<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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, 1996. (Fee Required)
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act for the transition period from _______to_______.
COMMISSION FILE NUMBER: 1-13290
THE SPORTS CLUB COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-4479735
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
11100 Santa Monica Blvd., Suite 300
Los Angeles, California 90025
(Address of registrant's principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (310) 479-5200
Securities registered pursuant to Name of each exchange on
Section 12(b) of the Act: which registered
Title of each class
None None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
common stock $.01 par value
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x]_No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 14, 1997 was $25,570,170.
The number of shares of the common stock, par value $ .01 per share,
outstanding (the only class of common stock of the registrant outstanding) was
11,358,000 on March 14, 1997.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
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PART I
ITEM 1. BUSINESS
General
The Sports Club Company, Inc. (the "Company") which is recognized as a
leading developer and operator of sports and fitness clubs, operates sports and
fitness clubs ("Clubs") under the names the "Sports Club," and the "Spectrum
Club". The Company was incorporated in 1994 and acquired the Spectrum Clubs
and Sports Connections from a group of affiliated entities (the "Predecessors")
controlled by the Company's Chairman of the Board and largest shareholder, D.
Michael Talla. The Sports Club/LA and The Sports Club/Irvine were acquired in
October 1994. The Company has entered into an agreement to acquire an
additional interest in this Club. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources." The Reebok Sports Club/NY, in which the Company currently owns a
50.1% interest, was opened in April 1995. The Company owns interests in eight
Clubs, three of which are Sports Clubs, and five of which are Spectrum Clubs.
Seven of the Clubs are located in Southern California with the remaining club,
the Reebok Sports Club/NY, located in New York City. As of February 28, 1997,
there were 45,684 members of the Sports Clubs and the Spectrum Clubs. The
Company has two clubs under development in Valencia, California and Houston,
Texas.
The two types of Clubs operated by the Company are differentiated
primarily by the level of amenities and services provided, diversity of
facilities available and fees charged for services. The Sports Clubs have been
developed as "urban country clubs" offering a full range of services and
amenities, and are marketed primarily to affluent, health conscious
individuals. The Spectrum Clubs are designed as smaller-scale Sports Clubs.
The marketing focus of the Spectrum Clubs is directed primarily to
professionals and the range of services and fitness options offered at these
Clubs is more limited than at the Sports Clubs.
The following table sets forth, as of February 28, 1997, the name,
address, square footage, opening or acquisition date, and percentage ownership
of each of the Clubs:
<TABLE>
<CAPTION>
APPROXIMATE YEAR OPENED ("O") PERCENT OWNED
NAME AND ADDRESS SQUARE FEET OR ACQUIRED ("A") BY COMPANY
---------------- ----------- ------------------- --------------
<S> <C> <C> <C>
THE SPORTS CLUBS
The Sports Club/Irvine . . . . . . . . . 130,000 1994 A 100%
1980 Main Street
Irvine, CA 92714
The Sports Club/LA . . . . . . . . . . . 100,000 1994 A 100% (1)
1835 Sepulveda Blvd.
Los Angeles, CA 90025
Reebok Sports Club/NY . . . . . . . . . . 140,000 1995 O 50.1% (2)
160 Columbus Ave.
New York, NY 10023
SPECTRUM CLUBS
Spectrum Club/Manhattan Beach . . . . . . 65,300 1987 O 46.1 %
2250 Park Place
El Segundo, CA 90245
Spectrum Club/Howard Hughes Center . . . 36,000 1994 A 100%
6833 Park Terrace
Los Angeles, CA 90045
Spectrum Club/Santa Monica . . . . . . . 30,000 1991 A 100%
1815 Centinela Avenue
Santa Monica CA 90404
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE YEAR OPENED ("O") PERCENT OWNED
NAME AND ADDRESS SQUARE FEET OR ACQUIRED ("A") BY COMPANY
---------------- ----------- ------------------- --------------
<S> <C> <C> <C> <C>
Spectrum Club/Agoura Hills . . . . . . . 30,000 1994 A 100%
5115 N. Clareton Drive
Agoura Hills, CA 91301
Spectrum Club/Water Garden . . . . . . . 18,600 1993 O 100%
2425 W. Olympic Blvd.
Santa Monica, CA 90404
Spectrum Club/Valencia . . . . . . . . . 57,000 1997 (3) 100%
24525 Town Center Drive
Valencia, CA 91355
</TABLE>
______________
(1) D. Michael Talla, the Company's Chairman and CEO has the right to 49.9%
of the first $300,000 of annual operating income from the partnership
which owns The Sports Club/LA. See "Item 13-Certain Relationships and
Transactions."
(2) The Company's 50.1% partnership interest is subject to the payment of
certain priority distributions and return of capital contributions to
other partners. The Company has entered into an agreement to acquire
certain of these interests. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources."
(3) The Spectrum Club/Valencia is scheduled to open in the summer of 1997.
STRATEGY
The Company's strategy is to expand its business to meet the public's
demand for facilities offering a wide variety of sports, fitness and social
activities. The Company's objectives include the development, and in select
cases, the acquisition of multi-amenity facilities complementary to the
existing Sports Clubs and Spectrum Clubs and to develop and implement new
programs at existing Clubs to maintain and expand membership. While certain
large-scale operators have entered the field, the Company believes that the
sports and fitness club industry remains highly fragmented, with a predominance
of smaller owner/operators at the lower end of the market. Consequently, the
Company believes that significant opportunities exist for the Company to
operate multi-amenity sports and fitness clubs at the higher end of the market
under both the Sports Club and Spectrum Club names and concepts.
Initially, the Company intends to expand further the Sports Club
operations and concept through development in selected metropolitan areas where
a sufficient potential membership base exists to support a large facility. To
expand further the Spectrum Club operations and concept, the Company expects to
develop and acquire suitable facilities located in or adjacent to metropolitan
areas either near a Sports Club or in areas where the potential membership base
will not support a Sports Club facility. The Company intends to develop and
acquire Sports Clubs and Spectrum Clubs at locations both within and outside of
California. The primary difference between these two types of Clubs is that the
Sports Clubs are significantly larger and, consequently, are feasible only in
those metropolitan centers where there exists a sufficient number of potential
members to support them.
The Company is currently developing a Sports Club in Houston, Texas
and is currently negotiating for Sports Club sites in Washington D.C. and San
Francisco, California. The Company has also signed a letter agreement with
WPI.KOLL Asia Pacific Advisors which provides the Company a right of first
refusal to operate Sports Clubs in MegaMalls being developed in Japan by a
consortium of major Japanese corporations.
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The Sports Clubs
The Sports Clubs are large, multi-purpose facilities, offering members
and their guests state of the art fitness equipment, modern programs, wellness
protocols (exercise regimens designed for specific groups of members),
extensive food and beverage selections, personal care and beauty options,
social programs, child care and valet parking. The Sports Club/LA
(approximately 100,000 square feet), was opened in 1987 and The Sports
Club/Irvine (approximately 130,000 square feet) was opened in 1990. These Clubs
were originally developed and operated by the Company's management, but between
January 1992 and October 1994 were managed and controlled by a third party
through a partnership in which the Predecessors had a non-controlling interest.
The Reebok Sports Club/NY was developed in partnership with a subsidiary of
Reebok International, Ltd. ("Reebok") and Millennium Partners ("Millennium")
within a 140,000 square foot facility. Reebok and Millennium retain a direct
interest in the partnership that owns the Reebok Sports Club/NY, which the
Company developed, managed from inception and in which it owns a controlling
50.1% partnership interest. The Company has entered into an agreement to
acquire an additional interest in this Club. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."
The Sports Club/LA. The Sports Club/LA opened in March 1987, in a 100,000
square-foot facility located in West Los Angeles, near the affluent communities
of Santa Monica, Brentwood, Beverly Hills, Westwood and Century City. The
Sports Club/LA offers fully equipped gyms, including a 9,500 square foot coed
gym, a complete gym with equipment designed for women, a spinning room and an
approximately 5,800 square foot cardio-vascular deck. These gyms feature
state-of-the-art equipment including free weights, Nautilus, Flex, Gravitron,
Cybex, Keiser, Trackmaster, Icarian, Lifecycle, Heartmate, Versaclimber,
Stairmaster, Spinning and Nordic Track equipment. Personal trainers are
available to develop and maintain members' exercise routines. The Sports
Club/LA has two 2,500 square-foot aerobics/exercise rooms featuring classes
throughout the day and evening, seven days a week, including aerobics, dance,
Step Reebok, yoga and karate.
Competitive sports may be played on two racquetball courts, two squash
courts, five outdoor paddle tennis courts and a full court basketball court
(which can be converted into a volleyball court). Additionally, there is a
25-meter indoor pool and a net-enclosed golf swing area on the roof deck.
Sports instructors provide lessons in racquet sports, golf and swimming.
Men's and women's locker rooms feature wood lockers and include complete
spa areas with steam rooms, saunas, jacuzzis and professional massage. The
Sports Club/LA also includes a sundeck, restaurant, sports bar, private
dining/conference room, a sports media center and a press conference area. A
full-time Activities Director is responsible for social and media events for
members, including organizing trips, lectures and charity events. The Sports
Club/LA also has a pro shop, hair salon, spa and childcare services.
A wholly owned subsidiary of the Company, HealthFitness Organization of
America, Inc. ("HFA") operates a facility staffed by physicians, exercise
physiologists, physical therapists and nutritionists who provide services to
members of The Sports Club/LA and others. The medical doctors are employed by
SCC Medical Group, Inc. which pays a management fee to HFA. The Company
believes that HFA provides valuable services which are complementary to the
other services provided by The Sports Club/LA.
The Sports Club/Irvine. The Sports Club/Irvine opened in February 1990,
in a 130,000 square foot facility located on a 1.46-acre site near Newport
Beach in Orange County, California. The Club offers 26,700 square feet of fully
equipped gyms consisting of a 14,000 square foot coed gym and a complete gym
with equipment designed for women; a 5,000 square foot cardiovascular deck;
basketball and volleyball courts; a rooftop running track; three racquetball
courts; four squash courts; and two outdoor paddle tennis courts. The
volleyball/basketball gymnasium is 9,600 square feet and can accommodate either
two full court basketball games, or a basketball and volleyball game
simultaneously. There is also an outdoor roof-top basketball court, and two
sand volleyball courts on adjacent property leased on a month-to-month basis.
Like The Sports Club/LA, The Sports Club/Irvine makes available to its members
and guests state of the art weight and exercise equipment and a variety of
aerobic and exercise classes held throughout the day, in addition to a 25-yard
indoor-outdoor pool, sundeck, social area and a roof deck featuring a
net-enclosed golf swing area.
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Men's and women's locker rooms include complete spa areas with steam
rooms, saunas and jacuzzis. Food and beverage facilities include private dining
rooms and conference facilities, a gourmet grill restaurant and sports bar, a
sidewalk cafe and a poolside juice bar. Massages, facials and spa treatments
are available at Oasis Body Salon, which is owned and operated by the Company.
In addition, the Club affords members the opportunity to work with personal
trainers and sports instructors, and to avail themselves of numerous exercise
and dance classes, a beauty salon and childcare services. A full-time
Activities Director plans social and cultural functions, while a full-time
Sports Coordinator organizes sports tournaments, leagues and classes. As is the
case with The Sports Club/LA, HFA operates a facility within The Sports
Club/Irvine.
Reebok Sports Club/NY. The Reebok Sports Club/NY opened in April 1995, in
a 140,000 square-foot facility, offering, among other recreational and fitness
options, 13,000 square feet of weight training gyms, a 5,000 square foot
cardiovascular center, two exercise class rooms, two basketball courts, a
rooftop roller-blading and running track, a 45-foot rock climbing wall, a
25-yard Junior Olympic-size swimming pool, complete spa facilities, a circuit
training center, volleyball, boxing, fencing, martial arts, gymnastics and
badminton. In addition, the Reebok Sports Club/NY offers members a bistro-style
open grill restaurant, a sidewalk cafe, a sun deck with juice bar, childcare, a
body salon, children's sports programming, meeting and banquet rooms, shoe
shine, dry cleaning and tailoring services. The Company is the manager of the
Reebok Sports Club/NY pursuant to a management agreement (the "Management
Agreement") with the Reebok-Sports Club/NY partnership (the "Partnership").
The Company has a controlling 50.1% partnership interest in the Partnership.
The Company's agreements relating to the Reebok-Sports Club/NY prohibit
the Company from engaging in pre-sale activities or opening a sports and
fitness club in New York City or within a 10-mile radius of the Reebok Sports
Club/NY Club which exceeds 30,000 square feet in size prior to June 1999. The
agreements also prohibit the Company from selling from the Reebok Sports
Club/NY any footwear, apparel, fitness equipment or other sporting goods
manufactured by a competitor of Reebok, or associating with any health club
facility affiliated with a competitor of Reebok through June 2002.
The Spectrum Clubs
The Company currently operates Spectrum Clubs in Manhattan Beach, Agoura
Hills, at two locations in Santa Monica and in West Los Angeles at the Howard
Hughes Center. The Company is currently constructing a 57,000 square foot
Spectrum Club in Valencia, California, which is expected to open in the summer
of 1997. While more limited in size and in terms of the social and
recreational options offered, the Spectrum Clubs are generally housed in
relatively large facilities containing modern equipment and offering members
personalized training and instruction; there are, however, differences among
the Spectrum Clubs in terms of their overall size, the age and aesthetic design
of facilities and the types of exercise and work-out equipment available to
members.
The Spectrum Clubs, which are anywhere from 18,000 to 65,000 square feet,
generally include full coed weight training rooms, computerized cardiovascular
centers, aerobics and exercise classrooms (with classes held throughout the day
and evening, seven days a week), locker rooms, private training, complete spa
facilities, juice bars and towel service. Certain of the Spectrum Clubs also
offer indoor swimming pools, childcare, pro shops, a basketball court,
racquetball courts, physical therapy facilities, volleyball, martial arts,
dance and children's and seniors' programs. All of the Spectrum Clubs other
than the Spectrum Club/Manhattan Beach are wholly-owned and operated by the
Company. The Company is the sole general partner and records, as its equity
interest, 46.1% of the net income generated by the operation of the Spectrum
Club/Manhattan Beach.
The Sports Connections
The Sports Connections, which are located in Santa Monica, West
Hollywood, South Bay, Long Beach and Costa Mesa, were managed by Bally's S.C.
Management, Inc., an indirect subsidiary of Bally's Health and Tennis
Corporation ("Bally's") until November 1, 1996. On this date, the Santa
Monica, West Hollywood, Long Beach and Costa Mesa locations were sold. The
South Bay club was operated by Bally's for an additional 30 days at which time
the club was closed and the management agreement between the Company and
Bally's was terminated.
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HealthFitness Organization of America, Inc.
On November 30, 1995, the Company acquired 100% of the common stock of
HealthFitness Organization of America, Inc. ("HFA"). HFA operates facilities
within The Sports Club/LA, The Sports Club/Irvine and The Spectrum Club/Agoura
Hills and is staffed by physicians, exercise physiologists, physical therapists
and nutritionists who provide services to members and others. The physicians
are employed by SCC Medical Group, Inc. which pays a management fee to HFA. The
Company believes that HFA provides valuable services which are complimentary to
the other services provided by the Clubs, and is considering expanding the HFA
concept to other clubs.
SALES AND MARKETING
General
The Company's marketing strategy is to continue to develop facilities
that are consistent with an "urban country club" image and to develop and
implement specific sports, fitness and social programs that are designed to
attract a wider membership base without undermining that image. The Sports
Clubs and the Spectrum Clubs both are marketed as multi-amenity facilities
catering to affluent consumers, reflecting the Company's belief that
prospective members are willing to pay higher fees for well-designed and
equipped facilities offering personalized instruction and multiple fitness and
workout options.
Word-of-mouth referrals and endorsements by existing members are the
Clubs' most important source of new members. In addition, both the Sports Clubs
and the Spectrum Clubs utilize targeted marketing programs which include
advertisements, promotions, public relations and community events. The
principal marketing media for the Clubs are print advertisements, with some use
of direct mail. The print advertisements are supplemented by special events and
special membership programs. The Sports Clubs and the Spectrum Clubs host
corporate parties and charity benefits and often donate free or discounted
memberships to charitable organizations. Because the Sports Club and the
Spectrum Club names are widely recognized in Southern California, the Company
has been able to rely, to a large extent, on their reputation and members'
referrals. The Company believes that it will be able to continue to utilize
these marketing strategies in the promotion of new Sports Clubs and Spectrum
Clubs.
The largest segment of the membership base for the Clubs consists of
health-conscious individuals. The Company has targeted five other groups that
it intends to pursue in order to expand that base: children and families,
seniors, corporate members, medical referrals and people who do not exercise on
a regular basis.
The Company believes the children/family market has considerable
potential, as younger members grow older, marry and have children, and as they
seek recreational activities in which the entire family can participate.
Similarly, the Company anticipates that as the current core membership group
ages, it will modify exercise and workout options to meet this group's changing
fitness needs and to attract additional members from this group. The corporate
market is another source of new members, due to the proximity of the Clubs to
business centers and the potential use by members of the Clubs to conduct
business and to develop and maintain business contacts. The Company believes
that it can also attract new members from the medical referral market through
its HFA subsidiary by offering specific rehabilitation and exercise protocols
to complement other forms of physical therapy recommended by a physician or
medical group. Finally, the Company believes that the image of the Clubs as
multiple-amenity facilities, which offer members numerous social and
less-rigorous exercise options, will help the Company attract prospective
members who do not currently exercise regularly.
Each of these groups require specialized exercise/fitness programs, and
the Company has developed specific programs to attract members of these groups.
For example, with respect to the family market, the Company has implemented
"KidFit" and "TeenFit" programs which are targeted to children between the ages
of 5 and 17, and involve both one-on-one private training and a six-week
fitness training series. The Clubs' weight- training facilities are made
available to children 13 and older at off-peak hours, and specially-designed
movement classes utilizing a variety of fitness equipment are offered to
younger children. The Clubs maintain a summer sports camp, provide
individualized sports instruction and offer multiple fitness activities such as
gymnastics, martial arts and dance that are age appropriate.
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The Company maintains training and exercise protocol manuals for the
senior market (which the Company generally defines as members who are over 60
years old) which include a description of exercise and fitness programs
specifically designed for seniors. These manuals also contain discussions of
the biological, psychological and medical aspects of aging and the benefits of
regular exercise. The Company believes this market will expand as the "baby
boomers" mature and the programs it has developed will adequately service this
market segment.
The Sports Clubs employ several Corporate Membership Directors whose
principal responsibilities are to solicit corporate memberships from businesses
operating in the vicinity of the Sports Clubs. The Sports Clubs provide
corporate group discounted initiation fees depending upon the number of new
members involved. The Company believes corporations are favorably disposed to
joining the Sports Clubs because of the positive impact regular exercise and
overall fitness can have on employee absenteeism, morale and productivity.
The Company's "Shape Over" program is intended to attract those people
who are out of shape but who are interested in resuming a regular exercise
regimen. Prospective members are given a free, introductory fitness
consultation with Club instructors, which covers nutritional and dietary
suggestions, personalized fitness programs and home exercise plans. In
addition, the Club has group aerobics classes that are specially designed for
this target group.
The Sports Clubs
The "urban country club" image is essential to the Company's overall
operating and marketing strategies. The three existing Clubs operating under
the Sports Club name are marketed as limited membership, private clubs
dedicated to personalized attention and multiple amenities and services. The
Company believes that the image of these Clubs as leaders in the sports and
fitness industry justifies its charging a premium for the added amenities that
come with a membership in the Sports Clubs. Members include professionals,
entertainment personalities and business people and the Company believes
word-of-mouth advertising from these types of members has enhanced the
reputation of the Sports Clubs.
The Sports Club/LA experienced rapid market acceptance after its opening
in March 1987 and reached a mature level of membership in 1990. As a result of
its closure for earthquake repairs, the Club's membership level declined to
approximately 7,600 members, but since reopening in September 1994 the
membership level has increased to 8,493 as of February 28, 1997. The Sports
Club/Irvine, on the other hand, has yet to reach its target membership level of
9,000 members, which the Company believes is primarily attributable to
competition from a similar multi- amenities health and fitness club located
nearby. Thus, the Company's marketing focus at The Sports Club/Irvine is to
increase membership levels. As of February 28, 1997, membership was 6,258 at
The Sports Club/Irvine. The Reebok Sports Club/NY, which opened in April 1995,
had 7,294 members at February 28, 1997. The Reebok Sports Club/NY membership
has grown steadily and, at current growth rates, should near operating capacity
in 1998.
The Spectrum Clubs
The Spectrum Clubs are marketed as scaled-down Sports Clubs having modern
equipment, private training, experienced, highly-trained instructors, and
aesthetically-pleasant surroundings. The Spectrum Clubs also emphasize
personalized service and instruction and the creation of a "club" atmosphere in
which members can relax and socialize.
The cost of the Spectrum Club membership (both in terms of the initiation
fee and monthly dues) is less than membership at the Sports Clubs and, within
the Southern California market, the Company believes the Spectrum Clubs offer
as many services and are as luxurious and aesthetically-pleasing as any other
sports and fitness club with which they compete (other than the Sports Clubs
and a few other large, multi- amenity health and fitness clubs). Because of
their smaller size, the Spectrum Clubs can be developed and operated in
locations where the potential membership base is not sufficiently large to
support a club operating under the Sports Club name.
The Company's marketing efforts at the older, more seasoned Clubs
operating under the Spectrum Club name emphasize maintaining existing members,
while the focus at the newer Spectrum Clubs is on maintaining existing members
and attracting and maintaining additional members. The Company hopes to achieve
its goals through periodic membership drives whereby referring members are
entitled to receive special gifts and other incentives.
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Employee Training
A key component of the Company's marketing strategy is a well-trained and
knowledgeable staff. The Company has developed a comprehensive training
program, which serves as an educational tool to enhance the effectiveness of
Company personnel. All newly-hired employees are required to attend a
three-hour orientation seminar, which is led by members of Company management
and a personnel instructor. Topics include member service and member
interaction skills, Company history and philosophy, and safety issues. These
orientation seminars are held throughout the year.
To aid in the development and continuing education of management
employees, the Company offers a workshop entitled "Introduction to Club
Management," for newly-hired management personnel and other employees
demonstrating management skills. The workshop consists of five, three- hour
seminars led by certain Company management and a full-time personnel
instructor. The workshops are intended to educate participants in the areas of
people and time management; hiring, developing, training and evaluating
employees; sales and marketing strategies; and safety concerns. Topics are
added periodically to reflect new management techniques or operating issues.
These seminars are held six times a year or as needed for new employees, and
the Company's management personnel are required to attend periodically to
maintain their skills.
The balance of the Company's employee seminars involves
specifically-designed programs for targeted employee groups. Seminars providing
specialized instruction for program directors, private trainers, aerobics
teachers and sales/marketing personnel are offered at various times during the
year, for which attendance on the part of newly-hired personnel within the
applicable employee group is mandatory. The Company places particular emphasis
on its sales/marketing training seminars, which are given once every two months
by a personnel instructor and in which all new membership directors must
complete 20 hours of participation and all other membership directors must
complete four hours of participation every two months. Topics covered include
sales and marketing goals and recruitment and qualification of prospective
members.
Membership Programs
The Sports Clubs offer three types of memberships: Executive, Racquet and
Health. The Executive membership offers the greatest number of amenities and
services, including unlimited use of all facilities, racquet sports privileges,
personal locker assignments within an executive locker room, laundry service,
free valet parking, and charge privileges for dining and other Club services.
At February 28, 1997, executive memberships constitute 10.9% and 15.6% of all
memberships at The Sports Club/LA and The Sports Club/Irvine, respectively. The
Racquet membership includes the unlimited use of racquetball, squash and paddle
tennis courts in addition to the use of Club facilities. At February 28, 1997,
racquet memberships account for approximately 3.6% and 2.7%, respectively, of
the total memberships of The Sports Club/LA and The Sports Club/Irvine. The
Health membership is the basic membership, offering unlimited use of all
facilities excluding racquet court privileges; racquetball courts are available
to holders of Health memberships for an additional fee. There are 12,374
members at the Sports Club/LA and Sports Club/Irvine who hold this type of
membership. The Reebok Sports Club/NY offers both an Executive and Health
membership. At February 28, 1997, the Reebok Sports Club/NY had 984 Executive
memberships and 6,310 Health memberships.
Racquet and Health memberships are generally available at the Spectrum
Clubs. At some Spectrum Clubs, lockers may be rented by members on a monthly
basis for an additional charge. Each Club operating under the Spectrum Club
name has reciprocity with the others, thereby allowing its members unlimited
use of all other such Clubs in exchange for a $5.00 increase in monthly dues.
The same reciprocity program is in effect at the Sports Clubs, although in
certain instances, The Sports Club/Irvine members are required to pay an
additional fee to utilize the facilities of The Sports Club/LA. As a member of
The International Health Racquet Sports Association of Quality Clubs ("IHRSA"),
the Spectrum Clubs extend guest membership privileges to out-of-town visitors
who are members of IHRSA clubs in their hometown, and the Spectrum Club members
may use IHRSA clubs in cities to which they may travel.
All memberships require a one-time initiation fee, plus monthly member
dues. Actual rates vary depending on whether the membership is for a Sports
Club or a Spectrum Club and the type of membership selected. Corporate
memberships are also available. Unlike many other sports and fitness clubs, the
Company does not offer financing for its memberships. Members electing to pay
their Club dues on a monthly basis must pay by the checkfree system, under
which each member is automatically debited each month for dues either through a
checking account or credit card. Prepaid memberships for an entire year
entitle the member to a discount equal to one free month. The Clubs' current
base membership fees for new memberships are as follows:
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<TABLE>
<CAPTION>
HEALTH RACQUET EXECUTIVE
------ -------- ---------
<S> <C> <C> <C>
THE SPORTS CLUB/LA
Initiation Fee(1) . . . . . . . . . . . . . . . . . $ 1,295 $ 1,600 $ 2,500
Monthly Dues . . . . . . . . . . . . . . . . . . . . $ 125 $ 135 $ 165
THE SPORTS CLUB/IRVINE
Initiation Fee . . . . . . . . . . . . . . . . . . . $ 750 $ 825 $ 1,475 (2)
Monthly Dues . . . . . . . . . . . . . . . . . . . . $ 88 $ 103 $ 137
REEBOK SPORTS CLUB/NY
Initiation Fee . . . . . . . . . . . . . . . . . . . $ 1,100 N/A $ 1,900
Monthly Dues . . . . . . . . . . . . . . . . . . . . $ 150 N/A $ 250
THE SPECTRUM CLUBS
Initiation Fee . . . . . . . . . . . . . . . . . . . $ 300 $ 300 N/A
Monthly Dues . . . . . . . . . . . . . . . . . . . . $ 57 (3) $ 65 (3) N/A
</TABLE>
___________________
(1) Initiation fees for The Sports Club/LA may be paid over a two to three
month period.
(2) Initiation fees for Executive membership in The Sports Club/Irvine may be
paid over a two month period.
(3) In addition, Spectrum Club members are charged an annual towel fee of
$40.
Consistent with past practices, the Company may, from time to time,
institute special marketing programs which include the offer of discounts on
initiation fees for the Clubs.
OPERATION, ACQUISITION AND DEVELOPMENT OF CLUBS
The Company's experience has been that membership levels at new Clubs
generally increase for a period of two years or more before reaching a
relatively stable level, following which membership may gradually increase or
decrease, depending upon market conditions and other factors. The Company
considers Clubs which have reached this level to be "mature" Clubs.
Recently-opened Clubs which have not achieved maturity have operated at a loss
or at only a slight profit during the first two to three years of operations as
a result of fixed expenses which, together with variable operating expenses,
approximate or exceed membership fees and other revenues. The Company
anticipates that these types of losses may be incurred as a normal part of the
Company's operations to the extent that it develops additional clubs in the
future.
The Company has established general criteria for the acquisition of
existing sports and fitness clubs to be operated under the Spectrum Club name.
The Company seeks clubs which exceed 30,000 square feet in size, have in place
an initiation fee and monthly dues structure and are located in an area with
appropriate demographic characteristics. In addition, the current cash flow,
purchase price and anticipated capital expenditures must meet certain
requirements, and the Company must believe that it has the ability to enhance
the profitability of the club following its acquisition. Similarly, the Company
will not undertake to construct a new sports and fitness club unless the
Company has made a determination that, when built, the club will satisfy the
foregoing criteria. The Company will apply similar criteria to the acquisition
and development of clubs to be operated under the Sports Club name, taking into
account that the Sports Club concept requires larger facilities as well as a
location near large metropolitan centers. The Company acquires and develops
clubs based upon its analysis of the number of potential members living in the
area in which the Club is to be located and will proceed with development if it
feels that it will be able to attract a number of members at or near the Club's
maximum capacity.
In July 1995, the Company announced the development of a 57,000 square
foot Spectrum Club in Valencia, California in a facility to be leased from The
Newhall Land and Farming Company. This Club currently is scheduled to open in
the summer of 1997. The Company is developing a Sports Club in Houston, Texas
and is currently negotiating for Sports Club sites in Washington D.C. and San
Francisco, California. The Company has also signed a letter agreement with
WPI.KOLL Asia Pacific Advisors which provides the Company a right of first
refusal to operate Sports Clubs in MegaMalls being developed in Japan by a
consortium of major Japanese corporations.
8
<PAGE> 10
COMPETITION
The sports and fitness industry, particularly in the basic sports and
fitness club market, is highly competitive. IHRSA estimates that as of December
31, 1996, there were approximately 48,000 sports and fitness clubs in the
United States. In this market, the Spectrum Clubs compete with a limited number
of large corporations which have substantially greater operating and financial
resources than the Company and with numerous regional and local operators of
sports and fitness clubs. In addition, the Company competes with recreational
facilities established by governments and businesses, the YMCA and YWCA,
racquet and tennis clubs, country clubs and weight-reducing salons, and with
products and services that can be used by health-conscious individuals in their
homes. However, the Company believes that there will continue to exist a market
for sports and fitness clubs and that its operating experience, its highly
visible image, the professionalism of its staff and its state-of-the-art
equipment and exercise facilities afford it an advantage over its competitors.
TRADEMARKS AND TRADENAMES
The Sports Club/LA name combined with the "flying lady" logo and the
Spectrum Club name are registered trademarks of the Company. However, the
"Sports Club" name generally is not protectible under federal or state
trademark law. The Company has also registered the "Young At Heart" name within
California for use in its senior wellness/exercise programs; however the
Company has not sought to protect the "Young At Heart" name at the federal
level. The Company has applied for a trademark of the HFA name and is awaiting
final approval of The Sports Club/LA name and logo in the international markets
of France, the United Kingdom, Germany, Japan and Canada. In addition, the
Company is currently seeking protection of the Sports Clubs "flying lady" logo
in Australia.
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to
regulation at the federal, state and, in some cases, local levels. State and
local consumer protection laws and regulations govern the Company's
advertising, sales and other trade practices.
Statutes and regulations affecting the fitness industry have been enacted
or proposed in California, New York and Texas. The Company operates or is
developing clubs in these states. Many other states into which the Company may
expand have or likely will adopt similar legislation. Typically, these statutes
and regulations prescribe certain forms and provisions of membership contracts,
afford members the right to cancel the contract within a specified time period
after signing, require an escrow of funds received from preopening sales or the
posting of a bond or proof of financial responsibility, and may establish
maximum prices for membership contracts and limitations on the term of
contracts. In addition, the Company is subject to numerous other types of
federal and state regulations governing the sale of memberships. These laws
and regulations are subject to varying interpretations by a number of state and
federal enforcement agencies and the courts. In this regard, the California
Civil Code imposes a maximum limit on the amounts that may be charged pursuant
to a contract for health studio services. The Company maintains internal
review procedures in order to comply with these requirements, and believes that
its activities are in substantial compliance with all applicable statutes,
rules and decisions.
Under so-called state "cooling-off" statutes, a member has the right to
cancel his or her membership for a period of three to ten days (depending on
the applicable state law) and, in such event, is entitled to a refund of any
down payment. In addition, the Company's membership contracts provide that a
member may cancel his or her membership at any time for death, medical reasons
or relocation of a certain distance from the nearest Club. The specific
procedures for cancellation in these circumstances vary due to differing state
laws. In each instance, the canceling member is entitled to a refund of prepaid
amounts only. Furthermore, where permitted by law, a cancellation fee is due to
the Company upon cancellation and the Company may offset such amount against
any refunds owed.
9
<PAGE> 11
EMPLOYEES
At February 28, 1997, the Company had approximately 1,600 employees, most
of whom are employed on a part-time basis in Club operating activities such as
aerobics, private training and food and beverage services. The Company employs
409 full-time employees. Approximately 158 employees are sales personnel,
instructors or supervisory personnel involved in Club operations, and 31 are
employed in general and administrative functions. The Company is not a party to
any collective bargaining agreement with its employees. Although the Company
experiences high turnover of non-management personnel, the Company has never
experienced any labor shortages nor had any difficulty in obtaining adequate
replacements for departing employees and considers its relations with its
employees to be good.
Each of the Company's Clubs has a staff of fitness instructors trained to
assist in the sales function and to implement fitness testing and
individually-tailored exercise programs, as well as one or more managers who
are responsible for sales. Most instructors are college- educated. The
Company's aerobics instructors must have at least one year of teaching
experience before they are permitted to teach at the Clubs, after which they
participate in ongoing training and periodic re-evaluation.
ITEM 2. PROPERTIES
The Company owns The Sports Club/Irvine, The Sports Club/LA, and the
Spectrum Club/Agoura Hills including all underlying real estate. All other
structures in which the Clubs are located are leased from independent third
parties.
In March 1996, the Company refinanced The Sports Club/LA property and in
October 1996, increased the note by $500,000 to purchase a parcel of land
adjacent to the Club. The new $23.5 million loan bears interest at a fixed
interest rate of 10.63%. The Company is required to make monthly principal and
interest payments of approximately $262,000. The note matures in March 2003
but, if certain conditions exist, the Company may extend the term of the note
by an additional five years. All assets of The Sports Club/LA secure this loan.
The building, improvements and personal property of The Sports Club/Irvine
secure a $5,375,000 note bearing interest at a fixed rate of 6%. The note
requires quarterly principal payments of $125,000 with a balloon payment of
$4,000,000 due on November 1, 1999. All assets of the Spectrum Club/Agoura
Hills secure a $2,550,000 note which bears interest at a fixed rate of 6%
through February 1997 and at 8.5% thereafter. Payments of interest only are
required through April 1997, thereafter monthly principal and interest payments
of $20,100 are required through the note's maturity in April 2024.
The following table provides certain information concerning the Company's
properties:
<TABLE>
<CAPTION>
OWN/LEASE TERM EXPIRATION RENEWAL OPTION
--------- --------------- --------------
<S> <C> <C> <C>
The Sports Club/LA . . . . . . . . . . . . . . . own N/A N/A
The Sports Club/Irvine . . . . . . . . . . . . . own N/A N/A
Reebok Sports Club/NY . . . . . . . . . . . . . . lease 4/19/15 three 14-year
options
Spectrum Club/Agoura Hills . . . . . . . . . . . own N/A N/A
Spectrum Club/Water Garden . . . . . . . . . . . lease 6/30/08 5-year option
Spectrum Club/Santa Monica . . . . . . . . . . . sublease 11/14/98 two 5-year options
Spectrum Club/Howard Hughes Center . . . . . . . lease 9/14/08 two 5-year options
Spectrum Club/Manhattan Beach . . . . . . . . . . lease 2/28/02 three 5-year options
Spectrum Club/Valencia . . . . . . . . . . . . . lease (1) two 5-year options
The Sports Connection/South Bay(2) . . . . . . . lease 8/31/04 4.5-year option
The Sports Connection/Encino(3) . . . . . . . . . lease 12/31/06 5-year option
</TABLE>
_________________
10
<PAGE> 12
(1) The term on the Spectrum Club/Valencia lease will expire 15 years after
the Club opens.
(2) Although the Company terminated the management agreement with Bally's and
the South Bay Sports Connection was permanently closed on November 30,
1996, a dispute has arisen with the landlord over future obligations with
respect to the lease.
(3) The Company no longer owns this Club and has assigned its interest in the
lease. The landlord, however, has not released the Company from liability
under this lease.
Leases for the Clubs are generally long-term "triple net" operating
leases (requiring the Company to pay all real estate taxes, insurance and
maintenance expenses, in addition to rent), having an average remaining term of
approximately 23 years (including options to extend exercisable by the
Company). The earliest expiration date of any of these leases is November 1998
(with respect to the Spectrum Club/Santa Monica). These leases generally
provide that rent payments shall be adjusted upward periodically during the
terms of the leases, including adjustments based upon changes in the Consumer
Price Index in the surrounding area (but subject to certain maximum increases
that will protect the Company in inflationary periods), and permit extension of
the primary term, subject to certain notice requirements. The Company also
leases approximately 15,600 square feet of office space in a commercial
building in Los Angeles, California, for administrative, accounting and general
corporate purposes. This lease requires monthly payments of $28,875 through the
end of the lease term in March 2000.
Effective January 26, 1992, all existing public accommodations (including
the Clubs) were required to comply with the Americans with Disabilities Act
(the "ADA"). The ADA, together with many state and local statutory provisions,
generally require that buildings be made accessible to persons with
disabilities. The Company has undertaken an assessment of its Clubs to
determine the extent of non-compliance and to devise a plan by which all
required corrective measures can be implemented in the future. Although the
cost of compliance with existing and evolving ADA, state and local statutory
provisions cannot be predicted with any certainty at this time, the Company
currently anticipates spending approximately $500,000 over the next two years
in order to comply with the ADA, most of which will be effected as part of the
Company's routine capital expenditures. Such capital expenditures will be
amortized over the useful life of the improvements. Such expenditures are not
expected to have a material adverse impact on the Company.
For a period of ten years following its completion in 1989, the property
comprising The Sports Club/Irvine is subject to a covenant to operate it as a
first-class coed athletic and social club facility. For a period of 15 years
thereafter, the property use may not change if the change requires development
approval by the City of Irvine that cannot be obtained separately from the
development rights of the project in which the Club is located. If either of
these covenants is violated, the master developer of that project has the right
to purchase The Sports Club/Irvine for a cash price equal to 95% of its
original purchase price from the master developer plus 95% of the construction
costs incurred in constructing The Sports Club/Irvine.
The Company believes its properties and equipment, as well as its leased
facilities, are adequate for its needs, have been well- maintained and, other
than mentioned above, do not require any substantial renovation or restoration
work at this time.
ITEM 3. LEGAL PROCEEDINGS
THE SPECTRUM CLUB COMPANY, INC., a California corporation, v. CENTURY
ENTERTAINMENT CENTER, L. P. (Los Angeles Superior Court). In August of 1995,
Century City Spectrum ("CCS"), a subsidiary of the Company, closed the Century
City Spectrum Club. In connection with the bankruptcy of the landlord, CCS's
rights under the lease related to this Club were acquired by Century
Entertainment Center, L.P. ("Century"). On August 10, 1995, CCS filed an
action against Century alleging a breach of the lease by the prior landlord.
Century filed a cross-complaint against CCS for rent due and against the
Company as a guarantor of CCS's obligations under the lease. The
Cross-Complaint seeks in excess of $800,000 through December 1995 plus rent
thereafter of approximately $39,000 per month. The trial court ruled CCS's
right of first refusal cannot be asserted against Century. CCS's primary
remaining defense is based upon Century's obligation to re-lease the subject
space. In addition, CCS may appeal the trial court's ruling following trial.
The Company is contesting the action against it as guarantor on the basis that
its obligations were exonerated or do not inure to the benefit of Century.
However, there can be no assurance that the Company will not be held liable for
all amounts found to be due to Century from CCS. Such liability could have a
material, adverse effect upon the Company.
11
<PAGE> 13
AGRICULTURAL INSURANCE COMPANY v. MKDG/RHODES SC PARTNERSHIP AND SPORTS CLUB,
INC. (Los Angeles Superior Court). In connection with the Northridge
earthquake on January 17, 1994, MKDG/Rhodes SC Partnership ("MKDG") carried
excess earthquake coverage for The Sports Club/LA with Agricultural Insurance
Company ("Agricultural"). Certain of the Company's predecessors and
subsidiaries (the "SCLA Parties") were named insureds under the policy. The
SCLA Parties assigned to MKDG all of their rights to payments under the
Agricultural earthquake policy in October 1994 and retained no interest in any
amounts paid by Agricultural under that policy. Agricultural made payments
totalling approximately $2,974,000 before a dispute arose under the policy.
MKDG filed a complaint against Agricultural on August 2, 1995, and Agricultural
filed a cross-complaint against MKDG and the SCLA Parties, alleging intentional
misrepresentation (fraud), negligent misrepresentation, breach of contract,
breach of implied covenant of good faith and fair dealing, rescission, money
had and received, declaratory judgment and indemnity. Agricultural seeks the
return of amounts paid plus punitive damages and attorneys fees. A hearing is
scheduled for May 1, 1997, and discovery is continuing. The Company believes
it is entitled to be indemnified by MKDG for all damages in this action.
ST INSTITUTE OF CALIFORNIA d/b/a SPORTS TRAINING PHYSICAL THERAPY, L.A. v. THE
SPORTS CLUB COMPANY, INC. (Los Angeles Superior Court) In 1989, ST Institute
of California ("STI") leased space in both The Sports Club/LA and The Sports
Club/Irvine. In 1995, the Company negotiated with HealthFitness Organization
of America, Inc. ("HFA"), now a wholly owned subsidiary of the Company, to take
over the space. Disputes arose regarding termination of STI's use of the
space, which were resolved when STI entered into an asset purchase agreement
with HFA whereby HFA purchased STI's assets. HFA agreed to make performance
payments to STI in the minimum amount of $100,000 per year. A dispute
subsequently arose between HFA and STI, and HFA ceased making payments after
having paid approximately $46,000. STI filed a complaint on December 30, 1996,
alleging damages for breach of contract, conversion, fraud, negligent
misrepresentation, and civil conspiracy. STI claims damages of not less than
$2,300,000 on the first two causes of action, and not less than $1,800,000 on
the fifth cause of action. The defendants have demurred to STI's complaint.
STI has stipulated to file an amended complaint.
HARVEY SCOTT SCHWARTZ v. LA/IRVINE SPORTS CLUB, LTD. AND SPORTS CLUB, INC. OF
CALIFORNIA. (Los Angeles Superior Court). The Company was recently served with
a class action lawsuit brought on behalf of all male members, past and present,
of The Sports Club/LA and The Sports Club/Irvine. The complaint alleges that
the civil rights of the class have been violated because of the existence of
"women's preferred" gym areas at these facilities. The complaint seeks
approximately $1,000 in damages for each class member. The Company and its
counsel are presently investigating the facts of the case, the potential size
of the class, and the likelihood that a class can or will be certified by the
court. At this early stage, the Company has not evaluated the scope of damages
or the amount in controversy. Although the Company has not yet responded to
the complaint, the Company believes the claim is without merit and will
vigorously defend the action. Men are not prevented from using or excluded
from the "women's preferred" gym area and the Company believes that no civil
rights violation has occurred.
OTHER MATTERS. The Company is also involved in various claims and lawsuits
incidental to its business, including claims arising from accidents and
disputes with landlords. However, in the opinion of management the Company is
adequately insured against such claims and lawsuits involving personal
injuries, and any ultimate liability arising out of any such proceedings will
not have a material adverse effect on the financial condition, cash flow or
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
The Company's common stock is quoted on the American Stock Exchange
under the symbol "SCY". The following table sets forth the quarterly high and
low prices for the Company's common stock as reported by the American Stock
Exchange.
<TABLE>
<CAPTION>
CALENDAR QUARTER HIGH LOW
----------------- ---- ---
<S> <C> <C>
1995:
First Quarter . . . . . . . . . . . . . . . . . . . . . . $ 8.000 $ 5.250
Second Quarter . . . . . . . . . . . . . . . . . . . . . $ 6.250 $ 4.500
Third Quarter . . . . . . . . . . . . . . . . . . . . . . $ 5.313 $ 3.875
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . $ 5.250 $ 2.625
1996:
First Quarter . . . . . . . . . . . . . . . . . . . . . $ 3.375 $ 2.125
Second Quarter . . . . . . . . . . . . . . . . . . . . . $ 3.250 $ 2.438
Third Quarter . . . . . . . . . . . . . . . . . . . . . $ 3.375 $ 2.313
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . $ 3.375 $ 2.375
1997:
First Quarter (through March 14, 1997) . . . . . . . . $ 5.000 $ 2.625
</TABLE>
As of March 14, 1997 there were 42 stockholders of record of the
Company's common stock and the closing price of the common stock on the
American Stock Exchange was $5.00.
The Company has not paid cash dividends on its common stock and does
not anticipate that it will do so in the foreseeable future. The Company's
present policy is to retain earnings for use in its operations and the
expansion of its business. On January 29, 1997, the Company instituted a stock
repurchase program pursuant to which it will repurchase up to $3,000,000 of the
outstanding common stock. As of March 21, 1997, the Company had repurchased
33,100 shares of common stock for $132,311.
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below under the captions"Statement of
Income Data" and "Balance Sheet Data" as of the end of and for each of the
years in the five-year period ended December 31, 1996, are derived from the
consolidated financial statements of the Company.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1992 (3) 1993 (3) 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues . . . . . . . . . . . . . . . . . . . $ 17,248 $ 13,195 $ 18,846 $ 36,092 $ 37,422
Income (loss) from operations (1) . . . . . . . (1,314) 1,946 3,645 5,302 5,448
Income (loss) before income taxes (1) . . . . . (1,692) 1,620 3,044 3,397 2,889
Income tax provision, including pro forma income
tax adjustment . . . . . . . . . . . . . . . 645 1,244 1,393 1,185
Net income after income tax provision, including
pro forma income tax adjustment (1) . . . . . . 975 1,800 2,004 1,704
Net income per share after income tax provision,
including pro forma income tax adjustment . . $.14 $.23 $.18 $.15
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . . . 6,850 7,836 11,353 11,355
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . . . $ 1,143 $ 209 $ 5,042 $ 1,545 $ 4,146
Current assets . . . . . . . . . . . . . . . . 4,836 2,478 7,398 7,147 7,341
Property and equipment, net . . . . . . . . . . 5,837 2,794 59,811 59,956 72,736
Total assets . . . . . . . . . . . . . . . . . 12,213 11,521 81,636 83,106 95,584
Deferred membership revenue . . . . . . . . . . 5,931 2,265 5,640 4,742 6,548
Current liabilities . . . . . . . . . . . . . . 9,790 5,323 11,037 10,818 13,562
Long-term debt including current installments . 3,545 4,818 33,489 32,913 38,497
Shareholders'/Owners' equity . . . . . . . . . 682 2,897 37,941 39,974 41,686
- ---------------------
</TABLE>
(1) Income (loss) from operations and net income (loss) for the periods
through October 20, 1994, reflect the effects on the historical data of
the payment to D. Michael Talla of annual compensation of $200,000,
which amounts equal the base compensation provided for by his
employment contract (assuming the employment agreement was effective at
the beginning of the respective period). See "Item 11 - Executive
Compensation -- Employment Agreements."
(2) Prior to the issuance of 4,500,000 shares of its common stock in a
public offering (the "Offering"), the Company operated through various
partnerships. As a result, the earnings of the Company have been taxed
for federal and California purposes directly to the owners. The income
tax provision includes the income tax expense incurred by the Company
subsequent to the Offering on October 20, 1994, and the pro forma
income tax expense as if the Company's income had been taxable as a
corporation for periods prior to the Offering.
(3) Effective March 1, 1993, the Company entered into a joint venture
management agreement relating to the operation of the Sports
Connections. As a result of this agreement, the Company's expenses
with respect to these Clubs were substantially eliminated, though the
Company continued to receive revenues, through 1995, from memberships
sold prior to the date of the transaction. Therefore, the results of
operations for the years ended December 31, 1992 and 1993 are not
comparable to future periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-K. The Company's consolidated statement of income include The Sports
Clubs, The Spectrum Clubs and HealthFitness Organization of America, Inc.
("HFA") which was acquired on November 30, 1995. The Reebok-Sports Club/NY,
which opened in April 1995 was accounted for under the equity method of
accounting, until December 30, 1996, at which time the Company acquired a
majority ownership position, and accordingly, the balance sheet of
Reebok-Sports Club/NY was consolidated with and into the Company. The Spectrum
Club/Manhattan Beach is accounted for under the equity method of accounting.
The comparability of the Company's operating results, financial condition
and capital requirements is impacted by the number and type of Clubs which the
Company operates. Seasonal factors have not had a significant effect on the
Company's operating results.
14
<PAGE> 16
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 were $37.4 million,
compared to $36.1 million in 1995, an increase of $1.3 million or 3.6%.
Revenues increased by $289,000 as a result of greater management fees earned
from the Reebok Sports Club/NY, which opened in April 1995; by $359,000 as a
result of HFA; and by $2.0 million as a result of higher membership dues and
increased ancillary revenues at existing Sports Clubs and Spectrum Clubs.
Offsetting these increases was a decrease in revenues resulting from the
closure of the Century City Spectrum Club.
Direct operating expenses increased to $23.4 million in 1996 versus
$22.7 million in 1995, an increase of $700,000 or 3.1%. HFA, which was
acquired on November 30, 1995, was responsible for an increase in direct costs
of $442,000 while club operating expenses increased $258,000. Direct operating
expenses as a percentage of revenues decreased to 62.6% in 1996 compared to
63.0% in 1995. Direct operating costs without those costs associated with HFA
were 62.0% of revenue in 1996.
Selling, general and administrative expenses were $6.1 million in 1996
versus $5.3 million in 1995, an increase of $800,000 or 15.1%. HFA was
responsible for an increase in selling, general and administrative costs of
$519,000 in 1996. The remaining increase was due to an increase in costs
associated with corporate overhead. As a percentage of revenues, selling,
general and administrative expenses were 16.2% in 1996 versus 14.7% in 1995.
Selling, general and administrative expenses without those costs associated
with HFA were 14.6% of revenue in 1996. The Company believes these costs
should decrease as a percentage of future revenues as the Company expands and
achieves economies of scale. There is no assurance, however, that such
expansion or economies of scale will be achieved.
Depreciation and amortization expense was $2.5 million in 1996 versus
$2.8 million in 1995, a decrease of $300,000 or 10.7%. This decrease was
primarily due to the sale of the Sports Connections in 1996. Interest expense
was $2.7 million in 1996 versus $2.6 million in 1995.
In 1996, equity interest in net income of unconsolidated subsidiaries
was $573,000 compared to $845,000 in 1995. The Company did not record any
income from the Sports Connections in 1996 versus $437,000 in 1995. The 1996
amounts and $278,000 in 1995 are associated primarily with the Spectrum
Club/Manhattan Beach's operations. Equity in the operations of the Reebok
Sports Club/NY was not significant during these periods.
In 1996 a loss of $300,000 resulted from the sale of the Sports
Connections.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 were $36.1 million,
compared to $18.8 million in 1994, an increase of $17.3 million or 92.0%. The
increase resulted primarily from revenues of $24.2 million recorded by The
Sports Club/LA and The Sports Club/Irvine, which were acquired on October 20,
1994, in 1995 compared to $4.7 million in 1994, $490,000 in management fees
generated from the Reebok Sports Club/NY, which was opened in April, 1995, and
increased Spectrum Club revenues resulting from membership growth. Offsetting
this increase was a reduction in revenues from other sources. In 1994, The
Spectrum Clubs received $2.1 million from the prior owners of The Sports
Club/LA for use of the Spectrum Clubs following the closure of The Sports
Club/LA as a result of the January 1994 Northridge earthquake. No comparable
revenue was received in 1995.
