PAGE>
D. The Lender and the Subordinated Creditor desire to enter into this
Agreement concerning the respective rights of the Lender and the Subordinated
Creditor with respect to the priority of their respective security interests in
and liens on the Collateral.
E. The terms of Sections 10.02. 12.01 and 12.02 of the Subordinated
Creditor Indenture permit the Borrower to enter into the Lender Credit
Agreement, subject to compliance with certain conditions, and in connection
therewith authorize and direct the Subordinated Creditor to enter into a
subordination agreement substantially in the form of this Agreement.
F. The Lender and the Subordinated Creditor hereby agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.01. Terms Defined Above and in the Recitals. As used in this
Agreement, the following terms shall have the respective meanings indicated in
the opening paragraph hereof and in the above Recitals:
"Agreement"
"Borrower"
"Collateral"
"Lender"
"Lender Credit Agreement"
"Maximum Senior Indebtedness"
"Security Agreement"
"Senior Security Agreements"
"Senior Loan Agreements"
"Subordinated Creditor"
"Subordinated Creditor Indenture"
"Subordinated Indenture Indebtedness"
"Subordinated Indenture Agreements"
"Trademark Assignment"
Section 1.02. Other Definitions. As used in this Agreement, the
following terms shall have the meanings set forth below:
"Event of Default" shall have the meaning ascribed thereto in the
Lender Credit Agreement.
"Fully Paid" shall mean the payment in cash in full of all obligations
under each Lender Loan Document at such time when there shall no longer be any
obligation of the Lender to make loans or advances or issue letters of credit
(or guaranties in respect thereof) and there shall no
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<PAGE>
longer be any letter of credit (or guaranty in respect thereof) outstanding
thereunder or such letter of credit (or guaranty in respect thereof) shall have
been cash collateralized in an amount not less than 105% of the undrawn amount
thereof.
"Insolvency Proceeding" shall mean any proceeding for the purposes of
dissolution, winding up, liquidation, arrangement or reorganization of the
Borrower or its subsidiaries, or their respective successors or assigns, whether
in bankruptcy, insolvency, arrangement, reorganization or receivership
proceedings or upon an assignment for the benefit of creditors or any other
marshaling of the assets and liabilities of the Borrower or its subsidiaries, or
their respective successors or assigns.
"Issue Date" shall have the meaning ascribed thereto in the
Subordinated Creditor Indenture.
"Lender Loan Documents" shall mean the Senior Loan Agreements, the
collateral documents and instruments executed and delivered in connection
therewith, and such other agreements, instruments and certificates as defined or
referred to in the Lender Credit Agreement, as any or all of the same may be
amended or supplemented from time to time.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction,
excluding true lease and consignment filings).
"Lien Priority" shall mean with respect to any Lien of the Lender or
the Subordinated Creditor in the Collateral, the order of priority of such Lien
as specified in Section 2.01.
"Loan Documents" shall mean the Lender Loan Documents and the
Subordinated Creditor Loan Documents.
"McDonald's" shall mean the McDonald's Corporation, a Delaware
corporation, and its successors and assigns.
"McDonald's Collateral" shall mean those certain fourteen parcels of
real property and related fixtures, including any proceeds thereof which
properties and proceeds are subject to McDonald's Senior Liens.
"McDonald's Secured Note" shall mean a secured promissory note issued
on the Issue Date by the Borrower in favor of McDonald's pursuant to the Plan of
Reorganization represents restructured secured claims against the Borrower in an
estimated aggregate principal amount of up to $4,600,000.
3
<PAGE>
"McDonald's Secured Rent Deferral Notes" shall mean secured promissory
notes to be issued on the Issue Date by the Borrower in favor of McDonald's
pursuant to the Plan of Reorganization, which notes represent restructuring of
rent deferrals which McDonald's granted to the Borrower during bankruptcy
proceedings of the Borrower in an estimated aggregate principal amount of to
$300 000.