Direct operating expenses increased to $22.7 million in 1995 versus
$10.5 million in 1994, an increase of $12.2 million or 116.2% primarily as a
result of direct operating expenses of $14.2 million incurred at The Sports
Club/LA and The Sports Club/Irvine compared to $2.6 million in 1994. The
remaining increase was primarily due to operating the Spectrum Club/Agoura
Hills and Spectrum Club/Howard Hughes Center for an entire 12 months in 1995
versus shorter periods in 1994, and an increase in the level of monthly
operating costs resulting from membership growth at the Spectrum Clubs. Direct
operating expenses as a percentage of revenues increased to 63.0% in 1995
compared to 55.8% in 1994. The earthquake related revenues received from the
prior owners of The Sports Club/LA, which were generated without a comparable
increase in expenses, resulted in the 1994 operating margins increasing to a
level above the Company's normal operating level.
15
<PAGE> 17
Selling, general and administrative expenses were $5.3 million in 1995
versus $3.2 million in 1994, an increase of $2.1 million or 65.6%. This
increase in expense was incurred as a result of the acquisition of The Sports
Club/LA and The Sports Club/Irvine and the development of an infrastructure
required to support the Company's management of the Reebok Sports Club/NY and
future growth.
Depreciation and amortization expense was $2.8 million in 1995 versus
$1.5 million in 1994, an increase of $1.3 million or 86.6%. The increase is
primarily due to depreciation and amortization expense for an entire year in
1995 versus shorter periods in 1994 for The Sports Club/LA, The Sports
Club/Irvine, Spectrum Club/Howard Hughes Center and Spectrum Club/Agoura Hills.
In 1995, equity interest in net income of unconsolidated subsidiaries
was $845,000 compared to $641,000 in 1994 primarily as a result of earnings
from the Sports Connections of $437,000 in 1995 compared to $333,000 in 1994.
The Sports Connections earnings were retained by Bally's for capital
expenditures and to establish a working capital reserve and therefore, the
Company did not receive any cash distributions. The remaining equity interest
is associated with the operations of the Spectrum Club/Manhattan Beach and the
Reebok Sports Club/NY.
Interest expense increased to $2.6 million in 1995 compared to $1.2
million in 1994 as a result of acquisitions made by the Company in 1994 and
their related financing costs.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1996 and 1995, the Company
generated $8.1 million and $8.8 million of earnings before interest,
depreciation, amortization and income taxes, respectively. At December 31,
1996, the Company had a cash and cash equivalent balance of $4.1 million of
which $727,000 is in a special construction account for the development of a
Spectrum Club in Valencia, California, $296,000 belongs to the Reebok-Sports
Club/NY Partnership and the remaining $3.1 million is available for general
corporate purposes. The Company anticipates its cash and cash equivalent
balance on hand plus cash generated from operations will be adequate to fund
the Company's current operating activities, debt service, expansion capital
requirements, and recurring capital expenditures for the next twelve months.
In March 1996, the Company refinanced The Sports Club/LA property,
which had an outstanding promissory note in the amount of $22.1 million. In
October 1996, the Company increased the note by $500,000 in order to purchase a
parcel of land adjacent to the Club. The new $23.5 million loan bears interest
at a fixed interest rate of 10.63%. The Company is required to make monthly
principal and interest payments of $262,000. The note matures in March 2003
but, if certain conditions exist, the Company may extend the term of the note
by an additional five years. All assets of The Sports Club/LA have been
pledged to secure this loan. This note replaced a note with interest at 10%,
secured by the land, building and equipment of The Sports Club/LA. This old
note required a balloon payment of approximately $22.0 million at December 31,
1996.
In connection with the acquisition of The Sports Club/Irvine, MKDG
Partners has agreed to pay the Company for each of the years ending December
31, 1994, 1995 and 1996, the lesser of approximately $1.0 million or the amount
by which The Sports Club/Irvine's earnings before depreciation and amortization
and the Company's administrative overhead relating to the Club, as defined, for
such year is less than approximately $2.9 million. The Company collected
$687,000 related to the 1995 shortfall in the third quarter of 1996. MKDG
Partners has agreed to pay $106,000 for previously disputed amounts relating to
the 1994 and 1995 shortfall amounts. The Company also anticipates making a
claim for approximately $684,000 in 1997 relating to the 1996 shortfall.
The Company sold its interest in certain Sports Connection Clubs to
Fitness Holding, Inc. d/b/a 24 Hour Fitness in November 1996. The Company
received cash proceeds of approximately $3.6 million and used $2.5 million of
such proceeds to acquire an additional 10.1% interest in the Reebok-Sports
Club/NY partnership.
16
<PAGE> 18
The Company currently owns a 50.1% interest in the Reebok-Sports Club/NY
Partnership. At December 31, 1996 the Partnership owed $3.3 million under a
loan secured by equipment and owed $4.0 million to the partners in the form of
notes payable. The Partnership is also in arrears in the payment of priority
Partnership distributions in the amount of $1.8 million. Notes payable in the
amount of $2.5 million and the $1.8 million priority distribution are recorded
as liabilities on the Company's December 31, 1996 consolidated balance sheet.
The Reebok Sports Club/NY achieved a positive cash flow in September 1995 and
has improved its operations since that date. The Club is expected to continue
to improve its operating results in the future as membership levels increase.
The future cash flows of the Partnership will first be used to satisfy the
principal and interest requirements of the equipment loan in the amount of
$75,000 per month. Additional cash flows will be used to pay the past due
priority Partnership distribution and the future priority distributions of $2.1
million in 1997 and $3.0 million per year thereafter. The remaining future
cash flows will be returned to the partners to satisfy the notes payable,
accrued management fees and certain additional priority distributions. At
December 31, 1996 these amounts total $14.0 million, of which the Company is
entitled to $8.6 million. After these amounts are paid, the Company will be
entitled to 50.1% of future cash distributions.
On March 13, 1997 the Company entered into an agreement to sell
2,105,263 shares of its common stock to Millennium Entertainment Partners,
L.P., ("MEP"). MEP currently owns a 9.9% interest in the Partnership. The
Company will receive $5.0 million in cash, MEP's 9.9% Partnership interest, and
a $2.5 million note due from the Partnership and MEP's right to certain accrued
management fees due from the Partnership in exchange for the newly issued
shares. Once the transaction is consumated, the Company will be entitled to
substantially all of the $14.0 million currently due to the partners for notes
payable, accrued management fees and certain additional priority distributions.
These amounts will be paid as cash flow of the Partnership is available.
The Company's long-term capital needs are to provide funds for the
retirement of existing long-term debt and to secure funds for the acquisition
of existing clubs and development of new clubs. The Company intends to continue
its efforts to pursue joint venture arrangements with strategic partners as a
means of financing the acquisition and development of new clubs. The Company
has secured a $5.0 million credit facility with a commercial bank. The credit
facility will be available to provide funds for the acquisition and development
of new clubs and for general corporate purposes.
In the first quarter of 1996, the Company began development of the
57,000 square foot Spectrum Club in Valencia, California. The Company will own
and manage the Club operations in a building which will be leased from The
Newhall Land and Farming Company. Through December 31, 1996, the Company has
deposited $1.9 million into a special construction escrow account of which $1.2
million has been expended on the project. The Company anticipates that it will
be able to fund its remaining portion of this development, estimated to be
approximately $100,000, from operating cash flows. In August 1996, the Company
announced plans to develop a Sports Club in Houston, Texas. The Company's
portion of this development is estimated to be $3.6 million and will be funded
starting in late 1997. In March 1997, the Company announced its intent to
develop Sports Clubs in Washingtion D.C. and San Francisco, California. These
projects should start near the end of 1997. The Company's portion of these two
developments is preliminarily estimated to be approximately $10.0 million.
Operating cash flow, the $5.0 million proceeds from the sale of common stock to
MEP and the $5.0 million revolving credit facility will be utilized to finance
the Company's portion of these three developments. The Company does not expect
these Clubs to contribute significantly to revenues or net income until 1999.
Other than as described above and for normal replacement of fitness
equipment and remodeling of Clubs, the Company has no commitments for capital
expenditures. Equipment has generally been available under capital lease
arrangements. In 1995, the Company invested approximately $1.9 million in
capital expenditures of which $1.0 million was financed under capital lease
agreements. In 1996 capital expenditures, other than those related to new club
development, were $1.6 million. In 1996, the Company secured a $500,000 lease
facility to be used to finance capital expenditures. As of December 31, 1996,
the Company had drawn down approximately $158,000 on this facility. The Company
has secured a similar $1.2 million facility to be used to finance the equipment
for the Spectrum Club in Valencia, California. The Company believes it will be
able to secure equipment financing for its Sports Clubs in Houston, Washington
D.C. and San Francisco, currently estimated to be $2.0 million per Club. While
capital expenditures may fluctuate from time to time, generally the Company
expects to spend approximately 4% of revenues on facility and equipment
upgrades and replacements. Expansion of the Company's operations beyond
existing Clubs will also require expenditures above this level.
17
<PAGE> 19
FORWARD LOOKING STATEMENTS
The foregoing discussion and other published documents contain
forward-looking statements relating to the future operations of the Company,
including The Reebok Sports Club/NY and HFA, the adequacy of the Company's cash
for its anticipated requirements, and other matters. These forward-looking
statements are based on a series of projections and assumptions regarding the
economy, other statements which are not historical facts, the Company's
operations and the sports and fitness industry in general. These projections
and assumptions involve certain risks and uncertainties that could cause actual
results to differ materially from those included in the forward-looking
statement. Furthermore, actual results may differ from projected results as a
result of unforeseen developments relating to demand for the Company's services
and competitive pricing trends in the health and fitness market; increased
expenses; the success of planned advertising, marketing and promotional
campaigns; changes in personnel or compensation; business interruptions
resulting from earthquakes, landlord disputes or other causes; general market
acceptance of new and existing Clubs operated by the Company; changes in
membership growth patterns; the success of new products; and regulatory or
legal proceedings and rulings which might adversely affect the Company.
Investors are also directed to consider other risk and uncertainties discussed
in all documents filed by the Company with the SEC. The Company expressly
disclaims any obligation to update any forward-looking statements as a result
of developments after the date hereof.
RECENT DEVELOPMENTS
Not applicable
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-2
Consolidated Statements of Income for the Three-Year Period ended December 31, 1996 F-3
Consolidated Statements of Shareholders' Equity for the Three-Year Period ended December F-4
31, 1996
Consolidated Statements of Cash Flows for the Three-Year Period ended December 31, 1996 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable
18
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of the Company, as well
as their respective ages as of February 28, 1997, and positions with the
Company, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
D. Michael Talla 50 Chairman of the Board and Chief Executive Officer
Rex A. Licklider 53 Vice Chairman of the Board
John M. Gibbons 48 President, Chief Operating Officer and Director
Nanette Pattee Francini 48 Executive Vice President, Secretary and Director
Mark S. Spino 42 Vice President - Director of Development
Philip J. Swain 39 Vice President - Director of Operations
Timothy M. O'Brien 45 Chief Financial Officer and Assistant Secretary
Andrew L. Turner 50 Director
Dennison Veru 36 Director
</TABLE>
D. MICHAEL TALLA co-founded the Company in 1977, has served as the Chief
Executive Officer since that time and has served as Chairman of the Board of
Directors since February 1994. Mr. Talla has been in the sports and fitness
industry for more than 20 years and has developed or participated in the
development of more than 20 clubs in the United States, including all Clubs
owned by the Company. Mr. Talla holds a Bachelor of Arts Degree in Business
Administration from the University of Arizona.
REX A. LICKLIDER has served as a director of the Company since February
1994 and was named Vice Chairman of the Board in May 1994. Prior to his
involvement with the Company, Mr. Licklider served as Chairman, President and
Chief Executive Officer of Com Systems, Inc., an AMEX- listed long-distance
telecommunications company which he founded in 1975. Mr. Licklider is a
director of Deckers Outdoor Corporation, GoldenTel, Inc., and Associated Travel
Services, Inc. He also serves on the Board of Directors of the Children's
Bureau of Southern California and Los Angeles Youth Programs, Inc. Mr.
Licklider holds a Bachelor of Arts Degree in Business Administration from the
University of Arizona and a Masters in Business Administration from the
University of California at Los Angeles.
JOHN M. GIBBONS was engaged by the Company to serve as Chief Financial
Officer in May 1994 and became Executive Vice President in February 1995 and
President and Chief Operating Officer on July 1, 1995. Mr. Gibbons was elected
to the Board of Directors effective August 14, 1995. From September 1993 until
May 1994, Mr. Gibbons was a financial and business consultant whose clients
included the Company. From February 1990 until September 1993, Mr. Gibbons was
employed as a Vice President by Com Systems, Inc., an AMEX-listed long-distance
telecommunications company located in Westlake Village, California, serving as
General Manager and Senior Vice President from December 1992 to September 1993,
and as Chief Financial Officer from August 1991 through December 1992. From
January 1988 through February 1990, Mr. Gibbons was employed as Chief Financial
Officer of TMC Communications, a long-distance telecommunications company
located in Santa Barbara, California, which was acquired by Com Systems, Inc.
in February 1990. Mr. Gibbons has a Bachelors of Business Administration from
Notre Dame and a Masters of Business Administration from the University of
Southern California, and is a Certified Public Accountant.
NANETTE PATTEE FRANCINI, Executive Vice President, co-founded the Company
in 1977, has been principally responsible for overseeing all marketing for the
Company since 1978 and has served as a director of the Company since February
1994. Ms. Pattee Francini has been in the sports and fitness industry for more
than 20 years and has developed or participated in the development of more than
20 sports and fitness clubs, including all Clubs owned by the Company. Ms.
Pattee Francini holds a Bachelor of Arts Degree from the University of Arizona.
19
<PAGE> 21
MARK S. SPINO has served as Director of Development of the Company from
1980 to the present and as a Vice President since 1984. Mr. Spino has been in
the sports and fitness industry for more than 15 years and has developed or
participated in the development of more than 15 sports and fitness clubs in the
United States, including many of the Clubs owned by the Company. From July 1979
to June 1980, Mr. Spino was Assistant Manager, and later Manager, of the
Mid-Valley Athletic Club in Reseda, California. Mr. Spino holds Bachelor of
Arts and Master of Arts Degrees in Physical Education from the University of
Southern California.
PHILIP J. SWAIN has been employed by the Company since 1982 and has
served as Vice President-Director of Operations since 1988. Mr. Swain has been
in the sports and fitness industry for more than 20 years and has developed or
participated in the development of more than 15 clubs in the United States,
including many of the Clubs owned by the Company. Mr. Swain served as Regional
General Manager from 1986 until 1988. From December 1979 to November 1982, Mr.
Swain was the Director of Marketing and Membership at the Mid-Valley Athletic
Club in Reseda, California. From February 1975 to December 1979, Mr. Swain was
employed by Health & Tennis Corporation of America, managing different
facilities in Detroit and Los Angeles.
TIMOTHY M. O'BRIEN has been employed by the Company since February 1995
as Chief Financial Officer. From July 1993 until February 1995, Mr. O'Brien was
employed as Vice President/Controller of WCT Communications, Inc., a publicly
traded long-distance telecommunications company located in Santa Barbara,
California. From May 1989 until July 1993, Mr. O'Brien was Controller for Com
Systems, Inc., an AMEX-listed long- distance telecommunications company located
in Westlake Village, California. Mr. O'Brien has a Bachelors of Business
Administration degree from the University of Wisconsin-Madison and is a
Certified Public Accountant.
ANDREW L. TURNER has been a director of the Company since September 1994
and has been Chairman of the Board of Directors, President and Chief Executive
Officer of Sun Healthcare Group, Inc. since its formation in 1989. Sun
Healthcare Group, Inc., of which Mr. Turner was a founder, is a long-term
health care services provider. Mr. Turner was also founder and previously
served as Chief Operating Officer of Horizon Healthcare Corporation, a health
care services provider, from 1986 to 1989. Prior to 1986, Mr. Turner served as
a Senior Vice President of Operations of The Hillhaven Corporation.
DENNISON VERU has been President of Awad & Associates, a money management
division of Raymond James Financial since November 1992. From February 1990 to
November 1992 he served as Executive Vice President, Investments of Smith
Barney, Inc. specializing in small and medium capitalization stocks. Prior to
that, Mr. Veru was Vice President of Broad Street Investment Management and an
Assistant Vice President at Drexel Burnham Lambert. Mr. Veru serves as a
diretor for Lois USA, Inc. a publicly held company. Mr. Veru is a graduate of
Fanklin and Marshall college.
The directors of the Company are divided into three classes having terms
expiring at the annual meetings of the Company's stockholders in 1997 (Messrs.
Talla and Licklider), 1998 (Messrs. Turner and Gibbons) and 1999 (Ms. Pattee
Francini and Mr. Veru), or such later dates as their successors are elected. At
each annual meeting of stockholders, successors to the class of directors whose
term expires at such meeting will be elected to serve for three-year terms and
until their successors are elected. After the planned sale of 2,105,263 shares
of common stock to Millennium Entertainment Partners, L.P., ("MEP"), a
representative of MEP will be appointed to the Board of Directors.
Officers serve at the pleasure of the Board of Directors subject to any
rights under employment agreements.
The Board of Directors has created an Audit Committee and a Compensation
Committee of the Board. The Audit Committee, composed of Messrs. Turner and
Veru, is charged with reviewing the Company's annual audit and meeting with the
Company's independent auditors and reviewing the Company's internal controls
and financial management practices. The Compensation Committee, also composed
of Messrs, Turner and Veru, recommends to the Board of Directors compensation
for the Company's key employees and administers the 1994 Stock Incentive Plan.
20
<PAGE> 22
CERTAIN TRANSACTIONS
Section 16(a) of the Securities Exchange Act of 1934, as amended,
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 ownership and changes in ownership with the Securities and Exchange
Commission and to furnish the Company with copies of such reports. Based on the
Company's review of the copies of those reports and written representations
which it has received, the Company believes that all such filings required to
be made from January 1, 1996 through the date hereof have been made.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to
the Chief Executive Officer and to the five other most highly compensated
executive officers for the years ended December 31, 1994, 1995 and 1996, for
services rendered. Current salaries of the Company's executives are described
below under "Employment Agreements."
1994, 1995 AND 1996 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
NAME AND ANNUAL COMPENSATION OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS (SHARES) COMPENSATION
- ------------------ ---- --------- ----- --------- ------------
<S> <C> <C> <C> <C> <C>
D. Michael Talla 1996 $218,000 (2) -- -- --
Chairman of the Board 1995 205,250 (2) -- -- --
and Chief Executive Officer 1994 31,154 (2) -- -- --
Nanette Pattee Francini 1996 124,175 -- 15,000 --
Executive Vice President, 1995 122,200 -- -- --
Secretary and Director 1994 104,400 -- -- --
John M. Gibbons 1996 232,800 (3) $25,000 225,000 (4) --
President, Chief Operating 1995 218,933 (3) -- 450,000 (4) --
Officer and Director 1994 26,586 -- -- $133,396 (5)
Mark S. Spino 1996 116,795 -- 15,000 --
Vice President and 1995 111,855 -- -- --
Director of Development 1994 81,535 -- -- --
Philip J. Swain 1996 131,375 -- 25,000 --
Vice President and 1995 127,000 -- -- --
Director of Operations 1994 105,450 20,000 -- --
Timothy M. O'Brien 1996 122,175 5,000 20,000 --
Chief Financial Officer 1995 100,087 -- 25,000 --
and Assistant Secretary 1994 -- -- -- --
</TABLE>
21
<PAGE> 23
(1) Includes automobile allowance.
(2) Until October 21, 1994, Mr. Talla received income from the Predecessors
in his capacity as a partner, and did not receive a salary. Mr. Talla
also receives, on an annual basis, 49.9% of the first $300,000 of The
Sports Club/LA's net cash flow. This amount is not included in Mr.
Talla's compensation.
(3) Includes an allowance for living expenses paid to Mr. Gibbons under the
terms of his employment agreement.
(4) Options to purchase 225,000 shares at the exercise price of $9.00 per
share issued on February 27, 1995, were canceled in connection with the
issuance on July 5, 1995 of options to purchase 225,000 shares at the
exercise price of $5.00 per share. Effective April 24, 1996, The
Compensation Committee of the Board of Directors lowered the exercise
price to $3.00 per share. Pursuant to the rules of the Securities and
Exchange Commission, the cancellation and regrant of the option, and the
repricing of the option, are each deemed to constitute a separate award.
(5) Prior to joining the Company, Mr. Gibbons was retained as an outside
consultant and received consulting fees for such services.
22
<PAGE> 24
OPTION GRANTS, EXERCISES AND YEAR-END VALUES
The following table provides information concerning stock options granted
by the Company to the Named Executive Officers during the year ended December
31, 1996.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SHARES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM
OPTIONS IN OR BASE EXPIRATION (1)
-
NAME GRANTED (2) FISCAL YEAR PRICE DATE 5% 10%
---- ----------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Nanette Pattee Francini 15,000 6.8% $2.6875 2/8/2006 $29,933 $68,730
Mark S. Spino 15,000 6.8 2.6875 2/8/2006 29,933 68,730
Philip J. Swain 25,000 11.3 2.6875 2/8/2006 49,889 114,550
Timothy M. O'Brien 15,000 6.8 2.6875 2/8/2006 29,933 68,730
Timothy M. O'Brien 5,000 2.3 2.7500 10/31/2006 9,665 23,535
- -----------------
</TABLE>
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% annual rates of stock appreciation prescribed by the Securities
and Exchange Commission and are not intended to forecast possible future
appreciation, if any, of the Company's stock price. No gain to the optionee
is possible without an increase in the price of the Company's stock which
will benefit all stockholders commensurately.
without an increase in the price of
the Company's stock, which will benefit all stockholders commensurately.
(2) All of such options are governed by the Company's 1994 Stock Incentive Plan
The following table provides information with respect to unexercised
stock options as of December 31, 1996. None of the Named Executive Officers
exercised stock options during the last fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF ALL
NUMBER OF UNEXERCISED UNEXERCISED IN-
OPTIONS UNDER THE-MONEY OPTIONS
THE OPTION PLAN AT FY-END (2)
EXERCISABLE/ EXCERCISABLE/
NAME UNEXERCISABLE(1) UNEXERCISABLE
---- ---------------- -------------
<S> <C> <C>
John M. Gibbons 162,508/62,492 $0/$0
Nanettte Pattee Francini 0/15,000 $0/$2,812
Mark S. Spino 0/15,000 $0/$2,812
Philip J. Swain 0/25,000 $0/$4,688
Timothy M. O'Brien 8,333/36,667 $0/$3,438
- -----------------
</TABLE>
(1) All such options are governed by the Company's 1994 Stock Incentive Plan.
(2) An in-the-money option is an option which has an exercise price for the
common stock which is lower than the fair market value of the common stock
on a specified date. The fair market value of the common stock on December
31, 1996, was $2.875, which was the closing price per share on the American
Stock Exchange on such date.
23
<PAGE> 25
EMPLOYMENT AGREEMENTS
Effective August 10, 1994, the Company entered into Employment Agreements
with D. Michael Talla, as Chief Executive Officer, and Nanette Pattee Francini,
as Executive Vice President, each of which expire on December 31, 2000. Certain
terms of Mr. Talla's employment agreement were amended by the Board of
Directors as of February 27, 1995. The Agreements provide for annual
compensation of $200,000 payable to Mr. Talla, and $120,000 payable to Ms.
Pattee Francini, subject to upward adjustment at the discretion of the Board of
Directors. The Company may terminate either Employment Agreement without
penalty for cause or upon the disability of the affected employee.
The Employment Agreements with Mr. Talla and Ms. Pattee Francini
summarized above entitle each employee to annual performance bonuses in the
discretion of the Board of Directors, to be paid within 120 days for Mr. Talla
and 150 days for Ms. Pattee Francini following the end of each fiscal year. The
Employment Agreements also include severance provisions which entitle each
executive officer to severance pay if his or her employment is terminated by
the Company without cause; if the employee dies or is disabled; or if the
employee terminates the Agreement as a result of a material breach by the
Company of its obligations thereunder (six months' pay for Ms. Pattee Francini
and twelve months' pay for Mr. Talla). In addition, the Employment Agreements
provide Mr. Talla and Ms. Pattee Francini with additional severance benefits
upon the occurrence of any one of the following events without the approval of
a majority of the Board of Directors: (i) the consolidation or merger of the
Company with any other corporation or other entity; (ii) the sale or other
transfer of all or substantially all of the assets of the Company; (iii) the
approval by the stockholders of the Company of a plan of liquidation or
dissolution of the Company; (iv) any person becomes the beneficial owner
directly or indirectly of 25% or more of the Company's outstanding common
stock; or (v) a change occurs in the composition of a majority of the Board of
Directors of the Company (unless approved by two-thirds of the Board of
Directors of the Company). If at any time within two years after the occurrence
of any one of the foregoing events Mr. Talla's or Ms. Pattee Francini's
employment is terminated (other than for cause, incapacity or death), or Mr.
Talla or Ms. Pattee Francini elects to terminate his or her employment for
"good reason" (as that term is defined in the Agreements), he or she is
entitled to receive severance compensation equal to the lesser of: (i) the
maximum amount which does not constitute a "parachute payment" as defined in
Section 280G of the Internal Revenue Code of 1986, as amended; or (ii) an
amount equal to three times the aggregate of (A) his or her base annual salary
then in effect, (B) the car allowance, club memberships and dues, and insurance
benefits paid for the employee during the one-year period immediately prior to
termination, and (C) bonuses accrued but unpaid through the date of termination
of employment. Under the Agreements, "good reason" means the assignment of any
duties inconsistent with the employee's position or any other action which
diminishes the employee's position, authority or duties, which determination
shall be made in good faith by the employee. If the employment of Mr. Talla or
Ms. Pattee Francini were terminated within such period as a result of the
occurrence of any of the foregoing events (assuming that neither would be
entitled to any performance bonus), the aggregate approximate amounts payable
to Mr. Talla and Ms. Francini would be $679,035 and $393,834, respectively.
Effective as of July 1, 1995, the Company entered into an Employment
Agreement with John M. Gibbons, which expires June 30, 1998. The Employment
Agreement provides for annual base compensation of $200,000, subject to annual
review and upward adjustment at the discretion of the Board of Directors. In
addition to his base salary Mr. Gibbons is entitled to participate in any
management bonus program the Board of Directors may implement from time to
time. The Employment Agreement also includes a severance provision which
entitles Mr. Gibbons to receive payments equal to his base compensation until
the earlier of 12 months following the date of his termination date or the
expiration of the agreement, if his employment is terminated prior to the
expiration date other than for cause or by Mr. Gibbons himself. Mr. Gibbons
will be paid $25,000 each year through March 1997 for living expenses and
$7,800 each year as an auto allowance payable in equal semi-monthly
installments. Pursuant to the terms of the Employment Agreement, the
Compensation Committee of the Board of Directors, effective July 1, 1995,
granted Mr. Gibbons an option to purchase 225,000 shares of the Company's
common stock at an exercise price of $5.00 per share ("Option Shares").
One-third of the Option Shares became immediately vested upon the grant with
the remaining two-thirds vesting in 24 equal monthly installments commencing
October 21, 1995. Upon any merger, acquisition or other reorganization in which
the Company is not the surviving corporation, or upon a change in control of
the Company, the Option Shares will be fully exercisable. Concurrent with the
grant of these options to purchase shares of common stock, options for the
purchase of 225,000 shares of common stock which were granted to Mr. Gibbons on
February 27, 1995 at a price of $9.00 per share were canceled.
24
<PAGE> 26
Effective April 24, 1996, the Compensation Committee of the Board of
Directors amended the employment agreement to lower the exercise price of the
Option Shares to $3.00 per share, the fair market price of a share of the
Company's common stock, as evidenced by the closing price on the American Stock
Exchange on April 24, 1996. In exchange, Mr. Gibbons agreed to waive 50% of
the $100,000 bonus that was to be paid to him in 1996 pursuant to the terms of
his employment agreement. In addition, payment of 50% of the remaining bonus
was deferred until the second quarter of 1997.
The Company does not have written employment agreements with Messrs.
Spino, Swain, and O'Brien who currently receive annual base salaries of
$117,500, $132,000, and $122,800 respectively.
COMPENSATION OF DIRECTORS
Effective February 1995, non-employee directors of the Company are
entitled to receive an annual fee of $10,000 and a fee of $500 for each meeting
attended. Non-employee directors who are members of the Audit Committee or
Compensation Committee are entitled to receive $500 for each meeting they
attend. In addition, non-employee directors receive 1,000 shares of the
Company's common stock each year pursuant to the Company's 1994 Stock
Compensation Plan. Messrs. Licklider, Turner and Veru currently serve on the
Board as non-employee directors. The Company provides Mr. Licklider with health
insurance under its group insurance plan. All directors receive reimbursement
of reasonable out-of-pocket expenses incurred in connection with meetings of
the Board. Amounts paid to directors were $36,000 during 1995 and $37,026
during 1996. Under the Stock Compensation Plan an aggregate of 8,000 shares of
common stock were issued to non-employee directors through December 31, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The executive compensation for the Company is administered by the
Compensation Committee of the Board, whose members are currently Messrs. Turner
and Veru. None of these individuals has ever been an officer or employee of the
Company. Prior to entering into a consulting agreement with the Company in
August 1996, Mr. Licklider also served as a member of the Compensation
Committee.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 1, 1997,
regarding the beneficial ownership of the Company's common stock, by (i) each
person known by the Company to be the beneficial owner of more than five
percent of its common stock; (ii) each director; (iii) each executive officer
listed in the Summary Compensation Table; and (iv) all directors and executive
officers as a group. Unless otherwise indicated, each of the following
stockholders has sole voting and investment power with respect to the shares
beneficially owned, except to the extent that such authority is shared by
spouses under applicable law.
25
<PAGE> 27
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT OF
NAME OF BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER(1) OWNED SHARES (7)
------------------- ----- ----------
<S> <C> <C>
D. Michael Talla (2) (3) . . . . . . . . . . . . . . . . . 4,872,238 42.83 %
The Licklider Living Trust
dated May 2, 1986 . . . . . . . . . . . . . . . . . . . 1,285,562 11.32 %
Mona Talla (2) (3) . . . . . . . . . . . . . . . . . . . . 4,872,238 42.83 %
Nanette Pattee Francini (2) (3) . . . . . . . . . . . . . 4,872,238 42.83 %
Mark S. Spino (2) (3) . . . . . . . . . . . . . . . . . . 4,872,238 42.83 %
Phil Swain (2) (3) . . . . . . . . . . . . . . . . . . . . 4,872,238 42.83 %
The Jared R. Talla
Irrevocable Trust dated
January 4, 1993 (2) (3) . . . . . . . . . . . . . . . . 4,872,238 42.83 %
The Brett M. Talla
Irrevocable Trust dated
January 4, 1993 (2) (3) . . . . . . . . . . . . . . . . 4,872,238 42.83 %
John M. Gibbons (4) . . . . . . . . . . . . . . . . . . . 228,005 1.97 %
Dennison Veru . . . . . . . . . . . . . . . . . . . . . . 11,000 ***
Timothy M. O'Brien (5) . . . . . . . . . . . . . . . . . . 21,666 ***
Andrew Turner . . . . . . . . . . . . . . . . . . . . . . 53,000 ***
All directors and executive officers as a group
(9 persons) (6) . . . . . . . . . . . . . . . . . . . . 6,471,471 55.86 %
- --------------
</TABLE>
*** Less than one percent.
(1) The address of each of the foregoing persons is 11100 Santa Monica
Boulevard, Suite 300, Los Angeles, California 90025.
(2) Includes shares with respect to which the named beneficial owner shares
voting power pursuant to a voting agreement which requires each party to
vote their shares in the manner determined by a majority of all holders.
The agreement is effective until October 20, 2004 or until terminated by
persons holding 66-2/3% of the common stock held by all persons subject
to the agreement. Mr. Talla, Mona Talla, The Jared R. Talla Irrevocable
Trust dated January 4, 1993, The Brett M. Talla Irrevocable Trust dated
January 4, 1993, Ms. Pattee Francini, Mr. Spino and Mr. Swain are record
owners of 3,956,487, 30,953, 70,362, 70,362, 286,107, 237,969, and
201,664 shares of the Company's common stock, respectively. Mr. Talla
(including members of his immediate family and trusts for their benefit)
is the record owner of 4,128,164 shares.
(3) Includes 18,334 shares of common stock issuable within 60 days upon the
exercise of options granted to Ms. Pattee Francini, Mr. Spino and Mr.
Swain under the Company's 1994 Stock Incentive Plan. Ms. Pattee Francini
and Mr. Spino each hold options exercisable for 5,000 shares and Mr.
Swain holds options exercisable for 8,334 shares.
(4) Includes 35,500 shares owned by Mr. Gibbons, 5,000 shares owned by Mr.
Gibbons' spouse and 187,505 shares of common stock issuable within 60
days upon the exercise of options granted under the Company's 1994 Stock
Incentive Plan.
(5) Includes 21,666 shares of common stock issuable within 60 days upon the
exercise of options granted under the Company's 1994 Stock Incentive
Plan.
(6) Includes 227,505 shares of common stock issuable within 60 days upon the
exercise of options granted under the Company's 1994 Stock Incentive
Plan.
(7) All shares not currently outstanding that are subject to options,
warrants, rights or conversion privileges exercisable within 60 days are
deemed to be outstanding for the purpose of computing the "Percent of
Outstanding Shares" held by the holder thereof, but are not deemed to be
outstanding for the purpose of computing the "Percent of Outstanding
Shares" held by any other shareholder, pursuant to Rule 13d-3(d)(1) under
the Securities Exchange Act of 1934, as amended.
26
<PAGE> 28
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company possesses a 50.1% interest in the partnership which owns The
Sports Club/LA; Mr. Talla owns the remaining 49.9% interest. The partnership
agreement provides that, on an annual basis, the partners will share in the
first $300,000 of The Sports Club/LA's net cash flow in proportion to their
percentage interests. The next $35.0 million of net cash flow will be
distributed to the Company (the "Priority Distribution"). All distributions of
net cash flow thereafter, if any, will be made to the partners in proportion to
their percentage interests. In addition, the partnership agreement provides the
Company with an option to purchase Mr. Talla's interest for an amount equal to
the product of four times the amount of distributions received by Mr. Talla in
the year immediately preceding the year in which the option is exercised.
The property on which the Sports Connection/West Hollywood is located is
leased from a partnership in which Mr. Talla and his affiliates hold a
controlling interest. The lease expires in August 2022, provides for monthly
rental payments of $48,228, provides for increases in rent based upon increases
in the CPI, and requires the lessee to pay all taxes, utilities, insurance and
maintenance. In November 1996, the Company sold its interest in the Sports
Connection/West Hollywood and the purchaser of the Club assumed the lease
payable to Mr. Talla.
As of December 31, 1996, Mr. Talla is either the guarantor of, or the
named debtor with respect to, approximately $245,000 in debts of the Company.
The Company has agreed with Mr. Talla to make all payments due with respect to
all such debts, and to indemnify him with respect to all costs incurred in
connection therewith. These debts have been reflected in the Company's
financial statements.
In April 1996, The Company's Board of Directors approved a renewal of the
loan to Mr. Talla in the amount of $600,000, secured by 384,000 shares of the
Company's common stock. The loan is due and payable on April 3, 1997 and bears
interest at 6.8%. Upon the payment of all accrued interest, the Company
intends to renew the loan for another year in exchange for a pledge of shares
of the Company's common stock. The number of shares pledged as security will be
determined by the common stock's fair market value, but in no event will the
value of the shares pledged be less than two times the amount of the loan.
Effective August 1, 1996, Mr. Licklider entered into a consulting
agreement with the Company pursuant to which Mr. Licklider will receive $10,000
per month plus reimbursement for reasonable and necessary expenses. The
Agreement has a one year term and expires July 31, 1997. Under the terms of
the Agreement, Mr. Licklider must provide the Company with a minimum of 60
hours of service per month outside the normal scope of his duties as a
director. Effective with the commencement of the consulting agreement, Mr.
Licklider resigned from the audit and compensation committees of the Board of
Directors.
The Company has entered into agreements with its directors and officers
providing for the indemnification of such directors and officers by the Company
to the maximum extent permitted under Delaware law, in the event such persons
are the subject of lawsuits or otherwise suffer losses as a result of their
activities on behalf of the Company. These agreements include, among other
things, indemnity for judgments and settlements in derivative actions, prompt
payment of legal expenses in advance of indemnification and equitable
contribution by the Company in certain instances in the event a director or
officer is not entitled to full indemnification. In addition, the
indemnification agreements between the Company and Messrs. Talla and Licklider
provide that the Company shall indemnify them against any losses incurred as a
result of guarantees extended for the benefit of the Company or any of the
Clubs. Currently, Mr. Licklider does not guarantee any indebtedness.
The Company believes that each of the foregoing transactions has been on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All transactions between the Company and any of its
directors or officers are subject to the approval of the disinterested
directors.
27
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements filed as part of this Report are listed in
Item 8 of this Report.
(2) No financial schedules have been included because they are not
applicable, not required or because required information is
included in the consolidated financial statements or notes
thereto.
(3) The following exhibits are filed as part of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
3.3 Amendment to Bylaws dated February 1, 1995.**
4.1 Specimen Common Stock Certificate.*
9.1 Voting Agreement among D. Michael Talla, Nanette Pattee Francini, Mark S.
Spino, Peter Feinstein, Philip J. Swain and FP II.*
10.1 1994 Stock Incentive Plan.*#
10.2 Form of Stock Option Agreement.*#
10.3 Form of Stock Purchase Agreement.*#
10.4 1994 Stock Compensation Plan.*#
10.5 Form of Indemnification Agreement between the Registrant and its directors and
certain officers.*
10.6 Indemnification Agreement between the Registrant and D. Michael Talla.*
10.7 Indemnification Agreement between Registrant and Rex A. Licklider.*
10.8 Employment Agreement between Registrant and D. Michael Talla.*#
10.9 Employment Agreement between the Registrant and Nanette Pattee Francini.*#
10.10 Promissory Notes executed by D. Michael Talla dated November 5, 1991 in favor
of World Trade Bank, N.A., and related Loan Agreement dated June 24, 1992, as
amended.*
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
10.11 Promissory Note executed by Agoura Hills/Spectrum Club dated March 29, 1994 in
favor of Hawthorne Savings and Loan Association.*
10.12 Ground Lease of premises for the Howard Hughes Center/Spectrum Club located at
6833 Park Terrace, Los Angeles, California dated November 15, 1991 as amended
August 20, 1992 and August 21, 1992 and as assigned February 4, 1994.*
10.13 Entertainment Center Lease of premises for the Spectrum Club/Century City
located at 2040 Avenue of the Stars, Los Angeles, California, dated January 1,
1969 as amended August 17, 1970, May 19, 1971, December 23,
1974, February 23, 1979, May 1, 1984 and June 14, 1984.*
10.14 Lease of premises for the Spectrum Club/Century City located at 2040 Avenue of
the Stars dated January 7, 1992, as amended May 12, 1992, and
Consent to Sublease dated February 4, 1992.*
10.15 Lease of premises for the Spectrum Club/Water Garden located at 2425 W. Olympic
Boulevard, Santa Monica, California dated July 1, 1992.*
10.16 Athletic Facility Lease of premises for the Spectrum Club/Manhattan Beach
located at 2250 Park Place, El Segundo, California dated
January 3, 1986, as amended January 3, 1986, October 17, 1986,
March 1, 1987, March 31, 1988 and July 29, 1990.*
10.17 Lease of premises for Reebok Sports Club/NY located at 160 Columbus Avenue, New
York, New York 10023 dated June 3, 1992.*
10.18 Sublease of premises for the Spectrum Club/Santa Monica located at 1815
Centinela Avenue, Santa Monica, California dated October 31, 1991.*
10.19 Lease of premises for The Sports Connection/Santa Monica located at 2929 31st
Street, Santa Monica, California dated May 2, 1978, as amended October 20,
1978, April 13, 1979, September 27, 1982, August 14, 1984,
January 15, 1989 and February 19, 1992 and as assigned June 28, 1978 and
April 1, 1979.*
10.20 Lease of premises for The Sports Connection Valley Ltd. located at 17401
Ventura Blvd., Encino, California dated May 15, 1991, as
amended February 14, 1992 and September 17, 1993.*
10.21 Agreement of Purchase and Sale between MKDG/RHODES SC Partnership and Rex
Licklider dated November 19, 1993, as amended November 19, 1993, December 10,
1993, December 31, 1993, and February 18, 1994.*
10.22 Master Agreement among Bally's Health & Tennis Corporation, Health and Tennis
Corporation of America, Bally's S.C. Management, Inc. (collectively, The "Bally
Group"), Talla Holding Company, and other limited partnerships
(collectively, the "Talla Group") dated January 22, 1993.*
10.23 Memorandum Agreement among The Bally Group, the Talla Group, Bally's HHC
Partner, Inc., B.T. Howard Hughes Center Partnership, D.
Michael Talla and Holiday Health Clubs of California dated
February 4, 1994.*
10.24 Secured Note executed by Talla Holding Company, D. Michael Talla, and certain
limited partnerships in favor of Bally's Health & Tennis
Corporation dated February 4, 1994.*
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
10.25 Joint Venture Agreement for Sports Connection - ES/MB between El Segundo-TDC,
Ltd. and Continental El Segundo Corporation effective as of January 3, 1986.*
10.26 Restated Agreement of Limited Partnership of El Segundo-TDC, Ltd., as amended.*
10.27 Assignment Agreement effective as of October 2, 1989 among D. Michael Talla,
ES/MB, Ltd. and El Segundo-TDC, Ltd.*
10.28 Assignment Agreement effective as of October 2, 1989, among ES/MB, Ltd., the
Spectrum Club/MB and El Segundo-TDC, Ltd.*
10.29 Agreement of Limited Partnership of R-SC/NY, Ltd.*
10.30 Management Agreement effective as of June 3, 1992, between R-SC/NY, Ltd. and
Pontius Realty, Inc.*
10.31 License Agreement between Reebok Fitness Centers, Inc. and R-SC/NY, Ltd. dated
June 3, 1992.*
10.32 Agreement of Purchase and Sale and Joint Escrow Instructions entered between
Hawthorne Savings and Loan Association and Agoura Hills/Spectrum Club, Inc.
effective as of April 14, 1994.*
10.33 Lease of premises for the Sports Connection/Costa Mesa located at 1301 Newport
Blvd., Costa Mesa, California, dated January 16, 1985, as amended March 14,
1994.*
10.34 Commercial Lease of premises for the Sports Connection/Beverly Hills located at
8612-24 and 880 Westbourne Drive, Los Angeles, California dated January 1980,
amended March 4, 1980, July 27, 1981, June 4, 1985 and as amended and assigned
September 29, 1987.*
10.35 Building lease of premises for the Sports Connection/South Bay located at 21345
Hawthorne Boulevard, Torrance, California dated December 13, 1978, as amended
December 13, 1978, July 23, 1979 as modified by letter agreement July 29, 1979
and February 18, 1981, as subleased and amended December 1, 1982, and as
assigned September 26, 1988.*
10.36 Lease of premises for the Sports Connection/Long Beach located at 3030
Bellflower Boulevard, Long Beach, California dated February 18, 1993.*
10.37 First Amendment to Joint Venture Agreement for Sports Connection - ES/MB dated
January 3, 1986.*
10.38 Form of Membership Agreements for the Sports Clubs, Spectrum Clubs and Sports
Connections.*
10.39 Third Amendment to Lease of premises for the Howard Hughes Center/Spectrum Club
located at 6833 Park Terrace, Los Angeles, California dated April 11, 1994.*
10.40 Letter Agreement regarding R-SC/NY dated June 3, 1992.*
10.41 Club Management Contract for the Spectrum Club/Manhattan Beach dated January 3,
1986, as amended January 3, 1986 and September 17, 1987 and as assigned June
30, 1992.*
10.42 Amendment to Lease for the Sports Connection Valley Ltd. premises dated January
6, 1994.*
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
10.43 Amendment to Agreement of Purchase and Sale between MKDG/Rhodes SC Partnership
and Rex Licklider dated May 3, 1994.*
10.44 Agreement of Limited Partnership of NY-SC, Ltd. dated as of April 29, 1992, as
amended July 1, 1992.*
10.45 Sixth Amended and Restated Agreement of Limited Partnership of L.A./Irvine
Sports Clubs. Ltd., dated June 30, 1992.*
10.46 Agreement of Limited Partnership of The Sports Connection/Century City, dated
January 15, 1992, as amended July 1, 1992.*
10.47 Assignment of Contract Rights Between Rex Licklider and Sports Club, Inc.,
dated as of June 21, 1994.*
10.48 Memorandum of Agreement between Reebok Fitness Centers, Inc. and the Company
dated as of June 3, 1992.*
10.49 Seventh Amendment and Restated Agreement of Limited Partnership of L.A./Irvine
Sports Club, Ltd., a Calfornia Limited Partnership.*
10.50 First Amendment to Seventh Amended and Restated Agreement of Limited
Partnership of L.A./Irvine Sports Club, Ltd., a California Limited
Partnership.*
10.51 Form of Option Agreement by and between D. Michael Talla, an individual, TTO
Partners, a California Limited Partnership, and Sports Club, Ltd., a California
Corporation, relating to L.A./Irvine Sports Club, Ltd., a California Limited
Partnership.*
10.52 Master Lease dated September 29, 1987, between Scott Cameron, The Sports
Connection, Beverly Hills and West Hollywood Development Company.*
10.53 Form of Membership Agreement for The Sports Club/LA.*
10.54 Form of Membership Agreement for the Reebok Sports Club/NY.*
10.55 Promissory Note dated June 17, 1993, issued by Talla Development Company to
Teachers Retirement System of the State of Illinois, in the amount of
$164,382.60.*
10.56 Settlement Agreement dated February 23, 1993 by and among Sepulveda Office
Partners, L.P., The Sports Connection-Van Nuys, Jackson Sports Limited, Inc.
and D. Michael Talla.*
10.57 Amended and Restated Agreement of Limited Partnership of TTO Partners, a
California Limited Partnership, dated June 30, 1992, as amended January 1,
1993, January 4, 1993 and February 12, 1994 and as assigned January 1, 1993.*
10.58 Letter Agreement dated October 11, 1994, by and between MKDG Rhodes/SC
Partnership, a General Partnership, and Rex Licklider, including a $5,500,000
promissory note and deed of trust to be delivered concurrently with the
consummation of the Offering.*
10.59 Guarantee by Marvin Davis in favor of L.A./Irvine Sports Club, Ltd., which
became effective with the consummation of the Offering.*
10.60 First Amended and Restated Agreement of Limited Partnership of Reebok-Sports
Club/NY, Ltd. dated as of October 12, 1994.*
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
10.61 Letter Agreement by and between Reebok Fitness Centers, Inc. and the Company
dated October 12, 1994.*
10.62 Amendment to First Amended and Restated Agreement of Limited Partnership of
Reebok-Sports Club/NY, Ltd. dated as of October 12, 1994.*
10.63 Letter Agreement by and between Reebok Fitness Centers, Inc. and the Company,
which became effective with the consummation of the Offering.*
10.64 License Agreement by and between Reebok Fitness Centers, Inc. and the Company,
which became effective with the consummation of the Offering.*
10.65 Assignment and First Amendment of Lease between Watergarden Associates, The
Sports Connection Watergarden and Agoura Hills/Spectrum Club, Inc. which became
effective with the consummation of the Offering.*
10.66 Assignment Agreement effective as of October 21, 1994 among The Sports Club
Company, Inc. and Jackson Sports Limited, Inc.**
10.67 Sixth Amendment to Athletic Facility Lease of premises for the Spectrum
Club/Manhattan Beach located at 2250 Park Place, El Segundo, California, dated
November 28, 1994.**
10.68 Assignment of Limited Partnership Interests in El Segundo-TDC, Ltd. between Dr.
Jerome Friedland and The Spectrum Club Company, Inc. dated as of February 17,
1995.**
10.69 Promissory Note executed by L.A./Irvine Sports Clubs, Ltd. in favor of
MKDG/Rhodes SC Partnership, dated October 20, 1994.**
10.70 Employment Agreement between the Registrant and John M. Gibbons.**#
10.71 First Amendment to Employment Agreement between Registrant and D. Michael
Talla, dated February 27, 1995. ***#
10.72 Amended and Restated Employment Agreement between Registrant and John M.
Gibbons, dated July 14, 1995. ***#
10.73 Secured Promissory Note and Security Agreement in connection therewith between
Registrant as Payee and D. Michael Talla as payor, both dated April 3, 1995.***
10.74 Office Sublease of premises located at 11100 Santa Monica Boulevard, Suite 300,
Los Angeles, California effective as of January 15, 1995.***
10.75 Athletic Club lease by and between The Spectrum Club Company, Inc. and The
Newhall Land and Farming Company dated as of January 22, 1996.***
10.76 Settlement Agreement by and among Lincoln Metrocenter Partners, L.P., Reebok-
Sports Club/NY, Ltd., Talla New York, Inc., RFC, Inc., and LMP Health Club Co.
dated as of December 28, 1995 and Promissory Notes in connection therewith.***
10.77 Credit Agreement and related Exhibits by and between The Sports Club Company,
Inc. and HealthFitness Organization of America, Inc. dated as of November 28,
1995.***
10.78 Notification to HealthFitness Organization of America, Inc.'s shareholders of
The Sports Club Company, Inc.'s exercise of its option to acquire shares of
HealthFitness Organization of America, Inc. dated as of November 28, 1995.***
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
10.79 Second Amendment to Promissory Note dated November 5, 1991 between World Trade
Bank, N.A. and D. Michael Talla, dated September 28, 1995.***
10.80 Loan Agreement between AT&T Commercial Finance Corporation and L.A./Irvine
Sports Clubs, Ltd. dated March 9, 1996.***
10.81 First Amendment to Loan Agreement between AT&T Commercial Finance Corporation
and L.A./Irvine Sports Clubs, Ltd., dated March 12, 1996.***
10.82 401-K Profit Sharing Plan and related Group Annuity Contract No. GA-P K522 and
Group Separate Account Annuity Contract No. GA-P K523, both with Nationwide
Life Insurance Company with an effective date of February 1, 1996.
10.83 First Amendment to Restated Employment Agreement between Registrant and John M.
Gibbons dated as of April 24, 1996.#
10.84 Asset Purchase Agreement among 24 Hour Fitness, Inc., The Sports Connection
Holding Company, and Registrant dated as of November 1, 1996.
10.85 Management Agreement by and between Registrant and C.I.T.E. Design Corp. dated
as of May 2, 1996.
10.86 Consulting Agreement by and between Registrant and Rex A. Licklider dated as of
August 1, 1996.#
10.87 Letter Agreement by and between Registrant and WPI.Koll Asia Pacific Advisors
dated as of October 9, 1996.
10.88 Second Amendment to Loan Agreement and related documents between AT&T
Commercial Finance Corporation and L.A./Irvine Sports Clubs, Ltd. dated as of
October 11, 1996.
10.89 Termination Agreement by and among Bally Total Fitness Holding Corporation,
Bally Total Fitness Corporation, Bally's S.C. Management, Inc., The Sports
Connection Holding Company and Registrant dated October 31, 1996.
10.90 Fourth Amendment to Athletic Club Lease dated December 11, 1996, by and between
Howard Hughes Properties, Limited Partnership, a Delaware limited partnership
and The Spectrum Club Company, Inc.
10.91 Agreement by and among Reebok-Sports Club/NY Ltd., Talla New York, Inc., RFC,
Inc., LMP Health Club Co., Millennium Entertainment Partners, L.P. and
Registrant dated as of December 30, 1996.
10.92 Letter Agreement between Millennium Entertainment Partners, L.P. and the
Registrant dated as of March 13, 1997.