"McDonald's Senior Liens" shall mean the first priority Liens of
McDonald's on the McDonald's Collateral, as set forth in the first mortgages,
deeds of trust and/or deeds to secure debt, which Liens secure, among other
things, the payment of the McDonald's Secured Note, the McDonald's Secured Rent
Deferral Notes and any obligations of the Debtors (as defined in the Plan of
Reorganization) or the Borrower or any of the other Reorganized Debtors (as
defined in the Plan of Reorganization) that may arise under (i) the agreement to
indemnify as set forth in Section 10.3(f) and Section 11.2(a) (iii) of the
Agreement and Plan of-Merger, dated as of August 30, 1994, by and among
Discovery Zone, Inc., Discovery Zone International, Inc., Leaps & Bounds, Inc.
and McDonald's and (ii) the Stipulation and Order Between Debtors and McDonald's
Providing for the Resolution, Settlement and Compromise of Disputes and for Rent
Deferrals and Allowance of Certain Claims, entered by the United States
Bankruptcy Court for the District of Delaware on November 18, 1996, which Liens
are senior to the subordinate liens on the McDonald's Collateral granted by the
Borrower to Subordinated Creditor as set forth in the Subordination Agreement,
dated as of July ___, 1997, by and between McDonald's and the Subordinated
Creditor.
"Party" shall mean any signatory to this Agreement.
"Plan of Reorganization" shall have the meaning ascribed thereto in the
Subordinated Creditor Indenture.
"Senior Liabilities" shall mean the "Obligations", contingent or
otherwise, of the Borrower to the Lender as defined in the Lender Credit
Agreement and the obligations, contingent or otherwise, of the subsidiaries of
the Borrower arising under or pursuant to the Lender Loan Documents, including,
in each case, interest, fees and expenses accruing after the initiation of any
Insolvency Proceeding (irrespective of whether allowed as a claim in such
proceeding), and including the secured claims of the Lender in respect of the
Collateral in any Insolvency Proceeding.
"Subordinated Creditor Enforcement Event" shall mean the occurrence and
continuance of an "Event of Default" under Section 6.01 of the Subordinated
Creditor Indenture.
"Subordinated Creditor Loan Documents" shall mean the Subordinated
Indenture Agreements, the Collateral Agreements (as defined in the Subordinated
Creditor Indenture), the Subordinated Creditor Notes, the real property
mortgages referred to in the Subordinated Creditor Indenture (now existing or
hereafter negotiated, executed, delivered and recorded), and such other
4
<PAGE>
agreements, instruments and certificates as defined or referred to in the
Subordinated Creditor Indenture, as any or all of the same may be amended or
supplemented from time to time.
"Subordinated Creditor Notes" shall mean the notes issued to the
holders thereof pursuant to the Subordinated Creditor Indenture.
"Subordinated Liabilities" shall mean the "Obligations", contingent or
otherwise, of the Borrower and the Subsidiary Guarantors (as defined in the
Subordinated Creditor Indenture) to the Subordinated Creditor and the holders of
the Subordinated Creditor Notes defined in Section 1.01 of the Subordinated
Creditor Indenture, including, in each case, interest, fees and expenses
accruing after the initiation of any Insolvency Proceeding (irrespective of
whether allowed as a claim in such proceeding), and including the secured claim
of the Subordinated Creditor in respect of the Collateral in any Insolvency
Proceeding.
"Trigger Event" shall mean any of (a) the occurrence of an Event of
Default, (b) the acceleration of or demand for payment with respect to the
Senior Liabilities by the Lender pursuant to the Lender Credit Agreement, or (c)
the commencement of any action by the Lender, whether judicial or otherwise, for
the enforcement of the Lender's rights and remedies under any of the Lender Loan
Documents, including (i) commencement of any receivership or foreclosure
proceedings against or any other sale of, collection on or disposition of any
Collateral, including any notification to third parties to make payment directly
to the Lender, (ii) exercise of any right of set-off, (iii) commencement of any
Insolvency Proceeding, and (iv) commencement of any action or proceeding against
the Borrower to recover all or any part of the Senior Liabilities.
Section 1.03. Singular and Plural. All definitions herein (whether set
forth herein directly or by reference to definitions in other documents) shall
be equally applicable to both the singular and the plural forms of the terms
defined.
Section 1.04. Miscellaneous. The words "hereof", "herein" or
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. Article and section references are to articles and sections of this
Agreement unless otherwise specified. The term "including" shall mean
"including, without limitation."
ARTICLE II.
LIEN PRIORITY
Section 2.01. Agreement to Subordinate. The Subordinated Creditor
hereby agrees that the Liens of the Subordinated Creditor in the Collateral are
and shall be subordinate in priority to the Lender's Liens in the Collateral
securing the Senior Liabilities up to and not exceeding the Maximum Senior
Indebtedness; provided, however, that the terms, provisions and restrictions of
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<PAGE>
this Agreement shall be void and of no further force and effect in the event,
but only to the extent, that the Lender's Liens in the Collateral are avoided,
disallowed, set aside or otherwise invalidated in any judicial proceeding by a
court, tribunal or administrative agency of competent jurisdiction. The
subordination of Liens by Subordinated Creditor in favor of the Lender herein
shall not be deemed to subordinate the Subordinated Creditor's Liens to the
Liens of any other Person.