10.93 Loan Agreement entered into by and among the Registrant, The Spectrum Club
Company, Inc., Pontius Realty, Inc., Sports Club, Inc. of California, Irvine
Sports Club, Inc., HealthFitness Organization of America, Inc., L.A./Irvine
Sports Club, Ltd., Talla New York, Inc., SCC Sports Club, Inc. and Sumitomo
Bank of California dated as of March 20, 1997.
21.1 Subsidiaries of the Registrant.
</TABLE>
_________________
33
<PAGE> 35
# Compensation agreement or plan.
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1, declared effective on October 13, 1994 (SEC file No. 33- 79552).
** Incorporated by reference to the Registrant's Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on March 31, 1995 (SEC
file No. 1-13290).
*** Incorporated by reference to the Registrant's Annual Report or Form 10-K,
filed with the Securities and Exchange Commission on March 29, 1996 (SEC
file No. 1-3290).
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the period
covered by this Report.
(c) Exhibits
INDEX TO EXHIBITS
SEQUENTIALLY
<TABLE>
<CAPTION>
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
<S> <C>
10.82 401-K Profit Sharing Plan and related Group Annuity Contract No.
GA-P K522 and Group Separate Account Annuity Contract No. GA-P
K523, both with Nationwide Life Insurance Company with an
effective date of February 1, 1996.
10.83 First Amendment to Restated Employment Agreement between
Registrant and John M. Gibbons dated as of April 24, 1996.#
10.84 Asset Purchase Agreement among 24 Hour Fitness, Inc., The Sports
Connection Holding Company, and Registrant dated as of November
1, 1996.
10.85 Management Agreement by and between Registrant and C.I.T.E.
Design Corp. dated as of May 2, 1996.
10.86 Consulting Agreement by and between Registrant and Rex A.
Licklider dated as of August 1, 1996.#
10.87 Letter Agreement by and between Registrant and WPI.Koll Asia
Pacific Advisors dated as of October 9, 1996.
10.88 Second Amendment to Loan Agreement and related documents between
AT&T Commercial Finance Corporation and L.A./Irvine Sports
Clubs, Ltd. dated as of October 11, 1996.
10.89 Termination Agreement by and among Bally Total Fitness Holding
Corporation, Bally Total Fitness Corporation, Bally's S.C.
Management, Inc., The Sports Connection Holding Company and
Registrant dated October 31, 1996.
10.90 Fourth Amendment to Athletic Club Lease dated December 11, 1996,
by and between Howard Hughes Properties, Limited Partnership, a
Delaware limited partnership and The Spectrum Club Company, Inc.
</TABLE>
34
<PAGE> 36
<TABLE>
<S> <C>
10.91 Agreement by and among Reebok-Sports Club/NY Ltd., Talla New
York, Inc., RFC, Inc., LMP Health Club Co., Millennium
Entertainment Partners, L.P. and Registrant dated as of December
30, 1996.
10.92 Letter Agreement between Millennium Entertainment Partners, L.P.
and the Registrant dated as of March 13, 1997.
10.93 Loan Agreement entered into by and among the Registrant, The
Spectrum Club Company, Inc., Pontius Realty, Inc., Sports Club,
Inc. of California, Irvine Sports Club, Inc., HealthFitness
Organization of America, Inc., L.A./Irvine Sports Club, Ltd.,
Talla New York, Inc., SCC Sports Club, Inc. and Sumitomo Bank of
California dated as of March 20, 1997.
21.1 Subsidiaries of the Registrant.
</TABLE>
_________________
# Compensation agreement or plan
35
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 26th
day of March 1997.
THE SPORTS CLUB COMPANY, INC.
/s/ D. Michael Talla
-----------------------------------
D. Michael Talla,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant, in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------- ------ -----
<S> <C> <C>
/s/ D. Michael Talla Chairman of the Board March 26, 1997
- --------------------------- and Chief Executive Officer
D. Michael Talla
/s/ Timothy O'Brien Chief Financial Officer March 26, 1997
- --------------------------- (Principal Financial and
Timothy O'Brien Accounting Officer)
/s/ Rex A. Licklider Vice Chairman of the Board March 26, 1997
- ---------------------------
Rex A. Licklider
/s/ John M. Gibbons President, Chief Operating Officer March 26, 1997
- --------------------------- and Director
John M. Gibbons
/s/ Nanette Pattee Francini Director March 26, 1997
- ---------------------------
Nanette Pattee Francini
/s/ Andrew L. Turner Director March 26, 1997
- ---------------------------
Andrew L. Turner
/s/ Dennison Veru Director March 26, 1997
- ---------------------------
Dennison Veru
</TABLE>
36
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Sports Club Company, Inc.:
We have audited the accompanying consolidated financial statements of The
Sports Club Company, Inc. and subsidiaries (the Company) as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
did not audit the December 31, 1996 balance sheet of Reebok-Sports Club/NY
(SC/NY), a partnership which is 50.1 percent owned by the Company. The balance
sheet of SC/NY reflects total assets constituting 13 percent of 1996
consolidated total assets. Prior to December 30, 1996, the Company's interest
in SC/NY was 40 percent. The equity interest in the net earnings of SC/NY for
1995 and 1996 were immaterial. The 1996 balance sheet of SC/NY was audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for SC/NY, is based solely on the report
of the other auditors.
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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Sports Club Company, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 13, 1997
except for the last paragraph of note 5
which is as of March 20, 1997
F-1
<PAGE> 39
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1995 1996
------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents, includes $727 escrowed
construction funds in 1996 $1,545 $4,146
Accounts receivable, net of allowance for doubtful accounts
of $39 and $57 in 1995 and 1996, respectively 1,323 1,376
Inventories 401 395
Other current assets 370 381
Due from affiliates 3,508 1,043
------- -------
Total current assets 7,147 7,341
Property and equipment, net 59,956 72,736
Equity interest in unconsolidated subsidiaries 4,478 529
Costs in excess of net assets acquired, less accumulated amortization of
$215 and $454 in 1995 and 1996, respectively 10,136 13,552
Organizational costs and other assets, net 1,389 1,426
------- -------
$83,106 $95,584
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and capitalized
lease obligations $1,890 $2,470
Accounts payable 2,021 1,431
Accrued liabilities 2,165 3,113
Deferred membership revenues 4,742 6,548
------- -------
Total current liabilities 10,818 13,562
Notes payable and capitalized lease obligations,
less current installments 31,023 36,027
Deferred lease obligations 691 3,309
Minority interest 600 1,000
------- -------
Total liabilities 43,132 53,898
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value 1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $.01 par value, 40,000,000 shares authorized; 11,355,000 and
11,358,000 shares issued and outstanding at December 31, 1995 and
1996, respectively 114 114
Additional paid-in capital 37,044 37,052
Retained earnings 2,816 4,520
------- -------
Total shareholders' equity 39,974 41,686
------- -------
$83,106 $95,584
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 40
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three-Year Period ended December 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $18,846 $36,092 $37,422
Operating expenses:
Direct 10,525 22,727 23,432
Selling, general and administrative 3,166 5,288 6,052
Depreciation and amortization 1,510 2,775 2,490
------- ------- -------
Total operating expenses 15,201 30,790 31,974
------- ------- -------
Income from operations 3,645 5,302 5,448
Other income (expense):
Interest (1,213) (2,600) (2,682)
Minority interests (29) (150) (150)
Equity interest in net income of unconsolidated subsidiaries 641 845 573
Loss on sale of Sports Connections 0 0 (300)
------- ------- -------
Total other income (expense) (601) (1,905) (2,559)
------- ------- -------
Income before income taxes 3,044 3,397 2,889
Provision for income taxes 460 1,393 1,185
------- ------- -------
Net income 2,584 2,004 1,704
Pro forma income tax adjustment (unaudited) - provision
for income taxes incremental to historical taxes 784 0 0
------- ------- -------
Net income after pro forma income
tax adjustment (1994 unaudited) $ 1,800 $ 2,004 $ 1,704
======= ======= =======
Net income per share after pro forma income
tax adjustment (1994 unaudited) $0.23 $0.18 $0.15
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 41
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three-Year Period ended December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional
Partners' -------------------- Paid-in Retained
Capital Shares Value Capital Earnings
---------- ------- ------ --------- ---------
<S> <C> <C> <C>
Partners' capital at January 1, 1994 $2,897 - $ - $ - $ -
Net income 1,772 - - - 812
Contributions 398 - - - -
Distributions and redemptions of partnership interests (2,902) - - - -
Exchange of partnership interest for common stock (2,165) 6,850 69 2,096 -
Issuance of common stock in connection with
initial public offering - 4,500 45 34,919 -
------- ------ ---- ------- ------
Balance, December 31, 1994 - 11,350 114 37,015 812
Net income - - - - 2,004
Issuance of common stock to outside directors - 5 - 29 -
------- ------ ---- ------- ------
Balance, December 31, 1995 - 11,355 114 37,044 2,816
Net income - - - - 1,704
Issuance of common stock to outside directors - 3 - 8 -
------- ------ ---- ------- ------
Balance, December 31, 1996 $ - 11,358 $114 $37,052 $4,520
======= ====== ===== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 42
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Year Period ended December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
1994 1995 1996
----- ---- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,584 $2,004 $1,704
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,510 2,775 2,490
Accrued management fees - (502) (97)
Equity interest in net income of unconsolidated subsidiaries (641) (845) (573)
Distributions from unconsolidated subsidiaries 258 320 623
Stock issued as directors' fees - 29 8
Loss on sale of Sports Connections - - 300
(Increase) decrease in:
Accounts receivable, net (172) (23) 149
Inventories 18 42 105
Other current assets 402 (106) (12)
Increase (decrease) in:
Accounts payable 665 1,012 (816)
Accrued liabilities 975 (654) 227
Deferred membership revenues (1,753) (898) (694)
Deferred lease obligations 379 312 211
-------- ------- --------
Net cash provided by operating activities 4,225 3,466 3,625
Cash flows from investing activities:
Capital expenditures (381) (929) (2,788)
Business acquisitions, net of cash acquired (27,906) (1,255) (2,118)
Proceeds from sale of Sports Connections - - 3,569
Sale (purchase) of other non-operating assets (1,116) (33) 95
-------- ------- --------
Net cash used for investing activities (29,403) (2,217) (1,242)
Cash flows from financing activities:
(Increase) decrease in due from affiliates (318) (2,658) 540
Proceeds from notes payable and capital lease obligations 714 - 23,371
Repayments of notes payable and capital lease obligations (5,085) (2,058) (23,693)
Net proceeds from sale of common stock 35,564 - -
Capital contributions by partners 398 - -
Distributions and redemptions of partnership interests (1,262) (30) -
-------- ------- --------
Net cash provided by (used for) financing activities 30,011 (4,746) 218
-------- ------- --------
Net increase (decrease) in cash and cash equivalents 4,833 (3,497) 2,601
Cash and cash equivalents at beginning of year 209 5,042 1,545
-------- ------- --------
Cash and cash equivalents at end of year $ 5,042 $ 1,545 $ 4,146
======== ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,021 $ 2,585 $ 3,068
======== ======= ========
Cash paid during the year for income taxes $ - $ 1,473 $ 590
======== ======= ========
Non-cash activities:
Redemption of partnership interests by issuance of notes payable $ 1,213 $ - $ -
Redemption of partnership interests by decrease in other assets 427 - -
Capital expenditures financed - 982 158
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 43
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. ORGANIZATION
The Sports Club Company, Inc. (the "Company") was formed on February 15, 1994.
In order to facilitate an initial public offering of common stock in October
1994, the Company issued 6,850,000 shares of common stock to the owners of The
Spectrum Club Company (predecessor company) in exchange for their 100%
ownership interests in The Spectrum Club Company. This transaction ("Exchange
Transaction") has been accounted for under the principles of reorganization
accounting and therefore The Spectrum Club Company's operating results for
periods prior to October 1994 are presented as the predecessor company. The
Spectrum Club Company was engaged in the management and development of health
and fitness facilities located in Southern California. The Spectrum Club
Company developed principally two distinct athletic club products serving
different markets; Spectrum Clubs and Sports Connections. The products were
differentiated by the level of amenities and services, diversity of facilities
and fees charged. The Spectrum Club concept generally serves an upscale market
in comparison to the Sports Connections which served the lower end of the
fitness market.
Commencing March 1, 1993, under a joint venture agreement between Bally's
Health and Tennis Corporation (Bally's) and The Spectrum Club Company, Bally's
began managing the Sports Connections. Since Bally's assumed financial and
operating control for the Sports Connections, the results of operations are not
included in the accompanying consolidated financial statements and the Company
had recorded its investment under the equity method of accounting. In November
1996, the Company sold its interest in certain Sports Connection clubs to
Fitness Holding, Inc. d/b/a 24 Hour Fitness. The Company received cash
proceeds of approximately $4.6 million. The management agreement with Bally's
was terminated simultaneously with this transaction in consideration of a
termination fee of $1.0 million.
Concurrent with the completion of the initial public offering, the Company
entered into an employment agreement with D. Michael Talla as its Chief
Executive Officer. The Company has recorded certain compensation to Mr. Talla
in the accompanying consolidated financial statements as if his current
employment agreement was in effect during the year ended December 31, 1994.
The pro forma financial information included on the consolidated statements of
operations is provided to illustrate the effects on the consolidated historical
financial information had the Company operated as a taxable corporation and
reflects the issuance of 6,850,000 shares of common stock for purposes of
presenting pro forma net income per share.
In October 1994, the Company completed its initial public offering of 4,500,000
shares of common stock. The net proceeds of such sale were primarily used to
acquire majority control of The Sports Club/LA and The Sports Club/Irvine.
These Clubs have been developed as "urban country clubs" offering a full range
of services and amenities primarily to affluent health conscious individuals.
The Reebok Sports Club/NY, which the Company manages and in which it initially
owned a 40% partnership interest, is in New York City and opened in April 1995.
The Company's investment had been accounted for under the equity method of
accounting. On December 30, 1996, the Company acquired an additional 10.1%
ownership interest and, the Company will begin including the financial
condition and operating results of the Reebok Sports Club/NY in its
consolidated financial statements as of that date. The balance sheet of
Reebok-Sports Club/NY has been consolidated with and into the Company's
financial statements at December 31, 1996.
F-6
<PAGE> 44
On November 30, 1995, the Company acquired 100% of the common stock of
HealthFitness Organization of America, Inc. ("HFA"). HFA provides integrated
wellness and musculoskeletal healthcare programs at The Sports Club/LA, The
Sports Club/Irvine and Spectrum Club/Agoura Hills.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain
reclassifications have been made to the prior years' financial statements to
conform to the presentation used in 1996.
Revenue Recognition
Annual dues are deferred and recognized as revenues evenly over the term of the
related membership agreement, which is primarily a twelve month term. New
membership initiation fees are recognized as revenue as sold (typically cash is
received at the time of sale). Membership initiation fees aggregated
$1,058,000, $2,435,000 and $2,146,000 for the years ended December 31, 1994,
1995 and 1996, respectively. Included in accounts receivable at December 31,
1995 and 1996 are amounts related to membership revenues aggregating $526,000
and $642,000, respectively.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents At December 31, 1996, cash and cash
equivalents include $727,000 of escrowed construction funds.
Inventories
Inventories are stated at the lower of cost or market using the average cost
method.
Depreciation and Amortization
Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or the
estimated useful life of the improvements. Loan costs are amortized over the
terms of the related loans and organizational costs are amortized over five
years.
Predevelopment Costs
Predevelopment costs consist of architectural and feasibility expenditures
incurred for certain prospective health and fitness projects. Projects are
reviewed periodically by management for viability. Should a project be deemed
not viable for construction, such related costs are charged to operations at
the time of determination. The Company has predevelopment costs for a Sports
Club in Houston, Texas in the amount of $53,000 at December 31, 1996.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net
F-7
<PAGE> 45
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement had no
impact on the Company's financial position, results of operation or liquidity.
Intangible Assets
The costs in excess of net assets of acquired businesses resulting from the
acquisitions referred to in Note 3 are being amortized on a straight-line basis
over a period of 40 years. The Company periodically evaluates the carrying
value of intangible assets and, considers the ability to generate positive cash
flow through undiscounted future operating cash flows of the acquired operation
as the key factor in determining whether the assets have been impaired. The
Company has not experienced an impairment of value of any of its intangible
assets as of December 31, 1996.
Equity Interest in Unconsolidated Subsidiaries
At December 31, 1995, equity interest in unconsolidated subsidiaries consisted
of the 40% general partnership interest in the Reebok-Sports Club/NY, a 46.1%
interest in a Spectrum Club located in Manhattan Beach, California, and the
Company's interest in the Sports Connections included in the joint venture
agreement with Bally's. The Company sold its interest in the Sports
Connections during 1996. On December 30, 1996, the Company acquired
controlling interest in the Reebok-Sports Club/NY and therefore this Club's
balance sheet is included in the Company's consolidated balance sheet as of
December 31, 1996 and the results of the Reebok-Sports Club/NY will be included
in the Company's consolidated statement of operations from the date of
acquisition.
The Company allocates profits and losses on a basis defined in the various
partnership agreements. Operating losses in the Reebok-Sports Club/NY in 1995
were allocated 99% to the limited partners and 1% to the Company. Operating
profits in 1996 were allocated 99% to the limited partners and 1% to the
Company. Summary financial information of unconsolidated subsidiaries is as
follows: (The December 31, 1996 balance sheet information only includes the
accounts of the Spectrum Club/Manhattan Beach since the Sports Connections were
sold and the Reebok-Sports Club/NY is now included in the consolidated balance
sheet.)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------
1995 1996
---- ----
(Amounts in thousands)
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . $ 26,510 $ 28,698
Net income (loss) . . . . . . . . . . . . . (887) 1,576
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------
1995 1996
---- ----
(Amounts in thousands)
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . $ 1,214 $ 522
Non-current assets . . . . . . . . . . . . . . . 18,658 2,653
------- ------
Total assets . . . . . . . . . . . . . . . . . . $19,872 $3,175
======= ======
Current liabilities . . . . . . . . . . . . . . . $ 4,153 $1,444
Non-current liabilities . . . . . . . . . . . . . 7,422 539
Total liabilities . . . . . . . . . . . . . . . . 11,575 1,983
Partners' capital . . . . . . . . . . . . . . . . 8,297 1,192
------- ------
Total liabilities and partners' capital . . . . . $19,872 $3,175
======= ======
</TABLE>
F-8
<PAGE> 46
Income Taxes
Prior to the October 1994 Exchange Transaction, the Company consisted of a
series of partnerships; accordingly no provisions for federal or state income
taxes were recorded, and the liability for such taxes was passed through to the
respective partners.
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
Earnings per Share
Net income per share is computed by dividing net income by the weighted average
number of common and dilutive common share equivalents (consisting of stock
options) outstanding during the period. Common stock equivalents are not
included when their effect would be antidilutive. The number of shares used
for this computation was 7,836,000, 11,353,000 and 11,355,000 for the years
ended December 31, 1994, 1995, and 1996, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions. These affect the reporting of assets and liabilities, the
disclosure of any contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from these estimates.
Fair Value of Financial Instruments
The carrying amounts of financial instruments approximate fair value as of
December 31, 1996. The carrying amounts related to cash and cash equivalents,
accounts receivable, other current assets and accounts payable approximate fair
value due to the relatively short maturity of such instruments. The fair value
of long-term debt is estimated by discounting the future cash flows of each
instrument at rates currently available to the Company for similar debt
instruments of comparable maturities by the Company's bankers.
3. ACQUISITIONS
On October 20, 1994, the Company acquired a controlling interest in The Sports
Club/LA and The Sports Club/Irvine (the "Sports Club Acquisition") in exchange
for $27.7 million in cash and a promissory note in the amount of $5.5 million.
The Company also assumed a $23.2 million note in connection with this
acquisition. This acquisition was accounted for as a purchase. Accordingly, the
operations of The Sports Club/LA and The Sports Club/Irvine are included in the
accompanying statement of operations from the date of acquisition. The purchase
price was primarily allocated to property and equipment, and the balance of
approximately $7.0 million was recorded as costs in excess of net assets
acquired.
On November 30, 1995, the Company acquired 100% of the stock of HealthFitness
Organization of America, Inc. ("HFA"). The acquisition was accounted for as a
purchase. Accordingly, the operations of HFA are included in the accompanying
statement of operations from the date of acquisition.
F-9
<PAGE> 47
On December 30, 1996, the Company acquired an additional 10.1% interest in The
Reebok-Sports Club/NY partnership for $2,525,000 which brings the Company's
total ownership to 50.1%. This acquisition was accounted for as a purchase and
accordingly, the operations of the Club will be included in the consolidated
statement of operations from the date of acquisition. The Company's
consolidated balance sheet as of December 31, 1996 includes the acquired assets
and liabilities of the Reebok-Sports Club/NY. Goodwill of approximately $3.8
million resulted due to this transaction. (See also note 11).
The following pro forma financial data present the Company's unaudited pro
forma statement of operations for the years ended December 31, 1995 and 1996,
giving effect to the Reebok-Sports Club/NY acquisition as if the transaction
had occurred on January 1, 1995. The operations of HFA, on a pro forma basis,
are not material to the consolidated statement of operations, accordingly, its
impact has been excluded from the following pro forma presentation. The
unaudited pro forma condensed statements of operations do not purport to
represent what the Company's actual results of operations would have been had
such transactions in fact occurred on such date. The unaudited pro forma
condensed statements of operations also do not purport to project the results
of operations of the Company for any future period.
<TABLE>
<CAPTION>
(Unaudited)
Year ended December 31,
-----------------------
1995 1996
---- ----
(in thousands, except per share data)
<S> <C> <C>
Revenues $ 45,536 $ 52,545
Operating expenses 43,370 48,023
-------- --------
Income from operations 2,166 4,522
Other expenses 904 3,024
-------- --------
Income before provision for income taxes 1,262 1,498
Provision for income taxes 518 615
-------- --------
Net income $ 744 $ 883
======== =========
Net income per share $ .07 $ .08
======== ========
Weighted average number of common shares outstanding 11,353 11,355
========== =========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation, and
summarized as follows at December 31:
<TABLE>
<CAPTION>
1995 1996 Estimated useful lives
---- ---- ----------------------
(Amounts in thousands)
<S> <C> <C> <C>
Land $ 9,744 $ 10,234
Building and improvements 47,967 58,076 31.5 to 40 years
Furniture, fixtures and equipment 4,995 9,126 5 to 7 years
-------- --------
62,706 77,436
Less accumulated depreciation and
amortization 2,750 4,700
-------- --------
Net property and equipment $ 59,956 $ 72,736
======== ========
</TABLE>
Equipment under capital leases was $1,911,000 and $2,056,000 and related
accumulated amortization was $649,000 and $1,008,000 at December 31, 1995 and
1996, respectively.
F-10
<PAGE> 48
5. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Notes payable and capitalized lease obligations are summarized as follows at
December 31:
<TABLE>
<CAPTION>
1995 1996
----- -----
(Amounts in thousands)
<S> <C> <C>
The Sports Club/LA note (a) $ 22,104 $ 23,070
The Sports Club/Irvine note (b) 5,500 5,375
Spectrum Club/Agoura Hills note (c) 2,550 2,550
Secured bank notes (d) 629 245
Equipment financing and capitalized
lease obligations(e) 1,494 4,303
Other notes payable (f) 636 2,954
-------- --------
32,913 38,497
Less current installments 1,890 2,470
-------- --------
$ 31,023 $ 36,027
======== ========
</TABLE>
(a) The Sports Club/LA note was assumed from the seller as part of the Sports
Club Acquisition. The note was secured by land, building improvements and the
building of The Sports Club/LA, with interest at the rate of 10% and required
monthly payments aggregating $264,000 with a balloon payment of approximately
$22 million on December 31, 1996. On March 9, 1996, the Company refinanced that
note with another lender. In October, 1996, the Company increased the note by
$500,000 in order to purchase a parcel of land adjacent to the Club. The new
loan bears interest at the rate of 10.63% and requires monthly payments of
approximately $262,000 with a balloon payment of approximately $17.5 million on
April 1, 2003. If certain conditions exist, the Company may extend the term of
the loan by five years. The note is secured by all the assets of The Sports
Club/LA and requires the Club to maintain a debt service coverage ratio, as
defined, of 1.4 to 1.0.
(b) The Sports Club/Irvine note was issued to the seller as partial
consideration for the Sports Club Aquisition. The note is secured by land,
equipment, building improvements and the building of The Sports Club/Irvine,
bears interest at 6%, and requires quarterly principal payments of $125,000,
which commenced in November 1996, and a balloon payment of $4.0 million on
November 1, 1999.
(c) The Spectrum Club/Agoura Hills note was issued by a savings and loan
association to complete the Company's acquisition of the Spectrum Club/Agoura
Hills. The note is secured by land, equipment, building improvements and the
building of the Spectrum Club/Agoura Hills. The note bears interest at the rate
of 6% through February 1997 and 8.5% thereafter. Payments of interest only are
required through April 1997, thereafter monthly principal and interest payments
of $20,107 are required through the note's maturity in April 2024.
(d) The secured bank notes are secured by an assignment of the Company's common
stock owned by the Company's Chairman and CEO. These notes bear interest
between 0.5% above the bank's prime interest rate (10.25% and 9.75% at December
31, 1995 and 1996 respectively) and the bank's prime interest rate. The notes
require varying monthly payments with the final payment due June 1997.
(e) The equipment financing and capitalized lease obligations are secured by
the furniture, fixtures and equipment. The amounts are generally repayable in
monthly payments over five years with effective interest rates between 8% to
14%.
(f) Other notes payable in 1996 include a $2.5 million note from the
Reebok-Sports Club/NY ("Partnership") to Millennium Entertainment Partners
L.P., a limited partner in the Partnership. The note bears interest at the
rate of 10% and is repayable as net cash flow of the Partnership is available,
with a final maturity in December 1999.
F-11
<PAGE> 49
Future minimum annual principal payments at December 31, 1996, are as follows
(in thousands):
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . $ 2,470
1998 . . . . . . . . . . . . . . . . . . . . . . . . 2,311
1999 . . . . . . . . . . . . . . . . . . . . . . . . 8,862
2000 . . . . . . . . . . . . . . . . . . . . . . . . 2,166
2001 . . . . . . . . . . . . . . . . . . . . . . . . 1,549
Thereafter . . . . . . . . . . . . . . . . . . . . . 21,139
--------
$ 38,497
========
</TABLE>
On March 20, 1997, the Company entered into a $5.0 million loan agreement. The
agreement provides a $3.0 million revolving line of credit for working capital
and new club development and a $2.0 million non-revolving line for funding
mergers and acquisitions. The revolving line of credit will bear interest at
the Bank's prime rate plus .5% over a two year term. The non-revolving line
will convert to a term-loan payable over three years with interest at prime
plus 1.0%. The loans are unsecured, however, the Company is prohibited from
pledging any of its assets except for normal furniture, fixture and equipment
financing. The agreement also requires the Company to maintain certain Tangible
Net Worth, Debt Coverage Ratios and Senior Liabilities to Tangible Net Worth
Ratio requirements.
6. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain facilities pursuant to various operating lease
agreements. The club facility leases are generally long-term and noncancelable
triple-net leases (requiring the Company to pay all real estate taxes,
insurance and maintenance expenses), and have an average remaining term of 23
years, including renewal options, with the earliest expiration date of November
1998. Future minimum noncancelable operating lease payments as of December 31,
1996 including the lease for the Spectrum Club in Valencia, expected to
commence in 1998, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1997 . . . . . . . . . . . . . . . . . . . . . . $ 6,126
1998 . . . . . . . . . . . . . . . . . . . . . . 8,019
1999 . . . . . . . . . . . . . . . . . . . . . . 7,912
2000 . . . . . . . . . . . . . . . . . . . . . . 7,672
2001 . . . . . . . . . . . . . . . . . . . . . . 7,608
Thereafter . . . . . . . . . . . . . . . . . . . 92,338
--------
Total minimum lease payments . . . . . . . $129,675
========
</TABLE>
Rent expense for facilities and equipment aggregated $1,465,000, $1,805,000 and
$1,960,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
Litigation
In August of 1995, Century City Spectrum ("CCS"), a subsidiary of the Company,
closed the Century City Spectrum Club. In connection with the bankruptcy of
the landlord, CCS's rights under the lease related to this Club were acquired
by Century Entertainment Center, L.P. ("Century"). On August 10, 1995, CCS
filed an action against Century alleging a breach of the lease by the prior
landlord. Century filed a cross-complaint against CCS for rent due and against
the Company as a guarantor of CCS's obligations under the lease. The
Cross-Complaint seeks in excess of $800,000 through December 1995, plus rent
thereafter of approximately $39,000 per month. The trial court ruled CCS's
right of first refusal cannot be asserted against Century. CCS's primary
remaining defense is based upon Century's obligation to re-lease the subject
space.
F-12
<PAGE> 50
In addition, CCS may appeal the trial court's ruling following trial. The
Company is contesting the action against it as guarantor on the basis that its
obligations were exonerated or do not inure to the benefit of Century.
However, there can be no assurance that the Company will not be held liable for
all amounts found to be due to Century from CCS. Such liability could have a
material adverse effect upon the Company.
The Company is also involved in various claims and lawsuits incidental to its
business, including claims arising from accidents and disputes with landlords.
However, in the opinion of management the Company is adequately insured against
such claims and lawsuits involving personal injuries, and any ultimate
liability arising out of any such proceedings will not have a material adverse
effect on the financial condition, cash flow or operations of the Company.
Employment Agreements
The Company currently has employment agreements with three key executive
officers which expire in 1998 and 2000. The agreements provide the executives
with a base compensation and, in the event of certain conditions, a severance
payment not to exceed three times each executive's annual compensation.
7. INCOME TAXES
The provision for income taxes, including the pro forma income tax adjustment
for income taxes incremental to historical taxes in 1994, consists of the
following:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Federal . . . . . . . . . . . . $ 951 $1,047 $ 916
State . . . . . . . . . . . . . 293 346 269
------ -------- ------
$1,244 $1,393 $1,185
====== ====== ======
</TABLE>
The Company's statements of operations reflect $460,000 as a provision for
income taxes in the year ended December 31, 1994. This amount represents the
federal and state tax liability incurred after October 20, 1994, the date of
the issuance of 6,850,000 shares to the partners of The Spectrum Club Company.
Prior to that date, the Company's earnings resulted from a series of
partnerships, accordingly, no provision for federal or state income taxes was
made as the liability for such taxes passed through to the respective partners.
The pro forma unaudited income tax expense presented represents the estimated
income taxes which would have been reported had the Company been subject to
federal and state income taxes as a taxable corporation.
Income tax expense (pro forma in 1994) differs from the statutory tax rate as
applied to income before income taxes as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Expected federal income tax expense . . . . . $ 1,035 $ 1,155 $ 982
State income taxes, net of federal benefit . . 209 238 203
--------- -------- --------
$ 1,244 $ 1,393 $ 1,185
======= ======= =======
</TABLE>
F-13
<PAGE> 51
Upon the completion of the Exchange Transaction, the Company recorded deferred
tax assets aggregating $100,000 relating to temporary differences in the
recognition of certain accrued expenses and depreciation and amortization
costs. The Company's deferred tax assets and liabilities at December 31, 1995
were approximately $500,000 and $130,000, respectively, compared with
approximately $416,000 and $25,000 at December 31, 1996. The Company's
valuation allowance for deferred taxes was approximately $370,000 and $391,000
at December 31, 1995 and 1996, respectively. The Company's most significant
temporary differences relate to differences in the bases, depreciable lives and
depreciation methods of property and equipment and cost in excess of net assets
acquired for tax and financial reporting purposes.
8. STOCK PLANS
In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123 defines a fair value based method of accounting for an
employee stock option or similar instrument and encourages all entities to
adopt that method of accounting for all of their employee stock compensation
plans. However, it allows an entity to continue to measure compensation cost
for these plans using the intrinsic value based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. Entities electing to remain with the accounting in APB
Opinion No. 25 must make pro forma disclosures of net earnings and earnings per
share, as if the fair value based method of accounting defined in SFAS 123 had
been applied. The Company implemented the statement during the year ended
December 31, 1996.
At December 31, 1996, the Company had an employee stock option plan which is
described below. The Company applied APB Opinion No. 25 in accounting for its
plan. Accordingly, no compensation cost has been recognized. Had compensation
cost for the Company's plan been determined consistent with SFAS 123, the
Company's net earnings and earnings per share would have been reduced to the
proforma amounts indicated below (in thousands of dollars, except per share
amounts):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net Earnings:
As reported . . . . . . . . . . . . . . . $ 2,004 $ 1,704
Pro forma . . . . . . . . . . . . . . . . 1,839 1,534
Earnings per share:
As reported . . . . . . . . . . . . . . . $ .18 $ .15
Pro forma . . . . . . . . . . . . . . . . .16 .14
</TABLE>
The fair value of all option grants for the Company's plan are estimated on the
date of grant using the Black-Scholes option-pricing model with the
weighted-average assumptions used for all fixed option grants in 1995 and 1996,
respectively: dividend yield of 0%, and 0%; expected volatility of 40.0%, and
51.3%; risk-free interest rates of 6.5%, and 7.0%; and expected lives of 7.5
years, and 7.0 years.
In May 1994 the Company instituted the 1994 Stock Incentive Plan (the "Plan")
which reserved 1,000,000 shares of common stock. The Plan authorizes the
issuance of various stock incentives to directors, officers, employees and
consultants including options, stock appreciation rights and purchase rights.
Options allow for the purchase of common stock at prices determined by the
Company's Compensation Committee. Incentive stock options must be granted at a
price at least equal to the fair market value of a share of common stock on the
date the option is granted. Non-statutory options must have an exercise price
equal to at least 85% of the fair market value of the Company's common stock at
the date of grant. Options granted under the Plan may, at the election of the
Compensation Committee, become exercisable in installments. All options will
expire on the tenth anniversary of the grant date.
F-14
<PAGE> 52
A summary of the status of Company stock options in all its stock-based plans
as of December 31, 1996 and 1995 and changes during the year then ended is
presented below:
<TABLE>
<CAPTION>
1995 1996
----------------------------- -----------------------
Weighted- Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 297,000 $5.06
Granted 522,000 $6.76 220,500 2.66
Canceled 225,000 9.00 25,000 3.18
------- ------
Outstanding at end of year 297,000 5.06 492,500 3.17
======= =======
Options exercisable at year-end 93,753 5.00 185,505 3.28
====== =======
Weighted-average fair value of
options granted during the year. 2.37 1.75
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Exercise Number Contractual Options
Prices Outstanding Live (Years) Exercisable
------ ----------- ------------ -----------
<S> <C> <C> <C>
$2.5625 72,500 9.40 -
2.6875 70,000 9.17 -
2.7500 58,000 9.83 -
3.0000 225,000 8.58 162,508
5.2500 67,000 8.25 22,997
-------- --------
492,500 9.05 185,505
======= =======
</TABLE>
Stock appreciation rights ("SAR's") may be granted in combination with options
or on a stand-alone basis. SAR's permit the holder to receive shares of stock,
cash or a combination of shares and cash based upon by the difference between
the option price and the fair market value of the common stock on the date of
exercise. Upon exercise of a SAR granted in combination with an option, the
related option is canceled. At December 31, 1996, no SAR's have been granted.
Rights to purchase shares of common stock to be offered for direct sale under
the Plan must be at a purchase price equal to not less than 85% of the fair
market value of the shares on the day preceding the date of grant. Purchase
rights are generally exercisable for a period of thirty days following the date
of grant. At December 31, 1996, no purchase rights have been granted.
In July 1994, the Company instituted its 1994 Stock Compensation Plan for the
purpose of compensating outside directors by issuing them shares of the
Company's common stock as part of their directors' fees. A total of 50,000
shares are reserved for issuance pursuant to this plan. A total of 5,000 and
3,000 shares were issued to outside directors in 1995 and 1996, respectively.
F-15
<PAGE> 53
9. RELATED PARTY TRANSACTIONS
Due from affiliates are summarized as follows at December 31:
<TABLE>
<CAPTION>
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Note receivable from the Company's CEO, including interest
at 5.3%, due on April 3, 1997. Secured by a pledge of
384,000 shares of the Company's common stock . . . . . . . $ 631 $ 624
Note receivable from the Reebok-Sports Club/NY, interest
at 10%, payable quarterly, principal repayable as net cash
flow of the partnership is available (1) . . . . . . . . . 1,500 --
Accrued management fees from the Reebok-Sports Club/NY
interest at 10%, payable as net cash flow of the partnership
is available (1) . . . . . . . . . . . . . . . . . . . . . 502 --
Advances to affiliates made in the normal course of business,
payable on demand . . . . . . . . . . . . . . . . . . . . 875 419
------ ------
$3,508 $1,043
====== ======
</TABLE>
(1) Effective December 30, 1996, the Company acquired a controlling interest
in the Reebok-Sports Club/NY. The note receivable and accrued management fees
are eliminated in the presentation of the Company's consolidated financial
condition at December 31, 1996.
The Company manages the operation of the Spectrum Club/Manhattan Beach, of
which it owns a 46.1% interest. The Company receives a fee of $27,447 per
month plus 4.5% of the Club's gross revenues for managing this Club.
The Company also manages the operations of the Reebok Sports Club/NY and
receives a fee of approximately 5.5% of the gross monthly collections, as
defined.
10. CONCENTRATION OF CREDIT RISK
The Company markets its products principally to customers in Southern
California and New York City. Management performs regular evaluations
concerning the ability of its customers to satisfy their obligations and
records a provision for doubtful accounts based upon these evaluations. The
Company's credit losses for the periods presented are insignificant and have
not exceeded management's estimates.
11. SUBSEQUENT EVENTS
On March 13, 1997, the Company entered into an agreement to sell 2,105,263
shares of its common stock to Millennium Entertainment Partners, L.P., ("MEP").
MEP curently owns a 9.9% Partnersip interest in the Reebok-Sports Club/NY
Partnership. The Company will receive $5.0 million in cash, MEP's 9.9%
Partnership interest, a $2.5 million note due from the Partnership and MEP's
rights to certain accrued management fees due from the Partnership in exchange
for the newly issued shares. The Company also announced it signed a letter of
intent to jointly develop Sports Clubs in Washington D.C. and San Francisco,
California on properties currently under development by an affiliate of MEP.
Consumation of the agreements is expected in April 1997, but is subject to
certain conditions including the negotiation of leases for the Washinton D.C.
and San Francisco, California Sports Clubs.
F-16
<PAGE> 1
10.82
401K PLAN
<PAGE> 2
NATIONWIDE LIFE INSURANCE COMPANY
SALARY DEFERRAL [401(K)] AND SAVINGS
PROTOTYPE PROFIT SHARING PLAN AND TRUST
PLAN NO. 002
NON-STANDARDIZED - INTEGRATED AND NON-INTEGRATED
Address of Sponsoring Organization or Authorized Representative: The Senex
Group, 21021 Ventura Blvd., Suite 310, Woodland Hills, CA 91364. Telephone
Number: (818)593-3535.
The Employer hereby establishes a profit sharing plan and trust for the benefit
of its eligible employees and the eligible employees of each Participating
Employer which adopts the Plan. The plan and trust shall consist of the
Nationwide Life Insurance Company Salary Deferral [401(k)] and Savings
Prototype Profit Sharing Plan and Trust and this Adoption Agreement.
1. Name of Employer;
1A. Business Entity: [ ] Corporation [ ] S Corporation
Date of Incorporation:
[ ] Partnership [ ] Sole Proprietor [ ] Other:
1B. Type of Business:
2. Employer Address:
3. Employer Tax Year End: Employer Identification No.:
4. Plan Name: 401(k) Profit Sharing Plan. Plan No.:
5. Limitation Year (elect one):
[ ] Calendar year
[x] The period selected in Exhibit 1, Section 3.
[ ] Other 12 month period ending:_________________
6. Plan Status (check a or b):
(a) [ ] Newly Adopted Plan
(b) [ ] Amendment and restatement of the (name of plan):
Effective date of amendment:
This amendment shall not apply to any Employee who
severed employment before the effective date of
amendment. The Accrued Benefit and vesting percentage
of each Participant who is an Employee on the effective
date of amendment shall be no less than before the
amendment.
Salary Deferral Profit Sharing - 1 -
PO 2112-2 National Office TRA 86 Version (IRS Approved)
<PAGE> 3
EXHIBIT 1 - DEFINITIONS
1. "Break in Service" (Section 2.7) means employment of not more than 500
(insert 500 or less) Hours of Service during an eligibility Computation
Period or Vesting Computation Period.
NOTE: This Section must be completed if Exhibit 5, Section 10(b) is
selected.
2. "Compensation" (Section 2.10) means all of each Participant's (elect a
or b):
(a) [X] W-2 earnings and any Salary Deferral Contributions for
the period selected below.
(b) [ ] compensation as that term is defined for Code Section
415(c)(3) purposes for the period selected below.
[ ] Check here if pursuant to Section 2.10 the Employer shall include
in the definition of Compensation in (a) or (b) above
contributions made pursuant to Section 125, 402(h) or 403(b) of
the Code.
2A. COMPENSATION EXCLUSIONS (Section 2.10) For Purposes of contributions
and allocations (except top-heavy minimum contributions and allocations
and for the purpose of discrimination testing under Article XVII), the
following Compensation shall not be considered (elect a, or one or more
of b, c, d, e, and f):
(a) [X] None, all Compensation shall be considered
(b) [ ] Bonus
(c) [ ] Overtime
(d) [ ] Commissions
(e) [ ] Compensation in excess of $_____________
(f) [ ] Other:
NOTE: "a" above must be selected if an integrated formula is
elected in Exhibit 3.
3. The compensation period of this Section shall be the (Section 2.10)
(elect a, b or c):
(a) [X] Plan Year.
(b) [ ] taxable year ending with or within the Plan Year.
(c) [ ] limitation year ending with or within the Plan Year.
4. If an Eligible Employee becomes a Participant after the beginning of the
period selected above, Compensation shall include for purposes of
Employer Discretionary Contributions and Qualified Non-Elective
Contributions (elect a or b):
(a) [X] only the Compensation for the portion of the period
selected above during which he became a Participant.
(b) [ ] the Compensation for the entire period selected above in
which he became a Participant.
Salary Deferral Profit Sharing - 2 -
<PAGE> 4
5. "Effective Date" (Section 2.14) means:
NOTE: If this is an amendment and restatement of an existing plan,
insert the original plan effective date
6. "Plan Year" (Section 2.36) means the 12 consecutive month period, or
such lesser period as a Participating Employer is in business,
beginning on the 1st day of ______, and ending on the ___ day of
______ in each year.
NOTE: The Plan Year should normally end on the last day of the
calendar year.
7. "Net Profits" (Section 2.26) Employer contributions shall be made
(elect one):
[ ] with [x] without regard to the definition of Net Profits in Section
2.26.
EXHIBIT 2 - ELIGIBILITY REQUIREMENTS
1. CLASSIFICATION REQUIREMENTS (Section 2.17) Classifications of Employees
that are not eligible to participate in the Plan are (elect a or one
or more of b through d):
(a) [ ] None: all Employees are eligible.
(b) [x] Covered by a Collective Bargaining Agreement included in
a unit of employees where retirement benefits have been
the subject of good faith bargaining between
representatives of such employee unit and the
Participating Employer, unless the resulting collective
bargaining agreement provides for the inclusion of such
unit of employees under this Plan.
(c) [x] Non-resident aliens who receive no Earned Income from a
Participating Employer which constitutes income from
sources within the United States.
(d) [ ] Employees of an Employer required to be aggregated with
a Participating Employer under Code Sections 414(b),
(c), or (m) and persons deemed to be employees under
Code Section 414(n).
(e) [ ] Other Classification:
2. SERVICE AND AGE REQUIREMENTS (Section 3.1):
(a) To be eligible to participate an Eligible Employee must have
completed the following Eligibility Service requirements
(complete both 1 and 2):
(1) On the Effective Date of the Plan the following
requirements apply:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(i) Service (ii) Age
[ ] No Service Requirement [ ] No Age Requirement
[ ] ___ Months from Employment [x] 21
Date (not to exceed 12)
[ ] 1 Year of Eligibility Service [ ] ___ (not to exceed Age 21)
</TABLE>
Salary Deferral Profit Sharing - 3 -
<PAGE> 5
(2) After the later of the Effective Date of the Plan or
Effective Date of Amendment, the following requirements
apply:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(i) Service (ii) Age
[ ] No Service Requirement [ ] No Age Requirement
[ ] _____Months from Employment [X] 21
Date (not to exceed 12)
[ ] 1 Year of Eligibility Service [ ] ___(Not to exceed Age 21)
</TABLE>
NOTE: The Service requirements in (1) and (2) above must be
the same if the Employee is a Self-Employed Individual.
If the service requirement elected is a stated number of months
of service, each Eligible Employee who has been employed with
the Participating Employer for such number of months shall be
deemed to have completed the service requirement as of that
date, regardless of the number of Hours Of Service actually
performed.
(b) One year of Eligibility Service shall be credited to the
Eligible Employee on the last day of each Eligibility
Computation Period in which he completes 1000 (not more than
1,000) Hours Of Service.
3. ENTRY DATE (Section 3.1) The entry date shall be the (elect one):
(a) [ ] date coinciding with satisfaction of all eligibility
requirements.
(b) [ ] day of the month coinciding with or next following
satisfaction of all eligibility requirements.
(c) [ ] first day of the Plan Year quarter following
satisfaction of all eligibility requirements.
(d) [ ] Plan Anniversary [ ] preceding [ ] coinciding with or
next following-satisfaction of all eligibility
requirements ("coinciding" may not be elected if Section
2(a)(1) or 2(a)(2) of this Exhibit provides for
Eligibility requirements of more than 6 months or age
20 1/2).
(e) [X] Plan Anniversary or the first day of the seventh month
of the Plan Year coinciding with or next following
satisfaction of all eligibility requirements.
EXHIBIT 3 - CONTRIBUTIONS AND ALLOCATION FORMULA
1. SALARY DEFERRAL CONTRIBUTION (Section 5.1) Participants shall be
permitted to make Salary Deferral Contributions (complete a through e):
(a) Minimum salary deferral percentage or amount is 1% per payroll
period.
(b) Maximum salary deferral percentage or amount is 15% per payroll
period.
[X] Check here if the Participant may make a special
election to defer all or a portion (including none) of
any bonus or other such single sum payment to the Plan.
Salary Deferral Profit Sharing - 4 -
<PAGE> 6
(c) A Participant may change his salary deferral percentage (elect
one):
(1) [ ] at any time.
(2) [ ] as of the first day of a Plan Year quarter.
(3) [ ] as of a Plan Anniversary.
(4) [ ] other:________________________.
(d) A Participant may revoke his Salary Deferral Agreement (elect
one):
(1) [X] at any time.
(2) [ ] as of the first day of a Plan Year quarter.
(3) [ ] as of a Plan Anniversary.
(4) [ ] other:________________________.
(e) A Participant who has revoked his Salary Deferral Agreement, may
execute a new Agreement (elect one):
(1) [ ] at any time.
(2) [ ] as of the first day of a Plan Year quarter.
(3) [ ] as of a Plan Anniversary.
(4) [X] other:________________________.
NOTE: In Section c, d, or e above, "other" must be at least once a
year.
2. EMPLOYEE (AFTER TAX) CONTRIBUTIONS (Section 5.4) Particpants shall
(elect a or b):
(a) [ ] be permitted to make Employee Contributions.
(b) [X] not be permitted to make Employee Contributions.
3. EMPLOYER MATCHING CONTRIBUTION (Section 5.2) Each Participating
Employer shall (elect a or b):
(a) [X] make Employer Matching Contributions equal to (elect
one):
(1) [ ] ____% of the first ____% of Compensation which
is deferred under the Plan.
(2) [ ] ____% of the first ____% of Compensation
contributed as Employee Contributions under the
Plan.
(3) [X] Other: A discretionary dollar amount or
percentage to be determined by the Board of
Directors before the beginning of each Plan
Year.
(b) [ ] not make Employer Matching Contributions.
4. EMPLOYER DISCRETIONARY CONTRIBUTIONS (Section 5.2) Each Participating
Employer shall (elect a or b):
(a) [X] make Employer Discretionary Contributions in such
amounts as may be determined by the Participating
Employer
(b) [ ] not make Employer Discretionary Contributions.
Salary Deferral Profit Sharing - 5 -
<PAGE> 7
5A. FORFEITURES (Section 10.2) Forfeitures from a Participant's Employer
Matching subaccount, except Excess Aggregate Contributions, shall be
(elect a or b):
(a) [X] reallocated to Employer Matching subaccounts of other
Participants.
(b) [ ] applied to reduce the next Participating Employer
contribution.
5B. FORFEITURES (Section 10.2) Forfeitures from a Participant's Employer
Discretionary subaccount shall be (elect a or b):
(a) [X] reallocated to Employer Discretionary subaccounts of
other Participants.
(b) [ ] applied to reduce the next Participating Employer
contribution.
6. FORFEITURES (Section 10.3A or B) Forfeitures from a Participant's
Employer Matching or Employer Discretionary subaccount shall occur:
(a) [X] upon distribution to a terminated Participant of his
vested Accrued Benefit, or his fifth consecutive Break
In Service, if earlier.
(b) [ ] after the Participant has incurred his fifth consecutive
Break in Service.
7. ALLOCATION FORMULA (Section 6.1) Employer Discretionary Contributions
and forfeitures arising from Employer Discretionary subaccounts shall be
allocated to the Employer Discretionary subaccount of each Participant
who has completed the requirements specified below in (elect a or b):
(a) [ ] in the proportion that the Participant's Compensation
bears to the total compensation of all Participants.
(b) [ ] in the proportion that the Participant's Compensation in
excess of the Integration Level bears to the total
Compensation of all Participants in excess of the
Integration Level, provided that the maximum amount of
contributions and forfeitures so allocated for the Plan
Year shall not exceed the Integration Percentage set
forth below. Providing further that the maximum amount
of contributions and forfeitures in excess of the
Integration Level shall not exceed the amount of
contributions and forfeitures allocated below the
Integration Level expressed as a percentage of each
Participant's Compensation by the lesser of (a) or (b)
where (a) equals the percentage of each Participant's
Compensation below the Integration Level and (b) equals
the greater of 5.7% or the percentage equal to the
portion of the tax rate under Code Section 3111(a) (in
effect as of the beginning of the year which is
attributable to old-age insurance. Any contributions
and forfeiture in excess of such percentage shall be
allocated to the subaccount of each Participant in the
proportion that his Compensation bears to the total
compensation of all Participants (complete (1) and (2)):
(1) Integration Level (elect a, b or c):
(a) [ ] the Taxable Wage Base.
(b) [ ] $_____, and increasing by _____% of the
actual dollar increase in the Taxable
Wage Base for each subsequent year.
(c) [ ] $_____.
NOTE: (b) & (c) above must not include an amount in excess of the
Taxable Wage Base. The Taxable Wage Base means the maximum
amount of earnings which may be considered wages for Social
Security purposes under Section 3121(a)(1) of the Code for each
calendar year.
Salary Deferral Profit Sharing - 6 -
<PAGE> 8
NOTE: A minimum contribution may need to be provided to each
Non-key Employee as required by Section 11.2.
(2) The integration Percentage is _____%.
NOTE: If the integration Level is the Taxable Wage Base, the
maximum integration percentage is 5.7% (or the rate of
tax under Code Section 3111(a) attributable to old age
insurance, if greater). If the integration Level is
below the Taxable Wage Base, the maximum integration
percentage is: 5.4% if the integration Level is more
than 80% but less than 100% of the Taxable Wage Base;
4.3% if the integration Level is above $10,000 (or 1/5
of the Taxable Wage Base, if greater) but not more than
80% of the Taxable Wage Base; and 5.7% (or the rate of
tax under Code Section 3111(a) attributable to old age
insurance, if greater) if the integration Level is at or
below $10,000 (or 1/5 of the Taxable Wage Base, if
greater).