Section 2.02. Standstill Period. If a Subordinated Creditor Enforcement
Event has occurred and is continuing, the Subordinated Creditor may give the
Lender written notice thereof, specifying the nature of the Subordinated
Creditor Enforcement Event in reasonable detail. If such Subordinated Creditor
Enforcement Event is continuing for more than 180 days after the delivery of
such notice, and if the Lender has not on or before the expiration of such
180-day period notified the Subordinated Creditor that the Lender has commenced
one or more types of enforcement actions described in Section 3.01 or that the
Borrower is the subject of an Insolvency Proceeding, then the Subordinated
Creditor may, subject to the Lien Priority and prior application of proceeds of
the Collateral to the Senior Liabilities, as provided herein, take one or more
types of enforcement actions described in Section 3.01 or otherwise available to
the Subordinated Creditor under the Subordinated Creditor Indenture and the
other Subordinated Creditor Loan Documents. If Lender has taken or commenced any
such enforcement action within such 180-day period and thereafter discontinues
such enforcement action or actions, and no Insolvency Proceeding is pending
against the Borrower and no action described in Section 2.01 is then being taken
by the Lender, and if, following the expiration of such 180-day period, such
Subordinated Creditor Enforcement Event is then continuing, then the
Subordinated Creditor may, subject to the Lien Priority and prior application of
proceeds of the Collateral to the Senior Liabilities, as provided herein, take
one or more types of enforcement actions described in Section 3.01 or otherwise
available to the Subordinated Creditor under the Subordinated Creditor Indenture
and the other Subordinated Creditor Loan Documents.
Section 2.03. Exercise of Rights.
(a) Subject to Section 2.02, the Subordinated Creditor may
exercise, and nothing herein shall constitute a waiver of any right it may have
at law or equity to receive notice of, or to commence or join with any creditor
in commencing any Insolvency Proceeding or to join or participate in, any action
or proceeding or other activity described in Section 3.01; provided, however,
that exercise of any such right by the Subordinated Creditor shall be subject to
the Lien Priority and prior application of proceeds of Collateral to the Senior
Liabilities as provided herein.
(b) The Subordinated Creditor may make such demands or file
such claims in respect of the Subordinated Liabilities as may be necessary to
prevent the waiver or bar of such claims under applicable statutes of
limitations or other statutes, court orders or rules of procedure, but except as
provided in this Section 2.03, the Subordinated Creditor shall not take any
actions restricted by Section 3.01 in respect of such claims until the Senior
Liabilities up to the amount of the Maximum Senior Indebtedness are Fully Paid.
6
<PAGE>
Section 2.04. Priority of Liens. Irrespective of the order of recording
of mortgages, financing statements, security agreements or other instruments,
and irrespective of the descriptions of Collateral contained in the Loan
Documents, including any financing statements, the Parties agree among
themselves that their respective Liens and security interests in the Collateral
shall be governed by the Lien Priority, which shall be controlling in the event
of any conflict between this Agreement and any of the Loan Documents.
Section 2.05. Notice of Trigger Event. The Lender and the Subordinated
Creditor each agree that it will notify the other if it receives actual notice
of the occurrence of a Trigger Event or Subordinated Creditor Enforcement Event,
respectively, not later than 30 days after the date of any such occurrence, such
notices to be sent in accordance with Section 5.06. The foregoing to the
contrary notwithstanding, the Lender and the Subordinated Creditor shall not
incur any liability to the other for the failure to provide any such notice so
long as the failure to so provide such notice was not the result of wilful
misconduct, bad faith, or gross negligence.
ARTICLE III.
ACTIONS OF THE PARTIES
Section 3.01. Limitation on Certain Actions. Subject to Section 2.02,
so long as any of the Senior Liabilities up to the amount of the Maximum Senior
Indebtedness are not Fully Paid, the Subordinated Creditor will not, without the
prior written consent of the Lender, take any of the following actions:
(a) commencement of any action, whether judicial or otherwise, for the
enforcement of the Lender's rights and remedies as a secured creditor with
respect to the Collateral including commencement of any receivership or
foreclosure proceedings against or any other sale of, collection on, or
disposition of any Collateral, or
(b) notifying any third party account debtors of the Borrower or its
subsidiaries to make payment directly to it or to any of its agents or other
Persons acting on its behalf.
Section 3.02. Notices. The Lender shall provide the Subordinated
Creditor with written notice at least 15 days prior to the Lender first
exercising any of its secured creditor remedies with respect to the Collateral.
The foregoing to the contrary notwithstanding, the Lender (a) shall not be
obligated to provide such prior written notice in the event that exigent
circumstances require that the Lender act immediately in order to preserve,
protect, or obtain possession or control over the Collateral or any portion
thereof; provided, however, that, in the event that any such exigent
circumstances do require the Lender to so act immediately, the Lender agrees
promptly to provide the Subordinated Creditor with written notice as soon as
practicable following the Lender first exercising any of its secured creditor
remedies with respect to the Collateral, and (b) the Lender shall not incur any
liability to the Subordinated Creditor for the failure to provide any such
notice
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<PAGE>
so long as the failure to so provide such notice was not the result of wilful
misconduct, bad faith, or gross negligence.
Section (a) Perfection of Possessory Security Interests. For the
limited purpose of perfecting the security interests of the Parties in those
types or items of Collateral in which a security interest only may be perfected
by possession or control, each Party hereby appoints the other as its
representative for the limited purpose of possessing on its behalf any such
Collateral that may come into the possession or control of such other Party from
time to time, and each Party agrees to act as the other's representative for
such limited purpose of perfecting the other's security interest by possession
or control through a representative, provided that neither Party shall incur any
liability to the other by virtue of acting as the other's representative
hereunder, and either Party may relinquish possession of Collateral in its
possession or control without the consent of the other Party, and without
incurring liability to the other Party unless there is an express written
agreement to the contrary in effect between the Parties.
ARTICLE IV.
ENFORCEMENT OF PRIORITIES
Section 4.01. In Furtherance of Lien Priorities. The Lender and the
Subordinated Creditor agree as follows:
(a) Upon any distribution of all or any of the assets of the
Borrower or its subsidiaries to creditors of the Borrower or its subsidiaries
(whether in cash, securities or other property) in connection with any
Insolvency Proceeding, which otherwise would be payable or deliverable upon or
with respect to the Collateral, such assets shall be paid or delivered by the
Subordinated Creditor directly to the Lender for application (in the case of
cash) to or as collateral (in the case of securities or other non-cash property)
for the payment or prepayment of the Senior Liabilities until the Senior
Liabilities up to the Maximum Senior Indebtedness shall have been Fully Paid.
(b) If any Insolvency Proceeding is commenced by or against
the Borrower or its subsidiaries, the Subordinated Creditor, to the extent party
to any such Insolvency Proceeding, and to the extent it has commenced any action
described in Section 3.01, shall (i) use its commercially reasonable efforts to
duly and promptly take such action as the Lender may reasonably request to
collect the proceeds of Collateral for the account of the Lender at Lender's
reasonable cost and expense and to file appropriate claims or proofs of claim in
respect of the Subordinated Liabilities and (ii) receive any and all payments or
distributions which may be payable or deliverable upon or with respect to the
Collateral and to hold such payments or distributions in trust for the Lender to
the extent set forth herein; provided, however, that Subordinated Creditor shall
have no liability to the Lender regarding the adequacy of any such proceeds or
for any action
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taken pursuant to Lender's request under clause (i) except for liabilities
resulting from Subordinated Creditor's wilful misconduct, bad faith, or gross
negligence.
(c) All payments or distributions upon or with respect to the
Subordinated Liabilities which are received by the Subordinated Creditor
contrary to the provisions of this Agreement shall be segregated from other
funds and property held by the Subordinated Creditor and shall be held in trust
for the Lender and Subordinated Creditor shall forthwith pay over such remaining
proceeds to the Lender in the same form as so received (with any necessary
endorsement without recourse or warranty) to be applied (in the case of cash) to
or held as Collateral (in the case of non-cash property or securities) for the
payment or prepayment of the Senior Liabilities up to the Maximum Senior
Indebtedness in accordance with the terms of the Lender Credit Agreement;
provided, however, that if, after such application of proceeds, the Senior
Liabilities up to the Maximum Senior Indebtedness are Fully Paid, the balance of
any amounts received by the Lender from the Subordinated Creditor shall be
segregated by the Lender from the Lender's other funds and properties and the
Lender shall hold such surplus amounts in trust for the Subordinated Creditor
and shall forthwith pay over such amounts to the Subordinated Creditor in the
same form as so received (with any necessary endorsement without recourse or
warranty) to be applied (in the case of cash) to or held as Collateral (in the
case of non-cash property or securities) for the payment or prepayment of the
Subordinated Liabilities in accordance with the terms of the Subordinated
Creditor Indenture.