8. ELIGIBILITY FOR ALLOCATION (Section 6.2) (complete a and b):
(a) A Participant who has completed less than 1,000 Hours Of
Service during a Plan Year shall (elect 1 or 2):
(1) [x] not share in the Employer Discretionary
Contribution (or Forfeitures) for such Plan
Year.
(2) [ ] share in the Employer Discretionary Contribution
(or forfeitures) for such Plan Year if the
Participant completes (complete (i) or (ii)):
(i) [ ] 1 Hour of Service.
(ii) [ ] more than 500 Hours of Service.
(b) A Participant whose employment is terminated before the end of
the Plan Year but after completion of the number of hours in (a)
above shall (elect 1 or 2):
(1) [x] not share in the Employer Discretionary
Contribution (or forfeitures) and Qualified
Non-Elective Contribution for such Plan Year.
(2) [ ] share in the Employer Discretionary Contribution
(or forfeitures) and Qualified Non-Elective
Contribution for such Plan Year.
9. QUALIFIED NON-ELECTIVE CONTRIBUTIONS (Section 2.37A)(complete a, b,
and c):
(a) Qualified Non-Elective Contributions shall (elect 1 or 2):
(1) [X] be permitted. Such contributions shall be made
at the discretion of the Participating Employer
and allocated on the basis of the ratio in which
a Participant's Compensation bears to the total
compensation for all participants who are (elect
(i) or (ii)):
(i) [x] Eligible Non-Highly Compensated
Employees who (elect one):
[ ] completed the requirements of Section 8
above.
[x] completed more than 1 Hours of Service
(insert 500 or less) during the Plan
Year and (complete one):
[ ] were employed on the last day of the
Plan Year.
[x] regardless of whether employed on the
last day of the Plan Year.
Salary Deferral Profit Sharing -7-
<PAGE> 9
(ii) [ ] Eligible Employees who (elect one):
[ ] completed the requirements of
Section 8 above.
[ ] completed more than __ Hours of
Service (insert 500 or less)
during the Plan Year and
(complete one):
[ ] were employed on the
last day of the Plan
Year.
[ ] regardless of whether
employed on the last
day of the Plan Year
(2) [ ] not be permitted.
(b) Qualified Non-Elective Contributions shall be taken into
account as (elect one):
(1) [ ] Salary Deferral Contributions for the purpose of
calculating the Actual Deferral Percentage
discrimination test.
(2) [ ] Matching Contributions for the purpose of
calculating the Average Contribution Percentage
discrimination test.
(3) [X] Salary Deferral Contributions to the extent
deemed necessary to satisfy the Actual Deferral
Percentage discrimination test. Any remaining
contributions shall be treated as Matching
Contributions for the purpose of calculating the
Average Contribution Percentage discrimination
test.
10. MATCHING CONTRIBUTION (Section 2.23A) If the employer has elected in
Exhibit 3 to provide for Matching Contributions and if Exhibit 5
provides that the Employer Matching subaccount shall be 100% immediately
vested, please complete the following (otherwise check "not applicable"
in (c) below) (elect one):
Matching Contributions which are 100% vested when made shall be taken
into account as (elect a, b, or c):
(a) [ ] Salary Deferral Contributions for the purpose of
calculating the Actual Deferral Percentage
discrimination test.
(b) [ ] Matching Contributions for the purpose of calculating
the Average Contribution Percentage discrimination test.
(c) [X] not applicable.
EXHIBIT 4 - INVESTMENTS
1. INVESTMENTS (Article VIII) All assets of the Plan shall be invested by
the Trustee except that (elect any that are applicable and complete e
and f):
(a) [ ] No exceptions.
(b) [ ] The Employer shall direct the Trustee in selecting
(1) [ ] all subaccounts.
Salary Deferral Profit Sharing - 8 -
<PAGE> 10
(2) [ ] the following subaccounts: .
---------------------
(c) [X] The Participant shall direct, from eligible investments
specified by the Plan Administrator, the Trustee in
selecting
(1) [ ] all subaccounts.
(2) [ ] the following subaccounts: .
---------------------
(d) [ ] The Employer shall appoint an Investment Manager to
direct the Trustee in selecting
(1) [X] all subaccounts.
(2) [ ] the following subaccounts: .
---------------------
Name:
--------------------------------------------------
Address:
-----------------------------------------------
Telephone Number: ( ) -
-------------------------
(e) The entity or individual selected above may change, subject to
the rules of an Insurer or other investing institution, its
investment election with respect to investments in its Accounts
(elect one):
(1) [X] at any time.
(2) [ ] no more frequently than once every 3 months.
(3) [ ] no more frequently than once every 12 months.
(4) [ ] other (at least annually) .
----------------------
(f) The entity or individual selected above may change, subject to
the rules of an Insurer or other investing institution, its
investment election with respect to investments of future
contributions (elect one):
(1) [X] at any time.
(2) [ ] no more frequently than once every 3 months.
(3) [ ] no more frequently than once every 12 months.
(4) [ ] other (at least annually) .
----------------------
2. COMMON DUE DATE (Section 2.9) (elect a or b):
(a) [X] The day of the month of in each year.
---- ----------
(b) The following dates: .
-------------------------------------------
NOTE: "N/A" should be placed in 2 above if Insurance Contracts
are not offered as an investment option under the Plan.
Salary Deferral Profit Sharing - 9 -
<PAGE> 11
EXHIBIT 5 - BENEFITS AND DISTRIBUTIONS
1. VESTING SCHEDULE (Section 10.1) (complete one box below) A
Participant's vested interest in his Employer Matching subaccount, if
any, and Insurance Policies, the premiums for which are paid from
Employer Matching Contributions, shall be [ ] 100% vested when made; [ ]
be determined by the following schedule (elect one):
<TABLE>
<CAPTION>
Years of (a) (b) (c) (d) (e) (f)
Vesting Service [ ] [ ] [ ] [ ] [ ] [ ]
--------------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
0 0% 0% 0% 0% 0% ___%
1 20% 0% 0% 0% 0% ___%
2 40% 20% 0% 0% 0% ___%
3 60% 40% 20% 100% 0% ___%
4 80% 60% 40% 0% ___%
5 100% 80% 60% 100% ___%
6 100% 80% ___%
7 100% 100%
</TABLE>
2. VESTING SCHEDULE (Section 10.1) (complete one box below) A
Participant's vested interest in his Employer Discretionary subaccount,
if any, and Insurance Policies, the premiums for which are paid from
Employer Discretionary Contributions, shall be [ ] 100% vested when
made; [ ] be determined by the following schedule (elect one):
<TABLE>
<CAPTION>
Years of (a) (b) (c) (d) (e) (f)
Vesting Service [ ] [ ] [ ] [ ] [ ] [ ]
--------------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
0 0% 0% 0% 0% 0% ___%
1 20% 0% 0% 0% 0% ___%
2 40% 20% 0% 0% 0% ___%
3 60% 40% 20% 100% 0% ___%
4 80% 60% 40% 0% ___%
5 100% 80% 60% 100% ___%
6 100% 80% ___%
7 100% 100%
</TABLE>
NOTE: If (f) is elected in 1 or 2 above, the vesting percentages for
all years of service must equal or exceed one of the applicable
minimum vesting schedules set forth in Code Section 411(a)(2).
3. VESTING COMPUTATION PERIOD (Section 2.49): The 12 consecutive month
period ending on the ___ day of ___________ in each year.
NOTE: The Vesting Computation Period shall coincide with the Plan
Year.
4. VESTING SERVICE (Section 2.50) One year of Vesting Service shall be
credited to a Participant for each Vesting Computation Period during
which he completes at least 1000 (not to exceed 1,000) Hours Of Service,
beginning on his Employment Date or Re-employment Date, subject to the
exclusions elected in 5.
5. EXCLUDED YEARS OF VESTING SERVICE (Section 2.50) In addition to years
of Vesting Service excluded by the Break in Service rules, the following
years of Vesting Service shall be excluded in determining a
Participant's vested interest (elect a or b):
(a) [X] No Vesting Service shall be excluded.
Salary Deferral Profit Sharing - 10 -
<PAGE> 12
(b) [ ] The following years of Vesting Service shall be
excluded (elect any that are applicable).
(1) [ ] years of Vesting Service completed
before the year in which the Participant
attains age 18.
(2) [ ] years of Vesting Service completed
before the Effective Date of the Plan.
5A. ELAPSED TIME (Section 2.21):
[ ] Check here if the elapsed time provisions of Section 2.21 are to
apply. If checked, Sections 3, 4 and 5 above are not
applicable.
6. NORMAL RETIREMENT AGE (Section 2.27) A Participant's Normal Retirement
Age will be the day he (elect a or b):
(a) [ ] attains age ___ (not more than 65).
(b) [X] attains the later of age 65 (not more than 65) or the
5th (insert 5 or less) anniversary of his participation
commencement date. Participation commencement date is
the first day of the Plan Year in which the
Participant began participating in the Plan.
7. EARLY RETIREMENT (Section 10.5): (elect a or b)
(a) [ ] A Participant who has attained age ___ and who is
credited with ___ years of Vesting Service may retire on
his Early Retirement Date. A Participant's Account
(elect (1) or (2)):
(1) [ ] shall, if not previously 100% vested, be 100%
vested upon attainment of his Early Retirement
Age.
(2) [ ] shall be subject to the vesting schedule in
Exhibit 5.
(b) [X] Early retirement is not provided.
8. AGE 59 1/2 (Section 10.10) Age 59 1/2 distributions (elect a or b):
(a) [X] are permitted.
(b) [ ] are not permitted.
9. HARDSHIP (Section 10.11) Hardship distributions (elect a or b):
(a) [X] are permitted.
(b) [ ] are not permitted.
10. COMMENCEMENT OF BENEFITS (Section 10.12) Subject to the requirement of
Section 10.18, a Participant who terminates his employment with his
Participating Employer may receive a distribution of his Accrued Benefit
(elect a, b, or c):
(a) [X] within a reasonable time after termination of
employment.
(b) [ ] after a Participant has incurred, within an Eligibility
Computation Period, a Break in Service.
(c) [ ] upon attainment of the Participant's Normal Retirement
date, or if selected, Early Retirement Date or age
59 1/2.
Salary Deferral Profit Sharing - 11 -
<PAGE> 13
11. LOANS TO PARTICIPANTS (Section 10.17) Loans to Participants are (elect
a or b):
(a) [X] permitted and (complete one of the following boxes):
[ ] are considered a general investment of the Trust
Fund [X] are considered an investment of the
Participant's Account.
(b) [ ] not permitted.
12. OPTIONAL FORMS OF BENEFITS (Section 10.23) In addition to the lump sum
normal form of benefit, and, if required to be provided under the Plan,
a Qualified Joint and Survivor Annuity, the following option forms of
benefits shall be provided (elect any that are applicable):
(a) [ ] Straight Life Annuity
(b) [ ] Life Annuity - Ten Years Certain
(c) [ ] Joint and Survivor Annuity
(d) [ ] Ten Year Certain Fixed Payments
(e) [ ] Life Annuity - Twenty Year Certain
(f) [ ] Other:__________________________________________________
(g) [ ] Other:__________________________________________________
NOTE: [X] Check here if a lump sum normal form of benefit will be
the only form of benefit offered under this Plan ((a)
through (g) must not be completed), and the Qualified
Pre-Retirement Survivor Annuity and Qualified Joint and
Survivor Annuity provisions will not be applicable
(Section 10.20).
NOTE: If this is an amendment and restatement of a prior plan, the
"other" line may be used to preserve an optional form of benefit
not currently owned by Nationwide. In addition, an additional
optional form of benefit may be specified in the "other" line
above only if such form of benefit does not discriminate in
favor of any Highly Compensated Employee.
13. CASH OUT DISTRIBUTION (Section 10.15) Upon termination of service, a
Participant's vested Accrued Benefit of $3,500 or less will (elect a or
b):
(a) [ ] be immediately distributed to the Participant.
(b) [X] not be distributed to the Participant without his
consent.
EXHIBIT 6 - PLAN ADMINISTRATOR
1. PLAN ADMINISTRATOR (Section 12.1) The Plan Administrator shall be
(elect a, b, c, or d):
(a) [X] the Employer.
(b) [ ] the Trustee.
(c) [ ] a committee consisting of at least three persons
appointed from time to time by the Board of Directors to
serve without compensation at the pleasure of the board.
Any person appointed a member of such committee shall
signify his acceptance of administrative responsibility
by filing written acceptance with the board and with the
committee. Any member of the committee may resign by
delivering his written resignation to the board and the
Secretary of the committee, and such resignation shall
become effective on some specified future date not less
than 30 days after receipt of such resignation by the
board.
Salary Deferral Profit Sharing - 12 -
<PAGE> 14
The committee may authorize one or more of its members
to execute or deliver any instrument or make any
payment in its behalf.
A majority of the members of the committee at the time
in office shall constitute a quorum for the transaction
of business. All resolutions or other matters coming
before the committee may be acted upon by the members of
the committee present at any meeting or without a
meeting by an instrument in writing signed by a majority
of the members of the committee. In the event any such
vote ends in a deadlock, the board shall cast the
deciding vote.
(d) [ ] (Specify by name, title, or other description):_________
EXHIBIT 7 - LIMITATIONS ON ALLOCATIONS
1. OTHER QUALIFIED PLANS (Sections 7.3 and 7.4) If the Employer maintains
or ever maintained another qualified plan in which any Participant in
this Plan is (or was) a Participant or could possibly become a
Participant, you must complete this section. The Employer must also
complete this Section if it maintains a welfare benefit fund, as defined
in Section 419(e) of the Code, or an individual medical account, as
defined in Section 415(1)(2) of the Code, under which amounts are
treated as annual additions with respect to any Participant in this
Plan. (complete a and b):
(a) The Employer must complete this Section if a Participant is
covered under another qualified defined contribution plan
maintained by the Employer, other than a Master or Prototype
Plan. (Complete 1, 2, or 3):
(1) [ ] The provisions of Section 7.2 will apply, as if
the other plan was a Master or Prototype plan.
(2) [ ] (Provide the method under which the plans will
limit total Annual Additions to the Maximum
Permissible Amount, and will properly reduce any
Excess Amounts, in a manner that precludes
Employer discretion.)
_______________________________________________
_______________________________________________
(3) [ ] not applicable.
(b) If the Participant is or ever has been a Participant in a
defined benefit plan maintained by the Employer (complete 1, 2,
or 3):
(1) [ ] In any Limitation Year, the Annual Additions
credited to the participant under this Plan may
not cause the sum of the Defined Benefit Plan
Fraction and the Defined Contribution Plan
Fraction to exceed 1.0. If the Participating
Employer contributions that would otherwise be
allocated to the Participant's Account during
such year would cause the 1.0 limitations to be
exceeded, the allocation will be reduced so
that the sum of the fraction equals 1.0. Any
contributions not allocated because of the
preceding sentence will be allocated to the
remaining Participants under the allocation
formula under the plan. If the 1.0 limitation
is exceeded because of an Excess Amount, such
Excess Amount will be reduced in accordance with
Section 7.1(d).
Salary Deferral Profit Sharing - 13 -
<PAGE> 15
(2) [ ] (Provide the method under which the plan
involved will satisfy the 1.0 limitation in a
manner that precludes Employer discretion.)
_______________________________________________
_______________________________________________
_______________________________________________
_______________________________________________
(3) [ ] not applicable.
EXHIBIT 8 - TOP HEAVY PROVISIONS
If the Plan covers employees under a collective bargaining agreement that meets
the requirements of Code Section 416(1)(4), please check not applicable in all
Sections below.
1. PARTICIPATING EMPLOYER MAINTAINING A DEFINED CONTRIBUTION PLAN IN
ADDITION TO THIS PLAN (Section 11.3) For any Plan Year in which the
Plan is top-heavy, each Participating Employer (elect a, b, or c):
(a) [ ] shall contribute to the Plan an amount, which when added
to a Non- Key Employee's Employer contribution and
forfeiture, will equal 3% of his Compensation, or such
lesser amount as provided in Section 11.3.
(b) [ ] shall satisfy the Section 11.3 required contribution by
making a contribution to the other defined contribution
plan for a Non-Key Employee covered by both plans.
(c) [ ] not applicable.
2. VESTING SCHEDULE FOR PLAN IN TOP-HEAVY STATUS (Section 11.5) A
Participant's vested interest in his Employer Matching and Employer
Discretionary subaccounts and insurance Policies shall be determined by
the following schedule (elect a, b, or c):
<TABLE>
<CAPTION>
Vesting Schedule
----------------
Years of (a) (b) (c)
Vesting Service [ ] [ ] [ ]
---------------
<S> <C> <C> <C>
0 0% 0% ___%
1 0% 0% ___%
2 0% 20% ___%
3 100% 40% ___%
4 60% ___%
5 80% ___%
6 100% 100%
</TABLE>
NOTE: If (c) is elected, the vesting percentages for all years
must equal or exceed those shown in (a) and (b).
The Vesting Computation Period and the Hours of Service required for
Vesting Service shall have the same meaning in this Exhibit as that
specified in Exhibit 5. This vesting schedule shall apply for all
top-heavy Plan Years, and all subsequent years, regardless of whether
the Plan is top-heavy.
Salary Deferral Profit Sharing - 14 -
<PAGE> 16
PARTICIPATING EMPLOYER MAINTAINING A DEFINED BENEFIT PLAN IN ADDITION
TO THIS PLAN (Section 11.4) For any Plan Year in which the Plan is
top-heavy, each Participating Employer (elect a, b, or c):
(a) [ ] shall contribute to this Plan, for a Non-Key Employee
covered by both plans, an amount, which when added to a
Non-Key Employee's Employer contribution and forfeiture,
will equal 5% of his Compensation.
(b) [ ] shall, in the defined plan, for a Non-Key Employee
covered by both plans, provide a 2% accrual per year of
service to each Non-Key Employee as required by Code
Regulation 1.416-1(m)(2).
(c) [ ] not applicable.
4. PARTICIPATING EMPLOYER MAINTAINING A DEFINED BENEFIT PLAN IN ADDITION TO
THIS PLAN EXTRA TOP-HEAVY CONTRIBUTION/BENEFIT (Sections 11.4 and 11.6)
For each Plan Year in which the Plan is top-heavy and the Top-heavy
Ratio is 90% or less, an addition top-heavy contribution/benefit
(elect a, b, c, or d):
(a) [ ] shall contribute to this Plan, for a Non-Key Employee
covered by both plans, an amount, which when added to a
Non-Key Employee's Employer contribution and forfeiture,
will equal 7 1/2% of his Compensation.
(b) [ ] shall, in the defined benefit plan, for a Non-Key
Employee covered by both plans, provide a 3% accrual per
year of service of each Non-Key Employee as required by
Code Regulation 1.416-1(m)(14).
(c) [ ] will not make any additional minimum contribution.
(d) [ ] not applicable.
NOTE: By selecting (a) or (b), the Employer is expanding the
maximum amount that can be contributed and/or accrued
under Section 7.5 for an Employee who is a Participant
in both a defined contribution and defined plans
maintained (or previously maintained) by the Employer.
5. PRESENT VALUE (Section 11.7) For purposes of computing Present Value,
the following will be used (complete a or b):
(a) Interest Rate_______%
Mortality Table__________________________
Valuation Date --------------------------
(B) [ ] NOT APPLICABLE.
NOTE: This Section only applies if the Participating Employer
is currently maintaining, or has previously maintained a
defined benefit plan.
Salary Deferral Profit Sharing - 15 -
<PAGE> 17
EXECUTION
CAUTION: THE FAILURE TO PROPERLY COMPLETE THIS ADOPTION AGREEMENT MAY RESULT
IN DISQUALIFICATION OF THE PLAN.
The Employer hereby adopts this Plan and Trust, subject only to acceptance by
the Trustee. The Employer, by executing this document, acknowledges that it
has read this Plan and Trust, that it has consulted legal counsel to the extent
deemed necessary, and that it releases Nationwide from any liability resulting
from adoption of the Plan and Trust. However, subject to Section 8.1,
Nationwide Life Insurance Company will inform the Employer of any amendments
made to the plan or of the discontinuance or abandonment of the Plan.
IRS OPINION LETTERS
The adopting Employer may not rely on an opinion letter issued by the National
Office of the Internal Revenue Service as evidence that the Plan is qualified
under Code Section 401. In order to obtain reliance with respect to plan
qualification, the Employer must apply to the appropriate IRS Key District
office for a determination letter.
This Adoption Agreement may be used only in conjunction with basic plan
document number 05.
EMPLOYER:
Date: By:
(Signature and Title)
TRUSTEE(S)
Date:
Date:
PARTICIPATING EMPLOYER(S)
Name of Employer(s)
Date:____________________ _____________________________
(Signature(s))
AFFILIATED EMPLOYER(S)
Name of Employer(s)
(No signature is required)
Salary Deferral Profit Sharing - 16 -
<PAGE> 18
NATIONWIDE LIFE INSURANCE COMPANY
SALARY DEFERRAL (401(K)) AND SAVINGS
PROTOTYPE PROFIT SHARING PLAN AND TRUST
BASIC PLAN DOCUMENT NO. 05
THIS PROTOTYPE RETIREMENT PLAN AND TRUST HAS BEEN APPROVED BY THE NATIONAL
OFFICE OF THE INTERNAL REVENUE SERVICE AS FOLLOWS:
PLAN LETTER SERIAL NUMBER
---- --------------------
001 D247600a
002 D347601a
<PAGE> 19
TABLE OF CONTENTS
ARTICLE PAGE
- ------- ----
I. PURPOSE OF PLAN AND TRUST 2
II. DEFINITIONS 2
III. PARTICIPATION 8
IV. ACCOUNTS 9
V. CONTRIBUTIONS 10
VI. ALLOCATIONS 12
VII. LIMITATIONS ON ALLOCATION 13
VIII. INVESTMENTS 17
IX. INSURANCE POLICIES 18
X. BENEFITS AND DISTRIBUTIONS 19
XI. TOP-HEAVY PROVISIONS 28
XII. PLAN ADMINISTRATION 31
XIII. TRUSTEE 32
XIV. AMENDMENT, MERGER AND TERMINATION 35
XV. DOMESTIC RELATIONS ORDER 36
XVI. DISCRIMINATION TESTING AND OTHER ISSUES 37
XVII. MISCELLANEOUS 42
<PAGE> 20
NATIONWIDE LIFE INSURANCE COMPANY
SALARY DEFERRAL [401(k)] AND SAVINGS
PROTOTYPE PROFIT SHARING PLAN AND TRUST
ARTICLE I - PURPOSE OF PLAN AND TRUST
The Nationwide Life Insurance Company Prototype Salary Deferral [401(k)] and
Savings Prototype Profit Sharing Plan and Trust has been created for the
exclusive benefit of Eligible Employees, and their Beneficiaries, of any
Participating Employer which adopts the Plan and Trust. The Plan is intended
to qualify under Code Sections 401(a) and 401(k) and the Trust is intended to
be tax-exempt under Code Section 501(a).
ARTICLE II - DEFINITIONS
Each item defined below, when used in the Plan and Trust or Adoption Agreement,
with the first letter of each word capitalized, shall have the meaning set
forth in this Article.
2.1 "Account" means the value of the Annuity Contracts, Mutual Fund Shares,
and other assets held by the Trustee on behalf of the Participant. The term,
"Account," does not include the value of any Insurance Policies held by the
Trustee on the life of the Participant.
2.2 "Accrued Benefit" means the sum of the value of any Insurance Policies
issued on the Participant's life plus the value of his Account and shall
constitute his entire interest in the Trust Fund.
2.3 "Adoption Agreement" means the document the Employer executes to adopt
the Plan and Trust and is made a part thereof.
2.4 "Affiliated Employer" means the Employer, and if authorized by the
Employer, any other employer which maintains a separate plan, agrees to
administer its plan in accordance with Sections 2.15, 2.50, 3.4, and 3.5, and
executes the Adoption Agreement as such.
2.5 "Annuity Contract" means any annuity contract, whether fixed or
variable, individual or group, deferred or immediate. Any Annuity Contract
distributed from the Plan shall be endorsed so that it is nontransferable.
2.5A "Annuity Starting Date" means (i) the first day of the first period for
which an amount is paid as an annuity, or (ii) in the case of a benefit not
paid in the form of an annuity, the first day on which all events have occurred
which entitle the Participant to such benefit.
2.6 "Beneficiary" means the Participant's Spouse unless the Participant
and, if required under this Plan, his Spouse have designated another person(s)
or entity as his beneficiary. Such beneficiary designation shall be made in a
form acceptable to the Plan Administrator and must be filed with the Plan
Administrator to be effective. The Participant's most recent beneficiary
designation shall supersede any previous designation. If no such beneficiary
is alive or if no designation is in effect at the time of distribution,
Beneficiary shall mean the executor or other legal representative of the last
to die of the Participant and designated beneficiary.
2.7 "Break In Service" means employment of not more than the number of
Hours Of Service specified in Exhibit 1 during any Eligibility Computation
Period or Vesting Computation Period.
Solely for purposes of determining whether a Break In Service for Eligibility
Service and Vesting Service has occurred in their respective computation
periods, an Employee who incurs a separation from service for maternity or
paternity reasons shall receive credit for the Hours Of Service which would
otherwise have been credited to such Employee but for such separation, or in
any case in which such hours cannot be determined, eight Hours Of Service per
day of absence. For purposes of this paragraph, separation from service for
maternity or paternity reasons means an absence on account of (1) an Employee's
pregnancy, (2) the birth of the Employee's child, (3) placement of a child with
an Employee in connection with the adoption of such child by the Employee, or
(4) caring for such child for a period beginning immediately after a birth or
placement. The Hours Of Service credited under this paragraph shall be
credited (1) in the computation period in which the separation from service
begins if necessary to prevent a Break In Service in that period, or (2) in all
other cases, in the following computation period. The total number of Hours Of
Service credited for any period under this paragraph shall not exceed 501 hours.
2.8 "Code" means the Internal Revenue Code of 1986, as most recently
amended.
2.9 "Common Due Date" means the date, if any, set forth in Exhibit 4 as of
which Insurance Policies may be purchased for a Participant.
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<PAGE> 21
2.10 "Compensation" is the amount defined in Exhibit 1. If the
Participating Employer is a sole proprietor or partnership, the Earned Income
of the Self-Employed Individuals will be considered Compensation. Effective
for the first Plan Year beginning on or after January 1, 1989, Compensation
shall be limited to the first $200,000 (or any increased amount, as permitted
by the Secretary of the Treasury) of Compensation. In determining the
compensation of a Participant for purposes of this limitation, the rules of
Section 414(g)(6) of the Code shall apply, except in applying such rules, the
term "family" shall include only the Spouse of the Participant and any lineal
descendants of the Participant who have not attained age 19 before the close of
the year. If elected by the Employer in the Adoption Agreement, Compensation
shall include any amount which is contributed by the Participating Employer
pursuant to a salary reduction agreement and which is not includible in the
gross income of an Employee under Code Sections 125, 402(h), or 403(b).
Compensation shall include only that compensation which is actually paid to the
Participant during the applicable period. Except as provided elsewhere in this
Plan, the applicable period shall be the period elected by the Employer in the
Adoption Agreement. If the Employer makes no election, the applicable period
shall be the Plan Year.
2.11 "Disability" means a Participant's inability to engage in any
substantial gainful activity by reason of a medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration. The permanence and degree of such
disablement shall be supported such by medical evidence.
2.11A "Early Retirement Age" means the age, if any, specified in Exhibit 5.
2.12 "Early Retirement Date" means the first day of the month after the
Participant's Early Retirement Age but prior to his Normal Retirement Age in
which the Participant has elected to retire.
2.13 "Earned Income" means net earnings from self-employment in the trade or
business with respect to which the Participating Employer has established the
Plan, provided personal services of the individual are a material income
producing factor. Net earnings will be determined without regard to items not
included in gross income and the deductions allocable to those items. Net
earnings are reduced by contributions by the Participating Employer to
qualified plans to the extent deductible under Code Section 404. Net earnings
shall be determined with regard to the deduction allowed to the Participating
Employer by Section 164(f) of the Code for taxable years beginning after
December 31, 1989.
2.14 "Effective Date" means the date set forth in Exhibit 1.
2.15 "Eligibility Computation Period" means the twelve month consecutive
period beginning on an Employee's Employment Date or Reemployment Date,
whichever is applicable. The succeeding twelve consecutive month periods
commence with the first Plan Year which commences prior to the first
anniversary of the Employee's initial Eligibility Computation Period regardless
of whether the Employee is entitled to be credited with 1,000 Hours Of Service
(or any lesser number of hours as specified in Exhibit 2) during the initial
Eligibility Computation Period. An Employee who is credited with 1,000 Hours
Of Service (or any lesser number of hours as specified in Exhibit 2) in both
the initial Eligibility Computation Period and the Plan Year which commences
prior to the first anniversary of the Employee's initial Eligibility
Computation Period will be credited with two years of service for purposes of
eligibility to participate.
2.16 "Eligibility Service" means the number of Eligibility Computation
Periods during which an Employee completes (if required) the number of Hours Of
Service (not more than 1,000) specified in Exhibit 2. Eligibility Service
shall include service with a Participating Employer, Affiliated Employer, and
with a predecessor employer providing the Participating Employer maintains the
plan of such predecessor.
2.17 "Eligible Employee" means all Employees, excluding any classification
of Employees specified in Exhibit 2, which have completed the Eligibility
Service requirements of Exhibit 2. If an Employee is excluded by
classification and also excluded based on the age and service requirements of
the Plan, the Employee shall be considered excluded based on the age and
service requirements.
2.18 "Employee" means any person employed by a Participating Employer, or of
any other employer required to be aggregated under Code Section 414(b), (c),
(m), or (o) as a bona fide, common law employee whose Compensation is subject
to laws requiring the withholding of Federal Income and Social Security Taxes,
and any person who has Earned Income including any individual who would be an
Employee as so defined but for the fact that the person received no Earned
Income. Any person deemed under Code Section 414(n) or (o) to be an Employee
of any employer described in the previous sentence, unless excluded in Exhibit
2 of the Adoption Agreement, shall also be considered an Employee.
2.18A "Employee Contributions" means contributions to the Plan made by a
Participant on an after tax basis.
2.19 "Employer" means the entity executing the Adoption Agreement as
Employer.
2.19A "Employer Discretionary Contributions" means contributions made
pursuant to Section 5.2.
2.20 "Employment Date" means the date on which an Employee first performs an
Hour Of Service.
2.20A "Highly Compensated Employee" means as defined in Section 16.10.
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<PAGE> 22
2.21 "Hour of Service" means:
(a) each hour for which an Employee is paid, or entitled to payment,
for the performance of duties for the Participating Employer. These
hours shall be credited to the Employee for the computation period in
which the duties are performed;
(b) each hour for which an Employee is paid, or entitled to payment by
the Participating Employer on account of a period of time during which
no duties are performed (irrespective of whether the employment
relationship has terminated) due to vacation, holiday, illness,
incapacity (including disability), layoff, jury duty, military duty or
leave of absence. No more than 501 Hours Of Service shall be credited
under this paragraph for any single continuous period (whether or not
the period occurs in a single computation period). Hours under this
paragraph shall be calculated and credited pursuant to Section
2530.200b-2 of the Department of Labor Regulations which are
incorporated herein by this reference;
(c) each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Participating Employer.
The same Hours Of Service shall not be credited both under paragraph (a)
or paragraph (b), as the case may be, and under this paragraph (c).
These hours shall be credited to the Employee for the computation period
or periods to which the award or agreement pertains rather than the
computation period in which the award, agreement or payment is made;
(d) each hour for which an Employee would have been credited during a
period of time during which no duties are performed due to absence
because of pregnancy of the Employee, the birth of a child of an
Employee, the placement of a child in connection with the adoption of
the child by the Employee, or for purposes of caring for the child
during the period immediately following the birth or placement for
adoption. Hours required to be credited in this paragraph shall be
credited for the computation period in which the absence commenced or in
the next following computation period, if necessary to prevent a Break
In Service. No more than 501 Hours Of Service shall be credited under
this paragraph during either computation period.
(e) each hour specified in (a), (b), (c), and (d) while an Employee is
in an ineligible class of Employees shall be counted for all purposes of
the Plan if the Employee becomes an Eligible Employee;
(f) each hour specified in (a), (b), (c), and (d) while an Employee is
employed by another Participating Employer or when employed by any
employers (whether or not incorporated) that are members of a controlled
group, as defined in Section 414(b) of the Code or under common control,
as defined in Section 414(c) of the Code, part of an affiliated service
group, as defined in Section 414(m) of the code, and any other entity
required to be aggregated with the Participating Employer pursuant to
Section 414(o) and regulations thereunder, will be counted for all
purposes of the Plan; and
(g) each hour specified in (a), (b), (c), and (d) will also be counted
for all purposes of the Plan for any person considered an Employee under
Code Section 414(n) or Section 414(o) and the regulations thereunder.
The Plan Administrator may, if elected by the Employer in Exhibit 5,
elect to determine an Employee's service under the Plan under the
elapsed time method. If elected, all provisions of the Plan shall be
interpreted consistent with such election. In such case the following
shall apply:
(h) For purposes of determining an Employee's initial or continued
eligibility to participate in the Plan or the nonforfeitable interest in
the Participant's Account derived from Employer Contributions (except
for period of service which may be disregarded under the "rule of
parity," as described in Section 10.1), an Employee will receive credit
for the aggregate of all periods of Eligibility and Vesting Service
commencing with the Employee's Employment Date or Re-employment Date and
ending on the date a Break In Service begins. For the purpose of this
Section 2.21(h) through (m), Employment Date or Re-employment Date shall
mean the first day the Employer performs an Hour Of Service, as defined
in this Section 2.21(a). An Employee will also receive credit for any
Period of Severance of less than 12 months. Fractional periods of a
year will be expressed in terms of days.
(i) In the case of an individual who is absent from work for maternity
or paternity reasons (as defined in Section 2.7), the 12-consecutive
month period beginning on the first anniversary of the first date of
such absence shall not constitute a Break In Service.
(j) A Period Of Severance is a continuous period of time during which
the Employee is not employed by the Employer. Such period begins on the
date the Employee retires, quits or is discharged, or if earlier, the 12
month anniversary of the date on which the Employee was otherwise first
absent from service.
(k) A Break In Service is a Period Of Severance of at least 12
consecutive months.
(l) Each Employee will share in Employer Contributions for the period
beginning on the date the Employee commences participation under the
Plan and ending on the date on which such Employee severs employment
with the Employer or is no longer a member of an eligible class of
employees.
(m) For purposes of determining an Employee's initial or continued
eligibility to participate in the Plan or the nonforfeitable interest in
the Participant's Account derived from Employer contributions (except
for periods of service which may be disregarded on account of the "rule
of parity" described in Section 10.1), an Employee
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<PAGE> 23
will receive credit for the aggregate of all time period(s) commencing
with the Employee's first day of employment or reemployment and ending
on the date a Break In Service begins. The first day of employment or
reemployment is the first day the Employee performs an Hour Of Service.
An Employee will also receive credit for any period of severance of less
than 12 consecutive months. Fractional periods of a year will be
expressed in terms of days.
For purposes of this Section, Hour Of Service shall mean each hour for
which an Employee is paid or entitled to payment for the performance of
duties for the Employer.
In the case of an Employee who is absent from work for maternity or
paternity reasons, the 12-consecutive month period beginning on the
first anniversary of the first date of such absence shall not constitute
a Break In Service. For purposes of this paragraph, an absence from
work for maternity or paternity reasons means an absence (1) by reason
of the pregnancy of the individual, (2) by reason of the birth of a
child of the individual, (3) by reason of the placement of a child with
the individual in connection with the adoption of such child by such
individual, or (4) for purposes of caring for such child for a period
beginning immediately following such birth or placement.
If the Employer is a member of an affiliated service group (under
Section 414(m), a controlled group of corporations (under Section
414(b), a group of trades or businesses under common control (under
Section 414(c)) or any other entity required to be aggregated with the
Employer pursuant to Section 414(o) and the regulations thereunder,
service will be credited for any employment for any period of time for
any other member of such group. Service will also be credited for any
individual required under Section 414(n) or Section 414(o) and the
regulations thereunder to be considered an Employee of any Employer
aggregated under Section 414(b), (c), or (m).
2.22 "Insurance Policy" means an ordinary life insurance, term insurance,
retirement income, endowment, or any other life insurance policy which is
issued by an Insurer on the life of a Participant and acquired under the Plan.
2.23 "Insurer" means a legal reserve life insurance company from which
Insurance Policies or Annuity Contracts are purchased pursuant to the Plan.
2.23A "Matching Contribution" means any contribution to the Plan or any other
defined contribution plan made by the Participating Employer for the Plan Year
and allocated to a Participant's Account by reason of the Participant's
Employee Contributions or Salary Deferral Contributions. A Matching
Contribution shall be returned by the Trustee to the Participant if the Salary
Deferral Contribution on which such contribution was based is returned to the
Participant pursuant to the discrimination tests set forth in Article XVI.
"100% Vested Matching" contributions are Matching Contributions in which 100%
immediate vesting is elected in Exhibit 5. "Non-100% Vested Matching"
contributions are Matching Contributions in which all or some of such
contributions vest over a period of time.
2.24 "Mutual Fund Shares" means shares of a Fund offered by any open end
investment company.
2.25 "Nationwide" means Nationwide Life Insurance Company. Reference to its
related and affiliated companies shall include Nationwide Financial Services,
Inc., Nationwide Variable Life Insurance Company, WAUSAU Insurance Companies,
and any other company affiliated with the Nationwide Corporation or Nationwide
Life Insurance Company.
2.26 "Net Profits" means the Participating Employer's net earnings
reportable for Federal Income Tax purposes before deduction for Federal Income
Tax and contributions to the Trust plus, accumulated earnings. If the
Participating Employer is a governmental employer or exempt from Federal Income
Tax under Code Section 501(a), Net Profits means the surplus of revenues or
receipts over expenditures. Employer contributions shall be made regardless of
Net Profits if elected in Exhibit 1.
2.27 "Normal Retirement Age" means the age specified in Exhibit 5.
2.28 "Normal Retirement Date" means the first day of the calendar month
coinciding with or next following a Participant's Normal Retirement Age, but
not earlier than the effective date.
2.29 "One Hundred Percent Vested" or "100% Vested" means the Participant's
Accrued Benefit is non-forfeitable.
2.30 "Owner-Employee" means a person who is a sole proprietor or who is a
partner owning more than ten percent (10%) of either the capital or profit
interest of the partnership.
2.31 "Participant" means an Eligible Employee or former eligible employee
who has met the eligibility requirements specified in Exhibit 2 and who may
become eligible to receive or is receiving benefits under the Plan.
2.32 "Participating Employer" means the Employer and, if authorized by the
Employer, any other employer which elects to participate in the Plan and
executes the Adoption Agreement or executes a board resolution as such.
2.33 "Plan" means the Plan set forth in this document, the Adoption
Agreement, and amendments thereto. The name of the Plan shall be as stated in
the Adoption Agreement.
2.34 "Plan Administrator" means the person, persons, or entity specified in
Exhibit 6.
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<PAGE> 24
2.35 "Plan Anniversary" shall mean the effective date, and subsequently, the
first day of the second and each succeeding Plan Year.
2.36 "Plan Year" means the period specified in Exhibit 1.
2.37 "Qualified Joint and Survivor Annuity" means an immediate annuity for
the life of the Participant, or if married on the Annuity Starting Date, an
immediate annuity for the life of the Participant with a survivor annuity for
the life of the Participant's Spouse which is not less than 50% or more than
100% of the amount of the annuity payable during the joint lives of the
Participant and Spouse. The percentage of survivor annuity shall be 50% unless
the Participant elects a different percentage. This form of distribution shall
be equal to the Participant's Accrued Benefit. Such an annuity shall equal the
aggregate value of the Participant's vested Account (including rollovers),
whether vested before or upon death, including the proceeds of insurance
contracts, if any, on the Participant's life.
2.37A "Qualified Non-Elective Contributions" shall mean a contribution made at
the discretion of the Participating Employer, other than Salary Deferral,
Matching, or Discretionary Contributions, which is 100% vested when made and
allocated according to Exhibit 3. Employer Discretionary Contributions which are
100% vested when made may also be considered to be Qualified Non-Elective
Contributions.
2.38 "Qualified Pre-Retirement Survivor Annuity" means an annuity for the
life of the Surviving Spouse.
2.39 "Re-employment Date" means the date on which an Employee first perform
an Hour Of Service following a Break In Service.
2.39A "Required Beginning Date" means:
(a) General Rule. The required beginning date of a Participant is
the first day of April of the calendar year following the calendar year
in which the Participant attains age 70 1/2.
(b) Transitional Rules. The required beginning date of a Participant
who attains age 70 1/2 before January 1, 1988, shall be determined in
accordance with (1) or (2) below:
(1) Non-5% Owners. The required beginning date of a Participant
who is not a 5% owner is the first day of April of the calendar
year following the calendar year in which the later of
retirement or attainment of age 70 1/2 occurs.
(2) 5% Owners. The required beginning date of a Participant who
is a 5% owner during any year beginning after December 31, 1979,
is the first day of April following the later of:
(i) the calendar year in which the Participant
attains age 70 1/2, or
(ii) the earlier of the calendar year with or within
which ends the Plan Year in which the Participant
becomes a 5% owner, or the calendar year in which the
Participant retires.
The required beginning date of a Participant who is not a 5% owner who
attains age 70 1/2 during 1988 and who has not retired as of January 1,
1989, is April 1, 1990.
(c) 5% Owner. A Participant is treated as a 5% owner for purposes of
this Section if such Participant is a 5% owner as defined in Section
416(1) of the Code (determined in accordance with Section 416 but
without regard to whether the plan is top-heavy) at any time during the
Plan Year ending with or within the calendar year in which such owner
attains age 66 1/2 or any subsequent Plan Year.
(d) Once distributions have begun to a 5% owner under this Section, they
must continue to be distributed, even if the Participant ceases to be a
5% owner in a subsequent year.
2.40 "Rollover Contribution" means a rollover contribution defined in
Section 402(a)(5), 403(a)(4), or 408(d)(3) of the Code.
2.41 "S Corporation" means a corporation defined in Section 1361(a) of the
Code.
2.42 "Salary Deferral Agreement" means a written agreement between an
Eligible Employee and the Participating Employer in which the Eligible Employee
agrees to accept a reduction in Compensation from the Participating Employer.
Such agreement shall become effective within the time period specified by the
Plan Administrator. Such Compensation shall not be currently available to the
Eligible Employee as of the date of the election.
2.42A "Salary Deferral Contributions" means contributions made to the Plan
during the Plan Year by the Employer, at the election of the Participant, in
lieu of cash compensation, and shall include contributions made pursuant to a
salary reduction agreement or other deferral mechanism.
With respect to any taxable year, a Participant's Salary Deferral Contribution
is the sum of all Employer contributions made on behalf of such Participant
pursuant to an election to defer under any qualified cash or deferred
arrangement as described in Section 401(k) of the Code, any simplified employee
pension cash or deferred arrangement as described in
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<PAGE> 25
Section 402(h)(1)(B), any eligible deferred compensation plan under Section
457, any plan as described under Section 501(c)(18), and any Employer
contributions made on the behalf of a Participant for the purchase of an annuity
contract under Section 403(b) pursuant to a salary reduction agreement.
2.43 "Self-Employed Individual" means an individual who has Earned Income from
the trade or business which established the Plan or who would have had Earned
Income but for the fact that the trade or business did not have Net Profits.
2.44 "Shareholder Employee" means an employee or officer of a Participating
Employer that is an S Corporation if he owns, or is considered as owning, on
any day of the Participating Employer's taxable year that ends within the Plan
Year, more than 5% of such Participating Employer's outstanding stock.
2.45 "Spouse" or "(Surviving Spouse)" means an individual who is married (or
was married on the date of the Participant's death) to a Participant, provided
that a former spouse will be treated as the Spouse or Surviving Spouse to the
extent provided under a qualified Domestic Relations Order as described in
Section 414(p) of the Code.
2.45A "Thrift Contribution Agreement" means a written agreement between an
Eligible Employee and the Participating Employer in which the Eligible Employee
agrees that a portion of the Eligible Employee's after tax Compensation be
contributed under the Plan.
2.46 "Trust" means the Trust set forth in this document, the Adoption
Agreement, and amendments thereto. The Trust name shall be the Plan name, as
stated in the Adoption Agreement, plus the word "Trust."
2.46A "Trustee(s)" means the individual(s) or entity executing the Adoption
Agreement as such.
2.47 "Trust Fund" means all assets of the Trust.
2.48 "Valuation Date" means the last day of each Plan Year and such other dates
as determined by the Plan Administrator. For the purpose of Article XI, the
last day of each Plan Year .
2.49 "Vesting Computation Period" means the period specified in Exhibit 5. If
the Vesting Computation Period is changed, the two overlapping 12 month periods
beginning with the first day of the last old period and ending with the last
day of the first new period shall be considered a Vesting Computation Period
for purposes of computing vesting under the Plan.
2.50 "Vesting Service" means the number of Vesting Computation Periods during
which an Employee completes the number of Hours of Service specified in Exhibit
5, excluding any Vesting Service specified in Exhibit 5. One year of Vesting
Service shall be credited for each such Vesting Computation Period.
Vesting Service shall include service with a Participating Employer, Affiliated
Employer, and with a predecessor employer providing the Participating Employer
maintains the plan of such predecessor.
A Participant who leaves the employ of a Participating Employer to enter the
military service or who is on an approved leave of absence shall not be
considered to have terminated employment and shall continue to accrue Vesting
Service during such periods. If a Participant fails to return or to resume
employment with the Participating Employer following completion of such periods,
he shall be deemed to have terminated employment as of the date the absence
commenced.
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<PAGE> 26
ARTICLE III - PARTICIPATION
3.1 ELIGIBILITY: Each Eligible Employee shall become a Participant on the
Effective Date or, if later, on the Entry Date (as defined in Exhibit 2) in
which he first meets the eligibility requirements specified in Exhibit 2.
Prior to the commencement of any Salary Deferral or Employee Contributions, a
Salary Deferral Agreement or Thrift Contribution Agreement must be completed
and received by the Plan Administrator. Following a termination of employment,
a former participant, or an Eligible Employee who has fulfilled the Plan's
eligibility requirements but is no longer employed by the Participating Employer
on his Entry Date, shall be permitted to reenter the Plan on his Re-employment
Date. Provided however, a nonvested former participant or an Eligible Employee
described in the preceding sentence shall be treated as a new Employee for the
purposes of determining eligibility to reenter the Plan where his successive
number of one-year Breaks in Service equals or exceeds the greater of either
(a) five, or (b) the aggregate number of prebreak years of Eligibility Service.
In the event a Participant becomes ineligible to participate because he is no
longer a member of an eligible class of Employees specified in Exhibit 2, but
has not incurred a one-year Break In Service, such Employee shall participate
immediately upon his return to an eligible class of Employees. If such
Employee incurs a one-year Break In Service, his eligibility to participate
shall be determined pursuant to the break in service rules of the plan.
In the event an Employee who is not a member of an eligible class of Employees
specified in Exhibit 2 becomes a member of an eligible class, such Employee
shall become a Participant immediately if such Employee has satisfied the
eligibility requirements specified in Exhibit 2.
3.2 WAIVER: For any Plan Year, any Participant who is governed by a
Non-Standardized Adoption Agreement may, in writing, and prior to the date any
contribution is made on his behalf, waive all or a portion of any Employer
Discretionary Contribution, providing such Participant does not receive any
amounts waived in cash.
An Employee who is governed by a Non-Standardized Adoption Agreement may make,
in writing, an irrevocable election upon commencement of employment or upon the
Employee's first becoming eligible to participate in the Plan to have a
specified amount or percentage (including none) contributed by the Participating
Employer to the Plan. Such an election shall not constitute a cash or deferred
election for the purpose of Article XVI. To the extent provided in final
regulation by the Secretary of the Treasury, this paragraph shall not apply to
an arrangement that directly or indirectly permits individual partners to vary
the amount of contributions made on their behalf.
3.3 BINDING FORCE: A Participant shall be conclusively deemed to have
assented to the Plan, to any subsequent amendments, to the terms of the
Annuity Contracts or Insurance Policies on his life, and shall be bound thereby
with the same force and effect as if he had formally executed this Plan.
3.4 TRANSFER FROM AN AFFILIATED EMPLOYER: If an Eligible Employee is
transferred from an Affiliated Employer to the Participating Employer, he shall
participate immediately if he meets the eligibility requirements specified in
Exhibit 2.
3.5 TRANSFER TO AN AFFILIATED EMPLOYER: If a Participant transfers to an
Affiliated Employer, he shall not be entitled to any distribution from this
Plan pending his subsequent death or severance of employment.
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<PAGE> 27
ARTICLE IV - ACCOUNTS
4.1 PARTICIPANTS' ACCOUNTS: The Plan Administrator shall maintain an Account
for each Participant showing the current dollar value of his interest in the
Plan. Subaccounts to be known as Salary Deferral, Employee, 100% Vested,
Rollover, and Non-100% Vested Employer Matching, Employer Discretionary, and
Qualified Non-Elective shall be kept, showing (a) the contributions in each
category (b) the earnings, losses and expenses, and (c) distributions from each
subaccount. Other subaccounts may be established as determined by the Plan
Administrator. If a Participant has 5 consecutive 1 year Breaks In Service, the
Plan Administrator shall maintain pre-break and post-break subaccounts.
4.2 VALUATION OF ACCOUNTS: On each Valuation Date, the Plan Administrator
shall determine the net increase or decrease in the fair market value of the
Trust Fund, excluding Insurance Policies, individual Annuity Contracts, or
allocated group Annuity Contracts, and shall equitably allocate the result
thereof to each Participant's Account. Such determination shall include
realized and unrealized gains and losses, investment income and losses, and
applicable expenses. Subject to Sections 8.3 and 10.17, such realized and
unrealized gains and losses shall be allocated on a fair and equitable basis
under a method specified by the Plan Administrator. A Participant's interest in
an individual annuity contract or allocated group annuity contract shall be
determined at the annuity contract value and changes in such value shall be
allocated to the Account of such Participant. Such determinations, other than
on the first Valuation Date, shall not include contribution or forfeiture
allocations.
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<PAGE> 28
ARTICLE V - CONTRIBUTIONS
5.1 SALARY DEFERRAL CONTRIBUTION: If the Employer so elects in Exhibit 3,
each Eligible Employee may elect to make Salary Deferral Contributions by
filing a Salary Deferral Agreement with the Plan Administrator within the time
period specified by the Plan Administrator. Such election may not be made
retroactively. The Salary Deferral Agreement shall include the amount or
percentage to be contributed (unless a special election is made pursuant to
Exhibit 3) which shall not be less than the minimum percentage of Compensation
no more than the maximum percentage of Compensation designated in Exhibit 3.
All such contributions shall be paid by the Participating Employer, from Net
Profits, unless otherwise elected in Exhibit 1, to the Trustee.
A Participant may prospectively change, revoke, or reestablish his Salary
Deferral Agreement at such times as are set forth in Exhibit 3. Any such
change, revocation, or re-establishment shall be made on a form satisfactory to
the Plan Administrator and shall be filed with the Plan Administrator within
the time period specified by the Plan Administrator before it is effective.
All Salary Deferral Contributions shall be paid to the Plan no later than 12
months after the end of the Plan Year.
If the Participating Employer does not have sufficient Net Profits from which to
make Salary Deferral Contributions, the Plan Administrator shall reduce the
salary deferral percentages of all Participants as permitted by the Code or
regulations thereunder.
5.2 EMPLOYER CONTRIBUTION: If the Employer so elects in Exhibit 3, each
Participating Employer shall make Employer Matching, Qualified Non-Elective and
Employer Discretionary Contributions to the Trust. All such contributions
shall be made from Net Profits, unless otherwise elected in Exhibit 1.