(d) Each of the Lender and the Subordinated Creditor is hereby
authorized to demand specific performance of this Agreement, whether or not the
Borrower shall have complied with any of the provisions hereof applicable to it,
at any time when the other shall have failed to comply with any of the
provisions of this Agreement applicable to it, provided, however, the remedy of
specific performance shall not be available, and the asserting party shall be
free to assert any and all legal defenses it may possess, if such remedy would
result in, or otherwise constitute, a violation of the Employee Retirement
Income Security Act of 1974, as amended. Each of the Lender and the Subordinated
Creditor hereby irrevocably waives any defense based on the adequacy of a remedy
at law, which might be asserted as a bar to such remedy of specific performance.
(e) This Agreement shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the Senior
Liabilities is, other than as a result of any wilful misconduct, bad faith, or
gross negligence of the Lender, rescinded or must otherwise be returned by the
Lender upon the insolvency, bankruptcy or reorganization of the Borrower or
otherwise, all as though such payment had not been made.
4.02 Control of Dispositions of Collateral and Effect thereof on Junior
Liens.
Except to the extent, if any, expressly prohibited by the terms and
conditions of Section 4.15 or Section 5.01 of the Subordinated Creditor
Indenture,
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(a) each Party hereby agrees that if the Party with the senior security
interest in such Collateral shall have agreed with the Borrower (or its
subsidiary, as applicable) that the Borrower (or its subsidiary, as
applicable) may sell or otherwise dispose of such Collateral, then the
security interest of the other Party in such Collateral shall be
released by such other Party concurrently with such sale or other
disposition and the net cash proceeds therefrom may, at the sole
election of the Party with the senior security interest therein, be
applied to the claims of the Parties in the manner provided for herein,
or be used by the Borrower (or its subsidiary, as applicable) for its
lawful general corporate purposes,
(b) each Party hereby further agrees that any UCC collection, sale, or
other disposition of Collateral by the Lender shall be free and clear
of any Lien of the Subordinated Creditor in such Collateral, provided
that the Subordinated Creditor shall retain a Lien (having the same
priority as the Lien it previously had on the item of Collateral that
was sold or otherwise disposed of) on the proceeds of such collection,
sale, or other disposition (except to the extent such proceeds are
applied to the Senior Liabilities, as provided herein, or are used by
the Borrower (or its subsidiary, as applicable) for general corporate
purposes as set forth in subsection (a) of this Section 4.02), and
(c) to the extent reasonably requested by either Party, the other Party
will cooperate in providing any necessary or appropriate releases to
permit a collection, sale, or other disposition of Collateral, as
provided in subsections (a) or (b) of this Section 4.02, by the Party
holding the senior Lien therein free and clear of the other Party's
junior Lien.
ARTICLE V.
MISCELLANEOUS
Section 5.01. Rights of Subrogation. The Subordinated Creditor agrees
that no payment or distribution to the Lender pursuant to the provisions of this
Agreement shall entitle the Subordinated Creditor to exercise any rights of
subrogation in respect thereof until the Senior Liabilities up to the Maximum
Senior Indebtedness shall have been Fully Paid.
Section 5.02. Further Assurances. The Parties will, at their own
expense and at any time and from time to time, promptly execute and deliver all
further instruments and documents, and take all further action, that may be
necessary or desirable, or that either Party may reasonably request, in order to
protect any right or interest granted or purported to be granted hereby or to
enable the Lender or the Subordinated Creditor to exercise and enforce its
rights and remedies hereunder; provided, however, that neither Party shall be
required to execute any instruments or documents, or take any other action
referred to in this Section 5.02 to the extent that such action would contravene
any law, order or other legal requirement binding upon such Party, and in the
event of a controversy or dispute, either Party may interplead any payment or
distribution in any
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court of competent jurisdiction, without further responsibility in respect of
such payment or distribution under this Section 5.02.
Section 5.03. Defenses Similar to Suretyship Defenses. All rights and
interests of the Lender hereunder, and all agreements and obligations of the
Subordinated Creditor under this Agreement, shall remain in full force and
effect irrespective of:
(a) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Senior Liabilities, or any other
amendment or waiver of or any consent to departure from the Lender Loan
Documents, provided, however, that this clause (a) shall not apply to, and the
Subordinated Creditor's Liens and security interests in the Collateral shall not
be subordinated in priority by virtue of this Agreement to the Lender's Liens
and security interests therein to the extent that the Senior Liabilities exceed
the Maximum Senior Indebtedness without the express written consent of the
Subordinated Creditor; or
(b) any release or non-enforcement of the Lender's Liens with
respect to any Collateral, or any release, amendment or waiver of or consent to
departure from any guaranty for all or any of the Senior Liabilities.
Section 5.04. Waiver. Except as otherwise provided herein, to the
maximum extent permitted by applicable law, the Subordinated Creditor hereby
waives, with respect to the Collateral to which the Lien Priority hereunder
relates (i) any failure, omission, delay or lack on the part of the Lender to
enforce, assert or exercise any right, power or remedy conferred on the Lender
in any of the Lender Loan Documents or this Agreement or the inability of the
Lender to enforce any provision of the Lender Loan Documents or this Agreement,
and (ii) without limiting the generality of the foregoing, any requirement that
the Lender protect, secure, perfect or insure any Liens or other lien or any
property subject thereto or exhaust any right or take any action against the
Borrower or any other Person or any Collateral; provided, however, that the
foregoing shall not be deemed to conflict with the proviso to Section 2.01.
Section 5.05. Amendments, Etc. No amendment or waiver of any provision
of this Agreement nor consent to any departure by any Party shall in any event
be effective unless the same shall be in writing and signed by the each Party,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
Section 5.06. Addresses for Notices. All demands, notices and other
communications provided for hereunder shall be in writing and,
if to the Subordinated Creditor, mailed or sent by telecopy or delivered to it,
addressed to it as follows:
State Street Bank and Trust Company
Two International Place
11
<PAGE>
Boston, MA 02110
Attention: Corporate Trust Department
Telephone: (617) 664-5326
Facsimile: (617) 664-5371
if to the Lender, mailed or sent by telecopy or delivered to it, addressed to it
as follows:
Foothill Capital Corporation
11111 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025
Attention: Business Finance Division Manager
Telephone: (310) 996-7000
Facsimile: (310) 575-9623
, or as to any party at such other address as shall be designated by such party
in a written notice to the other parties complying as to delivery with the terms
of this Section. All such demands, notices and other communications shall be
effective, when mailed, two business days after deposit in the mails, postage
prepaid, when sent by telecopy, when receipt is acknowledged by the receiving
telecopy equipment (or at the opening of the next business day if receipt is
after normal business hours), or when delivered, as the case may be, addressed
as aforesaid.
Section 5.07. No Waiver, Remedies. No failure on the part of any Party
to exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
Section 5.08. Continuing Agreement, Transfer of Senior Liabilities.
This Agreement is a continuing agreement and shall (i) remain in full force and
effect until the Senior Liabilities and, solely for the purposes of Section
5.14, the Subordinated Liabilities shall have been Fully Paid, (ii) be binding
upon the Parties and their successors and assigns, and (iii) inure to the
benefit of and be enforceable by the Parties and their respective successors,
transferees and assigns. Without limiting the generality of the foregoing clause
(iii), the Lender or the Subordinated Creditor may assign or otherwise transfer
the Senior Liabilities or the Subordinated Liabilities, as applicable, to any
other Person (other than Borrower or an Affiliate of Borrower), and such other
Person shall thereupon become vested with all the rights in respect thereof
granted to the Lender or Subordinated Creditor, as the case may be, herein or
otherwise.
Section 5.09. Governing Law; Entire Agreement. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of New York
except as otherwise preempted by applicable federal law. This Agreement
constitutes the entire agreement and understanding among the Parties with
respect to the subject matter hereof and supersedes any prior agreements,
written or oral, with respect thereto.
12
<PAGE>
Section 5.10. Counterparts. This Agreement may be executed in any
number of counterparts, and it is not necessary that the signatures of all
Parties be contained on any one counterpart hereof, each counterpart will be
deemed to be an original, and all together shall constitute one and the same
document.
Section 5.11. No Third Party Beneficiary. This Agreement is solely for
the benefit of the Parties (and their successors and assigns). No other Person
(including the Borrower or any subsidiaries or affiliates of the Borrower) shall
be deemed to be a third party beneficiary of this Agreement.