A Participating Employer shall have no right, title, or interest in
contributions made to the Plan and no part of such contributions or income
derived therefrom shall revert to the Participating Employer except as provided
in Section 5.3.
5.3 RETURN OF EMPLOYER CONTRIBUTIONS: Notwithstanding any other provision of
this Plan, contributions made by a Participating Employer may be returned to
such Participating Employer if the contribution was made by reason of a mistake
of fact. Such contribution must be returned within one year of the
contribution.
In the event that the Commissioner of Internal Revenue determines that this
Plan is not initially qualified under the Internal Revenue Code, any
contribution made incident to that initial qualification by the Participating
Employer must be returned to the Participating Employer within one year after
the date the initial qualification is denied, but only if the application for
the qualification is made by the time prescribed by law for filing the
Participating Employer's return for the taxable year in which the plan is
adopted, or such later date as the Secretary of the Treasury may prescribe.
The Participating Employer shall state by written request to the Trustee the
amount of contribution to be returned and the reason for such return. The
amount returned will not include any net earnings attributable to the
contribution and will be reduced by any net losses and expenses attributable to
the contribution. The Trustee will return the specified amount to the
Participating Employer promptly upon receipt of the written request.
5.4 EMPLOYEE CONTRIBUTIONS: If the Employer so elects in Exhibit 3, each
Participant may elect to make Employee Contributions during his period of
employment with a Participating Employer. The Participating Employer shall
collect such contributions and remit them to the Trustee.
The Participant may change his contribution percentage, subject to the limits
hereinabove set forth, or revoke his election, under the same rules and
conditions that apply to Salary Deferral Contributions.
Any election, change, or revocation shall be made on a form satisfactory to the
Plan Administrator and shall be filed with the Plan Administrator within the
time period specified by the Plan Administrator prior to the commencement of
contributions.
5.5 ROLLOVER CONTRIBUTION: Subject to the approval of the Plan Administrator
and upon completion of such forms as the Plan Administrator may require, a
Participant may make a Rollover Contribution to this Plan.
All Rollover Contributions made pursuant to this Section may not be withdrawn
except as otherwise provided by this Plan.
5.6 [Reserved]
5.7 TIME AND METHOD OF PAYMENT OF CONTRIBUTIONS: Salary Deferral
Contributions and any Employee Contributions for any Plan Year shall be paid to
the Trustee in one or more installments as of the earliest date on which such
contributions can reasonably be segregated from the Participating Employer's
general assets, not to exceed 90 days from the date on which such amounts are
received by the Participating Employer (in the case of amounts that a
Participant or beneficiary pays to an Employer) or the date on which such
amounts would otherwise have been payable to the Participant.
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<PAGE> 29
in cash (in the case of amounts withheld by the Participant's wages), but in
any event, not later than the end of the twelve-month period immediately
following the Plan Year to which the contribution relates. Employer Matching
Qualified Non-Elective, and Employer Discretionary Contributions for any Plan
Year shall be paid to the Trustee in one or more installments not later than
the time prescribed by law (plus extensions) for tax deduction purposes.
Any contribution which will be invested in an Insurance Policy, Annuity
Contract, Mutual Fund Shares, may be paid by the Participating Employer
directly to the company offering such investment. In this event, such
contribution shall be deemed to be received by the Trustee(s) as of the date of
receipt by such company.
5.8 DUTY OF TRUSTEE AND PLAN ADMINISTRATOR. The Trustee and the Plan
Administrator shall neither be liable nor responsible for collecting any
contribution or transfer and the Trustee shall have only the responsibility of
investing amounts received in accordance with Article XIII.
5.9 ADDITIONAL REQUIREMENTS: All contributions, other than Employer
discretionary contributions, made under this Plan shall be subject to Article
XVI. In addition, the Plan Administrator may specify additional requirements
governing any contributions to the Trust Fund.
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<PAGE> 30
ARTICLE VI-ALLOCATIONS
6.1 ALLOCATION OF PARTICIPATING EMPLOYER CONTRIBUTIONS AND FORFEITURES:
The Plan Administrator shall allocate to the Employer Matching subaccount of
each Participant eligible for an allocation his portion (as specified in Exhibit
3) of the Employer's Matching Contribution. Such allocation shall be made for
the period specified by the Plan Administrator. Unless elected to reduce the
next Participating Employer contribution, forfeitures arising from Employer
Discretionary subaccounts shall be allocated to the remaining Participant's
Employer Discretionary subaccount on the last day of the Plan Year, or more
frequently if permitted by the Plan Administrator, according to the allocation
formula specified in Exhibit 3. Employer Matching forfeitures shall be
allocated to all Participants who have an Employer Matching subaccount on the
last day of the Plan Year in which such amounts were forfeited and allocated to
such Participant's subaccount based on the ratio the Participant's Compensation
bears to the total compensation of all Participants. Qualified Non-Elective
Contributions and Employer Discretionary Contributions shall be allocated as of
the last day of the Plan Year (or more frequently if permitted by the Plan
Administrator) in which attributable in accordance with Exhibit 3.
6.2 ELIGIBILITY FOR ALLOCATION: Each Participant who meets the requirements
of Exhibit 3 shall share in any Qualified Non-Election Contribution, the
Employer Discretionary Contribution, and any discretionary forfeiture
allocation for such Plan Year. Unless otherwise stated in Exhibit 3 of the
Adoption Agreement, a Participant who is governed by a Standardized Adoption
Agreement must complete more than 500 hours of Service (1,000 Hours of Service
prior to the first Plan Year beginning January 1, 1990, or thereafter) in any
applicable Plan Year in order to share in an allocation for that year. Unless
otherwise stated in Exhibit 3 of the Adoption Agreement, a Participant who is
governed by a Nonstandardized Adoption Agreement must complete 1,000 Hours of
Service in any applicable Plan Year in order to share in any allocation for
that year.
6.3 ALLOCATION OF OTHER CONTRIBUTIONS: Employee Contributions and Rollover
Contributions shall be allocated on the date received directly to the
appropriate subaccount of the Participant on whose behalf such contribution was
made. Salary Deferral Contributions are allocated for the period specified by
the Plan Administrator.
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ARTICLE VII - LIMITATIONS ON ALLOCATIONS
7.1 LIMITATIONS ON PARTICIPATING EMPLOYERS THAT DO NOT MAINTAIN ANY OTHER
QUALIFIED PLAN:
(a) If the Participant does not participate in, and has never participated
in another qualified plan, a welfare benefit fund, as defined in Section
419(e) of the Code, or an individual medical account as defined in Section
415(1)(2) of the Code, maintained by the Employer which provides an Annual
Addition as defined in Section 7.5, the amount of the Annual Addition which
may be credited to the Participant's Account for any Limitation year will
not exceed the lesser of the Maximum Permissible Amount or any other
limitation contained in this Plan. If the Employer contribution and the
Salary Deferral Contribution that would otherwise be contributed or
allocated to the Participant's Account would cause the Annual Additions for
the Limitation Year to exceed the Maximum Permissible Amount, the amount
contributed or allocated will be reduced so that the Annual Additions for
the Limitation Year will equal the Maximum Permissible Amount. Provided,
however, an Annual Addition to a welfare benefit fund will be deemed to
have been allocated prior to any other allocation.
(b) Prior to determining the Participant's actual Compensation and
forfeitures for the Limitation Year, the Employer may determine the Maximum
Permissible Amount for a Participant on the basis of a reasonable
estimation of the Participant's Compensation or forfeitures for the
Limitation Year, uniformly determined for all Participants similarly
situated.
(c) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for the Limitation Year
will be determined on the basis of actual forfeitures and the Participant's
actual Compensation and forfeitures for the Limitation Year.
(d) If there is an Excess Amount due to paragraph (b), the excess will be
disposed of as follows:
(1) Any Employee Contributions, to the extent they would reduce the
Excess Amount, will be returned to the Participant;
(2) If after the application of (1) above an Excess Amount still
exists, and the Participant is covered by the Plan at the end of the
Limitation Year, the Excess Amount in the Participant's Account will
be used to reduce Employer contributions (including any allocation of
forfeitures) for such Participant in the next Limitation Year, and
each succeeding Limitation Year, if necessary:
(3) If after the application of (2) above an Excess Amount still
exists, and the Participant is not covered by the Plan at the end of
the Limitation Year, the Excess Amount will be held unallocated in a
suspense account. The suspense account will be applied to reduce
future Employer contributions (including allocation of any
forfeitures) for all remaining Participants in the next Limitation
Year, and each succeeding Limitation Year if necessary;
(e) If a suspense account is in existence at any time during the
Limitation Year pursuant to this Section, it will not participate in the
allocation of the Trust's investment gains and losses.
7.2 LIMITATION ON EMPLOYERS THAT MAINTAIN MORE THAN ONE QUALIFIED PLAN ALL OF
WHICH ARE QUALIFIED DEFINED CONTRIBUTION PLANS:
(a) This Section applies if, in addition to this Plan, the Participant is
covered under another qualified Master or Prototype defined contribution
plan or a welfare fund, as defined in Section 419(e) of the Code,
maintained by the Employer, or an individual medical account, as defined in
Section 415(1)(2) of the Code, maintained by the Employer, which provides
an Annual Addition as defined in Section 7.5, during any Limitation Year.
The Annual Additions which may be credited to a Participant's Account under
this Plan for any such Limitation Year will not exceed the Maximum
Permissible Amount reduced by the Annual Additions credited to a
participant's account under the other plans and welfare benefit funds for
the same Limitation Year. If the Annual Additional with respect to the
Participant under other defined contribution plans maintained by the
Employer are less than the Maximum Permissible Amount and the Employer
contribution that would otherwise be contributed or allocated to the
Participant's Account under this Plan would cause the Annual Additions for
the Limitation Year to exceed this limitation, the amount contributed or
allocated will be reduced so that the Annual Additions under all such plans
and funds for the Limitation Year will equal the Maximum Permissible
Amount. If the Annual Additions with respect to the Participant under such
other defined contribution plans and welfare funds in the aggregate are
equal to or greater than the Maximum Permissible Amount, no amount will be
contributed or allocated to the Participant's Account under this Plan for
the Limitation Year.
(b) Prior the determining the Participant's actual Compensation and
forfeitures for the Limitation Year, the Employer may determine the Maximum
Permissible Amount of a Participant in the manner described in Section
7.1(b).
(c) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for the Limitation Year
will be determined on the basis of the Participant's actual Compensation
and forfeitures for the Limitation Year.
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<PAGE> 32
(d) If, pursuant to Section 7.2(c), a Participant's Annual Additions
under this Plan and such other plans would result in an Excess Amount
for a Limitation Year, the Excess Amount will be deemed to consist of
the Annual Additions last allocated except that Annual Additions
attributable to a welfare benefit fund or individual medical account
will be deemed to have been allocated first regardless of the actual
allocation date.
(e) If an Excess Amount was allocated to a Participant on the last
day of the Plan Year of this Plan which coincides with the last day of
the Plan Year of another plan, the Excess Amount attributed to this Plan
will be the product of,
(1) the total Excess Amount allocated as of such date, times
(2) the ratio of (a) the Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
Plan to (b) the total Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
and all the other qualified Master or Prototype defined
contribution plans.
(f) Any Excess Amounts attributed to this Plan shall be disposed in
the manner described in Section 7.1(d).
7.3 LIMITATIONS ON PARTICIPATING EMPLOYERS THAT MAINTAIN QUALIFIED DEFINED
CONTRIBUTION PLANS OTHER THAN A MASTER OR PROTOTYPE PLAN: If the Participant is
covered under another qualified defined contribution plan maintained by the
Employer which is not a Master or Prototype Plan. Annual Additions which may be
credited to the participant's Account under this Plan for any Limitation Year
will be limited as specified in Exhibit 7 of the Adoption Agreement.
7.4 LIMITATIONS ON PARTICIPATING EMPLOYERS THAT MAINTAIN A QUALIFIED DEFINED
BENEFIT PLAN: If the Employer maintains, or at any time maintained, a qualified
defined benefit plan covering any Participant in this Plan, the sum of the
Participant's Defined Benefit Plan Fraction and Defined Contribution Plan
Fraction will not exceed 1.0 in any Limitation Year. The Annual Additions which
may be credited to the Participant's Account under this Plan for any Limitation
Year will be limited in accordance with Exhibit 7 of the Adoption Agreement.
7.5 SPECIAL DEFINITIONS:
(a) Annual Additions: The sum of the following amounts credited to a
Participant's Account for the Limitation Year:
(1) Salary Deferral Contributions including excess
contributions as defined in Section 401(k)(8)(B) of the Code,
excess aggregate contributions as defined in Section
401(m)(6)(B), and excess deferrals as described in Section
402(g), regardless of whether such amounts are distributed or
forfeited;
(2) All other Employer contributions;
(3) forfeitures; and
(4) the lesser of (i) one-half of the Employee Contributions or
(ii) the Employee Contributions in excess of 5% of the
Participant's Compensation for the Limitation Year. Effective
the first Plan Year beginning in 1987, all Employee
Contributions shall be considered. However, the Annual Addition
for any Limitation Year beginning before January 1, 1987 shall
not be recomputed to treat all Employee Contributions as Annual
Additions.
Amounts allocated after March 31, 1984 to an individual medical account,
as defined in Section 415(l)(1) of the Code, which is part of a pension
or annuity plan maintained by the Employer, are treated as Annual
Additions to a defined contribution plan. Also, amounts derived from
contributions paid or accrued after December 31, 1985, in taxable years
ending after such date, which are attributable to post-retirement
medical benefits allocated to the separate account of a Key Employee, as
defined in Section 419A(d)(3), under a welfare benefit fund, as defined
in Section 419(a), maintained by the Employer, are treated as Annual
Additions to a defined contribution plan.
For this purpose, any Excess Amount applied under Section 7.1(d) or
7.2(f) in the Limitation Year to reduce Employer contributions will be
considered Annual Additions for such Limitation Year.
(b) Compensation: A Participant's earned income, wages, salaries,
and fees for professional services and other amounts received for
personal services actually rendered in the course of employment with the
Employer maintaining the Plan (including, but not limited to
commissions, compensation for services on the basis of a percentage of
profits, commissions on insurance premiums, tips and bonuses), and
excluding the following:
(1) Employer contributions to a plan of deferred compensation
which are not includible in the employee's gross income for the
taxable year in which contributed, or Employer contributions
under a simplified employee pension plan to the extent such
contributions are deductible by the employee, or any
distributions from a plan of deferred compensation;
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<PAGE> 33
(2) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the
employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
(3) Amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock option;
and
(4) Other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under a
salary reduction agreement) towards the purchase of an annuity
described in Code Section 403(b) (whether or not the amounts are
actually excludable from the gross income of the employee).
For purposes of applying the limitations of this Article, Compensation
for a Limitation Year is the Compensation actually paid or includible in
gross income during such year.
(c) Defined Benefit Fraction: A fraction, the numerator of which is
the sum of the Participant's Projected Annual Benefits under all the
defined benefit plans (whether or not terminated) maintained by the
Employer, and the denominator of which is the lesser of 125% of the
dollar limitation determined for the Limitation Year under Sections
415(b) and (d) of the Code or 140% of the Highest Average Compensation,
including any adjustments under Section 415(b) of the Code.
Notwithstanding the above, if the Participant was a participant as of
the first day of the first Limitation Year beginning after December 31,
1986, in one or more defined benefit plans maintained by the Employer
which were in existence on May 6, 1986, the denominator of this fraction
will not be less than 125% of the sum of the annual benefits under such
plans which the Participant had accrued as of the close of the last
Limitation Year beginning before January 1, 1987 disregarding any
changes in the terms and conditions of the Plan after May 5, 1986. The
preceding sentence applies only if the defined benefit plans
individually and in the aggregate satisfied the requirements of Code
Section 415 for all Limitation Years beginning before January 1, 1987.
If the Plan satisfied the applicable requirements of Section 415 of the
Code as in effect for all Limitation Years beginning before January 1,
1987, an amount shall be subtracted from the numerator of the defined
contribution plan fraction (not exceeding such numerator) as prescribed
by the Secretary of the Treasury so that the sum of the defined benefit
plan fraction and defined contribution plan fraction computed under
Section 415(a)(1) of the Code does not exceed 1.0 for such Limitation
Year.
(d) Defined Contribution Fraction: A fraction, the numerator of
which is the sum of the Annual Additions to the Participant's Account
under all the defined contribution plans (whether or not terminated)
maintained by the Employer for the current and all prior Limitation
Years, (including the Annual Additions attributable to the Participant's
non-deductible employee contributions to all defined benefit plans,
whether or not terminated, maintained by the Employer, and the Annual
Addition attributable to all welfare benefit funds, as defined in
Section 419(e) of the Code, and individual medical accounts, as defined
in Section 415(l)(2) of the Code, maintained by the Employer), and the
denominator of which is the sum of the Maximum Aggregate Amounts for the
current and all prior Limitation Years of service with the Employer
(regardless of whether a defined contribution plan was maintained by the
Employer). The Maximum Aggregate Amount in any Limitation Year is the
lesser of 125% of the dollar limitation in effect under Code Section
415(c)(1)(A) or 35% of the Participant's Compensation for such year.
If the Employee was a Participant as of the end of the first day of the
first Limitation Year beginning after December 31, 1986, in one or more
defined contribution plans maintained by the Employer which were in
existence on May 6, 1986, the numerator of this fraction will be
adjusted if the sum of this fraction and the defined benefit fraction
would otherwise exceed 1.0 under the terms of this Plan. Under the
adjustment, an amount equal to the product of (1) the excess of the sum
of the fraction over 1.0 times (2) the denominator of this fraction,
will be permanently subtracted from the numerator of this fraction. The
adjustment is calculated using the fractions as they would be computed
as of the end of the last Limitation Year beginning before January 1,
1987, and disregarding any changes in the terms and conditions of the
plan made after May 6, 1986, but using the Section 415 limitation
applicable to the first Limitation Year beginning on or after January 1,
1987.
The Annual Addition for any limitation year beginning before January 1,
1987, shall not be recomputed to treat all Employee Contributions as
Annual Additions.
(e) Employer: For purposes of this Article, Employer shall mean the
Employer that adopts this Plan, and all members of a controlled group of
corporations (as defined in Section 414(o) of the Code as modified by
Section 415(h), all commonly controlled trades or businesses (as defined
in Section 414(c) as modified by Section 415(h)) or affiliated service
groups (as defined in Section 414(m)) of which the adopting employer is
a part, and any other entity required to be aggregated with the Employer
pursuant to regulations under Section 414(o) of the Code.
(f) Excess Amount: The excess of the Participant's Annual Additions
for the Limitation Year over the Maximum Permissible Amount.
(g) Highest Average Compensation: The Average Compensation for the
three consecutive years of service with the Participating Employer that
produces the highest average. A year of service with the Participating
Employer is the 12-consecutive month period defined in the Employer's
defined benefit plan.
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<PAGE> 34
(h) Limitation Year: A Limitation Year shall be the period selected in
Exhibit 1. If the Employer has more than one qualified plan, this Plan or the
other plan shall be amended so that all qualified plans maintained by the
Employer must use the same Limitation Year. If the Limitation Year is amended to
a different twelve-consecutive-month period, the new Limitation Year must begin
on a date within the Limitation Year in which the amendment is made.
(i) Master or Prototype Plan: A plan the form of which is the subject of a
favorable opinion letter from the Internal Revenue Service.
(j) Maximum Permissible Amount: The maximum Annual Addition that may be
contributed or allocated to a Participant's Account under the Plan for any
Limitation Year shall not exceed the lesser of:
(i) the defined contribution dollar limitation, or
(ii) 25% of the Participant's compensation for the Limitation Year.
The compensation limitation referred to in (ii) shall not apply to any
contribution for medical benefits (within the meaning of Section 401(h) or
Section 419A(f)(2) of the Code) which is otherwise treated as an Annual
Addition under Section 415(l)(1) or 419A(d)(2) of the Code. The defined
contribution dollar limitation is the lesser of $30,000 (or if greater,
one-fourth of the limitation in Section 415(b)(1) of the Code). If a short
Limitation Year is created because of an amendment changing the Limitation Year
to a different twelve-consecutive-month period, the Maximum Permissible Amount
will not exceed the amount specified in Code Section 415(c)(1) multiplied by
the following fraction:
number of months in the short Limitation Year
---------------------------------------------
12
(k) Projected Annual Benefit: The annual retirement benefit (adjusted to an
actuarially equivalent straight life annuity if such benefit is expressed in a
form other than a straight life annuity or qualified joint and survivor annuity)
to which the Participant would be entitled under the terms of the Plan assuming:
(1) the Participant will continue employment until Normal Retirement
Age under the Plan (or current age, if later), and
(2) the Participant's Compensation for the current Limitation Year
and all other relevant factors used to determine benefits under the Plan
will remain constant for all future Limitation Years.
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<PAGE> 35
ARTICLE VIII - INVESTMENTS
8.1 INVESTMENT AUTHORITY: The Plan Administrator or Trustee shall select
suitable investments in which Participant Accounts may be invested. Unless
Nationwide permits in writing to the contrary, some or all of the assets of the
Employer's Trust are required to be invested in Contracts, Mutual Funds or
other investment products of Nationwide Insurance Company, its affiliates, or
subsidiaries. All Plan assets not subject to investment direction by the
Employer, Participant, or Investment Manager shall be invested by the Trustee
in accordance with Article XIII.
8.2 EMPLOYER DIRECTED INVESTMENTS: If the Employer so elects in Exhibit 4,
it shall direct the Trustee in all investments of the Trust. In this event,
the Trustee shall not be liable for the directions or emissions of the Employer
nor shall the Trustee be under an obligation to invest or otherwise manage any
Plan assets that are subject to the direction of the Employer. Nothing in this
Section shall relieve the Trustee of any liability under the Trust for any act
or omission of the Trustee.
8.3 PARTICIPANT DIRECTED INVESTMENTS: If the Employer so elects in Exhibit
4, each Participant shall direct, in writing, the investment of his Account, or
the portion of his Account specified in Exhibit 4. However, a Participant
shall not be permitted to direct his Account if the Participant has received
the entire vested portion of his Account. The Plan Administrator may elect, on
a nondiscriminatory basis and for all Participants in the Plan, to prohibit the
Participant from directing his Account upon termination of employment or
retirement. The frequency with which a Participant may change his investment
selection shall be specified in Exhibit 4.
If Participant directed investments are permitted, the valuation procedures
specified in Section 4.2 shall not apply. The Plan Administrator shall
identify those assets being held in each Participant's Account and shall value
them at their market value in determining the value of the Account, except that
investments in Annuity Contracts shall be valued at the annuity contract value.
A Participant is not permitted to direct that his Accrued Benefit, or any
portion thereof, be invested in collectibles unless permitted by Code Section
408(m).
The Employer, Plan Administrator, and Trustee shall be under no duty to
question any investment direction of a Participant, or to review any directed
investments, or to make suggestions to the Participant, nor shall they be held
responsible in any manner for investment loss or depreciation in asset value of
any directed investment.
8.4 INVESTMENT MANAGER: The Employer may appoint an Investment Manager in
Exhibit 4 to assume certain powers and responsibilities in the investment and
management of Plan assets. The Investment Manager shall assume full liability
for all duties and powers assigned to him and shall be subject to the fiduciary
responsibilities of the Plan. The Trustees shall not be liable for the acts or
omissions of the Investment Manager nor shall the Trustee be under an
obligation to invest or otherwise manage any assets of the Plan that are
subject to the management of an Investment Manager. Nothing in this Section
shall relieve the Trustee of any liability under the Trust for any act or
omission of the Trustee.
"Investment Manager" means any fiduciary (other than a Trustee or named
fiduciary):
(a) who has the power to manage, acquire, or dispose of any assets
of a plan;
(b) who is (i) registered as an investment adviser under the
Investment Advisers Act of 1940; (ii) a bank, as defined in that
Act; or (iii) an insurer qualified to perform services described
in paragraph (a) under the laws of more than one state; and
(c) who has acknowledged in writing that he is a fiduciary with
respect to the Plan.
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<PAGE> 36
ARTICLE IX - INSURANCE POLICIES
9.1 PURCHASE OF INSURANCE POLICIES: With the approval of the Plan
Administrator, a Participant may direct the Trustee to apply a portion of each
contribution to the purchase of an Insurance Policy. The fact that any
Insurance Policy is issued on the life of a Participant shall not vest any
right, title, or interest in such Policy in the Participant except at the time
and on the terms and conditions set forth in the Plan. All Insurance Policies
shall be issued and all premiums shall be payable as of the Common Due Date.
The Plan Administrator may direct the Trustee to invest a portion of the Trust
Fund in an Insurance Policy on the life of any Employee of a Participating
Employer, in which case, the investment shall be deemed to be for the benefit
of the Trust Fund as a whole.
Each Insurance Policy shall be issued by an Insurer selected by the Plan
Administrator. The Trustee shall be the applicant, owner, and beneficiary of
each Insurance Policy. As applicant, the Trustee shall execute any and all
applications and other documents required by the Insurer in connection with the
issuance of any Insurance Policy. The Participating Employer, Plan
Administrator, and the Trustee shall not be liable for any loss suffered by a
Participant or a Beneficiary due to the Participant's failure to supply any
information or perform any other act required by the Insurer in connection with
issuance or maintenance of an Insurance Policy.
However, the Trustee shall be required to pay over all proceeds of any
Insurance Policies to the Participant's designated beneficiary in accordance
with the distribution provisions of this Plan. A Participant's Spouse will be
the designated beneficiary of the proceeds in all circumstances unless a waiver
has been made in accordance with Section 10.13. Under no circumstances shall
the Trust retain any part of the proceeds.
Insurance Policies may be held in the possession of the Trustee, Insurer, or
Participating Employer.
9.2 LIMITATIONS ON INSURANCE POLICIES: All Insurance Policy premiums shall
be payable from Salary Deferral Contributions or Participating Employer
contributions, except as provided below.
If ordinary life insurance is purchased, aggregate premium must be less than
50% of the aggregate Salary Deferral Contributions, Participating Employer
contributions, and forfeitures allocated to the Participant. If term or
universal life insurance is purchased, aggregate premium may not exceed 25% of
aggregate Salary Deferral Contributions, Participating Employer contributions,
and forfeitures allocated to the Participant. If both ordinary and term or
universal life insurance are purchased, aggregate premiums for the term
insurance plus one-half the aggregate premiums for the ordinary insurance may
not exceed 25% of the aggregate Salary Deferral Contributions, Participating
Employer contributions, and forfeitures allocated to the Participant. If
retirement income or endowment policies are purchased on behalf of a
Participant, the death benefit under the policy shall not be greater than 100
times the anticipated monthly annuity provided under the policy. Ordinary life
insurance is a policy that provides both non-decreasing death benefits and
non-increasing premiums.
If the premium payable is more than the amount of Salary Deferral or
Participating Employer contribution available for payment, the Trustee shall,
unless the Participant elects otherwise, convert other assets held on the
Participant's behalf into cash in the amount of the insufficiency, to the
extent that the limitations of this section are not exceeded, and pay such
amount to the Insurer.
If payment of the premium due would cause the limitations of this section to be
exceeded, the Trustee shall, unless the Participant elects otherwise, convert
other assets held on the Participant's behalf for two or more years into cash
in the amount of the excess and pay such amount to the Insurer.
Insurance Policy dividends and credits will be allocated to the Participant for
whose benefit the Policy is held.
9.3 DISPOSITION OF INSURANCE POLICIES: Upon the retirement, disability or
other termination of employment of a Participant, the Participant shall
instruct the Trustee as to the disposition of the Insurance Policies on his
life, including the surrender, conversion, or transfer of ownership of such
policies to the Participant, or placing them on a paid-up basis. If an
Insurance Policy is distributed to the Participant, such a policy shall be
subject to the provisions of Section 10.13. The Trustee shall dispose of the
policies in accordance with these instructions and shall, in any event, prior
to commencement of benefits under the Plan, convert Insurance Policies to cash
or an annuity contract or distribute them to the Participant.
9.4 MINIMUM PURCHASE: If the amount available for the purchase of an
Insurance Policy is insufficient to provide the minimum purchase amount as
specified by the Insurer, no Insurance Policy shall be purchased until the
Common Due Date on which the amount available is sufficient.
9.5 VALIDITY OF INSURANCE POLICY: Neither the Employer, the Plan
Administrator, nor the Trustee shall be responsible for the validity of any
Insurance Policy, nor the failure on the part of the Insurer to make payments
provided by such Policies, nor for the action of any person which may render an
Insurance Policy null or void or unenforceable in whole or in part.
9.6 SUBORDINATION OF INSURANCE POLICY OR ANNUITY CONTRACT: In the event of
any conflict between the terms of the Plan and the provisions of any Insurance
Policy or Annuity Contract, the terms of the Plan will control.
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<PAGE> 37
ARTICLE X - BENEFITS AND DISTRIBUTIONS
10.1 VESTING: Each Participant shall at all times be 100% vested in amounts
attributed to Salary Deferral, Qualified Non-Elective, Employee, and Rollover
contributions and earnings thereunder.
Each Participant who is employed by a Participating Employer shall be 100%
vested in his Employer Matching and Employer Discretionary subaccounts at his
Normal Retirement Age, and in the event of his Disability or death. The
Participant's vested interest in such subaccounts at any other time shall be
determined by the Vesting Schedule elected in Exhibit 5. Provided, however,
that if the Plan is top-heavy, for the top-heavy Plan Year and for all
subsequent years (regardless of whether the Plan is top-heavy for any subsequent
year) the vesting schedule in Exhibit 5, if different, shall be used.
Each Participant shall be 100% vested in his Insurance Policy if (1) his
premiums originated from Salary Deferral Contributions, (2) such Participant
was previously 100% Vested in such policy prior to contributions to the Plan,
or (3) such policy was 100% Vested prior to adoption of this Prototype Plan.
Otherwise, the Participant's vested interest in his Insurance Policy shall be
determined according to the preceding paragraph.
If a Participant terminates employment and is re-employed by a Participating
Employer:
(a) years of Vesting Service credited after five or more consecutive
one-year Breaks In Service shall be disregarded in determining the
Participant's vested interest in the pre-break portion of the
Participant's Accrued Benefit: and
(b) such Participant's pre-break Vesting Service will be disregarded in
determining the vested interest in any post-break portion of the
Participant's Accrued Benefit if (1) the Participant was not vested in
his Employer Matching subaccount or Employer Discretionary subaccount at
the time of his termination of employment, and (2) his successive number
of one-year Breaks In Service exceeds the greater of either (1) five; or
(2) the aggregate number of pre-break years of Vesting Service.
10.2 FORFEITURES: The Employer shall elect in Exhibit 3 when to forfeit the
nonvested portion of a terminated Participant's Accrued Benefit. If the
Participant's nonvested interest, pursuant to this Plan, is forfeited
immediately, and the Participant elects to have distributed less than the entire
vested portion of the Account derived from Employer contributions, the part of
the nonvested portion that will be treated as a forfeiture is the total
nonvested portion multiplied by a fraction, the numerator of which is the
amount of the distribution attributable to Employer contributions and the
denominator of which is the total value of the vested Employer derived
Account. No forfeiture shall occur solely as a result of a Participant's
withdrawal of his Salary Deferral or Employee Contributions. If a Participant
terminates employment without a vested interest in his Accrued Benefit, the
Participant shall be deemed to have received his interest in his Accrued
Benefit upon separation of service, and a forfeiture of the Participant's
Account shall occur at the time specified in Exhibit 3.
Employer Discretionary and matching forfeitures may be allocated to
Participants' Accounts or applied to reduce the next Participating Employer
contribution, as specified by Exhibit 3. Forfeitures of Excess Aggregate
Contributions (as defined in Article XVI) shall be distributed as specified in
Article XVI.
If, at termination of Plan, forfeitures remain unallocated or unapplied, such
forfeitures shall be allocated to the Employer Matching subaccount or Employer
Discretionary subaccount, whichever is applicable, of each Participant in
accordance with the allocation formula in Exhibit 3.
10.3A REPAYMENT AFTER IMMEDIATE FORFEITURE: If the Plan Administrator elects
in Exhibit 3 to forfeit all or a portion of the nonvested portion of a
Participant's Accrued Benefit according to Exhibit 3, Section 6(a), a former
Participant who has resumed employment with the Participating Employer may
repay to the Plan the full amount of a vested benefit distributed to him, under
provision of Article X, provided that such Participant:
(a) had received a distribution of the present value of his
non-forfeitable benefit attributable to such service which he elected to
receive;
(b) was not fully vested in the value of his Accrued Benefit at the time
of the distribution;
(c) either elected to receive the distribution, or was required to
receive a distribution whose value attributable to his entire
non-forfeitable benefit did not exceed $3,500; and
(d) resumed employment and repaid the full amount of the distribution,
in the case of a distribution on account of a Participant who separated
from service before the earlier of (1) five years after the first date
on which the Participant is subsequently re-employed by the
Participating Employer; or (2) the close of the first period of five
consecutive one year Breaks In Service commencing after the
distribution. However, in the case of any other distribution, repayment
must be made within five years after the date of distribution.
In the event of such repayment, the Participant's forfeited Accrued Benefit
(including all optional forms of benefits and subsidies relating to such
benefit) as of the most recent Valuation Date prior to the date of termination
shall be restored. Such restoration shall first come from any forfeitures
allocated during the Plan Year, then from any Employer contributions.
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<PAGE> 38
A nonvested former participant who, pursuant to Section 10.2, shall have been
deemed to forfeit his nonvested interest in his Account upon termination of
employment shall, upon rehire, be considered to have repaid his nonvested
interest in accordance with this Section.
10.3B REHIRE PRIOR TO FORFEITURE: If the Plan Administrator elects in
Exhibit 3 to forfeit the Participant's Accrued Benefit according to Exhibit 3,
Section 6(b), a distribution is made at a time when a Participant has a
nonforfeitable right to less than 100% of the Accrued Benefit derived from
Employer contributions, and the Participant may increase his nonforfeitable
percentage, then:
(a) A separate subaccount will be established for the Participant's
interest in the Plan as of the time of the distribution, and
(b) At any relevant time the Participant's nonforfeitable portion of
the separate subaccount will be equal to an amount ("X") determined by the
formula:
X = P(AB + D) - D
For purposes of applying the formula, P is the nonforfeitable percentage at the
relevant time, AB is the Accrued Benefit at the relevant time, and D is the
amount of the distribution.
10.4 NORMAL RETIREMENT BENEFIT: Each Participant who retires on or after
his Normal Retirement Date shall be entitled to his Accrued Benefit. The form
of such distribution shall be subject to Section 10.13.
10.5 EARLY RETIREMENT BENEFIT: If the Employer has elected in Exhibit 5 to
permit early retirement, a Participant who terminates employment after meeting
the early retirement requirements specified in Exhibit 5 shall be entitled to
his vested Accrued Benefit on his Early Retirement Date. A Participant who
terminates employment after fulfilling all of the requirements except the
minimum age requirement, may elect early retirement at any time after attaining
such minimum age. The form of such distribution shall be subject to
Section 10.13.
10.6 DEFERRED RETIREMENT BENEFIT: If a Participant shall continue in active
employment following his Normal Retirement Date, payment of his benefits,
subject to Section 10.12, shall be postponed until his actual retirement. The
form of such distribution shall be subject to Section 10.13.
10.7 DISABILITY BENEFIT: A Participant whose employment is terminated prior
to his Normal Retirement Age as a result of Disability shall be immediately
entitled to his Accrued Benefit. The form of such distribution shall be subject
to Section 10.13.
10.8 DEATH BENEFIT: If a Participant dies before his Annuity Starting Date,
the Participant's Beneficiary shall be entitled to a death benefit equal to the
Participant's Accrued Benefit. Such Accrued Benefit shall not include the value
of any security interest in the Participant's Account held by the Plan by
reason of any loan under Section 10.17. If married on the date of the
Participant's death, the Surviving Spouse shall be the Beneficiary and shall be
entitled to a Qualified Pre-Retirement Survivor Annuity unless a valid waiver
(as described in Section 10.13) was executed. However, after the death of the
Participant, the Beneficiary may elect any other form of benefit offered under
the Plan. The Participant's entire interest under this Section may be
distributed as soon as administratively practical, but in any event, no later
than the December 31 of the calendar year in which the fifth anniversary of the
Participant's death occurs unless the Designated Beneficiary or Spouse elects
one of the following forms of distributions:
(a) If any portion of the Participant's interest is payable to a
Designated Beneficiary, distributions may be made in substantially equal
installments over the life or Life Expectancy of the Designated
Beneficiary commencing no later than the December 31 of the calendar
year after the Participant's death; or
(b) If the Designated Beneficiary is the Participant's Surviving Spouse,
the date distributions are required to begin shall not be earlier than
the later of the December 31 of the calendar year in which the
Participant would have attained age 70 1/2, or the December 31 of the
calendar year immediately following the calendar year in which the
Participant died. If the Spouse dies before payments begin, such Spouse
shall be treated as the Participant for the purpose of calculating
future required distributions.
If the Participant dies after distribution of his interest has begun, the
remaining portion of such interest will continue to be distributed at least as
rapidly as under the method of distribution being used prior to the
Participant's death.
If the Participant dies before distribution of his interest begins,
distribution of the Participant's entire interest shall be completed by
December 31 of the calendar year containing the fifth anniversary of the
Participant's death except to the extent that an election is made to receive
distributions in accordance with (a) or (b) above.
If the Participant has not made an election by the time of his or her death,
the Participant's Designated Beneficiary must elect the method of distribution
no later than the earlier of (a) December 31 of the calendar year in which
distributions would be required to begin under this Section, or (2) December 31
of the calendar year which contains the fifth anniversary of the date of death
of the Participant. If the Participant has no Designated Beneficiary, or if the
Designated Beneficiary does not elect a method of distribution, distribution of
the Participant's entire interest must be completed by December 31 of the
calendar year containing the fifth anniversary of the Participant's death.
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<PAGE> 39
For purposes of this Section, if the Surviving Spouse dies after the
Participant, but before payments to such Spouse begin, the provisions of this
Section, with the exception of paragraph (b) above, shall be applied as if the
Surviving Spouse were the Participant.
For purposes of this Section, any amount paid to a child of the Participant will
be treated as if it has been paid to the Surviving Spouse if the amount becomes
payable to the Surviving Spouse when the child reaches the age of majority.
For purposes of this Section, distribution of a Participant's interest is
considered to begin on the Participant's Required Beginning Date (or the date
distribution is required to begin to the Surviving Spouse pursuant to paragraph
(b) above). If distribution in the form of an annuity irrevocably commences to
the Participant before the Required Beginning Date, the date the distribution
is considered to begin is the date distribution actually commences.
For purposes of this Section, payments will be calculated by use of the return
multiples specified in Tables V and VI, of Section 1.72-9 of the regulations
under the Code as of the date the distribution commences. Life Expectancy of a
Surviving Spouse may, at the Spouse's election, be recalculated annually. In the
absence of an election, life expectancy of a Surviving Spouse may not be
recalculated. In the case of any other Designated Beneficiary, Life Expectancy
will not be recalculated.
"Life Expectancy" and "Designated Beneficiary" shall have the meaning as
defined in Section 10.22.
10.9 OTHER TERMINATION OF EMPLOYMENT BENEFIT: Subject to Section 10.13, each
Participant whose service with the Participating Employer is terminated shall,
if provided by Exhibit 5, be entitled to his vested Accrued Benefit.
10.9A OTHER DISTRIBUTIONS: An affected Participant's Accrued Benefit may also
be distributed in a lump sum (1) if the Plan is terminated and a defined
contribution plan is not established within a reasonable period of time after
termination. Established within a reasonable time period after termination
means the existence of the time this Plan terminated or within the period
ending within 12 months after distribution of all assets from this Plan of any
other defined contribution plan (other than an ESOP); or (2) upon the
disposition to an unrelated corporation of substantially all the assets (within
the remaining of Section 409(d)(2) of the Code) of a corporation which are used
in the trade or business in which the Participant is employed, but only with
respect to employees who continue employment with the corporation acquiring
such assets, and the corporation continues to maintain the Plan after
disposition; or (3) after disposition to an unrelated entity of a corporation's
interest in a subsidiary providing such corporation continues to maintain this
Plan, and the Participant continues in employment with the subsidiary. In (2)
and (3) above, the disposing corporation must continue to maintain the Plan.
The form of such distributions are subject to Section 10.13.
10.10 AGE 59-1/2: If the Employer has elected in Exhibit 5 to permit age
59-1/2 benefit distributions, a Participant may elect payment of his vested
Accrued Benefit, or any portion thereof, at any time after attaining age 59-1/2.
The form of such distribution shall be subject to Section 10.13.
10.11 HARDSHIP: If the Employer has elected in Exhibit 5 to permit hardship
distributions, such distributions to a Participant shall be made if the
distribution is necessary in light of Immediate and Heavy Financial Needs of
the Participant and where such Participant lacks other available resources. A
distribution based upon financial hardship cannot exceed the amount required to
meet the immediate financial need created by the hardship (or the Participant's
vested Accrued Benefit, if less) and not reasonably available from other
resources of the Participant. The determination of the existence of financial
hardship and the amount required to be distributed to meet the need created by
the hardship shall be made by the Plan Administrator in accordance with the
standards set forth below. Such distribution must comply with Section 10.18.
Hardship distributions may only be made from the Participant's Salary Deferral,
Employee Contribution, Non-100% Vested Matching. 100% Vested Matching (not used
under Section 16.3) and Employer Discretionary Subaccounts. Effective for the
first Plan Year beginning on or after January 1, 1989, a hardship distribution
from the Participant's Salary Deferral Subaccount shall not exceed the sum of
the Participant's subaccount as of December 31, 1988, and the Participant's
Salary Deferral Contributions made during Plan Years after December 31, 1988.
For the purpose of this Section, Immediate and Heavy Financial Need means: (1)
medical expenses described in Code Section 213(d) incurred by the Participant,
the Participant's Spouse, or dependents of the Participant (as defined in Code
Section 152); (2) the purchase (excluding mortgage payments) of a principal
residence of the Participant; (3) payment of tuition for the next semester or
quarter of post secondary education for the Participant, his spouse, children,
or dependents; (4) the need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the Participant's
principal residence; or (5) any other event which the Commissioner of the
Internal Revenue Service has deemed to be an Immediate and Heavy Need. A
Participant making an application under this Section shall have the burden of
presenting evidence of such need.
A distribution will be considered as necessary to satisfy an immediate and
heavy financial need providing: (1) the Participant withdraws and borrows (on a
nontaxable basis) all amounts available to the Participant under this plan and
all plans of the Employer (other than the mandatory employee portion of a
defined benefit plan); (2) all Plans maintained by the Employer suspend for a
period of 12 months from the date of such distribution, the Participant's
ability to make Salary Deferral Contributions or Employee Contributions; and
(3) all Plans maintained by the Employer limit such Participant's ability to
make Salary Deferral Contributions for the Participant's taxable year
immediately following the taxable year of the hardship in excess of the limit
specified in Code Section 402(g) for such taxable year less the amount of such
Participant's Salary Deferral Contributions for the taxable year of the
hardship distribution.
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<PAGE> 40
Each request for a hardship distribution shall be made by written application
on a form acceptable to the Plan Administrator. The form of such distribution
shall be subject to Section 10.13.
10.12 COMMENCEMENT OF BENEFITS: A Participant may elect to commence
distribution of his benefit at any time on or after he meets the requirements
for a distribution set forth in this Article. However, subject to the
succeeding sentence, the Plan Administrator may elect to defer payment to a
Participant until all contributions and allocations have been made on behalf of
any Participant. Unless the Participant elects otherwise, distribution of
benefits will begin no later than the 60th day after the close of the Plan Year
in which the Participant attains Normal Retirement Age or the Participant
terminates service with the Participating Employer, whichever is later.
Notwithstanding the foregoing, the failure of a Participant and Spouse to
consent to a distribution while a benefit is immediately distributable, within
the meaning of Section 10.18, shall be deemed to be an election to defer
commencement of payment of any benefit sufficient to satisfy this Section.
Notwithstanding the other requirements of this Article and subject to the
requirements of Section 10.13, distribution on behalf of any Employee,
including a 5% owner, may be made in accordance with all of the following
requirements (regardless of when such distribution commences):
(a) The distribution by the trust is one which would not have
disqualified such trust under Section 401(a)(9) of the Internal Revenue
Code as in effect prior to amendment by the Deficit Reduction Act of
1984;
(b) The distribution is in accordance with a method of distribution
designated by the Employee whose interest in the trust is being
distributed or, if the Employee is deceased, by a beneficiary of such
Employee;
(c) Such designation was in writing, was signed by the Employee or the
beneficiary, and was made before January 1, 1983;
(d) The Employee had accrued a benefit under the Plan as of December
31, 1983;
(e) The method of distribution designated by the Employee or the
beneficiary specifies the time at which distributions will be made, and
in the case of any distribution upon the Employee's death, the
beneficiaries of the Employee listed in order of priority.
A distribution upon death will not be covered by this transitional rule unless
the information in the designation contains the required information described
above with respect to the distributions to be made upon the death of the
Employee.
For any distribution which commences before January 1, 1984, but continues
after December 31, 1983, the Employee or the beneficiary, to whom such
distribution is being made, will be presumed to have designated the method of
distribution under which the distribution is being made if the method of
distribution was specified in writing and the distribution satisfies the
requirements of this Section.
If a designation is revoked any subsequent distribution must satisfy the
requirements of Section 401(a)(9) of the Code and the regulations thereunder.
If a designation is revoked subsequent to the date distributions are required
to begin, the trust must distribute by the end of the calendar year following
the calendar year in which the revocation occurs the total amount not yet
distributed which would have been required to have been distributed to satisfy
Section 401(a)(9) of the Code and the regulations thereunder, but for the
Section 242(b)(2) election. For calendar years beginning after December 31,
1988, such distributions must meet the minimum distribution incidental benefit
requirements in Section 1.401(a)(9)-2 of the Income Tax Regulations. Any
changes in the designation will be considered to be a revocation of the
designation. However, the rare substitution or addition of another beneficiary
(one not named in the designation) under the designation will not be considered
to be a revocation of the designation, so long as such substitution or addition
does not alter the period over which distributions are to be made under the
designation, directly or indirectly (for example, by altering the relevant
measuring life). In the case in which an amount is transferred or rolled over
from one plan to another plan, the rules in Q&J J-2 and Q&A J-3 of such
regulations shall apply.
10.13 FORM OF DISTRIBUTION:
(a) Any Participant who is credited with at least one Hour Of Service
with the Employer after August 23, 1984 shall receive a benefit at
retirement in the form of a Qualified Joint and Survivor Annuity. A
Participant may select a benefit other than a Qualified Joint and
Survivor Annuity benefit during the 90 day period preceding the Annuity
Starting Date provided that an appropriate waiver, as described in
subsection (c) of this Section, is executed. The Participant may elect
to have such annuity distributed upon attainment of his Early Retirement
Age.
(b) The Spouse of any Participant who dies prior to his Annuity Staring Date
will receive a benefit in the form of a Qualified Pre-Retirement Survivor
Annuity. The Surviving Spouse may elect to have such annuity distributed within
a reasonable period after the Participant's death. A Participant may select a
benefit other than a Qualified Pre-Retirement Survivor Annuity or a beneficiary
other than the Participant's Spouse if the Participant is unmarried or if the
Participant, during a period which begins on the first day of the Plan Year in
which the Participant attains age 35 and ends on the earlier of the date of the
Participant's death or his
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<PAGE> 41
Annuity Starting Date executes an appropriate waiver as described in
subsection (c) hereof. If a Participant terminates employment prior to the
first day of the Plan Year in which the Participant attains age 35, with
respect to the Participant's Account as of the date of termination, the
selection period shall begin upon termination of employment.
Notwithstanding the above paragraph, a Participant who will not yet attain
age 35 as of the end of any current Plan Year may make a special qualified
election to waive the Qualified Pre-Retirement Survivor Annuity for the
period beginning on the date of such election and ending on the first day
of the Plan Year in which the Participant will attain age 35. Such election
shall not be valid unless the Participant receives a written explanation of
the Qualified Pre-Retirement Survivor Annuity in such terms as are
comparable to the explanation required under paragraph (d) below. Qualified
Pre-Retirement Survivor Annuity coverage will be automatically reinstated
as of the fist day of the Plan Year in which the Participant attains age
35. Any new waiver on or after such date shall be subject to the full
requirements of this Article.
(c) A married Participant who selects a benefit other than a Qualified
Joint and Survivor Annuity, a Qualified Pre-Retirement Survivor Annuity, or
designates a beneficiary other than his Spouse, must execute a written
waiver and must obtain the consent of his Spouse, if any, pursuant to the
terms of Section 10.18 hereof. A Participant may revoke any waiver during
the periods described without the consent of his Spouse. There is no limit
on the number of revocations or waivers that may be made under this
Article. However, after the death of the Participant, the Participant's
Surviving Spouse, unless an Annuity Contract is purchased or the Spouse has
executed a written waiver pursuant to Section 10.18, may elect any other
form of benefit offered under the Plan.
(d) The Plan Administrator shall provide each Participant with an
explanation of the Qualified Joint and Survivor Annuity and the Qualified
Pre-Retirement Survivor Annuity which meets the requirements of the
Internal Revenue Code. With respect to the Qualified Joint and Survivor
Annuity, such explanation shall be provided no less than 30 days and no
more than 90 days prior to his Annuity Start Date. Such written explanation
shall include: (i) the terms and conditions of a Qualified Joint and
Survivor Annuity; (ii) the Participant's right to make and the effect of an
election to waive the Qualified Joint and Survivor Annuity form of benefit;
(iii) the rights of a Participant's Spouse; and (iv) the right to make, and
the effect of, a revocation of a previous election to waive the Qualified
Joint and Survivor Annuity.
With respect to the Qualified Pre-Retirement Survivor Annuity, such
explanation shall be provided within the later of (1) the period beginning
with the first day of the Plan Year in which the Participant attains age 32
and ending on the close of the Plan Year preceding the Plan Year in which
the Participant attains age 35; (2) a reasonable period after the
individual become a Participant; (3) a reasonable period ending after Code
Section 401(a)(ii) applies to the Participant; (4) a reasonable period
after Section 10.20 ceases to apply to the Participant; (5) a reasonable
period after separation from service in case of a Participant who separates
before attaining age 35. Such written explanation of the Qualified
Pre-Retirement Survivor Annuity shall be provided in such terms and in such
manner as would be comparable to the explanation provided for meeting the
requirements applicable to a Qualified Joint and Survivor Annuity.
For purposes of applying the preceding paragraph, a reasonable period
ending after the enumerated events described above is the end of the
two-year period beginning one year prior to the date the applicable event
occurs, and ending one year after that date. In the case of a Participant
who separates from service before the Plan Year in which age 35 is
attained, notice shall be provided within the two-year period beginning one
year prior to separation and ending one year after separation. If such a
Participant thereafter returns to employment with the Employer, the
applicable period for such Participant shall be redetermined.
Notwithstanding the other requirements of this subsection (d), the
respective notices prescribed in this subsection need not be given to a
Participant if (1) the Plan "fully subsidizes" the costs of a Qualified
Joint and Survivor Annuity or Qualified Pre-Retirement Survivor Annuity,
and (2) the Plan does not allow the Participant to waive the Qualified
Joint and Survivor Annuity or Qualified Pre-Retirement Survivor Annuity and
does not allow a married Participant to designate a non-spouse beneficiary.
For purposes of this subsection, a Plan fully subsidizes the costs of a
benefit if no increase in cost, or decrease in benefits to the Participant
may result from the Participant's failure to elect another benefit.
10.13A DISTRIBUTION REQUIREMENTS
(a) Except as otherwise provided in Section 10.13, the requirements of this
Section shall apply to any distribution of a Participant's interest and
will take precedence over any inconsistent provisions of this Plan. Unless
otherwise specified, the provisions of this Section apply to calendar
years beginning after December 31, 1984.
(b) All distributions required under this Section shall be determined and made
in accordance with the Income Tax Regulations under Section 401(a)(9),
including the minimum distribution incidental benefit requirement of
Section 1.401(a)(9)-2 of the regulations.
(c) The entire interest of a Participant must be distributed or begin to be
distributed no later than the Participant's Required Beginning Date.
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<PAGE> 42
(d) Limits on Distribution Periods. As of the first Distribution
Calendar Year, distributions, if not made in a single-sum, may only be
made over one of the following periods (or a combination thereof):
(1) the life of the Participant.
(2) the life of the Participant and a Designated
Beneficiary.
(3) a period certain not extending beyond the Life
Expectancy of the Participant, or
(4) a period certain not extending beyond the joint and last
survivor expectancy of the Participant and a Designated
Beneficiary.
(e) If the Participant's interest is to be distributed in other than
a single sum, the following minimum distribution rules shall apply on or
after the Required Beginning Date:
(1) Individual Account.
------------------
(i) If a Participant's benefit is to be distributed
over (1) a period not extending beyond the Life
Expectancy of the Participant or the joint life and last
survivor expectancy of the Participant and the
Participant's Designated Beneficiary or (2) a period not
extending beyond the Life Expectancy of the Designated
Beneficiary, the amount required to be distributed for
each calendar year, beginning with distributions for the
first Distribution Calendar Year must at least equal the
quotient obtained by dividing the Participant's benefit
by the Applicable Life Expectancy.
(ii) For calendar years beginning before January 1,
1989, if the Participant's Spouse is not the Designated
Beneficiary, the method of distribution selected must
assure that at least 50% of the present value of the
amount available for distribution is paid within the
Life Expectancy of the Participant.
(iii) For calendar years beginning after December 31,
1988, the amount to be distributed each year, beginning
with distributions for the first Distribution Calendar
Year shall not be less than the quotient obtained by
dividing the Participant's benefit by the lesser of (1)
the applicable Life Expectancy or (2) if the
Participant's Spouse is not the Designated Beneficiary,
the applicable divisor determined from the table set
forth in Q&A-4 of Section 1.401(a)(9)-2 of the Income
Tax Regulations. Distributions after the death of the
Participant shall be distributed using the Applicable
Life Expectancy in (i) above as the relevant divisor
without regard to regulations Section 1.401(a)(9)-2.
(iv) The minimum distribution required for the
Participant's first Distribution Calendar Year must be
made on or before the Participant's Required Beginning
Date. The minimum distribution for other calendar years,
including the minimum distribution for the Distribution
Calendar Year in which the Employee's Required Beginning
Date occurs, must be made on or before December 31 of
that Distribution Calendar Year.
(2) Other Forms.
------------
(i) If the Participant's benefit is distributed in
the form of an annuity purchased from an insurance
company, distributions thereunder shall be made in
accordance with the requirements of Section 401(a)(9) of
the Code and the regulations thereunder.
(f) Life Expectancy, Designated Beneficiary, Distribution Calendar
Year, and Applicable Life Expectancy shall have the meanings as defined
in Section 10.22.
10.14 METHOD OF DISTRIBUTION: For any distribution under this Article, the
Participant or Beneficiary may, providing such methods of distribution are
offered under the Plan, elect payment in (a) cash, (b) Mutual Fund Shares, (c)
Annuity Contracts, (d) an annuity under a group annuity contract, or (e)
Insurance Policies. Annuity Contracts used to fund a Participant's benefit must
meet the requirements of Code Sections: 411(a)(11) and 417.
10.15 CASH-OUT DISTRIBUTION: If the value of the Participant's vested Accrued
Benefit on the date he terminates service does not exceed $3,500, the Plan
Administrator shall, as elected in Exhibit 5, either: (1) immediately distribute
to such Participant his Account in the form of a lump sum; or (2) permit the
Participant to elect to receive a distribution subject to the provisions of this
Article. The above sentence shall also apply to the value of a Qualified Joint
and Survivor Annuity or Qualified Pre-Retirement Survivor Annuity which does not
exceed $3,500. However, no distribution (regardless of amount) shall be made
pursuant to the preceding sentence after the Annuity Starting Date unless the
Participant and his Spouse (or the Participant's Surviving Spouse) consents,
pursuant to Section 10.18.
10.16 WITHDRAWALS OF EMPLOYEE CONTRIBUTIONS: Subject to the consent
provisions of Section 10.18, and disregarding any other provisions limiting
withdrawals from this Plan, a Participant may, upon written notice to the Plan
Administrator, withdraw from the Plan, in cash, all or a portion of the value
of his Employee Contribution subaccount.
If Employee Contributions are made pursuant to a Thrift Contribution Agreement,
then this Section shall be inoperative and withdrawals of a Participant's
Employee Contribution subaccount shall only be permitted as otherwise permitted
by this Article.
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<PAGE> 43
10.17 LOANS TO PARTICIPANTS: If the Employer so elects in Exhibit 5, and the
consent of the Participant's Spouse is obtained pursuant to Section 10.18, the
Trustee may make a loan to any Participant (except a Shareholder Employee or
Owner-Employee) or Beneficiary. Each loan shall be made upon the written
application of the Participant on a form acceptable to the Plan Administrator
and shall be subject to the approval of the Plan Administrator. Loans shall:
(a) be made available to Participants and Beneficiaries on a
reasonably equivalent basis;
(b) not be available to highly compensated employees (within the
meaning of 414(q)) in an amount greater than the amount available to
other employees;
(c) be secured by the Participant's vested Accrued Benefit and bear
a reasonable rate of interest;
(d) by its terms require that repayment (principal and interest) be
amortized in level payments, not less frequently than quarterly, over a
period not extending beyond five years from the date of the loan, unless
the loan is for the sole purpose of buying the principal residence of
the Participant; and
(e) not exceed $50,000 (reduced by the excess, if any, of the
highest outstanding balance of loans made during the one year period
ending on the day before the loan is made, over the outstanding balance
of loans from the Plan on the date the loan is made) or 50% of the
Participant's vested Accrued Benefit (without regard to a Participant's
Keogh transfer subaccount), whichever is less. For these purposes, all
loans from all plans of the Participating Employer and other members of
a group of employees described in Code Sections 414(b), 414(c), and
414(m) are aggregated. Provided however, if the Participant's or
Beneficiary's vested Accrued Benefit is less than $10,000, a loan of up
to the Participant's vested Accrued Benefit may be made. An assignment
or pledge of any portion of a Participant's interest in the Plan and a
loan, pledge, or assignment with respect to any Annuity Contract
purchased under this Plan will be treated as a loan under this
subsection.
All such loans shall be considered either a general investment of the Trust Fund
or an asset of the Participant's Account, as elected in Exhibit 5.
A Participant shall not have more than one loan in effect at any time. The Plan
Administrator, in a non-discriminatory manner, may create other rules and
regulations governing loans. Effective for any loan granted or renewed on or
after January 1, 1990, such rules and regulations must (if required by
regulations issued by the Department of Labor) include a written document which
is to be made part of this Plan which, at a minimum, specifies:
(a) The identity of the person or positions authorized to administer
the participant loan program;
(b) A procedure for applying for loans;
(c) The basis on which loans will be approved or denied;
(d) Limitations (if any) on the types and amounts of loans offered;
(e) The procedure under the program for determining a reasonable
rate of interest;
(f) The types of collateral which may secure a participant loan; and
(g) The events constituting default and the steps that will be taken
to preserve plan assets in the event of such default.
If loans are permitted in Exhibit 5, effective for any loan granted or renewed
on or after the first Plan Year beginning in 1989, the Trustee is specifically
authorized to establish and the Plan Administrator is authorized to maintain and
administer a Participant loan program.
An assignment or pledge of any portion of a Participant's interest in the Plan
and a loan, pledge, or assignment with respect to any Annuity Contract purchased
under this Plan will be treated as a loan under this Section.
If a Participant shall default on any loan, the Plan Administrator shall deduct
the unpaid principal and any unpaid interest from the Participant's Account at
the time when the Participant's Account becomes distributable.
10.18 CONSENT: If the value of a Participant's vested Accrued Benefit derived
from Employer and Employee Contributions exceeds (or at the time of any prior
distribution exceeded) $3,500, and his Accrued Benefit is immediately
distributable, the Participant and the Participant's Spouse (or where either the
Participant or the Spouse has died, the survivor) must consent to any
distribution. The consent of the Participant and the Participant's Spouse shall
be obtained in writing within the 90-day period ending on the Annuity Starting
Date. The Plan Administrator shall notify the Participant and the Participant's
Spouse of the right to defer any distribution until the Participant's Account is
no longer immediately distributable. Such notification shall include a general
description of the material features, and an explanation of the relative values
of the optional forms of benefit available under the plan in a manner that would
satisfy the notice requirements of Section 417(a)(3), and shall be provided no
less than 30 days and no more than 90 days prior to the Annuity Starting Date.
Notwithstanding the foregoing, only the Participant need consent to the
commencement of a distribution in the form of a Qualified Joint and Survivor
Annuity while his Accrued Benefit is immediately distributable. Furthermore, if
payment in the form of a Qualified Joint and Survivor Annuity is not required
with respect to the Participant pursuant to Section 10.20 of the Plan, only the
Participant need consent to the distribution of his Accrued Benefit that is
immediately distributable. Neither the consent of the Participant nor the
Participant's Spouse shall be required to the extent that a distribution is
required to satisfy Section 401(a)(9) or Section 415 of the Code. In addition,
upon
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<PAGE> 44
termination of this Plan, if the Plan does not offer an annuity option
(purchased from a commercial provider), the Participant's Account may, without
the Participant's consent, be distributed to the Participant or transferred to
another defined contribution plan (other than an employee stock ownership plan
as defined in Section 4975(a)(7) of the Code) within the same controlled group.
An Accrued Benefit is immediately distributable if any part of the Account
could be distributed to the Participant (or Surviving Spouse) before the
Participant attains or would have attained if not deceased) the later of Normal
Retirement Age or age 62.
A waiver of a Qualified Pre-Retirement Survivor Annuity or Qualified Joint and
Survivor Annuity must include the consent of the Spouse of the Participant.
Such consent must be in writing and must be witnessed by either a plan
representative or notary public. The Spouse's waiver must be limited to a
designation of a specific alternate beneficiary including any class of
beneficiaries or any contingent beneficiaries. Such alternate beneficiary must
not be changed without the Spouse's consent (unless the consent of the Spouse
expressly permits designations by the Participant without any requirement of
further consent by the spouse). In addition, the Spouse's consent must
acknowledge the effect of the election. Notwithstanding the foregoing, if it
is established to the satisfaction of the plan representative that such written
consent may not be obtained because there is no Spouse or the Spouse cannot be
located, no such consent will be required.
Any consent by a Spouse obtained under this provision (or establishment that
the consent of a Spouse may not be obtained) shall be effective only with
respect to such Spouse. A consent that permits designations by the Participant
without any requirement of further consent by such Spouse must acknowledge that
the Spouse has the right to limit consent to a specific beneficiary, and a
specific form of benefit where applicable, and that the Spouse voluntarily
elects to relinquish either or both of such rights. A revocation of a prior
waiver may be made by a Participant without the consent of the Spouse at any
time before the commencement of benefits. The number of revocations shall not
be limited. No consent obtained under this provision shall be valid unless the
Participant has received notice as provided in Section 10.13 above.
A Participant must obtain the consent of his Spouse, if any, the use of his
Account as security for the loan. Spousal consent shall be obtained no earlier
than the beginning of the 90-day period that ends on the date on which the loan
is to be secured. The consent must be in writing, must acknowledge the effect
of the loan, and must be witnessed by a plan representative or notary public.
Such consent shall thereafter be binding with respect to the consenting spouse
or any subsequent spouse with respect to that loan. A new consent shall be
required if the Account is used for renegotiation, extension, renewal, or other
revision of the loan.
If a valid spousal consent has been obtained in accordance with the above
paragraph, then, notwithstanding any other provision of this Plan, the portion
of the Participant's vested Account used as a security interest held by the
Plan by reason of a loan outstanding to the Participant shall be taken into
account for purposes of determining the amount of the Account payable at the
time of death or distribution, but only if the reduction is used as repayment
of the loan. If less than 100% of the Participant's vested Account (determined
without regard to the preceding sentence) is payable to the Surviving Spouse,
then the Account shall be adjusted by first reducing the vested Account by the
amount of the security used as repayment of the loan, and then determining the
benefit payable to the Surviving Spouse.
10.19 OTHER PROVISIONS: The Plan Administrator, on a non-discriminatory basis,
may promulgate other rules and regulations governing distributions from the
Plan including, if not prohibited by Section 14.1, limiting the forms of
benefits offered under this Plan.
10.20 QUALIFIED SPECIAL RULE FOR PROFIT SHARING PLANS: The above Qualified
Joint and Survivor and Qualified Pre-Retirement Survivor Annuity notice,
waiver, and consent provisions (including, without limitation, spousal loan and
beneficiary consent requirements specified in Sections 10.17 and 1.6
respectively) shall not be applicable to this Plan if the Plan Administrator
administers a profit sharing plan according to the following limitations:
(a) the Participant does not or cannot elect payments in the form of a
life annuity; and
(b) on the death of the Participant, the Participant's vested Account
will be paid to the Participant's Surviving Spouse, but if there is no
Surviving Spouse, or if the Surviving Spouse has consented in a manner
conforming to a qualified election, then to the Participant's designated
beneficiary. The Surviving Spouse may elect to have distribution of the
vested Account commence within the 90-day period following the date of
the Participant's death. The Account shall be adjusted for gains or
losses occurring after the Participant's death in accordance with the
provisions of the Plan governing the adjustment of Account for other
types of distributions. This Section shall not be operative with respect
to a Participant in a profit sharing plan if the plan is a direct or
indirect transferee of a defined benefit plan, money purchase plan, a
target benefit plan, stock bonus, or profit sharing plan which is
subject to the survivor annuity requirements of Section 401(a)(11) and
Section 417 of the Code.
The Participant may waive the spousal death benefit described in this
Section at any time provided that no such waiver shall be effective
unless it satisfies the conditions of this Article (other than the
notification requirement referred to therein) that would apply to the
Participant's waiver of the Qualified Pre-Retirement Survivor Annuity.
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<PAGE> 45
In addition, this Section shall not apply unless the Participant's Spouse is
the designated beneficiary of any insurance on the Participant's life purchased
by Employer contributions or forfeitures allocated to the Participant's Account.
10.21 SPECIAL RULE: [Reserved]
10.22 DEFINITIONS: For the purpose of Sections 10.8 and 10.13A, the
following definitions shall apply:
(a) Applicable Life Expectancy. The life expectancy (or joint and
last survivor expectancy) calculated using the attained age of the
Participant (or designated beneficiary) as of the Participant's (or
designated beneficiary's) birthday in the applicable calendar year
reduced by one for each calendar year which has elapsed since the date
life expectancy was first calculated. If life expectancy is being
recalculated, the applicable life expectancy shall be the life
expectancy as so recalculated. The applicable calendar year shall be the
first distribution calendar year, and if life expectancy is being
recalculated such succeeding calendar year. If annuity payments commence
before the Required Beginning Date, the applicable calendar year is the
year payments commence. If distribution is in the form of an immediate
annuity purchased after the Participant's death with the Participant's
remaining interest, the applicable calendar year is the year of
purchase.
(b) Designated Beneficiary. The individual who is designated as the
beneficiary under the Plan in accordance with Section 401(a)(9) and the
regulations thereunder.
(c) Distribution Calendar Year. A calendar year for which a minimum
distribution is required. For distributions beginning before the
Participant's death, the first distribution calendar year is the
calendar year immediately preceding the calendar year which contains the
Participant's Required Beginning Date. For distributions beginning after
the Participant's death, the first distribution calendar year is the
calendar year in which distributions are required to begin pursuant to
Section 10.18 above.
(d) Life Expectancy. Life expectancy and joint and last survivor
expectancy are computed by use of the expected return multiples in
Tables V and VI of Section 1.72-9 of the Income Tax Regulations.
(e) Participant's Benefit.
(1) The Participant's Account as of the last valuation date
in the calendar year immediately preceding the distribution
calendar year (valuation calendar year) increased by the amount
of any contributions or forfeitures allocated to the Account as
of dates in the valuation calendar year after the valuation date
and decreased by distributions made in the valuation calendar
year after the valuation date.
(2) Except for second distribution calendar year. For
purposes of paragraph (1) above, if any portion of the minimum
distribution for the first distribution calendar year is made in
the second distribution calendar year on or before the Required
Beginning Date, the amount of the minimum distribution made in
the second distribution calendar year shall be treated as if it
has been made in the immediately preceding distribution calendar
year.
10.23 FORMS OF BENEFITS: The normal form of benefit under this Plan shall be
a lump sum. The optional forms of benefits provided in this Plan shall be
stated in Exhibit 5. However, if this Plan is an amendment and restatement of a
prior plan, all optional forms of benefits provided in the prior plan, to the
extent accrued, shall be provided in this Plan.
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<PAGE> 46
ARTICLE XI - TOP-HEAVY PROVISIONS
11.1 DETERMINATION OF TOP-HEAVY STATUS: If this Plan is or becomes top-heavy
in any Plan Year beginning after December 31, 1983, the provisions of Article
XI will supersede any conflicting provisions in the Plan or Adoption
Agreement. For any Plan Year beginning after December 31, 1983, this Plan is
top-heavy if any of the following conditions exist:
(a) If the Top-heavy Ratio for this Plan exceeds 60% and this Plan is
not part of any Required Aggregation Group or Permissive Aggregation
Group of plans.
(b) If this Plan is a part of a Required Aggregation Group of plans but
not part of a Permissive Aggregation Group and the Top-heavy Ratio for
the group of plans exceeds 60%.
(c) If this Plan is a part of a Required Aggregation Group and part of
a Permissive Aggregation Group of plans and the Top-heavy Ratio for the
Permissive Aggregation Group Exceeds 60%.
11.2 MINIMUM ALLOCATION FOR THIS PLAN: Notwithstanding any allocation formula
in Exhibit 3, if this Plan provides for Employer Discretionary Contributions
and this Plan is top-heavy (as determined by Section 11.1), the Participating
Employer discretionary contributions and discretionary forfeitures (if any)
shall be allocated to the Employer discretionary subaccount of all participants
eligible for an allocation in the proportion that the Participant's
Compensation bears to the total Compensation of all Participants. The maximum
allocation to any Participant under this paragraph shall not exceed 3% of the
Participant's Compensation. The remaining allocation shall be made according
to the formula provided in the adoption agreement.
11.3 MINIMUM REQUIRED ALLOCATION: Except as provided in Section 11.4 below, if
this Plan is top-heavy as determined in Section 11.1, each Non-Key Employee who
is a Participant shall receive minimum allocation of three percent (3%) of his
Compensation. However, in the case where the Employer has no defined benefit
plan which designates this Plan to satisfy Section 401 of the Code, if the
highest allocation provided a Key Employee (including any Salary Deferral
Contribution) is less than three percent (3%) of the Key Employee's Compensation
not exceeding $200,000 (or any increased amount, as permitted by the Secretary
of the Treasury), each Non-Key Employee shall receive such lesser allocation.
Such minimum allocation may be satisfied from any Participating Employer
contribution and forfeiture (including, prior to the first Plan Year beginning
on January 1, 1989, any Salary Deferral Contribution) made for the benefit of
any Non-Key Employee. To the extent that such minimum allocation is satisfied
by such contribution and forfeiture, or in the case of two or more defined
contribution plans which are part of a Required Aggregation Group, by
aggregating contributions for both plans, or if the Non-Key Employee is covered
by another plan of the Employer and the Employer has provided in Exhibit 8 that
such plan will provide the minimum required allocation or benefit, no
additional allocation or benefit shall be provided under this Section.
The minimum allocation is determined without regard to any Social Security
contribution. This minimum allocation shall be made even though under other
plan provisions the Non-Key Employee who is a Participant would not otherwise
by entitled to receive an allocation, or would have received a lesser
allocation for the year because of (i) the Non-Key Employee's failure to
complete 1,000 Hours Of Service (or any equivalent provided in the Plan), or
(ii) the Non-Key Employee's failure to make mandatory employee contributions to
the Plan, or (iii) compensation less than a stated amount. No minimum
allocation shall be made for any Non-Key Employee who has separated from
service prior to the last day of the Plan Year.
The minimum allocation required (to the extent required to be nonforfeitable
under Section 416(b)), may not be forfeited under Section 411(a)(3)(B) or
411(a)(3)(D).
11.4 PARTICIPATING EMPLOYER MAINTAINS ONE OR MORE DEFINED BENEFIT PLAN-MINIMUM
ALLOCATION OR BENEFIT: If an Employer maintains a defined benefit plan in
addition to this Plan, and the plans are top-heavy as determined by Section
11.1, the Employer shall elect in Exhibit 8 as to whether the minimum allocation
or benefit shall be satisfied in this Plan or the defined benefit plan.
If this Plan is selected to provide the minimum top-heavy benefit, each Non-Key
Employee who is a Participant in both plans shall receive the allocation stated
in Exhibit 8. The minimum allocation must be provided to all Non-Key Employees
who are required to receive an allocation under Section 11.3.
If the Employer selects in Exhibit 8 for the defined benefit plan to provide
the minimum top-heavy benefit, the defined benefit plan shall provide for a
Non-Key Employee who is a participant in both plans shall receive the product
of (i) an employee's average annual compensation for the period of consecutive
years (not exceeding five) when the Employee had the highest aggregate
compensation from the employer, and (ii) the lesser of 2% per year of service
with the employer or 20%. 3 and 30% shall be substituted in the preceding
sentence for 2 and 20% respectively, if designated in Exhibit 8.
If a Non-Key Employee of this Plan is not a participant in the defined benefit
plan, the Non-Key Employee shall receive the allocation provided in Section
11.3.
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<PAGE> 47
11.5 MINIMUM VESTING REQUIREMENTS: If the Plan is or becomes top-heavy, each
Participant's vested percentage in his Employer Matching subaccount, Employer
Discretionary subaccount, and Insurance Policies will be determined by the
schedule specified in Exhibit 8. Provided, however, that such percentage is not
less than that which would otherwise apply under any other provisions of this
Plan. Such vesting schedule shall not apply for all subsequent years,
regardless of whether this Plan is top-heavy. Vesting Service shall be measured
as provided by Section 2.50.
11.6 LIMITATION OF ALLOCATIONS: If, during any Limitation Year, the
Participant is a Participant in both this Plan and a defined benefit plan which
are part of a top-heavy group, "100%" shall be substituted for "125%" each
place it appears in Section 7.5 unless otherwise provided in Exhibit 8, except
that, such substitution shall not have the effect of reducing any benefit
accrued under a defined benefit plan prior to the first day of the Plan Year in
which this provision becomes applicable.
This Section shall not apply if the Plan provides for the additional
contribution or benefit required in Exhibit 8.
11.6A COMPENSATION LIMITATION: For any Plan Year in which this Plan is
top-heavy, a Participant's Compensation shall be his Top-Heavy Compensation.
11.7 SPECIAL DEFINITIONS: For the purposes of applying the provisions of
Article XI:
(a) "Top-Heavy Compensation" shall mean the first $200,000 (or,
beginning January 1, 1986, such larger amount as the Commissioner of
Internal Revenue may prescribe) of compensation as defined (without any
exclusions specified in Exhibit 1) in Exhibit 1. This Section shall not
restrict a Participant's deduction under Code Section 404, or the amount
of contribution or benefit accrued under Code Section 415.
(b) "Determination Date" for any Plan Year is the last day of the
preceding Plan Year or, in the case of the first Plan Year, the last day
of that Plan Year.
(c) "Key Employee" shall mean, as of any Determination Date, any
Employee or former Employee (and the beneficiaries thereof) who, at any
time during the Plan Year (which includes the Determination Date) or
during the preceding four Plan Years, is an officer of the Employer
whose compensation is more than 50% of the dollar limitation under
Section 415(b)(1)(A), one of the Participants owning the ten largest
interests in the Employer if such Participant's Compensation exceeds the
dollar limitation under Code Section 415(c)(1)(A), a 5% owner of the
Employer, or a 1% owner of the Employer who has annual Compensation of
more than $150,000. The constructive ownership rules of Code Section 318
(or the principles of that section, in the case of an unincorporated
Employer) will apply to determine ownership in the Employer.
Determination of which Employees are Key Employees will be made in
accordance with Code Section 416(i)(1) and the regulations thereunder.
Key-Employee shall not include any officer or employee of a governmental
employer. Annual compensation means compensation as defined in Section
415(c)(3) of the Code, but including amounts contributed by the Employer
pursuant to a salary reduction agreement which are excludible from the
Employee's gross income under Section 125, Section 402(a)(8), Section
402(h) or Section 403(b) of the Code. The determination period is the
Plan Year containing the determination date and the four preceding Plan
Years.
(d) "Non-Key Employee" is an Employee who does not meet the
definition of Key Employee.
(e) "Present Value" means the amount determined solely on the basis
of the interest rate and mortality table set forth in Exhibit 8.
(f) "Permissive Aggregation Group" is the Required Aggregation Group
plus any other qualified plans maintained by the Employer, but only if
such group would satisfy in the aggregate the requirements of Code
Section 401(a)(4) and Code Section 410.
(g) "Required Aggregation Group" means:
(1) Each qualified plan of the Employer in which at least
one Key Employee participates or participated at the time during
the determination period (regardless of whether the Plan has
terminated); and
(2) Any other qualified plan of the Employer which enables a
plan described in (1) to meet the requirements of Code Section
401(a)(4) or Code Section 410.
(h) "Top-heavy Ratio" means:
(1) If the Employer maintains one or more defined
contribution plans (including any Simplified Employee Pension
Plan) and the Employer has not maintained any defined benefit
plan which during the five year period ending on the
determination dates has or has had accrued benefits, the
Top-heavy Ratio for this plan alone or for the required or
permissive aggregation group as appropriate, is a fraction, the
numerator of which is the sum of the account balances of all Key
Employees as of the Determination Date(s) (including any part of
any account balance distributed in the 5-year period ending on
the Determination Date(s), and the denominator of which is the
sum of all account balances (including any part of any account
balance
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<PAGE> 48
distributed in the 5-year period ending on the Determination Date(s)) both
computed in accordance with Section 416 of the Code and the regulations
thereunder. Both the numerator and denominator of the Top-heavy Ratio are
increased to reflect any contribution not actually made as of the determination
date, but which is required to be taken into account on that date under Section
416 of the Code and the regulations thereunder.
(2) If the Employer maintains one or more defined contribution plans
(including any Simplified Employee Pension Plan) and the Employer
maintains or has maintained one or more defined benefit plans which
during the five year period ending on the determination date(s) has or
has had any accrued benefits, the Top-heavy Ratio for any required or
permissive aggregation group as appropriate is a fraction, the numerator
of which is the sum of account balances under the defined contribution
plans for all Key Employees determined in accordance with (1) above and
the Present Value of accrued benefits under the defined benefit plans
for all Key Employees as of any determination date(s), and the
denominator of which is the sum of the account balances under the
defined contribution plans for all Participants determined in accordance
with (1) above and the present value of accrued benefits under the
defined benefit plans for all Participants as of the determination
date(s), all determined in accordance with Code Section 416 and the
regulations. Both the numerator and denominator of the Top-Heavy Ratio
are increased for any distribution of an account balance of an accrued
benefit made in the 5-year period ending on the Determination Date and
any contribution due but unpaid as of the Determination Date.
(3) For purposes of (1) and (2) above, the value of account balances
and the Present Value of accrued benefits will be determined as of the
most recent Valuation Date that falls within or ends with the 12-month
period ending on the Determination Date, except as provided in Section
415 of the Code and the regulations thereunder for the first and second
plan years of a defined benefit plan. The account balances and accrued
benefits of an individual who is not a Key Employee but who was a Key
Employee in a prior year, or who has not performed services with any
employer maintaining the Plan at any time during the 5-year period
ending on the Determination Date shall not be taken into account. The
calculation of the Top-Heavy Ratio, and the extent to which
distributions, rollovers, and transfers are taken into account will be
made in accordance with Code Section 416 and the regulations thereunder.
Deductible employee contributions will not be taken into account for
purposes of computing the Top-heavy Ratio. When aggregating plans the
value of account balances and accrued benefits will be calculated with
reference to the Determination Dates that fall within the same calendar
year.
11.8 KEY EMPLOYEE DETERMINATION: Solely for the purpose of determining if the
Plan or any other plan included in a Required Aggregation Group of which this
Plan is a part, is top-heavy (within the meaning of Section 11.1) the accrued
benefit in a defined benefit plan of an employee other than a Key Employee shall
be determined under (a) the method, if any, that uniformly applies for accrual
purposes under all plans maintained by the Employer, or (b) if there is no such
method, as if such benefit accrued not more rapidly than the slowest accrual
rate permitted under the fractional accrual rate of Section 411(b)(1)(C) of the
Code.
11.9 PARTICIPATING EMPLOYER: To the extent not required to be aggregated by
other provisions of this Article, a Participating Employer shall be considered
separately for the purpose of this Article.
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<PAGE> 49
ARTICLE XII - PLAN ADMINISTRATION
12.1 PLAN ADMINISTRATOR: The Employer shall appoint a Plan Administrator in
Exhibit 6. The Plan Administrator shall serve as the named fiduciary of the
Plan. If, at any time, there is no appointed Plan Administrator, the Employer
shall be the Plan Administrator.
12.2 DUTIES: The Plan Administrator shall have the general responsibility
for the administration of the Plan and carrying out its provisions, including,
but not by way of limitation, the power to interpret and construe the Plan, and
to determine the validity of any claim for benefits under the Plan, and may
establish rules for the administration of the Plan and the transaction of its
business. Determinations on all questions arising out of or in conjunction with
the provisions of the Plan, not herein required to be determined by another
party, shall be made by the Plan Administrator, and any such determination
shall be conclusive and binding upon all persons having an interest in or under
this Plan.
The Plan Administrator shall maintain accounts reflecting the fiscal
transactions of the Plan. The Plan Administrator shall prepare annually a report
showing in reasonable detail the assets and liabilities of the Plan and setting
forth a brief account of the operation of the Plan for the preceding year.
The Plan Administrator shall exercise its discretion in such a way as to avoid
discrimination in favor of officers, shareholder, or highly compensated
Employees.
The Plan Administrator may employ counsel and agents and such clerical,
accounting and actuarial services as it may require in carrying out the
provisions of the Plan.
The Plan Administrator shall have the power to delegate specific fiduciary
responsibilities to Employees of the Employer, or to other individuals, all of
whom shall serve at the pleasure of the Plan Administrator, and, if full time
Employees of the Employer, without compensation. Any such person may resign by
delivering written notice of such resignation to the Plan Administrator.
Vacancies created by resignation, death, or other cause may be filled by the
Plan Administrator or the delegated responsibilities may be reabsorbed or
redelegated by the Plan Administrator.
12.3 CLAIMS PROCEDURE: Any person who believes that he is entitled to a
benefit under the Plan shall have the right to file with the Plan Administrator
a written notice of claim for such benefit.
Within 60 days after its receipt of such written notice of claim, the Plan
Administrator shall either grant or deny such claim provided, however that any
delay on the part of the Plan Administrator in arriving at a decision shall not
adversely affect benefits payable under a granted claim. the Plan Administrator
shall provide to each claimant whose claim for benefits is denied a written
notice setting forth in a manner calculated to be understood by the claimant;
the specific reasons for such denial; specific reference to the pertinent Plan
provisions on which the denial is based; a description of any additional
material or information necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary; and an
explanation of the Plan's claim review procedure.
Each claimant shall have the right to appeal the denial of his claim to the
Plan Administrator for a full and fair review at any time within 75 days after
the claimant received written notice of such denial. The Plan Administrator
shall thereby afford the claimant or his duly authorized representative the
opportunity (i) to review documents pertinent to the claim, (ii) to submit
issues and comments in writing, and (iii) to discuss such documents and issues
with the Plan Administrator.
The final decision of the Plan Administrator shall be made promptly, and not
later than 60 days after its receipt from the claimant of a request for review
unless circumstances beyond the control of the Plan Administrator require an
extension of time for processing, in which case a decision shall be made as
soon as possible but not later than 120 days after receipt of a request for
review. Such decision shall be made in writing and shall include specific
reasons for the decision, written in a manner calculated to be understood by
the claimant, and specific references to pertinent Plan provisions on which the
decision is based.
12.4 ADMINISTRATION EXPENSES: All expenses incurred in establishing and
maintaining the Plan shall be paid from the Trust Fund, unless the Employer or
Participating Employer, in its discretion, elects to pay all or part of such
expenses.
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ARTICLE XIII - TRUSTEE
13.1 ESTABLISHMENT AND ACCEPTANCE OF TRUST: By executing the Adoption
Agreement, the Trustee accepts appointment as Trustee hereunder. The Trustee
agrees to hold in trust, manage and administer contributions to the Trust, and
the income or gain or loss therefrom, for the purposes herein set forth.
The Trust is established for the exclusive benefit of Participants and their
Beneficiaries, and no part of the Trust Fund, except such part as may be needed
for expenses and taxes, shall be used for, or diverted to, any other purpose
prior to the satisfaction of all liabilities under the Plan with respect to
such person, except as provided in Section 5.3. The trust year of the Trust
Fund is the Plan Year.
13.2 CONTRIBUTIONS TO THE TRUST FUND: The Trustee shall accept such
contributions by and on behalf of Participants as it may receive from time to
time from the Participating Employer. All such contributions shall be in cash,
except as otherwise approved by the Trustee, the Trustee shall have no duty to
collect any contribution or other sum from the Participating Employer, Plan
Administrator, Participants, or any other person.
13.3 CONTRIBUTION OF EXISTING QUALIFIED PLAN: If at the time the Employer
adopts the Plan, it specifies in the Adoption Agreement that the Plan is to be
substituted for an existing plan that is qualified under Code Section 401(a)
the Trustee shall accept the assets of such plan from the trustee, custodian or
insurer thereof, in the form of cash, Mutual Funds Shares, Annuity Contracts,
Policies, or any other asset satisfactory to the Trustee.
13.4 POWERS AND DUTIES: The Trustee shall have all powers necessary for the
performance of its duties, including the power to execute such instruments as
may be deemed necessary or proper and including the following powers, all of
which may be exercised without order of or report to any court:
(a) to invest in Annuity Contracts, Mutual fund Shares, Insurance
Policies, stocks, bonds, securities, investment company or trust shares,
mortgages, notes, accounts, deposits, or other investments offered by a
bank, choses in action, real estate, improvements thereon, and other
property, including any such property of the Employer;
(b) to sell, exchange, or otherwise dispose of any property at any time
held or acquired under this Trust, at public or private sale, for cash
or on terms, without advertisement, including the right to lease for any
term notwithstanding the period of this Trust;
(c) to transfer, at any time and from time to time, such part or all of
the Trust Fund as it shall deem advisable to any other trust which is
qualified and exempt under Code Section 401(a) and is maintained as a
medium for the collective investment of funds of pension, profit-sharing
or other employee or self-employed benefit trusts, and the Trustee may,
thereafter, withdraw any part or all of the Trust Fund so transferred to
such other trust. the provisions of any such trust shall be deemed to be
a part of this Trust;
(d) to hold cash in such amounts as may be in its opinion reasonable for
the proper operation of this Trust, and to deposit any portion of the
Trust Funds in certificates of deposit, or in a bank account or accounts
selected by the Trustee, including these of the Trustee, or a bank or
similar financial institution related to the Trustee. Any such account
deposit shall bear a reasonable rate of interest;
(e) to make such investments as the Trustee in its discretion shall deem
best without regard to any law now or hereafter in force limiting the
investments for trustees or other fiduciaries;
(f) to pay premiums, interest, or other charges due and payable to
acquire or maintain any Annuity Contract or Insurance Policy held under
the Trust, provided funds for such payments are then available in the
Trust; and to exercise all ownership rights under such Annuity Contracts
or Insurance Policies in accordance with the terms of the Plan;
(g) to vote in person or by proxy any corporate stock or other security
and to agree to take any other action in regard to any reorganization,
merger, consolidation, liquidation, bankruptcy or other procedure or
proceeding affecting any stock, bond, note or other property;
(h) to compromise, settle and/or adjust any claim or demand by or
against the Trust and to agree to any rescission or modification of any
contract or agreement affecting such Trust;
(i) to the extent such activity doesn't violate ERISA, to borrow money,
and to secure the same by mortgaging, pledging and/or conveying any
property of the Trust;
(j) to register any stock, bond or other security in the name of a
nominee, without the addition of words indicating that such security is
held in a fiduciary capacity; but accurate records shall be maintained
showing that such security is a Trust Asset and the Trustee shall be
responsible for the acts of such nominee;
(k) to write covered call options on securities held in the Trust Fund,
and to engage in other transactions directly related to such covered
call options outstanding in the Trust Fund; and
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(1) to delegate any administrative duties assigned to it under the
Trust, with the consent of the Plan Administrator, to any third party
which shall act as the agent of the Trustee.
13.5 LIMITED TRUSTEE RESPONSIBILITIES: The Employer may appoint an Investment
Manager or itself to assume certain powers or responsibilities in the investment
and management of the Trust Fund. The investment manager or Employer shall
assume full liability for all duties and powers assigned to it and shall be
subject to the fiduciary responsibilities of this Plan. The Trustee shall not be
liable for the acts or omission of the Investment Manager or Employer nor shall
the Trustee be under an obligation to manage any assets of the Plan that are
subject to the management of an Investment Manager or the Employer.
13.6 AUTHORIZED PERSONS: The Employer shall certify in writing to the Trustee
the names and signatures of the persons who are or shall act for the Plan
Administrator, Investment Manager, or Employer and the Trustee shall assume that
such persons continue to hold office until a new certificate is received from
the Employer.
13.7 TAXES AND FEES: The Trustee shall charge the Trust Fund for any taxes
paid by it which may be imposed upon the Trust.
The annual service fees (if any) of the Trustee shall be fixed in advance by
agreement with the Employer, but such agreement may be changed prospectively
from time to time during the year. However, no Trustee who receives full-time
pay from the Employer shall be compensated for his services as a Trustee except
for reimbursement of expenses properly and actually incurred. The Employer shall
pay the Trustee its fees and expenses. If not so paid, the Trustee shall
withdraw its fees and expenses from the Trust Fund.
13.8 DISTRIBUTIONS: The Trustee shall make distributions from the Trust Fund
in accordance with written directions from the Plan Administrator. The Trustee
may make any payments or distributions required to be made by it hereunder by
first class mail in a sealed envelope addressed to the person to whom such
payment or distribution is to be made, according to the certification of the
Plan Administrator. The Trustee shall not be required to make any investigation
to determine the identity or mailing address of any person entitled to benefits
and shall be entitled to withhold making payments or giving directions to the
Insurer with respect to the payment of benefits until the identity and mailing
addresses of persons entitled to benefits are properly certified to it including
the certification as to amount, payee, and other terms of payments. The Trustee
or the Plan Administrator may direct the Insurer to make distributions directly
from Plan assets held the Insurer.
13.9 TRUSTEE REPORTS: Within sixty (60) days following the close of the
Plan Year or at such other time or times as may be agreed upon, the Trustee
will furnish the Plan Administrator a written statement and report setting
forth all investments, all receipts and disbursements and all other financial
transactions affecting the Trust Fund since the date of the last such report.
Upon expiration of sixty (60) days from the date of mailing the written
statement and report, the Trustee shall be forever released and discharged
from any liability or accountability to anyone as respects its transactions,
except with respect to any transaction as to which the Plan Administrator
shall, within the sixty (60) day period, file its written disapproval, and
neither the Plan Administrator nor any other person shall have the right to
demand or be entitled to any further or different accounting by the Trustee.
13.10 DEALING WITH THE INSURER. The Trustee is hereby authorized to execute
all necessary applications, receipts, and releases to the Insurer. The Insurer
shall be fully discharged from any and all liability for any action taken by it
upon the written direction of any one Trustee. The Trustee shall have no
responsibility for the form, genuineness, validity, sufficiency or effect of
any Insurance Policy or Annuity Contract at any time included in the Trust, or
for any action of the Participating Employer, Plan Administrator, Employee, or
other person which may render such Policy or Contract void, or for the failure
of any Insurer to pay the proceeds of any such policy or contract as and when
the same shall become payable, or for any delay occasioned by reason of any
provisions contained in any such Policy or Contract, or for the refusal of the
Insurer to take any action requested by the Trustee, or if for any reason
whatsoever (save for the misconduct or neglect of an employee of the Trustee)
any policy or contract shall lapse or otherwise become uncollectible.
13.11 LIMITATION OF LIABILITY. The Trustee shall use the care, skill, prudence
and diligence in the exercise of its powers and the performance of its duties
hereunder that a prudent person, who is familiar with such matters, would use
in the conduct of an enterprise of a like character and with like aims under
the prevailing circumstances. The Trustee may at any time request instruction
of the Employer, the Plan Administrator, Participant or the investment manager,
if any, as to any action relating to the Trust. The Trustee shall not be liable
for any action taken or omitted on the instruction of the Employer,
Participant, the Plan Administrator, or the investment manager or in the
absence of such instructions, for the omission of any actions to which the
Employer, Participant, the Plan Administrator, or the Investment Manager, are
required or authorized to instruct it; or for any failure of contributions to
meet pension or other liabilities under this Plan and Trust. The Trustee shall
be protected in acting upon any notice, resolution, order, certificate,
opinion, telegram, or letter or other document believed by the Trustee to be
genuine and to have been signed by the proper party or parties.
13.12 CO-TRUSTEES: Any one of the Trustees may sign any application, report,
check, other instrument, or paper on behalf of all Trustees. If one or more
Trustees die or resign, the remaining Trustee or Trustees shall continue to
administer the Trust until such time as the Employer appoints an appropriate
successor or successors; and the Plan Administrator shall resolve any
differences that may exist among an even number of Trustees in the interim and
its decision shall be binding on the Trustees.
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13.13 TRUSTEE REMOVAL OR RESIGNATION. The Trustee may resign at any time
upon delivering to the Employer a written notice of its intention to resign.
Such resignation shall be effective not less than 30 days after the delivery
thereof, unless such notice is waived by the Employer.
Any trustee appointed hereunder may be removed by the Employer. Such removal
shall be effective at a date specified in the written notice to the Trustee,
which shall not be less than 30 days after the delivery of such notice, unless
such notice is waived by the Trustee.
In case of the resignation or removal of the Trustee, the Trustee shall have
the right to a settlement of its accounts, which may be made at its option
either: (1) by argument of settlement between the Trustee, the Employer and the
Plan Administrator, or (2) by judicial settlement in an action instituted by it
in a court of competent jurisdiction.
Upon such settlement, the Trustee shall transfer to the successor trustee or to
an insurer the Trust Fund as it may then be constituted and true copies of such
of its records as relate to the Trust; and shall execute all documents
necessary for transferring the assets of the Trust; and the Trustee shall
thereupon be discharged from further accountability for all matters embraced in
its settlement.
The Employer agrees that it will, upon its receipt or giving of notice of the
resignation or removal of a Trustee, forthwith appoint a successor Trustee. Any
successor Trustee so appointed may qualify as such by executing, acknowledging,
and delivering to the Employer and to the resigning or removed Trustee any
instrument accepting such appointment; and upon delivery of the Trust assets,
such successor, without further act, shall become vested with all the estate,
right powers, discretion and duties of its predecessor Trustee with like effect
as it originally named as Trustee herein. If no Trustee is appointed, the
individual signing the most recent Adoption Agreement on behalf of the Employer
shall be the Trustee.
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ARTICLE XIV - AMENDMENT, MERGER, AND TERMINATION
14.1 AMENDMENT: The Employer may amend the Adoption Agreement to change the
choice of any option in the Adoption Agreement, and overriding language in the
Adoption Agreement, when such language is necessary to satisfy Section 415 or
Section 416 of the Code because of the required aggregation of multiple plans,
and add certain model amendments published by the Internal Revenue Service
which specifically provide that their adoption will not cause the Plan to be
treated as individually designed. The Employer shall promptly submit copies of
the amendment to the Trustee, Plan Administrator, and Insurer. The Trustee,
Plan Administrator or Insurer shall not be on notice of the contents thereof
until a copy is actually received. If the Employer amends this Plan for any
other reason (including a waiver of the minimum funding requirement under
Section 412(d) of the Code, or the Employer's Plan does not attain or retain
qualification, or the Employer chooses to discontinue participation in this
Plan and does not substitute an approved Master or Prototype Plan, the
Employer's Plan shall cease to be a prototype plan and shall thereafter be
considered to be an individually designed plan.
Nationwide may amend any part of the Plan and Trust without prior notice to the
Employer or any person having an interest in the Plan.
No amendment shall (a) increase the duties or liabilities of the Trustee or Plan
Administrator without their written consent; (b) deprive any Participant or
Beneficiary of any Accrued Benefit or eliminate an optional form of benefit; (c)
provide that Trust assets be used for purposes other than for the exclusive
benefit of Participants and their Beneficiaries, or that Trust assets ever
revert to or be used or enjoyed by any Participating Employer; (d) retroactively
deprive a Participant or a Beneficiary of any Accrued Benefit; provided,
however, that any amendment may be made retroactive which is necessary to
qualify this Plan and Trust as a tax-exempt retirement plan. Notwithstanding the
preceding sentence, a Participant's Accrued Benefit may be reduced to the extent
permitted under Code Section 412(c)(8). Furthermore, no amendment to the Plan
shall have the effect of decreasing a Participant's vested interest determined
without regard to such amendment as of the later of the date such amendment is
adopted or the date it becomes effective.
If the Plan's Vesting Schedule is amended, or the Plan is amended in any way
that directly or indirectly affects the computation of a Participant's vested
interest in his Accrued Benefit, each Participant with at least 5 (3, beginning
on the first Plan Year on or after January 1, 1989) years of service (as
computed under Code Regulation 1.411(a)-8(b)(3)) may elect, within a period
after the adoption of the amendment, to have his vested interest computed under
the Plan without regard to such amendment. The period during which the election
may be made shall commence with the date the amendment is adopted and shall end
60 days after the amendment is effective, is adopted, or the Participant is
issued written notice of the amendment, whichever is latest.
If the adoption of this Plan constitutes an amendment and restatement of the
Plan of the Employer, such amendment and restatement shall not eliminate, to
the extent accrued, an optional form of benefit previously provided under the
prior plan.
14.2 MERGER: No merger or consolidation of this Plan with, or transfer of
its assets or liabilities to, any other plan, shall be effected unless each
Participant would receive a benefit immediately after the merger,
consolidation, or transfer, if the Plan was then terminated, which is at least
equal to the benefit he would have been entitled to receive had the Plan
terminated immediately before such merger, consolidation or transfer.
14.3 TERMINATION: The Employer expects to continue the Plan indefinitely but
reserves the right to terminate or partially terminate the Plan at any time. In
the event of termination, partial termination, or the complete discontinuance
of contributions (in the case of a Plan in which Code Section 412 does not
apply), each Participant affected thereby shall automatically be 100% Vested in
his Accrued Benefit. The Plan Administrator will direct the Trustee(s) to
distribute all assets to Participant upon termination of the Plan.
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ARTICLE XV - DOMESTIC RELATIONS ORDER
15.1 DEFINITIONS: "Domestic Relations Order" or "DRO" means any judgment,
decree, or order (including approval of a property settlement agreement), issued
by a state court pursuant to a state domestic relations law, which provides for
child support, alimony, or marital property rights to an Alternate Payee.
"Alternate Payee" means a Spouse, former Spouse, child or other dependent of a
Participant who is recognized by a DRO as having a right to receive a benefit
under the Plan.
15.2 PROCEDURES: The Plan Administrator shall provide written notice to the
Participant concerned and any Alternate Payee named that the DRO was served on
the Plan. Such notices shall be sent by mail, postage prepaid, to the
addresses of the Participant and Alternate Payee specified in the DRO (or the
last known address of either if the DRO does not include an address). A copy
of this Procedure shall be included with the notice, and any Alternate Payee
shall be permitted to designate a representative to receive copies of any
additional notices to be provided with respect to the DRO.
The Plan Administrator will establish a separate interest bearing account in
the Plan in which to segregate all amounts which would be payable to the
Alternate Payee pursuant to the DRO during the period between the receipt of
such order and a determination that such order constitutes a Qualified Domestic
Relations Order ("QDRO"). If it is determined within 18 months that the DRO
(including any modifications thereof) is a QDRO, all sums held in the account
shall be distributed to the Alternate Payee according to the terms of the QDRO.
If the DRO (including any modification thereof) is determined not to be a QDRO,
or no determination is made within 18 months from the date of receipt of such
DRO, the balance in the account shall be distributed pursuant to the terms of
the Plan or credited to the account of the Participant.
The Plan Administrator shall determine whether the DRO constitutes a QDRO.
Only an order which meets the following criteria shall constitute a QDRO:
(a) It specifies the name and last known mailing address (if any) of
the affected Participant and the name and mailing address of each
Alternate Payee;
(b) It states the amount or percentage of the Participant's benefits
to be paid by the Plan to each Alternate Payee, or the manner in which
such amount or percentage is to be determined;
(c) It states the period for which it is to apply (or the number of
payments);
(d) It specifies the Plan or Plans to which it applies;
(e) It does not provide a form of benefit or options which are
unavailable under the Plan, provided, however, that it may require
payments to an Alternate Payee prior to the Participant's separation
from the service if;
(1) the payment specified does not exceed that to which the
Participant would have been entitled had he retired on that date
taking into account only the present value of his Accrued
Benefit (and not considering any early retirement subsidy
provided by the Plan); and
(2) the payment form is a benefit option available to the
Participant under the Plan (other than a joint and survivor
annuity for the Alternate Payee and his or her subsequent
spouse).
(f) It does not require the Plan to provide an increased benefit;
and
(g) It does not provide for payment of benefits to an Alternate
Payee which are required, pursuant to a prior QDRO, to be paid to
another Alternate Payee.
Once the Plan Administrator has made a determination pursuant to this
procedure, notice shall be provided to the Participant and Alternate Payee, or
designated representative, in the manner specified herein. If the DRO is
determined to be a QDRO, the Plan Administrator shall comply with its terms in
making future distributions from the Plan.
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ARTICLE XVI - DISCRIMINATION TESTING AND OTHER ISSUES
16.1 MAXIMUM AMOUNT OF SALARY DEFERRALS: A Participant's Salary Deferral
Contributions during any taxable year shall not exceed the dollar limitation
contained in Section 402(g) of the Code in effect at the beginning of such
taxable year.
16.2 DISTRIBUTION OF EXCESS SALARY DEFERRALS: If an excess Salary Deferral
Contribution was made for any taxable year, such contribution will be
distributed no later than the April 15th after the taxable year in which
allocated. Prior to such distribution, the Participant must make a claim in
writing for such contribution by March 30th of the year after allocation. Such
claim must state that if such amounts are not distributed, such amounts when
added to amounts deferred under other plans described in 401(k), 408(k) or
403(b) of the Code will exceed the limit set forth in 402(g) of the Code. Such
amounts described in Section 16.1 or this Section shall be referred to as an
excess Salary Deferral Contribution. The amount of any distribution under this
Section or Section 16.1 shall be adjusted by the income or loss attributed to
such excess Salary Deferral Contribution. The income or loss allocable to
excess Salary Deferral Contributions for a taxable year is determined by
multiplying the income or loss for the taxable year allocable to Salary
Deferral Contributions by a fraction. The numerator of the fraction is the
Participant's excess Salary Deferral Contributions for the prior taxable year.