Section 5.12 Headings. The headings of the articles and Sections of
this Agreement are inserted for purposes of convenience only and shall not be
construed to affect the meaning or construction of any of the provisions hereof.
Section 5.13. Severability. If any of the provisions in this Agreement
shall for any reason, be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement and shall not invalidate the Lien Priority or any
other priority set forth in this Agreement.
Section 5.14. Payment in Full of Senior Liabilities. From and after the
date on which the Senior Liabilities (up to the Maximum Senior Indebtedness)
have been Fully Paid:
(a) All payments or distributions received by the Lender with
respect to the Collateral shall be segregated from other funds and property held
by the Lender and held in trust by the Lender for the Subordinated Creditor and
shall be promptly paid over to the Subordinated Creditor in the same form as
received (with any necessary endorsement without recourse or warranty) to be
applied to or held for the payment or prepayment of the Subordinated Liabilities
in accordance with the terms of the Subordinated Creditor Indenture; and
(b) The Lender will promptly execute and deliver all further
instruments and documents, and take all further acts that may be necessary or
desirable, or that the Subordinated Creditor may reasonably request, to permit
the Subordinated Creditor to enforce the Subordinated Liabilities or recover any
proceeds of the Collateral;
provided, however, that the Lender shall not be required to pay over any payment
or distribution, execute any instruments or documents, or take any other action
referred to in this Section 5.14 to the extent that such action would contravene
any law, order or other legal requirement binding upon the Lender, and in the
event of a controversy or dispute, the Lender may interplead any payment or
distribution in any court of competent jurisdiction, without further
responsibility in respect of such payment or distribution under this Section
5.14.
Section 5.15. Other Non-Subordinated Encumbered Assets. Notwithstanding
any term herein to the contrary, it is hereby acknowledged and agreed that the
subordination set forth in this
13
<PAGE>
Agreement (and the term "Collateral" as defined in this Agreement) does not
include or apply to (i) cash, securities instruments and/or certificates in an
escrow account established with and pledged to the Subordinated Creditor under
and pursuant to a certain Escrow and Security Agreement between the Borrower and
the Subordinated Creditor dated July 22, 1997, and (ii) McDonald's rights in the
McDonald's Collateral encumbered by the McDonald's Senior Liens.
Section 5.16. Subordinated Creditor Trustee Status. Notwithstanding any
term herein to the contrary, it is hereby expressly agreed and acknowledged that
the subordination and related agreements set forth herein by the Subordinated
Creditor are made solely in its capacity as trustee and collateral agent under
the Subordinated Creditor Indenture and with respect to the Subordinated
Creditor Notes (and not in its individual commercial capacity, except to the
extent that it is or becomes the holder of any such Subordinated Creditor Note).
The Subordinated Creditor shall not have any duties, obligations, or
responsibilities to the Lender under this Agreement except as expressly set
forth herein. Nothing in this Agreement shall be construed to operate as a
waiver by the Subordinated Creditor, with respect to the Borrower or any holder
of any Subordinated Indenture Indebtedness, of the benefit of any exculpatory
provisions, presumptions, indemnities, or reliance rights contained in the
Subordinated Creditor Indenture, and the Borrower expressly agrees that as
between itself and the Subordinated Creditor, the Subordinated Creditor shall
have such benefit with respect to all actions or omissions by the Subordinated
Creditor pursuant to this Agreement. For all purposes of this Agreement,
Subordinated Creditor may (a) rely in good faith, as to matters of fact, on any
representation of fact believed by Subordinated Creditor to be true (without any
duty of investigation) and that is contained in a written certificate of any
authorized representative of Borrower, of the Lender, or of any holder of any
Subordinated Indenture Indebtedness, (b) rely in good faith, as to matters of
law, on any advice received from its legal counsel, and shall have no liability
for any action or omission taken in reliance thereon, and (c) assume in good
faith (without any duty of investigation), and rely upon, the genuineness, due
authority, validity, and accuracy of any certificate, instrument, notice, or
other document believed by it in good faith to be genuine and presented by the
proper person.
[Signature page to follow.]
14
<PAGE>
IN WITNESS WHEREOF, the Lender and the Subordinated Creditor each has
caused this Agreement to be duty executed and delivered as of the date first
above written.