The denominator is the portion of the Participant's Account attributable to
Salary Deferral Contributions as of the end of the prior taxable year (without
regard to any income or loss occurring during such taxable year). Such amount
shall be determined by multiplying 10% of the income or loss determined above
by the calendar months between the end of the Participant's taxable year and
the date of distribution, counting the month of distribution if the
distribution occurs after the 15th of the month.
15.3 DISCRIMINATION TESTING FOR SALARY DEFERRAL CONTRIBUTIONS AND AMOUNTS
TREATED AS SALARY DEFERRAL CONTRIBUTIONS: The Average Actual Deferral
Percentage for Highly Compensated Employees for each Plan Year and the Average
Actual Deferral Percentage for Non-Highly Compensated Employees for the same
Plan Year must satisfy one of the following tests:
(a) The Average Actual Deferral Percentage for Participants who are
Highly Compensated Employees for the Plan year shall not exceed the
Average Actual Deferral Percentage for Participants who are Non-Highly
Compensated Employees for the Plan Year multiplied by 1.25; or
(b) The Average Actual Deferral Percentage for Participants who are
Highly Compensated Employees for the Plan Year shall not exceed the
Average Actual Deferral Percentage for Participants who are Non-Highly
Compensated Employees for the Plan Year multiplied by 2.0, provided that
the Average Actual Deferral Percentage for Participants who are Highly
Compensated Employees does not exceed the Average Actual Deferral
Percentage for participants who are Non-Highly Compensated Employees by
more than two percentage points.
16.4 SPECIAL RULES: The Actual Deferral Percentage for any Participant who
is a Highly Compensated Employee for the Plan Year and who is eligible to have
Salary Deferral Contributions (and amounts treated as Salary Deferral
Contributions), allocated to his subaccounts under two or more arrangements
described in Section 401(k) of the Code that are maintained by the Employer
(other than Plans not required to be aggregated under regulation
1.401(k)-1(b)(5)(11)) shall be determined as if such contributions were made
under a single arrangement. If elected in Exhibit 3, to the extent that
Qualified Non-Elective and 100% Vested Matching Contributions are treated under
this Section as Salary Deferral Contributions, all such contributions made
during the Plan Year shall be treated as Salary Deferral Contributions. If such
arrangements have different Plan Years, all cash or deferred arrangements ending
with or within the same calendar year shall be treated as a single arrangement.
In the event that this Plan satisfies the requirements of Sections 401(k),
401(a)(4), or 410(b) of the Code only if aggregated with one or more other
plans, or if one or more other plans satisfy the requirements of such sections
of the Code only if aggregated with this Plan, then this Section shall be
applied by determining the Actual Deferral Percentage of Employees as if all
such plans were a single plan. For Plan Years beginning after December 31,
1989, plans may be aggregated in order to satisfy Section 401(k) of the Code
only if they have the same Plan Year.
For purposes of determining the Actual Deferral Percentage of a Participant who
is a 5% owner or one of the ten most highly paid Highly Compensated Employees,
Salary Deferral Contributions, amounts treated as Salary Deferral Contributions,
and Compensation of such Participant shall include the Salary Deferral
Contributions, amounts treated as Salary Deferral Contributions, and
Compensation for the Plan Year of Family members (regardless of whether such
Family Members are Highly Compensated Employees). For Plan Years beginning on or
after January 1, 1987, the Actual Deferral Percentage of such Participant shall
be the greater of the Actual Deferral Percentage as calculated under the
previous sentence or the Actual Deferral Percentage calculated as combining the
above amounts only for Highly Compensated Employees who are Family members.
Family Members, with respect to such Highly Compensated Employees, shall be
disregarded as separate employees in determining the Actual Deferral Percentage
both for Participants who are Non-Highly Compensated Employees and for
Participants who are Highly Compensated Employees.
For purposes of this Section, all Salary Deferral Contributions (and amounts
treated as Salary Deferral Contributions) must be made before the last day of
the 12-month period immediately following the Plan Year to which contributions
relate.
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<PAGE> 56
The Employer shall maintain records sufficient to demonstrate satisfaction of
the test described in this Section and the amount and source of contributions
used in the test.
The determination and treatment of contributions made above shall satisfy such
other requirements as may be prescribed by the Secretary of the Treasury.
16.5 DISTRIBUTION OF EXCESS CONTRIBUTIONS: Notwithstanding any other
provision of the Plan, Excess Contributions plus any income and minus any loss
allocable thereto, shall be distributed to the Participating Employer on or
before the 15th day of the third month following the end of each Plan Year to
which such contributions relate (without being subject to Section 16.11), but
in no event later than the last day of the Plan Year subsequent to the Plan
Year to which such excess relates. Such distributions shall be made to Highly
Compensated Employees on the basis of the respective portions of the Excess
Contributions attributable to each of such employees. Excess Contributions
shall be allocated to Participants who are subject to the family member
aggregation rules of Section 414(g)(6) of the Code in the number prescribed by
the regulations. The income or loss allocable to Excess Contributions for a
Plan Year is determined by multiplying the income or loss for the Plan Year
which is allocable to the portion of the Participant's Account attributable to
Salary Deferral Contributions (and amounts treated as Salary Deferral
Contributions) by a fraction. The numerator of the fraction is the
Participant's excess Salary Deferral Contributions (and amounts treated as
Salary Deferral Contributions) for the prior Plan Year. The denominator is the
portion of the Participant's Account attributable to Salary Deferral
Contributions (and amounts treated as Salary Deferral Contributions) as of the
end of the prior Plan Year (determined without regard to any income or loss
occurring during such Plan Year). Income or loss from the end of the Plan Year
to the date of distribution shall also be distributed. Such amount shall be
determined by multiplying 10% of the income or loss determined above by the
number of whole calendar months between the end of the Plan Year to the date of
distribution shall also be distributed. Such amount shall be determined by
multiplying 10% of the income or loss determined above by the number of whole
calendar months between the end of the Plan Year and the date of distribution,
counting the month of distribution if distribution occurs after the 15th of
such month. Such Excess Contributions shall also be treated as Annual Additions
under the Plan. Such distributions are neither subject to any tax on early
withdrawals nor any spousal consent requirements set forth in this Plan.
Amounts distributed under this Section shall be made from the Participant's
Salary Deferral and 100% Vested Matching subaccounts (to the extent such
contributions were treated under Section 16.3 for such Plan Year as Salary
Deferral Contributions) in proportion to the Participant's Elective Deferrals
and 100% Vested Matching Contributions made for the Plan Year. Excess
Contributions shall be distributed from the Participant's Qualified
Non-Elective Contribution subaccount only to the extent that such Excess
Contributions exceed the balance in the Participant's Salary Deferral and 100%
Vested Matching subaccounts.
For the purpose Section 16.3, 16.4, 16.5, and 16.9 the following definitions
apply:
(a) "Actual Deferral Percentage" or "ADP" shall mean the ratio
(expressed as a percentage, calculated separately, and effective the first Plan
Year beginning in 1989, to the nearest 1/100 of 1%) of Salary Deferral
Contributions and amounts treated as Salary Deferral Contributions on behalf
of a Participant (whether or not the Participant was employed for the entire
Plan Year) for the Plan Year (including amounts returned to Highly Compensated
Employees pursuant to Section 16.2) to the Participant's Compensation for the
Plan Year. The Actual Deferral Percentage of an Employee who is eligible to,
but does not make a Salary Deferral Contribution, and who does not receive an
allocation of a Salary Deferral Contribution, is zero.
(b) "Average Actual Deferral Percentage" shall mean the average
(expressed as a percentage and, effective the first Plan Year beginning in
1989, to the nearest 1/100 of 1%) of the Actual Deferral Percentages of the
Participants in a group.
(c) "Excess Contribution" shall mean, with respect to any Plan Year for
each Highly Compensated Employee, the excess of:
(1) The amount of Salary Deferral Contributions and amounts treated
as Salary Deferral Contributions actually taken into account with
respect to a Highly Compensated Employee for such Plan Year in
computing the Average Actual Deferral Percentage, over;
(2) The maximum amount of such contributions permitted in computing
the Average Actual Deferral Percentage for such Highly Compensated
Employees in order of the Actual Deferral Percentages, beginning
with the highest of such percentages until the Average Actual
Deferral Percentage test set forth in Section 16.3 is satisfied.
For the purpose of Sections 16.3, 16.4, and 16.5, 100% Vested Matching
Contributions and Qualified Non-Elective Contributions, if elected in Exhibit 3
of the Adoption Agreement, will be treated as Salary Deferral Contributions. If
elected, all such contributions made during the Plan Year shall be treated as
Salary Deferral Contributions. If elected, all such contributions made during
the Plan Year shall be treated as Salary Deferral Contributions. However, any
contributions not considered under Section 16.3 must be considered under
Section 16.6. Salary Deferral Contributions may be excluded under this Section
and shall be applied in Section 16.6 providing the test set forth in Section
16.3 is satisfied both with and without exclusion of these contributions.
16.6 DISCRIMINATION TESTING - MATCHING CONTRIBUTIONS, AMOUNTS TREATED AS
MATCHING CONTRIBUTIONS, AND EMPLOYEE CONTRIBUTIONS: The Average Contribution
Percentage for Highly Compensated Employees for each Plan Year and the Average
Contribution Percentage for Non-Highly Compensated Employees for the same Plan
Year must satisfy one of the following tests:
-38-
<PAGE> 57
(a) The Average Contribution Percentage for Participants who are Highly
Compensated Employees for the Plan Year shall not exceed the Average
Contribution Percentage for Participants who are Non-Highly Compensated
Employees for the Plan Year multiplied by 1.25; or
(b) The Average Contribution Percentage for Participants who are Highly
Compensated Employees for the Plan Year shall not exceed the Average
Contribution Percentage for Participants who are Non-Highly Compensated
Employees for the Plan Year multiplied by two, provided that the Average
Contribution Percentage for Participants who are Highly Compensated
Employees does not exceed the Average Contribution Percentage for
Participants who are Non-Highly Compensated Employees by more than two
percentage points.
16.7 SPECIAL RULES: For purposes of this Section, the Contribution Percentage
for any Participant who is a Highly Compensated Employee and who is eligible to
make Employee Contributions, or to have Matching Contributions and amounts
treated as Matching Contributions allocated to his account under two or more
plans described in Section 401(a) of the Code, or arrangements described in
Section 401(k) of the Code, that are maintained by the Employer (other than
Plans not required to be aggregated under regulation 1.401(m)-1(b)(4)(ii)),
shall be determined as if the total of such contributions were made under a
single arrangement. If elected in Exhibit 3, to the extent that 100% Vested
Matching Contribution or Qualified Non-Elective Contributions are treated as
Matching Contributions, all such contributions made for the Plan Year shall be
treated as Matching Contributions.
In the event that this Plan satisfies the requirements of Section 410(b) of the
Code only if aggregated with one or more other plans, or if one or more other
plans satisfy the requirements of Section 410(b) of the Code only if aggregated
with this Plan, then this Section shall be applied by determining the
Contribution Percentages of Participants as if all such plans were a single
plan.
For purposes of determining the Contribution Percentage of a Participant who is
a Highly Compensated Employee, the Employee Contributions, Matching
Contributions and amounts treated as Matching Contributions, and Compensation
of such Participant shall include the Employee Contributions, Matching
Contributions, amounts treated as Matching Contributions, and Compensation of
Family Members (regardless of whether such Family Members are Highly
Compensated Employees). For Plan Years beginning on and after January 1, 1987,
the Contribution Percentage of such Participant shall be the greater of the
Contribution Percentage as calculated under the previous sentence or the
Contribution Percentage calculated as combining the above amounts only for
Highly Compensated Employees who are Family Members. Family Members, with
respect to Highly Compensated Employees, shall be disregarded as separate
employees in determining the Actual Deferral Percentage both for Participants
who are Non-Highly Compensated Employees and for Participants who are Highly
Compensated Employees.
For purposes of this Section, the Contribution Percentage for any Participant
who is a Highly Compensated Employee and who is eligible to have Contribution
Percentage amounts allocated to his Account under two or more plans described in
section 410(a) of the Code, or arrangements described in Section 410(k) of the
Code that are maintained by the Employer, shall be determined as if the total of
such Contribution Percentage amounts was made under each plan. If a Highly
Compensated Employee participates in two or more cash or deferral arrangements
that have different plan years, all cash or deferred arrangements ending with or
within the same calendar year shall be treated as a single arrangement.
In the event that this Plan satisfies the requirements of Sections 401(m),
401(a)(4) or 410(b) of the Code only if aggregated with one or more other
plans, or if one or more other plans satisfy the requirements of such sections
of the Code only if aggregated with this Plan, then this Section shall be
applied by determining the Contribution Percentage of employees as if all such
plans were a single plan. For Plan Years beginning after December 31, 1989,
plans may be aggregated in order to satisfy Section 401(m) of the Code only if
they have the same Plan Year.
For purposes of determining the Contribution Percentage test, Employee
Contributions are considered to have been made in the Plan Year in which
contributed to the trust. Matching Contributions and Qualified Non-Elective
Contributions will be considered made for a Plan Year if made no later than the
end of the 12-month period beginning on the day after the close of the Plan
Year.
The Employer shall maintain records sufficient to demonstrate satisfaction of
the CAP test and the amount of Qualified Non-Elective Contributions or 100%
Vested Matching Contributions, or both, used in such test.
The determination and treatment of the Contribution Percentage of any
Participant shall satisfy such other requirements as may be prescribed by the
Secretary of the Treasury.
16.8 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS: Notwithstanding any
other provision of this Plan, Excess Aggregate Contributions, plus any income
and minus any loss allocable thereto, shall (if required) be distributed on or
before the 15th day of the third month following the end of the Plan Year in
which such contribution relates (without being subject to Section 16.11), but
in no event later than the last day of the Plan Year subsequent to the Plan
Year in which such contributions relate. Such Excess Aggregate Contributions
shall be allocated to Participants who are
- 39 -
<PAGE> 58
subject to the family member aggregation rules of Section 414(g)(5) of the Code
in the manner prescribed by the regulations. Prior to the distribution or
forfeiture of Excess Aggregate Contributions, Matching Contributions for which
the corresponding Salary Deferral Contribution has been returned pursuant to
Section 16.2, 16.3, or this Section, shall be treated as a forfeiture and used
to reduce the next Participating Employer Contribution. Employee Contributions
which are considered Excess Aggregate Contributions shall be distributed by the
Trustee to the Participant. Remaining nonvested Excess Aggregate Contribution
shall be treated as a forfeiture and used to reduce the next Participating
Employer Contribution. Remaining Vested Excess Aggregate Contributions shall be
distributed to affected Highly Compensated Employees and Family Members. The
income or less allocable to Excess Aggregate Contributions for a Plan Year is
determined by multiplying the income or loss for the Plan Year which is
allocable to the portion of the Participant's Account attributable to Matching
and Employer Contributions (and amounts treated as Matching Contributions) by a
fraction. The numerator of the fraction is the Participant's Excess Aggregate
Contributions for the Plan Year. The denominator is the portion of the
Participant's Account attributable to Excess Aggregate Contributions (and
amounts treated as Matching Contributions) as of the end of the Plan Year
(without regard to any income or loss occurring during such Plan Year). Income
or loss from the end of the Plan Year to the date of distribution shall also be
distributed. Such amount shall be determined by multiplying by 10% the amount
determined above by the number of whole calendar months between the end of the
Plan Year and the date of distribution, counting the month of distribution if
the distribution occurs after the 15th of such month. Excess Aggregate
contributions shall be treated as Annual Additions under the Plan.
Amounts distributable under this Section shall be made from the Participants
subaccount attributable to Employee Contributions, Non-100% Vested Matching
Contributions, or if considered under Section 16.6 for the Plan Year, Qualified
Non-Elective, 100% Vested Matching or Salary Deferral Contributions, first from
any unmatched Employee Contributions, and then in proportion to such remaining
contributions for the Plan Year.
The determination of the Excess Aggregate Contributions shall be made after
first determining the excess Salary Deferral Contributions, and then
determining the Excess Contributions.
For purposes of Section 16.6, 16.7, 16.8, and 16.9 the following definitions
shall apply:
(a) "Average Contribution Percentage" or "ACP" shall mean the average
(expressed as a percentage and calculated separately for each
Participant, and effective the first Plan Year beginning in 1989, to the
nearest 1/100 of 1%) of the Contribution Percentages of the Participants
in a group.
(b) "Contribution Percentage" shall mean the ratio (expressed as a
percentage, and effective the first Plan Year beginning in 1989, to the
nearest 1/100 of 1%) of the sum of the Employee Contributions and
Non-100% Vested Matching Contributions under the Plan on behalf of the
Participant (whether or not he was employed for the entire Plan Year)
for the Plan Year to the Participant's Compensation for the Plan Year.
Such Contribution Percentage amounts shall include forfeitures of Excess
Aggregate Contributions or Matching Contributions allocated to the
Participant's Account which shall be taken into account in the year in
which such forfeiture is allocated.
(c) "Excess Aggregate Contributions" shall mean, with respect to any
Plan Year, the excess of:
(1) The aggregate Employee Contributions, Non-100 Vested Matching
Contributions, and amounts treated as Non-100% Vested Matching
Contributions, taken into account in computing the numerator of the
Contribution Percentage of each Highly Compensated Employee for
such Plan Year, over
(2) The maximum amount of such contributions permitted by the
Average Contribution Percentage test set forth in Section 16.6 for
such Highly Compensated Employee (determined by reducing
contributions made on behalf of Highly Compensated Employees in
order of their Contribution Percentages beginning with the highest
of such percentages until the Average Contribution Percentage test
is set forth in Section 16.6 is satisfied).
For the purpose of Section 16.6, 16.7, and 16.8, Qualified Non-Elective
Contributions and 100% Vested Matching Contributions, provided such an election
is made in Exhibit 3, will be treated as Matching Contributions. However, any
contributions considered under Section 16.3 may not be considered under Section
16.6. The Employer also may elect to use Salary Deferral Contributions in the
Contribution Percentage amounts so long as the ADP test is met before the
deferrals are used in the ACP test and continues to be met following the
exclusion of those deferrals that are used to meet the ACP test.
16.9 MULTIPLE USE DISCRIMINATION TEST: Notwithstanding any other provision of
this Plan, effective the first Plan Year beginning in 1989, this Plan shall
comply with regulation 1.401(m)-2 of the Code.
For the purpose of the discrimination test set forth in this Section, Salary
Deferral Contributions may only be used to satisfy the discrimination test set
forth in Section 16.6 to the extent necessary to meet the discrimination test
set forth in Section 16.6, and only if such remaining Salary Deferral
Contributions meet the discrimination test set forth in Section 16.3. This
test shall be performed after the return of contributions set forth in Section
16.2, 16.5, and 16.8.
If one or more Highly Compensated Employees participate in both a cash or
deferred arrangement and a plan subject to the ACP test maintained by the
Employer and the sum of the ADP and ACP of those Highly Compensated Employees
subject to either or both tests exceeds the Aggregate Limit, then the ACP of
those Highly Compensated Employees who also
<PAGE> 59
participate in a cash or deferred arrangement will be reduced (beginning with
such Highly Compensated Employee whose ACP is the highest) so that the limit is
not exceeded. The amount by which each Highly Compensated Employee's
Contribution Percentage amounts is reduced shall be treated as an Excess
Aggregate Contribution. The ADP and ACP of the Highly Compensated Employees are
determined after any corrections required to meet the ADP and ACP tests.
Multiple use does not occur if both the ADP and ACP of the Highly Compensated
Employees does not exceed 1.25 multiplied by the ADP and ACP of the Non-Highly
Compensated Employees.
16.10 DEFINITIONS: For the purpose of this Article, and as otherwise required
under the terms of this Plan:
"Adjustment Factor" shall mean the cost of living factor prescribed by the
Secretary of the Treasury under Section 415(d) of the Code for years beginning
after December 31, 1987, as applied to such items and in such manner as the
Secretary shall provide.
"Aggregate Limit" shall mean the sum of (i) 125% of the greater of the ADP of
the Non-Highly Compensated Employees for the Plan Year or the ACP of Non-Highly
Compensated Employees under the Plan subject to Code Section 401(a) for the Plan
Year beginning with or within the Plan Year in the cash or deferred arrangement
and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP.
"Family Member" shall mean an individual described in Section 414(q)(6)(B) of
the Code.
"Highly Compensated Employee" shall include highly compensated active employees
and highly compensated former employees.
A highly compensated active employee includes any Employee who performs service
for the Employer during the determination year and who, during the look-back
year: (i) received compensation from the Employer in excess of $75,000 (as
adjusted pursuant to Section 415(d) of the Code); (ii) received compensation
from the Employer in excess of $50,000 (as adjusted pursuant to Section 415(d)
of the Code) and was a member of the top-paid group for such year; or (iii) was
an officer of the Employer and received compensation during such year that is
greater than 50% of the dollar limitation in effect under Section 415(b)(1)(A)
of the Code. The term highly compensated active employee also includes: (i)
employees who are both described in the preceding sentence if the term
"determination year" is substituted for the term "look-back year" and the
Employee is one of the 100 employees who received the most compensation from
the Employer during the determination year; and (ii) employees who are 5%
owners at any time during the look-back year or determination year.
If no officer has satisfied the compensation requirement of (iii) above during
either a determination year or look-back year, the highest paid officer for
such year shall be treated as a Highly Compensated Employee.
For this purpose, the determination year shall be the Plan Year. The look-back
year shall be the 12-month period immediately preceding the determination year.
A highly compensated former employee includes any Employee who separated from
service (or was deemed to have separated) prior to the determination year,
perform no service for the Employer during the determination year, and was a
highly compensated active employee for either the separation year or any
determination year ending on or after the Employee's 55th birthday.
If an Employee is, during a determination year or look-back year, a family
member of either a 5% owner who is an active or former employee or a highly
compensated employee who is one of the 10 most highly compensated employees
ranked on the basis of compensation paid by the Employer during such year, then
the family member and the 5% owner or top-ten highly compensated employee shall
be aggregated. In such case, the family member and 5% owner or top-ten highly
compensated employee shall be treated as a single employee receiving
compensation and plan contributions or benefits equal to the sum of such
compensation and contributions or benefits of the family member and 5% owner or
top-ten highly compensated employee. For purposes of this Section, family
member includes the spouse, lineal ascendants and descendants of the employee
or former employee and the spouses of such lineal ascendants and descendants.
The determination of who is a highly compensated employee, including the
determinations of the number and identity of employees in the top-paid group,
the top 100 employees, the number of employees treated as officers and the
compensation that is considered, will be made in accordance with Section 414(g)
of the Code and the regulations thereunder.
"Non-Highly Compensated Employee" shall mean an Employee of the Employer who is
neither a Highly Compensated Employee nor a Family Member.
16.11 EXCISE TAX: The Employer shall be liable for a 10% excise tax which is
imposed on any Excess Contributions or Excess Aggregate Contribution which is
part of the Plan for a Plan Year ending in a taxable year of the Employer. No
tax shall be imposed under this Section if the Excess Contribution and the
Excess Aggregate Contribution is distributed, or if permitted by the Plan,
forfeited, within two and one-half months of the following Plan Year.
-41-
<PAGE> 60
ARTICLE XVII - MISCELLANEOUS
17.1 EMPLOYMENT RIGHTS: No provision of this Plan shall be deemed to give any
Employee the right to be retained in the service of his Employer or to interfere
with the right of the Employer to discharge an Employee at any time.
17.2 NOTICES: Whenever provision is made in the Plan that a Participant may
exercise any option or election or designate any Beneficiary, the action of such
Participant shall be evidenced by a written notice signed by the Participant and
delivered to the Plan Administrator in person or by mail. If a form is furnished
by the Plan Administrator for such purpose, a Participant shall give written
notice of his exercise of any option or election or of his designation of any
Beneficiary on the form provided for such purpose. Written notice shall not be
effective until received by the Plan Administrator.
17.3 OWNER-EMPLOYEE PROVISIONS: If this Plan provides contributions or
benefits for one or more Owner-Employees who control both the business for which
this Plan is established and one or more other trades or businesses, this Plan
and the plan established for other trades or businesses must, when looked at as
a single plan, satisfy Code Sections 401(a) and (d) for the employees of this
and all other trades or businesses.
If the Plan provides contributions or benefits for one or more Owner-Employees
who control one or more other trades or businesses, the employees of the other
trades or businesses must be included in a plan which satisfies Code Sections
401(a) and (d) and which provides contributions and benefits not less favorable
than provided for Owner-Employees under this Plan.
If a Participant is covered as an Owner-Employee under the plans of two or more
trades or businesses which are not controlled and the Participant controls a
trade or business, then the contributions or benefits of the employees under the
plan of the trades or businesses which are controlled must be as favorable as
those provided for him under the most favorable plan of the trade or business
which is not controlled.
For purposes of the preceding paragraphs, an Owner-Employee, or two or more
Owner-Employees, will be considered to control a trade or business if the
Owner-Employee, or two or more Owner-Employees together:
(a) own the entire interest in an unincorporated trade or business,
or
(b) in the case of a partnership, own more than 50% of either the
capital interest or the profits interest in the partnership.
For purposes of the preceding sentence, an Owner-Employee, or two or more
Owner-Employees shall be treated as owning any interest in a partnership which
is owned, directly or indirectly, by a partnership which such Owner-Employee, or
such two or more Owner-Employees, are considered to control within the meaning
of the preceding sentence.
17.4 SPENDTHRIFT PROVISION: All benefits payable under the Plan shall be
exempt from the claims of, and shall not be subject to attachment, garnishment
or other legal process by any creditor of such Participant, his Beneficiary, or
his spouse, and shall not be subject to alienation, assignment, pledge or
encumbrance, either voluntarily or involuntarily by any such person.
The preceding sentence shall also apply to the creation, assignment, or
recognition of a right to any benefit payable with respect to a Participant
pursuant to any Domestic Relations Order, unless such order is determined,
pursuant to procedures set forth in Article XVI, to be a qualified domestic
relations order, as defined in Section 414(p) of the Code, or any domestic
relations order entered before January 1, 1985.
17.5 COMPETENCY: If any person due a benefit hereunder is, in the judgement
of the Plan Administrator, incapable of personally receiving or receipting for
any payment due hereunder, payment may be made to the guardian or legal
representative of such person, or to such other person or institution, who, in
the opinion of the Plan Administrator is then maintaining or has custody of such
person. Such payment shall constitute a full discharge of the liability of the
Plan with respect to such person.
17.6 MISSING PERSONS: Notwithstanding any provision in this Plan and Trust to
the contrary, if the Plan Administrator is unable to locate any former
Participant or Beneficiary who is entitled to benefits under this Plan within
three years of the date he first becomes entitled to a distribution from the
Trust, any amounts being held on his behalf shall be forfeited and used to
reduce the Participating Employer's current or next succeeding contribution. The
Plan Administrator shall proceed with due diligence in attempting to locate any
former Participant or Beneficiary. No forfeiture shall occur until the Plan
Administrator has mailed the former Participant or Beneficiary a notice advising
him of his benefits and the provisions of this Section to his last known
address, via U.S. Mail Postage prepaid, return receipt requested. If the former
Participant or Beneficiary is located subsequent to such forfeiture, the
Participating Employer shall reinstate the forfeited amount to the former
Participant's or Beneficiary's Account, and shall distribute the value of the
Account to him in accordance with the Plan.
17.7 CONTROLLED GROUPS AND AFFILIATED SERVICE GROUPS: Except as provided in
Article VII, all employees of all corporations which are members of a controlled
group of corporations (as defined in Code Section 414(b)) and all employees of
all trades or businesses (whether or not incorporated) which are under common
control (as defined in Code Section 414(c)) will be treated as employed by a
single employer. All employees of all members of an affiliated service group (as
defined in Code Section 414(m)) will be treated as employed by a single
employer.
- 42 -
<PAGE> 61
17.8 LEASED EMPLOYEES: Any leased employee shall be treated as an employee of
the recipient employer, however, contributions or benefits provided by the
leasing organization which are attributable to services performed for the
recipient employer shall be treated as provided by the recipient employer. The
preceding sentence shall not apply to any leased employee if such employees do
not constitute more than 20% of the recipient employer's workforce, and all
employees of the leasing organization other than those employees who perform
substantially all these services for the leasing organization or earn under
$1,000 during the Plan Year and 3 Prior Plan Years are covered by a money
purchase pension plan providing: (a) a nonintegrated employer contribution rate
of at least 10% of compensation allocated to such Employee regardless of the
number of hours worked, (b) immediate participation, and (c) full and immediate
vesting. For purposes of this paragraph, the term "leased employee" means any
person (other than an Employee of the recipient) who pursuant to an agreement
between the recipient and any other person ("leasing organization") has
performed services for the recipient (or for the employer and related persons
determined in accordance with Code Section 414(n)(6)) on a substantially full
time basis for a period of at least one year and such services are of a type
historically performed by employees in the business field of the recipient
employer.
17.9 CONSTRUCTION: The Plan and Trust has been established with the intent
that it shall be a qualified plan under Code Sections 401(a) and 401(k) and the
Trust tax-exempt under Code Section 501(a). All terms and provisions contained
herein shall be interpreted, wherever possible, so as to be in compliance with
the requirements for such qualification and exemption.
In case any provisions of the Plan and Trust are determined to be illegal or
invalid for any reason, such determination shall not affect the remaining
provisions of the Plan and Trust, and the Plan and Trust will be construed and
enforced as if said illegal or invalid provision had never been included herein.
17.10 GOVERNING LAW: This Plan and Trust shall be construed, administered, and
enforced according to the laws of the State of the Employer's principal place of
business, except to the extent superseded by Federal Law.
17.11 FAILURE OF QUALIFICATION: If the Employer's Plan fails to attain or
retain qualification, such Plan will no longer participate in the prototype plan
and will be considered an individually designed plan.
17.12 GENDER AND NUMBER: The masculine gender shall include the feminine and
the singular shall include the plural.
17.13 EFFECTIVE DATE: No provision of the Tax Reform Act of 1986, shall have
an effective date prior to its statutory effective date. No provision of this
Plan shall apply to a governmental Employer if not applicable by law to such
employer.
17.14 PLAN-TO-PLAN TRANSFERS: The Trustee(s) of this Plan may receive from or
transfer to another plan any or all assets of a Participant.
17.15 ADDITIONAL PARTICIPATION REQUIREMENT: The Participating Employer's Plan
established herein must benefit the lesser of 50 Employees of the Employer, or
40% or more of all Employees of the Employer. Such a determination shall be made
in accordance with the requirements of Code Section 401(a)(26) and the
regulations thereunder.
- 43 -
<PAGE> 1
10.83
GIBBONS EMPLOYMENT
AGREEMENT
<PAGE> 2
FIRST AMENDMENT
TO EMPLOYMENT AGREEMENT
This First Amendment is hereby made to amend that certain Employment
Agreement entered into by and between The Sports Club Company, Inc., a Delaware
corporation (the "Company") and John M. Gibbons (the "Executive") on July 14,
1995 (the "Agreement") as follows:
1. Paragraph 4(b) is hereby amended by deleting the first sentence thereof and
adding in its place and stead the following:
"Executive shall be paid a bonus of Fifty Thousand Dollars ($50,000.00).
Such bonus shall be paid in two equal installments of $25,000 each, with
the first to be paid in April 1996 and the second to be paid in July 1996."
2. Paragraph 8 is hereby amended to provide for an option exercise price of
$3.00, the fair market value as of April 24, 1996.
3. All other terms and conditions of this Agreement shall remain in full force
and effect.
Dated as of April 24, 1996
The Sports Club Company, Inc. Executive
a Delaware corporation
By: /s/ D. Michael Talla /s/ John M. Gibbons
--------------------------- -----------------------------
D. Michael Talla John M. Gibbons
<PAGE> 1
10.84
SPORTS CONNECTIONS
AGREEMENT
<PAGE> 2
ASSET PURCHASE AGREEMENT
among
24 HOUR FITNESS INCORPORATED
a California corporation;
THE SPORTS CONNECTION HOLDING COMPANY,
a California corporation;
and
THE SPORTS CLUB COMPANY, INC.,
a Delaware corporation
Dated as of October 31, 1996
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1. PURCHASE AND SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Assets to be Transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Liabilities to be Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Liabilities Not to be Assumed . . . . . . . . . . . . . . . . . . . . . . . . 4
1.5 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.6 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.7 Purchase Price Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.8 Sales Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.9 Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.10 Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.11 Further Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.12 Prorations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SCC . . . . . . . . . . . . . . 8
2.1 Due Organization; No Subsidiaries; Etc. . . . . . . . . . . . . . . . . . . . 8
2.2 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.4 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.5 Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.6 Equipment, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.7 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.8 Proprietary Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.9 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.10 Compliance With Legal Requirements . . . . . . . . . . . . . . . . . . . . . 13
2.11 Governmental Authorizations . . . . . . . . . . . . . . . . . . . . . . . . 13
2.12 Employee and Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.14 Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.15 Proceedings; Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.16 Authority; Binding Nature of Agreements . . . . . . . . . . . . . . . . . . 15
2.17 Non-Contravention; Consents . . . . . . . . . . . . . . . . . . . . . . . . 15
2.18 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.19 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.20 WARN Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 3. REPRESENTATIONS AND WARRANTIES OF SCC . . . . . . . . . . . . . . . . . . . . . 16
3.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.2 Authority; Binding Nature of Agreements . . . . . . . . . . . . . . . . . . 17
3.3 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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3.4 Non-Contravention; Consents . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER . . . . . . . . . . . . . . . . . . 18
4.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.2 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.3 Authority; Binding Nature of Agreement . . . . . . . . . . . . . . . . . . . 18
4.4 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.5 Non-Contravention; Consents . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 5. INDEMNIFICATION, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . 19
5.2 Indemnification by SCC and the Company . . . . . . . . . . . . . . . . . . . 19
5.3 Indemnification by Purchaser . . . . . . . . . . . . . . . . . . . . . . . . 20
5.4 Nonexclusivity of Indemnification Remedies . . . . . . . . . . . . . . . . . 21
5.5 Limitations on Indemnification . . . . . . . . . . . . . . . . . . . . . . . 21
5.6 Defense of Third Party Claims by SCC and the Company . . . . . . . . . . . . 22
5.7 Defense of Third Party Claims by Purchaser . . . . . . . . . . . . . . . . . 23
5.8 Exercise of Remedies by Indemnitees . . . . . . . . . . . . . . . . . . . . 23
SECTION 6. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.1 Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.2 Seller Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.3 Refurbishment of the West Hollywood Club . . . . . . . . . . . . . . . . . . 24
6.4 Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 7. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.1 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.2 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.3 Attorney's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.5 Publicity; Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.6 Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.7 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.9 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.9 Governing Law; Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.10 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.11 Remedies Cumulative; Specific Performance . . . . . . . . . . . . . . . . . 28
7.12 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.13 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.14 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.15 Panics in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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7.16 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.17 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.19 Survival Post-Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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iii
<PAGE> 6
EXHIBITS
Exhibit A: Certain Definitions
Exhibit B: Form of Assumption Agreement
Exhibit C: Intentionally Omitted
Exhibit D: Bill of Sale
Exhibit E: Form of Noncompetition Agreement
Exhibit F-1: Form of Opinion from Resch Polster Alpert & Berger LLP
Exhibit F-2: Form of Opinion from Cooley Godward LLP
Exhibit G: Intentionally Omitted
Exhibit H: Reciprocity and Transition Agreement
Exhibit I: Form of Memorandum of Lease
Exhibit J: Form of Non-Disturbance Agreement
Exhibit K: Form of Concession Agreement
Exhibit L: Amendment to Santa Monica Lease
Exhibit M: Amendment to West Hollywood Lease
SCHEDULES
Schedule 1.1(d) Assumed Contracts
Schedule 1.1(h) Permits, Licenses and Approvals
Disclosure Schedule
<PAGE> 7
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of
October 31, 1996, by and among 24 HOUR FITNESS, INC., a California corporation
("Purchaser"), THE SPORTS CONNECTION HOLDING COMPANY, a California corporation
(the "Company"), and THE SPORTS CLUB COMPANY, INC., a Delaware corporation
("SCC"). Certain capitalized terms used in this Agreement are defined on
Exhibit A.
RECITAL
A. SCC is the sole shareholder of the Company.
B. SCC and the Company desire to sell to Purchaser, and Purchaser
desires to purchase from the Company and SCC, (the "Acquisition") substantially
all of the assets used or held for use in the operation of the Clubs.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, Purchaser, the Company and SCC,
intending to be legally bound, agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS
1.1 ASSETS TO BE TRANSFERRED. Subject to the terms and conditions
of this Agreement, on the Closing Date (as hereinafter defined) the Company
shall, and SCC shall cause Company to, sell, transfer, convey, assign, and
deliver to Purchaser and Purchaser shall purchase and accept all of the
business, rights, claims and assets (of every kind, nature, character and
description, whether real, personal or mixed, whether tangible or intangible,
whether accrued, contingent or otherwise, and wherever situated) of the
Company, other than the Excluded Assets (as hereinafter defined) (collectively
the "Purchased Assets"). The Purchased Assets shall include, but not be
limited to, the following:
(a) LEASED REAL PROPERTY. All of the real property
leases of the Company, including the leases described on PART 2.7 of the
Disclosure Schedule (the "Real Property Leases"), if any.
(b) PERSONAL PROPERTY LEASES. All leases of machinery,
equipment, vehicles, furniture and other personal property leased by Company,
if any, including all such leases (the "Personal Property Leases") described on
PART 2.6 of the Disclosure Schedule.
1.
<PAGE> 8
(c) MACHINERY AND EQUIPMENT. All machinery, equipment,
vehicles, tools, supplies, spare parts, furniture and all other personal
property not included in inventory (other than personal property leased
pursuant to Personal Property Leases) owned, utilized or held for use by
Company.
(d) CONTRACTS. Other than the Membership Agreements, all
Contracts, contractual rights purchase orders and sales orders (the "Assumed
Contracts") of the Company that are listed on SCHEDULE 1.1(d) and subject to
Section 1.3(b) expressly assumed by Purchaser.
(e) MEMBERSHIP AGREEMENTS. All of the Membership
Agreements, including, rights to renewals, monthly membership fees subject to
Section 1.12(c), receivables and other rights related thereto.
(f) RECORDS AND FILES. All membership lists (in both
written and machine readable format), records, files, invoices, customer lists,
blueprints, specifications, designs, drawings, accounting records, business
records, operating data and other data of Company.
(g) TELEPHONE NUMBERS. All local telephone numbers
associated with the Clubs.
(h) LICENSES; PERMITS. All licenses, permits and
approvals of the Company, which to SCC's and the Company's Knowledge are
transferable, except those licenses, permits and approvals listed on SCHEDULE
1.11(h).
1.2 EXCLUDED ASSETS. The provisions of Section 1.1
notwithstanding, SCC and the Company shall not sell, transfer, assign, convey
or deliver to Purchaser, and Purchaser will not purchase or accept the
following assets of Company (collectively the "Excluded Assets"):
(a) CONSIDERATION. The consideration delivered by
Purchaser to Company pursuant to this Agreement.
(b) TAX CREDITS. Federal, state and local income and
franchise tax credits and tax refund claims.
(c) CORPORATE FRANCHISE. The Company's franchise to be a
corporation, its certificate of incorporation, corporate seal, stock books,
minute books and other corporate records having exclusively to do with the
corporate organization and capitalization of the Company. Purchaser and its
designated agents shall have reasonable access to such books and records and
may make excerpts therefrom and copies thereof
(d) TAX RECORDS. The Company's income and franchise tax
returns and tax records.
(e) INVENTORY. All inventories of raw materials,
work-in-process and finished goods (including all such in transit) of the
Company, together with related packaging materials (collectively the
"Inventory").
2.
<PAGE> 9
(f) CASH AND CASH EQUIVALENTS. All cash and cash
equivalents, including the working capital reserves of each Club, set forth on
the Sports Connection Financial Statements; all receivables due to the Company
from any Affiliate thereof; and any claims that the Company may have against
Bally's relating to any payments from Members received by Bally's prior to the
Closing and not properly applied or otherwise accounted for by Bally's, which
claims in any event will have no material adverse effect on Purchaser or the
Purchased Assets.
(g) BALLY'S AGREEMENTS. The Bally's Agreements.
(h) PROPRIETARY ASSETS. Except for any Proprietary
Rights of SCC and the Company to Membership Agreements, all the Company's
right, title and interest in any Proprietary Assets.
(i) SOUTH BAY LEASE. The South Bay Lease.
1.3 LIABILITIES TO BE ASSUMED. Subject to the terms and
conditions of this Agreement, on the Closing Date, Purchaser shall assume and
agree to perform and discharge to the extent indicated below the following, and
only the following, specific debts, liabilities and obligations of the Company
(collectively the "Assumed Liabilities"):
(a) MEMBERSHIP AGREEMENTS. The Company's obligation to
honor and service the Membership Agreements, including all refunds thereunder,
except the following refunds, the payment of which shall be the joint and
several obligation of SCC and the Company and shall be paid by SCC directly:
(i) refunds to Members in connection with
Membership Agreements, which are required by Legal Requirement (i.e. refunds
requested within three (3) days of a Member entering into a Membership
Agreement), minus such amounts apportioned to Purchaser pursuant to Section
1.12(c) relating to Membership Agreements for which refunds as contemplated by
this subclause 1.3(a)(i); and
(ii) refunds pursuant to the Santa Monica Order
resulting solely from the Acquisition minus such amounts that Purchaser either
received credit for pursuant to Section 1.12(c) or collected for its own
account subsequent to the Closing.
Purchaser shall refer such requests for refunds described in subclause
(i) and (ii) to SCC as instructed by SCC.
(b) SPECIFIED CONTRACTUAL LIABILITIES. The Specified
Contractual Liabilities.
(c) LIABILITIES UNDER LEASES, PERMITS AND LICENSES. The
Company's obligations arising after the Closing Date under the Real Property
Leases and any of the permits or licenses assigned to Purchaser at the Closing.
Nothing contained in this Agreement or any Transactional Agreement shall be
deemed to modify or affect the exclusion of obligations arising
3.
<PAGE> 10
an or prior to the Closing Date under any such Real Property Leases, permits or
licenses assigned to Purchaser at Closing.
(d) VIOLATION OF LAW. Liabilities and obligations
relating directly to the Purchased Assets for any violation of or failure to
comply with any Legal Requirement or Order of which SCC or the Company has no
Knowledge; provided, however (i) Purchaser shall not assume any such
liabilities or obligations of which SCC or the Company had Knowledge at or
prior to the Closing, (ii) Purchaser shall not assume any such liabilities or
obligations relating to the Membership Agreements assumed as part of the
Purchased Assets regardless of SCC's or the Company's Knowledge and (iii)
Purchaser shall not assume any such liabilities or obligations (whether or not
Purchaser has Knowledge thereof) that arise out of, result from or relate to
the operations of the Clubs prior to the Closing, including, without
limitation, liabilities and obligations arising out of, resulting from or
related to employment discrimination charges, wrongful termination, or
complaints or suits of sexual harassment.
1.4 LIABILITIES NOT TO BE ASSUMED. Except as and to the extent
specifically set forth in Section 1.3, notwithstanding anything to the contrary
in any of the Transactional Agreements, Purchaser is not assuming any debts,
liabilities, obligations or contracts of the Company and all such debts,
liabilities, obligations and contracts shall be and remain the responsibility
of the Company. Notwithstanding the provisions of Section 1.3 and without
limiting the generality of the foregoing, Purchaser is not assuming and the
Company shall not be deemed to have transferred to Purchaser the following
debts, liabilities, obligations and contracts of Company:
(a) CERTAIN CONTRACTS. The obligations of the Company
under and pursuant to the following contracts and leases:
(i) The Bally's Agreements; and
(ii) The Personal Property Leases.
(b) TAXES ARISING FROM TRANSACTION. Any United States,
foreign, state or other taxes applicable to, imposed upon or arising out of the
sale or transfer of the Purchased Assets to Purchaser and the other
transactions contemplated by this Agreement, including but not limited to any
transfer, sales, use, gross receipts or documentary stamp taxes.
(c) INCOME AND FRANCHISE TAXES. Any liability or
obligation of the Company or SCC for Federal income taxes and any state or local
income, profit or franchise taxes (and any penalties or interest due on account
thereof).
(d) INSURED CLAIMS. Any liability of the Company insured
against, to the extent such liability is or will be paid by an insurer.
(e) LITIGATION MATTERS. Any liability or obligation with
respect to any suits, actions, claims or Proceedings, whether or not described
on Part 2.15 of the Disclosure Schedule, arising out of, resulting from or
related to the operation of the Clubs on or prior to Closing.
4.
<PAGE> 11
(f) INFRINGEMENTS. Any liability to a third party under
the Company's Proprietary Assets.
(g) TRANSACTION EXPENSES. All liabilities, costs,
obligations or expenses incurred by, or on behalf of, the Company in
connection with this Agreement and the transactions contemplated herein.
(h) LIABILITY FOR BREACH. Liabilities and obligations of
the Company or SCC for any breach or failure to perform any of the Company's
covenants and agreements contained in, or made pursuant to, this Agreement, or,
prior to the Closing, any other Contract, whether or not assumed hereunder or
under the Transactional Agreements, including any breach arising from
assignment of such contracts hereunder without consent of third parties.
(i) LIABILITIES TO AFFILIATES. Liabilities and
obligations of the Company to its Affiliates.
(j) WEST HOLLYWOOD; ADA SUIT. The costs, liabilities and
expenses required to refurbish the West Hollywood Club in respect of
allegations of non-compliance with the Americans with Disabilities Act of 1990
and the rules and regulations promulgated thereunder incurred to the minimum
extent necessary to settle or finally resolve the ADA Suit.
1.5 PURCHASE PRICE.
(a) As consideration for the sale of Purchased Assets, at
Closing Purchaser shall (i) pay to the Company a total of $4,859,373 (the
"Purchase Price") in two installments as set forth in Sections (b) and (c)
below, and (ii) assume the Assumed Liabilities by executing and delivering to
SCC and the Company the Assumption Agreement (the "Assumption Agreement") in
the form of Exhibit B and an assignment and assumption agreement with respect
to each Real Property Lease (each an "Assignment of Lease") in form
satisfactory to Purchaser in its sole discretion.
(b) The first installment of the Purchase Price shall be
$4,809,375 payable in cash at Closing.
(c) The second installment of the Purchase Price shall be
$50,000 payable in cash upon the earlier of commencement in a manner reasonably
acceptable to Purchaser or satisfaction of the Company's and SCC's obligations
under Section 6.3. Purchaser's obligation to make the payment contemplated by
this Section 1.5(c) shall be subject to any right of setoff that Purchaser may
be entitled to exercise (pursuant to Section 5 or otherwise).
1.6 CLOSING.
(a) Consummation of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Resch Polster
Alpert & Berger LLP, Los Angeles, California on the Closing Date.
5.
<PAGE> 12
(b) Contemporaneously with the execution and delivery of
this Agreement, four originally executed copies of the following items shall be
provided at Closing:
(i) SCC and Company will execute and deliver such
bills of sale, instruments of assignment, transfer, conveyance or endorsement,
including, without limitation, the Bill of Sale in the form of Exhibit D,
necessary or desirable to assign, convey, transfer and deliver to Purchaser good
and valid title to the Purchased Assets free and clear of any encumbrances;
(ii) SCC shall execute and deliver to Purchaser a
Noncompetition Agreement, (the "Noncompetition Agreement") in the form of
Exhibit E;
(iii) The Company and SCC shall cause Resch Polster
Alpert & Berger LLP to deliver to Purchaser an opinion letter dated as of the
Closing Date in the form of Exhibit F-1;
(iv) Purchaser shall cause Cooley Godward LLP to
deliver to SCC and the Company an opinion letter dated as of the Closing Date
in the form of Exhibit F-2;
(v) The Company and SCC shall cause to be
delivered to Purchaser a landlord's estoppel certificate and consent agreement
executed by each of the landlords to the Real Property Leases in form and
substance satisfactory to Purchaser in its sole discretion;
(vi) Purchaser shall have received the consent of
Banque Nationale de Paris, in form and substance satisfactory to Purchaser in
its sole discretion, to the consummation of the Transactions;
(vii) Purchaser and Bally's shall execute and
deliver a Reciprocity and Transition Agreement dated as of the Closing Date
(the "Reciprocity and Transition Agreement") in the form of Exhibit H;
(viii) Purchaser and SCC shall execute and deliver a
concession agreement in respect of each of the Santa Monica and West Hollywood
Clubs substantially in the form of Exhibit K;
(ix) The Company shall have executed and delivered
an amendment to the Real Property Lease relating to the Santa Monica Club in a
form acceptable to Purchaser in its sole discretion and attached hereto as
Exhibit L;
(x) The Company and SCC shall execute and deliver
all other documents, instruments or certificates as may be reasonably requested
by Purchaser.
(xi) The Company shall have executed and delivered
an amendment to the Real Property Lease relating to the West Hollywood Club in
a form acceptable to Purchaser in its sole discretion and attached hereto as
Exhibit M deleting Section 4.03 of such lease; and
6.
<PAGE> 13
1.7 PURCHASE PRICE ALLOCATION. Subsequent to the Closing Date,
Purchaser, the Company and SCC shall agree on an allocation of the Purchase
Price and Company liabilities (which liabilities shall be treated as an
additional amount paid by Purchaser to Seller) among the Purchased Assets (the
"Allocation Statement"). The allocation set forth in the Allocation Statement
will conform to the requirements of the Treasury Regulations under Section 1060
of the Code. The parties agree to report (on Form 8594 and otherwise) the
allocation of the Purchase Price and Company liabilities in a manner consistent
with the Allocation Statement. The allocation prescribed by the Allocation
Statement shall be conclusive and binding upon each party for all purposes. No
party shall file any Tax Return or other document with, or make any statement
or declaration to, any governmental body if such document, statement or
declaration is inconsistent with the allocation prescribed by the Allocation
Statement.
1.8 SALES TAXES. Subject to Section 7.2, the Company shall bear
and pay any sales taxes, use taxes, transfer taxes, documentary charges,
recording fees, or similar taxes, charges, fees or expenses that are or may
become payable in connection with the sale of the Purchased Assets to Purchaser
or in connection with any of the Transactions (other than any such tax, charge,
fee or expense payable in connection with the transactions contemplated by
Section 6.3, which shall be the sole obligation of, and be paid by, Purchaser).
1.9 ACCOUNTING TREATMENT. The parties intend that the
Acquisition will be treated as a purchase for accounting purposes.
1.10 TAX CONSEQUENCES. For federal income tax purposes, the
Acquisition is intended to constitute a taxable transaction.
1.11 FURTHER ACTION. After the Closing Date, SCC and the Company
shall execute and deliver such bills of sale, endorsements, assignments and
other documents and take any further action as may be reasonably necessary to
assign, convey, transfer and deliver to Purchaser good and valid title to the
Purchased Assets free and clear of any Encumbrances.
1.12 PRORATIONS.
(a) Except as otherwise set forth herein, at and as of
the Closing Date, Purchaser and the Company shall proportionately allocate (i)
real property taxes and assessments for each of the Clubs for the current
fiscal year of the Company if and only to the extent that the Company shall be
liable for real property taxes and assessments under the applicable Real
Property Lease, (ii) rents and other payments, including, without limitation,
CAM changes, under the Real Property Leases paid in advance for the month in
which the Closing occurs, (iii) utility and sewer charges paid in advance for
the month in which the Closing occurs and (iv) payments under the Assumed
Contracts, other than the Real Property Leases, paid in advance for the month
in which the Closing occurs. The Company shall maintain in place all deposits
under the Real Property Leases and all utilities and other deposits for the
benefit of the Purchaser, except for the security deposit for the Real Property
Lease at the Santa Monica Club, which will be remitted to the Company. Neither
the Company nor SCC shall be entitled to any credit to the Purchase Price or
other benefit with respect to such deposits that remain in place. In the event
the parties are unable to proportionately allocate such amounts and other
operating expenses under this Section
7.