LENDER: FOOTHILL CAPITAL CORPORATION
By: /s/ Brian Duffy
---------------------------------
Name: Brian Duffy
Title: AVP
SUBORDINATED CREDITOR: STATE STREET BANK AND TRUST COMPANY,
as trustee and collateral agent
By: /s/ Mary Lee Storrs
---------------------------------
Name: Mary Lee Storrs
Title: Vice President
15
<PAGE>
ACKNOWLEDGMENT
The undersigned ("Borrower"), hereby acknowledges that it has
received a copy of the foregoing Intercreditor Agreement and consents thereto,
and agrees to recognize all rights granted thereby to the parties thereto, and
will not do any act or perform any obligation which is not in accordance with
the agreements set forth in such Intercreditor Agreement. Borrower further
acknowledges that it is not an intended beneficiary or third party beneficiary
under the Intercreditor Agreement.
Dated as of March 31, 1998.
DISCOVERY ZONE, INC.
a Delaware corporation
By: /s/ Robert Rooney
---------------------------------
Name: Robert Rooney
Title: Senior Vice President-Chief Financial
Officer
<PAGE>
EXHIBIT 12.1
DISCOVERY ZONE, INC
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
SEVEN MONTHS FIVE MONTHS
ENDED JULY 31 ENDED DECEMBER
1997 31, 1997
------------- ---------------
<S> <C> <C>
Income (loss) before taxes on income............................................. (5,453) (27,966)
Adjustments:
fixed charges.................................................................. 3,249 6,076
------------- -------
Earnings before taxes and fixed charges as adjusted.............................. (2,204) (21,890)
------------- -------
------------- -------
Fixed Charges:
Interest incurred.............................................................. 3,249 6,076
Portion of rent expense which represents interest factor....................... -- --
------------- -------
Total fixed charges.............................................................. 3,249 6,076
------------- -------
------------- -------
Ratio of earnings to fixed charges............................................... -- --
------------- -------
------------- -------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996
------------- ---------------
<S> <C> <C>
Income (loss) before taxes on income............................................. (445,245) (83,834)
Adjustments:
fixed charges.................................................................. 12,226 6,277
------------- -------
Earnings before taxes and fixed charges as adjusted.............................. (433,019) (77,557)
------------- -------
------------- -------
Fixed Charges:
Interest incurred.............................................................. 5,137 6,277
Portion of rent expense which represents interest factor....................... -- --
------------- -------
Total fixed charges.............................................................. 5,137 6,277
------------- -------
------------- -------
Ratio of earnings to fixed charges............................................... -- --
------------- -------
------------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> AUG-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,607
<SECURITIES> 0
<RECEIVABLES> 750
<ALLOWANCES> 0
<INVENTORY> 1,739
<CURRENT-ASSETS> 29,225
<PP&E> 140,666
<DEPRECIATION> 9,314
<TOTAL-ASSETS> 176,591
<CURRENT-LIABILITIES> 26,179
<BONDS> 87,091
13,897
0
<COMMON> 40
<OTHER-SE> 42,215
<TOTAL-LIABILITY-AND-EQUITY> 176,591
<SALES> 0
<TOTAL-REVENUES> 48,485
<CGS> 0
<TOTAL-COSTS> 60,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,076
<INCOME-PRETAX> (27,966)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,966)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,966)
<EPS-PRIMARY> (7.02)
<EPS-DILUTED> (7.02)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 82,537
<CGS> 0
<TOTAL-COSTS> 86,248
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,249
<INCOME-PRETAX> (5,453)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,453)
<DISCONTINUED> 0
<EXTRAORDINARY> 332,165
<CHANGES> 0
<NET-INCOME> 326,712
<EPS-PRIMARY> (5.66)
<EPS-DILUTED> (5.66)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,490
<SECURITIES> 0
<RECEIVABLES> 3,785
<ALLOWANCES> 2,185
<INVENTORY> 9,067
<CURRENT-ASSETS> 17,807
<PP&E> 158,872
<DEPRECIATION> 11,132
<TOTAL-ASSETS> 171,571
<CURRENT-LIABILITIES> 194,878
<BONDS> 127,259
0
0
<COMMON> 575
<OTHER-SE> (180,748)
<TOTAL-LIABILITY-AND-EQUITY> 171,571
<SALES> 0
<TOTAL-REVENUES> 259,490
<CGS> 0
<TOTAL-COSTS> 267,786
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,149
<INTEREST-EXPENSE> 12,226
<INCOME-PRETAX> (445,245)
<INCOME-TAX> 4,000
<INCOME-CONTINUING> (449,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (449,245)
<EPS-PRIMARY> (8.30)
<EPS-DILUTED> (8.30)
</TABLE>