<PAGE> 14
1.12, whether paid in advance or payable subsequent to the Closing, the parties
agree to pro rate such amounts as of the Closing Date. Any party owing funds
to the other party shall remit such amounts as soon as practicable, but in any
event within 30 days after demand therefor.
(b) At and as of the Closing Date, Purchaser and the
Company shall proportionately allocate monthly dues paid one month in advance
whether or not paid at the time of Closing that relate solely to the month in
which the Closing shall occur. Notwithstanding anything contained herein to
the contrary, there shall be no proportionate allocation of (i) any membership
dues that have been paid more than one month in advance in the Ordinary Course
of Business, (ii) gift certificates issued in the Ordinary Course of Business,
or (iii) initiation fees paid and collected in the Ordinary Course of Business.
Any membership dues collected by the Company from and after the Closing shall
be held in trust for the account of Purchaser and shall be promptly remitted to
Purchaser minus any prorated amounts owed to the Company for the month in which
the Closing shall have, occurred as set forth in the preceding sentence. The
Company shall together with the above amount provide Purchaser with an
accounting of such membership dues in reasonable detail satisfactory to
Purchaser. Any membership dues collected by Purchaser from and after the
Closing that are owed to the Company shall be held in trust for the account of
the Company and shall be promptly remitted to the Company minus any prorated
amounts owed to Purchaser for the month in which the Closing shall have
occurred. Purchaser shall together with the above amount provide the Company
with an account of such Membership dues in reasonable detail satisfactory to
the Company.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SCC
The Company and SCC jointly and severally represent and warrant, to
and for the benefit of the Purchaser Indemnitees, as follows:
2.1 DUE ORGANIZATION; NO SUBSIDIARIES; ETC.
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of California and has
all necessary power and authority:
(i) to conduct its business in the manner in which
its business is currently being conducted;
(ii) to own and use its assets in the manner in
which its assets are currently owned and used; and
(iii) to perform its obligations under all Sports
Connection Contracts.
(b) Except as set forth on PART 2.1 of the Disclosure
Schedule, the Company has never conducted any business under or otherwise used,
for any purpose or in any jurisdiction, any fictitious name, assumed name,
trade name or other name.
8.
<PAGE> 15
2.2 FINANCIAL STATEMENTS.
(a) The Company has delivered, or caused to be delivered,
to Purchaser the following financial statements for each of the Clubs on a club
by club basis:
(i) the unaudited balance sheet of the Company's
cafe operations and investments in the Clubs' fixed assets at December 31,
1995 (the "Fiscal 1995 Balance Sheet"), and the related unaudited statements of
operation for the year ended December 31, 1995;
(ii) the unaudited balance sheet of the Company's
cafe operations and investments in the Club's fixed assets at January 31, 1996,
February 29, 1996, March 31, April 30, 1996, May 31, 1996, June 30, 1996 and
July 31, 1996 and the related unaudited statements of operations for the one,
two, three, four, five and six and seven-month periods, respectively, ended on
such dates (the items referred to in Sections 2.2(a)(i) and (ii) being
collectively referred to as the "Sports Connection Financial Statements"); and
(iii) the unaudited statement of operations for the
Clubs prepared by Bally's for the ten-month period ended December 31, 1995 (the
"Clubs Operating Statement").
(b) All of the Sports Connection Financial Statements are
accurate and complete in all material respects, and the dollar amount of each
line item included in the Sports Connection Financial Statements is accurate in
all material respects. The Sports Connection Financial Statements present
fairly the financial position of the Company's cafe operations and investments
in the Clubs' fixed assets as of the respective dates thereof and the results
of operations for the periods covered thereby. The Sports Connection Financial
Statements have been prepared in accordance with GAAP, applied on a consistent
basis throughout the periods covered.
2.3 ABSENCE OF CHANGES.
(a) Except as set forth in PART 2.3 of the Disclosure
Schedule, since December 31, 1995:
(i) there has not been any loss, damage or
destruction to, or any interruption in the use of, any of the Company's
material assets (whether or not covered by insurance);
(ii) since March 13, 1996. the Company has not
effected or been a party to any Acquisition Transaction;
(iii) the Company has not purchased or otherwise
acquired any asset from any other Person, except for equipment, supplies and
other items acquired by the Company in the Ordinary Course of Business;
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(iv) the Company has not sold or otherwise
transferred, and has not leased or licensed, any asset to any other Person
except for products sold by the Company from its inventory in the Ordinary
Course of Business,
(v) the Company has not pledged or hypothecated
any of its assets, including, without limitation, its Membership Agreements, or
otherwise permitted any of such assets to become subject to any Encumbrance;
(vi) none of the Purchased Assets has become bound
by any Contract that is not an Excluded Contract;
(vii) no Contract by which the Company or any of
the assets owned or used by the Company is or was bound, or under which the
Company has or had any rights or interest, has been amended or terminated other
than in the Ordinary Course of Business;
(viii) except to the Transactions, the Company has
not entered into any transaction or taken any other action outside the Ordinary
Course of Business, including without limitation, any sales of prepaid new or
promotional Membership Agreements or prepaid renewals or any existing
Membership Agreements other than in the Ordinary Course of Business; and
(ix) the Company has not agreed, committed or
offered (in writing or otherwise), to take any of the actions referred to in
clauses "(ii)" through "(viii)" above.
(b) Except as set forth in PART 2.3 of the Disclosure Schedule,
since December 31, 1995, there has not been any material adverse change in the
Company's business, condition, assets, liabilities, operations, financial
performance or net income.
2.4 TITLE TO ASSETS.
(a) The Company owns, and has good and valid title to,
all of the Purchased Assets, including, without limitation, the Membership
Agreements, free and clear of any Encumbrances.
(b) PART 2.4 of the Disclosure Schedule identifies all
material assets that are being leased or licensed to the Company, other than
the Real Property Leases, which are set forth in PART 2.7 of the Disclosure
Schedule.
2.5 MEMBERS.
(a) Attached as PART 2.5 of the Disclosure Schedule is
the form of Membership Agreement used by each of the Clubs to govern the
membership of each Member. True and complete copies of such Membership
Agreements arc maintained by Bally's.
(b) Prior to the Closing Date, Purchaser shall have been
provided, in a form acceptable to Purchaser in its sole discretion, on a
Club-by-Club basis and as of a recent date, (i) the name of the Members, (ii)
monthly Club fee, (iii) the amount of prepaid Club fees, if any, (iv) the
number of months of service covered by each such prepayments, (v) the number of
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renewable Memberships and the terms thereof, and (vi) the Memberships issued on
a promotional, non-fee basis (the "Facilities Schedule").
(c) Prior to the Closing Date, Purchaser shall have been
provided, in a form acceptable to Purchaser in its sole discretion, a breakdown
of the number of Members and aggregate monthly Membership fees at each Club
operated by or on behalf of the Company in the State of California for all
months after December 31, 1994.
(d) The terms and provisions of each Membership Agreement
comply with the provisions of California Civil Code Sections 1812.80 through
1812.95. Neither the Company nor SCC is required to notify at or prior to
Closing any Member of the Santa Monica Club of any right arising out of the
Transactions to a refund in compliance with that certain Order of the City of
Santa Monica.
(e) Initiation fees and prepaid monthly Club fees
obtained by or on behalf of the Company from any Members are not refundable
except pursuant to the terms of the Membership Agreements and the Santa Monica
Order.
2.6 EQUIPMENT, ETC. PART 2.6 of the Disclosure Schedule
identifies for each Club on a club-by-club basis substantially all equipment
used or held for use by the Company all of which is owned by the Company and
will be transferred as part of the Purchased Assets at Closing.
2.7 REAL PROPERTY. The Company does not own any real property or
any interest in real property, except for the South Bay Lease and the
leaseholds created under the real property leases identified in PART 2.7 of
the Disclosure Schedule and true and complete copies of which are attached
thereto. PART 2.7 of the Disclosure Schedule provides an accurate and complete
description of the annual rental rate of each such lease, the termination date
thereof, extension periods and any material use, hour or radius restrictions.
The Company enjoys peaceful and undisturbed possession of such premises, which
are supplied with utilities and other reasonable services necessary for the
operation thereof. PART 2.7 of the Disclosure Schedule indicates in each case
whether the consent of a third party, including the lessor, is required for the
assignment and transfer of all of the right, title interest of the Company, in
and to such lease upon the consummation of the Transactions. Except as
disclosed in PART 2.7 of the Disclosure Schedule, (a) all such leases are
legally valid and binding and are in full force and effect; (b) there have not
been and there currently are not any material defaults thereunder by the
Company or by any other party thereto; (c) no event has occurred which (whether
with or without notice, lapse of time or the happening or occurrence of any
other event) would constitute a default thereunder entitling the landlord or
any third party to terminate the lease; (d) the real property and all
improvements thereto which are the subject of such leases are in conformity
with all applicable ordinances, regulations and building, zoning and other
applicable law. There has been no substantial damage to any portion of such
property caused by fire or other casualty which has not been repaired to
restored. Neither SCC nor the Company has received written notice of any
Proceeding by any Governmental Body to modify or amend the zoning statutes,
ordinances, regulations or laws applicable to any such leased facilities, which
would materially impair the use of such leased
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<PAGE> 18
facilities as currently being used or materially detract from the value thereof
Neither SCC nor the Company has received written notice of any Proceeding
commenced by any private person which would materially impair the use of such
leased facilities as currently being used or materially detract from the value
thereof. The conditions use permit relating to the West Hollywood Club
has not been revoked, modified or amended and is in full force and effect
subject to terms thereof and said permit runs with land.
2.8 PROPRIETARY ASSETS.
(a) Except as set forth in Part 2.8 of the Disclosure
Schedule, there is no Proprietary Asset that is owned by or licensed to the
Company or that is otherwise used in connection with the Company's business.
(b) Except as set forth in Part 2.8 of the Disclosure
Schedule, the Company has not received any notice or other communication (in
writing or otherwise) of any actual, alleged, possible or potential
infringement of, any Proprietary Asset owned or used by any other Person.
2.9 CONTRACTS.
(a) Part 2.9 of the Disclosure Schedule identifies and
provides an accurate and complete description of each Sports Connection
Contract, except for any Excluded Contract, Membership Agreement and Bally's
Agreement. None of the Bally's Agreements nor any provision thereof (nor any
Liability resulting therefrom, related thereto or arising thereunder) shall
survive after the Closing, except such agreements, provisions or Liabilities
that will not adversely affect Purchaser or the Purchased Assets. The Company
has delivered to Purchaser accurate and complete copies of all Sports
Connection Contracts identified in Part 2.9 of the Disclosure Schedule,
including all amendments thereto.
(b) Each Sports Connection Contract identified in Part
2.9 of the Disclosure Schedule is valid and in full force and effect, and is
enforceable by the Company in accordance with its terms, except as enforcement
may be limited by applicable bankruptcy, insolvency, reorganization,
arrangement, moratorium or other similar laws affecting creditors' rights, and
subject to general equity principles and to limitations on availability or
equitable relief, including specific performance.
(c) Except as set forth in Part 2.9 of the Disclosure
Schedule, the Company has not received any notice or other communication (in
writing or otherwise) regarding any actual or alleged violation or breach of,
or default under, any Sports Connection Contract, except for Excluded Contracts
and Bally's Agreements.
(d) Except as set forth in Part 2.9 of the Disclosure
Schedule, the Company has not guaranteed or otherwise agreed to cause, insure
or become liable for, or pledged any of its assets to secure, the performance
or payment of any obligation or other Liability of any other Person.
12.
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(e) The Contracts identified in Part 2.9 of the
Disclosure Schedule, the Membership Agreements, the Bally's Agreements and the
Excluded Contracts collectively constitute all of the Contracts necessary to
enable the Company to conduct its business in the manner in which its business
is currently being conducted.
2.10 COMPLIANCE WITH LEGAL REQUIREMENTS.
(a) Except as set forth in Part 2.10 of the Disclosure
Schedule, the Company has not received, at any time, any notice or other
communication (in writing or otherwise) from any Governmental Body or any other
Person regarding any actual, alleged, possible or potential violation of, or
failure to comply with, any Legal Requirement.
(b) The Company has delivered to Purchaser an accurate
and complete copy of each report or study in the Company's possession that
addresses or otherwise relates to the compliance of the Company with, or the
applicability to the Company of, any Legal Requirement.
2.11 GOVERNMENTAL AUTHORIZATIONS. Except as set forth in Part 2.11
of the Disclosure Schedule, the Company has not received any notice or other
communication (in writing or otherwise) from any Governmental Body or any other
Person regarding (A) any actual, alleged, possible or potential violation of or
failure to comply with any term or requirement of any Governmental
Authorization, or (B) any actual, proposed, possible or potential revocation,
withdrawal, suspension, cancellation, termination or modification of any
Governmental Authorization.
2.12 EMPLOYEE AND LABOR MATTERS.
(a) The Company has no employees of its own and has not
had, in the past seven years, any employees subject to collective-bargaining
agreements. The Company has no obligations or potential obligations with
respect to any former employees, if any. Attached to Part 2.12 of the
Disclosure Schedule is, to the Company's and SCC's Knowledge, a current payroll
report for the employees employed by Bally's and independent contractors
utilized by Bally's to operate the Clubs, including what is, to the Company's
and SCC's Knowledge, a complete and accurate list identifying all such
employees and independent contractors as such and setting forth their current
salaries or rates.
(b) Except as set forth in Part 2.12 of the Disclosure
Schedule, the employment of each of the Bally's employees described in Part
2.12 of the Disclosure Schedule is terminable by Bally's at will.
2.13 ENVIRONMENTAL MATTERS.
(a) During the period that the Company has owned or
leased its properties or owned or operated any facilities, there have been no
disposals, releases or threatened releases of Hazardous Material on, from or
under such properties or facilities that may directly or indirectly give rise
to, or result in the Company becoming subject to any Liability. Neither the
Company
13.
<PAGE> 20
nor SCC has any Knowledge of any presence, disposals, releases or threatened
releases of Hazardous Material on, from or under any such properties or
facilities that may have occurred prior to the Company having taken possession
of any of such properties or facilities or after the Company no longer had
possession of any of such properties or facilities. For the purposes of this
Agreement, the terms "disposal," "release," and "threatened release" shall have
the definitions assigned thereto by CERCLA.
(b) The Company has not used, handled, generated,
manufactured or stored on, under or about such properties or facilities or
transported to or from such properties or facilities any Hazardous Material.
(c) There has been no Proceeding brought or threatened in
writing against the Company by, or any settlement reached by the Company with,
any party or parties alleging that the Company is liable for the presence,
disposal, release or threatened release of any Hazardous Material on from or
under any of such properties or facilities or for a violation or alleged
violation of any Environmental Law.
(d) The Company is and at all times was in compliance
with all applicable Environmental Laws and has used and is in compliance with
all Licenses, permits and authorizations required by the applicable
Environmental Laws.
(e) There are no active or inactive underground storage
tanks located on the properties currently owned or leased by the Company.
(f) The Company has provided Purchaser all environmental
investigations, inspections, studies, audits, tests, reviews or other written
analysis prepared by the Company or any third party in the Company's possession
and conducted in relation to any property or facility now or previously owned
or leased by the Company.
2.14 RELATED PARTY TRANSACTIONS. Except as set forth in Part 2.14
of the Disclosure Schedule, no Related Party has any direct or indirect
interest of any nature in any asset used in or otherwise relating to the
business of the Company.
2.15 PROCEEDINGS; ORDERS.
(a) Except as set forth in Part 2.15 of the Disclosure
Schedule, there is no pending Proceeding, and the Company has not received any
notice or other communication (in writing or otherwise) to commence any
Proceeding:
(i) that involves the Company or that otherwise
relates to or might affect the Company's business or any of the assets owned or
used by the Company (whether or not the Company is named as a party thereto)
and that (A) is not covered by insurance and (B) would materially adversely
affect the Company if such Proceeding were to be finally determined in a manner
adverse to the Company; or
14.
<PAGE> 21
(ii) that challenges, or that could be reasonably
likely to have the effect of preventing, delaying, making illegal or otherwise
interfering with, any of the Transactions.
Except as set forth in PART 2.15 of the Disclosure Schedule, no event has
occurred, and no claim, dispute or other condition or circumstance exists, that
would directly or indirectly give rise to or serve as a basis for the
commencement of any such Proceeding.
(b) Except as set forth in PART 2.15 of the Disclosure Schedule,
there is no Order to which the Company, or any of the assets owned or used by
the Company, is subject.
2.16 AUTHORITY; BINDING NATURE OF AGREEMENTS. The Company has the
absolute and unrestricted right, power and authority to enter into and to
perform its obligations under this Agreement and the other Transactional
Agreements to which it is a party; and the execution, delivery and performance
by the Company of this Agreement and the other Transactional Agreements have
been duly authorized by all necessary action on the part of the Company and its
stockholders, board of directors and officers. This Agreement constitutes the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or
other similar laws affecting creditors' rights, and subject to general equity
principles and to limitations on availability of equitable relief, including
specific performance. SCC, the sole shareholder of the Company, has approved,
adopted and authorized this Agreement.
2.17 NON-CONTRAVENTION; CONSENTS. Except as set forth in Part 2.17
of the Disclosure Schedule, neither the execution and delivery of any of the
Transactional Agreements, not the consummation or performance of any of the
Transactions, will directly or indirectly (with or without notice or lapse of
time):
(a) contravene, conflict with or result in a violation of
(i) any of the provisions of the Company's articles of incorporation or bylaws,
or (ii) any resolution adopted by the Company's stockholders, the Company's
board of directors or any committee of the Company's board of directors;
(b) contravene, conflict with or result in a violation
of, or give any Governmental Body or other Person the right to challenge any of
the Transactions or to exercise any remedy or obtain any relief under, any
Legal Requirement or any Order to which the Company, or any of the assets owned
or used by the Company, is subject;
(c) contravene, conflict with or result in a violation of
any of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Company or any of its employees or that
otherwise relates to the Company's business or to any of the assets owned or
used by the Company;
15.
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(d) contravene, conflict with or result in a violation or
breach of, or result in a default under, any provision of, or give any Person
the right to declare a default under, any Assumed Contract;
(e) give any Person the right to (i) declare a default or
exercise any remedy under any Assumed Contract, (ii) accelerate the maturity or
performance of any Assumed Contract, or (iii) cancel, terminate or modify any
Assumed Contract; or
(f) result in the imposition or creation of any
Encumbrance upon or with respect to any Purchased Asset owned or used by the
Company.
Except as set forth in PART 2.17 of the Disclosure Schedule, the Company was
not, is not or will not be required to make any filing with or give any notice
to, or to obtain any Consent from, any Person in connection with the execution
and delivery of any of the Transactional Agreements or the consummation or
performance of any of the Transactions.
2.18 BROKERS. The Company has not agreed or become obligated to
pay, nor has it taken any action that might result in any Person claiming,
through the Company, to be entitled to receive, any brokerage commission,
finder's fee or similar commission or fee in connection with any of the
Transactions.
2.19 LIABILITIES. Except as set forth in PART 2.19 Disclosure
Schedule, the Company has no Liabilities other than such Liabilities as are (i)
stated or described in the Fiscal 1995 Balance Sheet, (ii) incurred in the
Ordinary Course of Business since the date of the Fiscal 1995 Balance Sheet or
(iii) incurred in connection with the Transactions contemplated hereunder.
2.20 WARN ACT. Except as set forth in PART 2.20 of the Disclosure
Schedule, neither SCC, Bally's or the Company has taken or failed to take any
action, which may result in any violation of the Worker's Adjustment and
Restraining Notification Act, P.L. 100-379, 102 State. 890 (the "WARN Act")
with respect to the operations of the Clubs or which would subject Purchaser to
any disclosure or announcement obligations under the WARN Act.
Notwithstanding anything contained herein to the contrary, except for the
representations and warranties made in Sections 2.4, 2.16 and 2.18, all of the
representations and warranties made in this Section 2 are hereby made to the
Knowledge of the Company and SCC.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF SCC
SCC represents and warrants, to and for the benefit of the Purchaser
Indemnitees, as follows:
3.1. DUE ORGANIZATION. SCC is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all necessary power and authority:
(i) to conduct its business in the manner in
which its business is currently being conducted; and
16.
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(ii) to own and use its assets in the manner in
which its assets are currently owned and used.
3.2 AUTHORITY; BINDING NATURE OF AGREEMENTS. SCC has the absolute
and unrestricted right, power and capacity to enter into and to perform its
obligations under each of the Transactional Agreements to which it is or may
become a party. This Agreement constitutes the legal, valid and binding
obligation of SCC, enforceable against SCC in accordance with its terms. Upon
the execution of each of the other Transactional Agreements at the Closing,
each of such other Transactional Agreements will constitute the legal, valid
and binding obligation of SCC if a party thereto, and will be enforceable
against SCC in accordance with its terms, except as enforcement may be limited
by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium
or other similar laws affecting creditors' rights, and subject to general
equity principles and to limitations on availability of equitable relief,
including specific performance.
3.3 BROKERS. SCC has not agreed or become obligated to pay, nor
has it taken any action that might result in any Person claiming, through SCC,
to be entitled to receive, any brokerage commission, finder's fee or similar
commission or fee in connection with any of the Transactions.
3.4 NON-CONTRAVENTION; CONSENTS. Except as set forth in Part 3.4
of the Disclosure Schedule, neither the execution and delivery of any of the
Transactional Agreements, nor the consummation or performance of any of the
Transactions, will directly or indirectly (with or without notice or lapse of
time):
(a) contravene, conflict with or result in a violation of
(i) any of the provisions of SCC's certificate of incorporation or bylaws, or
(ii) any resolution adopted by SCC's stockholders, SCC's board of directors or
any committee of SCC's board of directors;
(b) contravene, conflict with or result in a violation
of, or give any Governmental Body or other Person the right to challenge any of
the Transactions or to exercise any remedy or obtain any relief under, any
Legal Requirement or any Order to which SCC, or any of the assets owned or used
by SCC, is subject; or
(c) give any Person the right to (i) declare a default or
exercise any remedy under any Assumed Contract, (ii) accelerate the maturity or
performance of any Assumed Contract, or (iii) cancel, terminate or modify any
Assumed Contract.
Except as set forth in PART 3.4 of the Disclosure Schedule, SCC was not, is
not or will not be required to make any filing with or give any notice to, or
to obtain any Consent from, any Person in connection with the execution and
delivery of any of the Transactional Agreements or the consummation or
performance of any of the Transactions.
Notwithstanding anything contained herein to the contrary, except for the
representations and warranties made in Sections 3.1, 3.2 and 3.3, all of the
representations and warranties made in this Section 3 are hereby made to the
Knowledge of SCC.
17.
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SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants, to and for the benefit of the Seller
Indemnitees, as follows:
4.1 DUE ORGANIZATION. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and has all necessary power and authority:
(a) to conduct its business in the manner in which its
business is currently being conducted; and
(b) to own and use its assets in the manner in which its
assets are currently owned and used.
4.2 FINANCIAL STATEMENTS.
(a) Purchaser has delivered, or caused to be delivered, to SCC
Purchaser's audited balance sheet at December 31, 1995, and its related audited
statements of operations, changes in stockholder's equity and cash flows for
the twelve months ended December 31, 1995.
(b) To Purchaser's Knowledge, the Purchaser Financial Statements
are accurate and complete in all material respects, and the dollar amount of
each line item included in such financial statements is accurate in all
material respects. To Purchaser's Knowledge, the Purchaser Financial
Statements present fairly the financial position of Purchaser as of the dates
thereof and the results of operations, changes in stockholder's equity and cash
flows of Purchaser for the periods covered thereby. To the Knowledge of
Purchaser, the Purchaser Financial Statements have been prepared in accordance
with GAAP throughout the periods covered.
4.3 AUTHORITY; BINDING NATURE OF AGREEMENT.
(a) Purchaser has the absolute and unrestricted right,
power and authority to enter into and perform its obligations under this
Agreement and the other Transactional Agreements to which it is a party;
(b) The execution, delivery and performance of this
Agreement and the other Transactional Agreements by Purchaser has been duly
authorized by all necessary action on the part of Purchaser and its board of
directors; and
(c) Each of this Agreement and the other Transactional
Agreements constitutes a legal, valid and binding obligation of Purchaser,
enforceable against Purchaser in accordance with its terms, except as
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium or other similar laws affecting
creditors' rights, and subject to general equity principles and to limitations
on availability of equitable relief, including specific performance.
4.4 BROKERS. Purchaser has not agreed or become obligated to pay,
and has not taken any action that might result in any Person claiming, through
Purchaser, to be entitled to receive,
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<PAGE> 25
any brokerage commission, finder's fee or similar commission or fee in
connection with any of the Transactions.
4.5 NON-CONTRAVENTION; CONSENTS. To Purchaser's Knowledge,
neither the execution and delivery of any of the Transactional Agreements, nor
the consummation or performance of any of the Transactions, will directly or
indirectly (with or without notice or lapse of time) contravene, conflict with
or result in a violation of (i) any of the provisions of Purchaser's
certificate of incorporation or bylaws, or (ii) any resolution adopted by
Purchaser's stockholders, Purchaser's board of directors or any committee of
Purchaser's board of directors.
SECTION 5. INDEMNIFICATION, ETC.
5.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
(a) The representations and warranties made by the parties hereto
in this Agreement shall survive the Closing and shall expire on the first
anniversary of the Closing Date; provided, (i) the representations and
warranties contained in Sections 2.1, 2.16, 3.1, 3.2, 4.1 and 4.3 shall survive
the Closing and shall not terminate, and (ii) the representations and
warranties contained in Sections 2.4, 2.7, 3.3 and 4.4 shall survive until 90
days after the expiration of the applicable statute of limitations, provided
further, that if, at any time prior to the first anniversary of the Closing
Date or other applicable time period, any Indemnitees (acting in good faith)
delivers a written notice alleging the existence of a Breach of any of such
representations and warranties and asserting a claim for recovery under Section
5 based on such alleged Breach, then the claim asserted in such notice shall
survive the first anniversary of the Closing or such other applicable time
period until such time as such claim is fully and finally resolved.
(b) For purposes of this Agreement, each statement or other item
of information set forth in the Disclosure Schedule shall be deemed to be a
representation and warranty in this Agreement made by the party by whom such
schedule was delivered.
5.2 INDEMNIFICATION BY SCC AND THE COMPANY. SCC and the Company,
jointly and severally, shall hold harmless and indemnify each of the Purchaser
Indemnitees from and against, and shall compensate and reimburse each of the
Purchaser Indemnitees for, any Damages which are suffered or incurred by any of
the Purchaser Indemnitees or to which any of the Purchaser Indemnitees may
otherwise become subject at any time (regardless of whether or not such Damages
relate to any third-party claim) and which arise from, or as a result of, or
are connected with:
(a) any Breach of any representation or warranty made by
the Company or SCC in this Agreement or any of the Transactional Agreements,
except such Breaches as to which Purchaser had Knowledge at Closing;
(b) any Breach of any covenant or obligation of the
Company or SCC;
(c) any Liability that arises from or relates to any
Sports Connection Transaction Costs;
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(d) any matter identified or referred to in Part 2.15 of
the Disclosure Schedule;
(e) any Liability to which any of the Purchaser
Indemnitees may become subject and that arises from or relates to (A) any the
Excluded Assets or (B) any Liability of the Company not specifically assumed by
Purchaser pursuant to this Agreement; or
(f) subsequent to the Closing, any Liability that arises
from or relates to both (i) any non-compliance of the West Hollywood Club with
the Americans with Disabilities Act and any and all regulations, rules,
building codes promulgated thereunder and (ii) a claim or Proceeding instituted
by a third party (which shall include, without limitation, the landlord of the
West Hollywood Club, its lender, its insurance company, Purchaser's lender and
Purchaser's insurance company so long as such claim or Proceeding is not
initiated or solicited by Purchaser);
(g) any Proceeding commenced relating to any Breach,
Liability or matter of the type referred to in clause "(a)", "(b)", "(c)",
"(d)", "(e)" or "(f)", above.
5.3 INDEMNIFICATION BY PURCHASER. Purchaser shall hold harmless
and indemnify each of the Seller Indemnitees from and against, and shall
compensate and reimburse each of the Seller Indemnitees for, any Damages that
are suffered or incurred by any of the Seller Indemnitees or to which any of
the Seller Indemnitees may otherwise become subject at any time (regardless of
whether or not such Damages relate to any third-party claim) and that arise
from, or as a result of, or are connected with:
(a) any Breach of any representation or warranty made by
Purchaser in this Agreement or any of the Transactional Agreements, except such
Breaches as to which SCC or the Company had Knowledge at Closing;
(b) any Breach of any covenant or obligation of Purchaser
in this Agreement or any of the Transactional Agreements;
(c) except for any Liability as to which SCC or the
Company had Knowledge at Closing to which neither SCC nor the Company shall
have any right to indemnification, any Liability to which any of the Seller
Indemnitees may become subject and that arises from or relates to (i) the
Purchased Assets subsequent to Closing, (ii) any Assumed Liability, or (iii)
the operation of any of the Clubs subsequent to Closing; provided, that such
Liability arises solely out of the operations of the Clubs by Purchaser and
does not arise from or relate, directly or indirectly, to any Liability
occurring or existing on or prior to Closing; or
(d) any Proceeding commenced relating to any Breach,
Liability or matter of the type referred to in clause "(a)", "(b)" or "(c)"
above.
5.4 NONEXCLUSIVITY OF INDEMNIFICATION REMEDIES. The
indemnification remedies and other remedies provided in this Section 5 shall
not be deemed to be exclusive. Accordingly, the exercise by any Person of any
of its rights under this Section 5 shall not be deemed to be an election of
remedies and shall not be deemed to prejudice, or to constitute or operate as a
waiver
20.
<PAGE> 27
of, any other right or remedy that such Person may be entitled to exercise. In
addition to any rights of setoff or other right or remedy that any of the
Indemnitees may be entitled to exercise (whether under this Agreement, under
any other Contract, under any statute, rule or other Legal Requirement, at
common law, in equity or otherwise) each Indemnitee shall have the right to
withhold and deduct any sum that may be owed to such Indemnitee under this
Section 5 from any amount otherwise payable by such Indemnitee to the
indemnifying party.
5.5 LIMITATIONS ON INDEMNIFICATION.
(a) The Company and SCC shall not be required to make any
indemnification payment pursuant to Section 5.2 for any Breach of any of their
representations and warranties until such time as the total amount of all
Damages (including the Damages arising from such Breach and all other Damages
arising from any other Breaches of any representations or warranties) that have
been suffered or incurred by any one or more of the Purchaser Indemnitees, or
to which any one or more of the Purchaser Indemnitees has or have otherwise
become subject, exceeds $50,000 in the aggregate, at which time such
Indemnitees shall be entitled to be indemnified against only the amount of such
Damages in excess of $50,000.
(b) Purchaser shall not be required to make any
indemnification payment pursuant to Section 5.3 for any Breach of any of its
representations and warranties until such time as the total amount of all)
Damages (including the Damages arising from such Breach and all other Damages
arising from any other Breaches of any representations or warranties) that have
been suffered or incurred by any one or more of the Seller Indemnitees, or to
which any one or more of the Seller Indemnitees has or have otherwise become
subject, exceeds $50,000 in the aggregate, at which time such Indemnitees shall
be entitled to be indemnified against only the amount of such Damages in excess
of $50,000.
(c) The obligations of the parties hereto to indemnify
and hold harmless a Person, pursuant to Section 5.2(a)(i) and 5.3(a) above,
shall terminate when the applicable representation and warranty terminates
pursuant to Section 5.1(a) above; provided however, such obligation to
indemnify and hold harmless shall not terminate with respect to any matter
about which an Indemnitee shall have, before the expiration of the applicable
time period, delivered written notice alleging the existence of a Breach of any
of such representations and warranties and asserting a claim for recovery under
Section 5.
(d) The obligations of the Company and SCC to indemnify
and hold harmless any Purchaser Indemnitee pursuant to Section 5.2(f)(i) shall
be limited to the minimum extent required to satisfy and discharge, in full,
any such claim or Proceeding contemplated by Section 5.2(f) up to fifty percent
(50%) of the first Two Hundred Thousand Dollars ($200,000) of Damages and (ii)
shall terminate one year after the Closing; provided, however, such obligations
shall not terminate with respect to any matter contemplated by Section 5.2(f)
about which an Indemnitee shall have, before the expiration of such one-year
period, delivered written notice of such Liability asserting a claim for
recovery under Section 5.2(f).
21.
<PAGE> 28
5.6 DEFENSE OF THIRD PARTY CLAIMS BY SCC AND THE COMPANY.
(e) In the event of the assertion or commencement by any
Person of any claim or Proceeding with respect to which the Company or SCC may
become obligated to indemnify, hold harmless, compensate or reimburse any
Purchaser Indemnitee pursuant to this Section 5, Purchaser shall promptly
notify SCC or the Company of the assertion or commencement of such claim or
Proceeding; provided, however, that the failure to notify SCC or the Company of
the assertion or commencement of such claim or Proceeding shall not limit or
otherwise affect any liability or obligation that the Company and SCC may have
to any Purchaser Indemnitee, except to the extent such indemnified party shall
have been materially prejudiced by such failure. Neither SCC nor the Company
shall have the right to assume the defense of such claim or Proceeding unless
otherwise agreed upon by SCC, the Company and Purchaser at the time. The
parties shall cooperate with each other in the defense of such claim or
Proceeding.
(b) In the event the parties agree to allow SCC to assume
the defense of a Proceeding, then:
(i) it will be deemed conclusively established
for purposes of this Agreement that all claims made in such claim or Proceeding
are within the scope of and are subject to the indemnification provisions set
forth in Section 5.2, and neither the Company nor SCC shall be permitted to
contest the applicability of Section 5.2 to such claim or Proceeding or to
contest SCC's and the Company's obligation to provide indemnification with
respect thereto;
(ii) Purchaser shall make available to SCC any
non-privileged documents and materials in the possession of Purchaser that may
be necessary to the defense of such claim or Proceeding;
(iii) SCC shall keep Purchaser informed of all
material developments and events relating to such claim or Proceeding;
Purchaser shall have the right to participate (at its own expense) in the
defense of such claim or Proceeding;
(iv) SCC shall not settle, adjust or compromise
such claim or Proceeding unless (A) such settlement, adjustment or compromise
involves no finding or admission of any violation or breach by any Purchaser
Indemnitee of any right of any other Person or of any Legal Requirement, (B)
the sole relief provided in connection with such settlement, adjustment or
compromise is monetary damages that are paid in full by SCC or noncash items,
which do not affect any of the Purchaser Indemnitees or the Purchased Assets
and (C) such settlement, adjustment or compromise contains a release of the
Purchaser Indemnitees from the subject matter of such claim or Proceeding.
(v) Purchaser shall use commercially reasonable
efforts to cooperate with SCC, in a timely manner, in the defense of such claim
or Proceeding.
22.
<PAGE> 29
5.7 DEFENSE OF THIRD PARTY CLAIMS BY PURCHASER.
(a) In the event of the assertion or commencement by any
Person of any claim or Proceeding with respect to which Purchaser may become
obligated to indemnify, hold harmless compensate or reimburse any Seller
Indemnitee pursuant to this Section 5, SCC shall promptly notify Purchaser of
the assertion or commencement of such claim or Proceeding; provide, however,
that the failure to notify Purchaser after commencement of such claim or
Proceeding shall not limit or otherwise affect any liability or obligation that
Purchaser may have to any Seller Indemnitee, except to the extent such
indemnified party shall have been materially prejudiced by such failure.
Purchaser shall not have the right to assume the defense of such claim or
Proceeding unless otherwise agreed upon by SCC, the Company and Purchaser at
the time. The parties shall cooperate with each other in the defense of such
claim or Proceeding.
(b) In the event the parties agree to allow Purchaser to
assume the defense of a Proceeding, then:
(i) it will be deemed conclusively established
for purposes of this Agreement that all claims made in such claim or Proceeding
are within the scope of and are subject to the indemnification provisions set
forth in Section 5.3, and Purchaser shall not be permitted to contest the
applicability of Section 5.3 to such claim or Proceeding or to contest
Purchaser's obligation to provide indemnification with respect thereto;
(ii) SCC shall make available to Purchaser any
non-privileged documents and materials in the possession of SCC or the Company
that may be necessary to the defense of such claim or Proceeding;
(iii) Purchaser shall keep SCC informed of all
material developments and events relating to such claim or Proceeding; SCC
shall have the right to participate (at its own expense) in the defense of such
claim or Proceeding;
(iv) Purchaser shall not settle, adjust or
compromise such claim or Proceeding unless (A) such settlement, adjustment or
compromise involves no finding or admission of any violation or breach by any
Seller Indemnitee of any right of any other Person or of any Legal Requirement,
(B) the sole relief provided in connection with such settlement, adjustment or
compromise is monetary damages that are paid in full by Purchaser or non-cash
items, which do not affect any of the Seller Indemnitees and (C) such
settlement, adjustment or compromise contains a full and absolute discharge and
release of the Seller Indemnitees.
(v) SCC and the Company shall use commercially
reasonably efforts to cooperate with Purchaser, in a timely manner, in the
defense of such claim or Proceeding.
5.8 EXERCISE OF REMEDIES BY INDEMNITIES. Notwithstanding
anything herein to the contrary, no Indemnitee (other than Purchaser or any
successor thereto or assign thereof for the Purchaser Indemnitees or SCC or any
successor thereto or assign thereof for the Seller Indemnitees) shall be
permitted to assert any indemnification claim or exercise any other remedy
under this Agreement.
23.
<PAGE> 30
SECTION 6. COVENANTS
6.1 AUDIT. The Company and SCC agree subsequent to the Closing to
cooperate with Purchaser to allow its accountants to complete an audit of the
Sports Connection Financial Statements and the business and operations of the
Company for up to the three most recent prior fiscal years (prior to, at or
after the Closing) as reasonably requested by Purchaser to the extent SCC or
the Company has such information or has the right to obtain such information
from Bally's. To the extent such right is assignable, SCC and the Company
hereby assign such right to Purchaser.
6.2 SELLER COOPERATION. The Company and SCC shall use
commercially reasonable efforts to cooperate with Purchaser prior to, on or
subsequent to the Closing to perform the following:
(a) assist Purchaser in recording Memoranda of Lease in
the form of Exhibit I for each of the Real Property Leases;
(b) assist Purchaser in receiving commitments from
Stewart Title of California (in form reasonably acceptable to Purchaser) to
issue ALTA Leasehold Policies of Tide Insurance (Form 1992), insuring Purchaser
as the holder of a leasehold interest in each of the Peal Property Laws; and
(c) assist Purchaser in obtaining Non-Disturbance
Agreements in the form of Exhibit J from each and every lender holding a
security interest in the real property underlying any of the Real Property
Leases.
6.3 REFURBISHMENT OF THE WEST HOLLYWOOD CLUB. The Company and
SCC, jointly and severally, agree to refurbish, at their sole expense, the West
Hollywood Club to the minimum extent required in the settlement or final
adjudication of the ADA Suit. The Company and SCC shall use commercially
reasonable efforts to complete the aforementioned refurbishment as soon as
practicable with the least amount of disruption to the operations of the West
Hollywood Club, including, without limitation, selection of a reputable,
licensed and insured general contractor reasonably satisfactory to Purchaser to
perform such refurbishments. Purchaser agrees to use commercially reasonable
efforts to cooperate with the Company and SCC to complete such refurbishment.
6.4 ACCESS. For a period of 30 days after the Closing Date,
Purchaser agrees to permit Bally's and certain concessionaires operating at the
Clubs at the time of Closing reasonable access to the Clubs for the purpose of
winding up their respective operations and removing such Persons' rightful
equipment and other property. Such winddown operations shall be conducted at
such times and in such manner consistent with the Ordinary Course of Business
and such removals shall be made at such times and in such manner reasonably
acceptable to Purchaser. Purchaser shall have no liability to the Company, SCC
or any Person with respect to its covenants under this Section 6.4. Further,
Purchaser shall have no liability and be under no obligation to maintain or
safeguard such equipment and other property. Nothing continued in this Section
6.4 shall entitle the Company or SCC to any indemnification rights under
Section 5
24.
<PAGE> 31
hereof. The Company and, SCC shall have no liability to Purchaser for
Purchaser's agreement to provide access for such winddown operations and the
removal of such property and equipment during such 30-day period.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 FURTHER ASSURANCES. Each party hereto shall execute and/or
cause to be delivered to each other party hereto such instruments and other
documents, and shall. take such other actions, as such other party may
reasonably request (prior to, at or after the Closing) for the purpose of
carrying out or evidencing any of the Transactions.
7.2 FEES AND EXPENSES.
(a) Subject to the provisions of Section 5 (including the
indemnification and other obligations of Purchaser thereunder) SCC shall bear
and pay all its own Transaction Costs and all Transaction Costs (including all
legal fees and expenses payable to Resch Polster Alpert & Berger LLP) that have
been incurred or that are in the future incurred by, on behalf of or for the
benefit of, the Company (the "Sports Connection Transaction Costs").
(b) Subject to the provisions of Section 5 (including the
indemnification and other obligations of SCC thereunder), Purchaser shall bear
and pay all Transaction Costs (including all legal fees and expenses payable to
Cooley Godward LLP) that have been incurred or that we in the future incurred
by, or on behalf of or for the benefit of, Purchaser (the "Purchaser
Transaction Costs").
7.3 ATTORNEYS' FEES. If any legal action or other legal
proceeding relating to any of the Transactional Agreements or the enforcement
of any provision of any of the Transactional Agreements is brought against any
party hereto, the prevailing party shall be entitled to recover reasonable
attorneys' and expert witness fees, costs and disbursements (in addition to any
other relief to which the prevailing party may be entitled).
7.4 NOTICES. Any notice or other communication required or
permitted to be delivered to any party under this Agreement shall be in writing
and shall be deemed properly delivered, given and received when delivered (by
hand, by registered mail, by courier or express delivery service or by
telecopier with proof of transmission and receipt) to the address or telecopier
number set forth beneath the name of such party below (or to such other address
or telecopier number as such party shall have specified in a written notice
given to the other parties hereto):
if to the Company or SCC:
The Sports Club Company, Inc.
11100 Santa Monica Boulevard
Suite 300
West Los Angeles, California 90025
Attention: D. Michael Talla
Telecopier: (310) 479-4350
25.
<PAGE> 32
with a copy (not constituting notice) to:
Resch Polster Alpert & Berger LLP
10390 Santa Monica Boulevard
Fourth Floor
Los Angeles, California 90025-5058
Attention: Ronald M. Resch, Esq.
Telecopier: (310) 552-3209
if to Purchaser:
24 Hour Fitness, Inc.
6668 Owens Drive
Pleasanton, CA 94588
Attention: Gil Freeeman
Telecopier: (510) 416-7398
with a copy (not constituting notice) to:
Cooley Godward LLP
3000 Sand Hill Road
Building 3, Suite 230
Menlo Park, California 94025-7116
Attention: Craig E. Dauchy, Esq.
Telecopier: (415) 854-2691
If notice is sent by telecopier, a copy of such notice shall be concurrently
sent by one of the other means set forth in this section. Failure to do so
will not affect the validity and due delivery of such notice.
7.5 PUBLICITY; CONFIDENTIALITY. AT ALL TIMES AFTER THE CLOSING
DATE:
(a) no press release or other publicity concerning any of
the Transactions shall be issued or otherwise disseminated by or on behalf of
the parties hereto unless mutually agreed upon by the parties in advance. Each
of the parties shall continue to keep the existence and terms of this Agreement
and the other Transactional Agreements strictly confidential except to the
extent such information is publicly available, lawfully obtained from
independent sources or as may be required by any Legal Requirement.
(b) SCC shall keep strictly confidential, and shall not
use or disclose to any other Person, any document or other information in SCC's
possession that relates, directly or indirectly to the business of the Company,
Purchaser or any affiliate of Purchaser, except to the extent such information
is publicly available, lawfully obtained from independent sources or as may be
required by any Legal Requirement.
26.
<PAGE> 33
(c) Purchaser shall keep strictly confidential, and shall not use
or disclose to any other Person, any document or other information in
Purchaser's possession that relates directly or indirectly to the business of
SCC or any affiliate of SCC, except to the extent such information is publicly
available, lawfully obtained from independent sources or as may be required by
any Legal Requirement.
7.6 TIME OF THE ESSENCE. In connection with consummation of the
Acquisition and the Transactions, the parties agree that time is of the
essence.
7.7 HEADINGS. The underlined headings contained in this Agreement
are for convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
7.8 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one agreement.
7.9 GOVERNING LAW; VENUE.
(a) This Agreement shall be construed in accordance with,
and governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws).
(b) Any legal action or other legal proceeding relating
to this Agreement or the enforcement of any provision of this Agreement may be
brought or otherwise commenced in any state or federal court located in the
County of Los Angeles, California. Each party to this Agreement:
(i) expressly and irrevocably consents and
submits to the jurisdiction of each state and federal court located in the
County of Los Angeles, California (and each appellate court located in the
State of California) in connection with any such legal proceeding;
(ii) agrees that each state and federal court
located in the County of Los Angeles, California shall be deemed to be a
convenient forum; and
(iii) agrees not to assert (by way of motion, as a
defense or otherwise), in any such legal proceeding commenced in any state or
federal court located in the County of Los Angeles, California, any claim that
such party is not subject personally to the jurisdiction of such court, that
such legal proceeding has been brought in an inconvenient forum, that venue of
such claim or proceeding is improper or that this Agreement or the subject
matter of this Agreement may not be enforced in or by such court.
(c) SCC agrees that, if any Proceeding is commenced
against any Indemnitee by any Person in or before any court or other tribunal
anywhere in the world, then such Indemnitee may proceed against SCC in such
court or other tribunal with respect to any indemnification claim or other
claim arising directly or indirectly from or relating directly or
27.
<PAGE> 34
indirectly to such Proceeding or any of the matters alleged therein or any of
the circumstances giving rise thereto.
7.10 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon:
the Company and its successors and assigns (if any); SCC and its successors and
assigns (if any), and Purchaser and its successors and assigns (if any). This
Agreement shall inure to the benefit of: the Company; SCC; Purchaser; and the
respective successors and assigns (if any) of the foregoing. Purchaser may only
assign all of its rights under this Agreement (including its indemnification
rights under Section 5, and not any part thereof, and then only if (a) the
proposed assignee is an Entity controlled by, controlling or under common
control with Purchaser and (b) SCC is provided with a written assignment and
assumption agreement, reasonably acceptable to SCC, executed by Purchaser and
such assignee and pursuant to which such assignee assumes all of Purchaser's
rights, duties and obligations under the Transaction Agreements. Any such
permitted assignment and assumption shall not relieve Purchaser or any of its
duties or obligations under any of the Transaction Agreement: Notwithstanding
anything herein to the contrary, Purchaser shall be permitted to assigns, as
collateral, all, but not less than all, of its rights, duties and obligations
under the Transactional Agreements to an institutional lender holding a first
priority perfected security interest in substantially all of Purchaser's assets,
which institutional lender shall not be required to provide SCC with a written
assignment and assumption agreement, as set forth in clause (b) above of this
section. Any purported assignment by Purchaser in violation of the requirements
of this section shall be void ab initio.
7.11 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE. The rights and
remedies of the parties hereto shall be cumulative (and not alternative). SCC
agrees that:
(a) in the event of any Breach or threatened Breach by
SCC of any covenant, obligation or other provision set forth in this Agreement,
Purchaser shall be entitled (in addition to any other remedy that may be
available to it) to (i) a decrease or order of specific performance or mandamus
to enforce the observance and performance of such covenant obligation or other
provision, and (ii) an injunction restraining such Breach or threatened Breach;
and
(b) neither Purchaser nor any other Indemnitee shall be
required to provide any bond or other security in connection with any such
decree, order or injunction or in connection with any related action or
Proceeding.
7.12 Waiver.
(a) Except as expressly set forth herein, no failure on
the part of any Person to exercise any power, right, privilege or remedy under
this Agreement, and no delay on the part of any Person in exercising any power,
right, privilege or remedy under this Agreement, shall operate as a waiver of
such power, right, privilege or remedy; and no single or partial exercise of
any such power, right, privilege or remedy shall preclude any other or further
exercise thereof or of any other power, right, privilege or remedy.
(b) Except as expressly set forth herein, no Person shall
be deemed to have waived any claim arising out of this Agreement, or any power,
right, privilege or remedy under
28.
<PAGE> 35
this Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such Person; and any such waiver shall not be applicable
or have any effect except in the specific instance in which it is given.
7.13 AMENDMENTS. This Agreement may not be amended,
modified, altered or supplemented other than by means of a written instrument
duly executed and delivered on behalf of Purchaser and SCC.
7.14 SEVERABILITY. In the event that any provision of
this Agreement, or the application of any such provision to any Person or set
of circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to Persons or circumstances other than those as
to which it is determined to be invalid, unlawful, void or unenforceable, shall
not be impaired or otherwise affected and shall continue to be valid and
enforceable to the fullest extent permitted by law.
7.15 PARTIES IN INTEREST. Except for the provisions of
Section 5 hereof, none of the provisions of this Agreement is intended to
provide any rights or remedies to any Person other than the parties hereto and
their respective successors and assigns (if any).
7.16 ENTIRE AGREEMENT. The Transactional Agreements set
forth the entire understanding of the parties relating to the subject matter
thereof and supersede all prior agreements and understandings among or between
any of the parties relating to the subject matter thereof.
7.17 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
(b) The parties hereto agree that any rule of conduction
to the effect that ambiguities are to be resolved against the drafting party
shall not be applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(d) Except as otherwise indicated, all references in this
Agreement to "Sections" and "Exhibits" are intended to refer to Sections of
this Agreement and Exhibits to this Agreement.
7.18 SURVIVAL POST-CLOSING. Any provisions of this Agreement, or
any other Transactional Agreement, which require observance or performance
after Closing shall survive
29.
<PAGE> 36
Closing and shall continue to be binding on the parties hereto, subject to and
in accordance with the other terms and conditions of this Agreement and the
other Transactional Agreements.
30.
<PAGE> 37
The parties hereto have caused this Asset Purchase Agreement to be
executed and delivered as of the dale first written above.
"PURCHASER": 24 HOUR FITNESS, INC.
a California corporation
By: /s/ [GILBERT K. FREEMEN]
---------------------------------
Gilbert K. Freemen
Chief Financial Officer
"COMPANY": THE SPORTS CONNECTION HOLDING
COMPANY, a California corporation
By: /s/ [D. MICHAEL TALLA]
---------------------------------
D. Michael Talla
Chief Executive Officer
"SCC": THE SPORTS CLUB COMPANY, INC.
a Delaware corporation
By: /s/ [D. MICHAEL TALLA]
---------------------------------
D. Michael Talla
Chief Executive Officer
ASSET PURCHASE AGREEMENT
<PAGE> 38
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
1. ACQUISITION TRANSACTION. "Acquisition Transaction" shall mean
any transaction involving:
(a) the sale or other disposition of all or any portion
of the Company's business or assets (other than in the Ordinary Course of
Business);
(b) the issuance, sale or other disposition of (i) any
capital stock of the Company, (ii) any option, call, warrant or right (whether
or not immediately exercisable) to acquire any capital stock of the Company, or
(iii) any security, instrument or obligation that is or may become convertible
into or exchangeable for any capital stock of the Company; or
(c) any merger, consolidation, business combination,
share exchange, reorganization or similar transaction involving the Company.
2. ADA SUIT. "ADA Suit" shall mean Lindsey et al. v. Bally Total
Fitness Corp. et al., U.S. District Court No. 96-0138-MRP (VAPx).
3. AFFILIATE. "Affiliate" shall mean and include:
(i) any current or former shareholder, director
or officer of the Company;
(ii) any sibling, uncle, aunt, niece or nephew of
any person described in clause (i);
(iii) any ancestor or lineal descendant of any
person described in clauses (i) or (ii);
(iv) any current or former spouse of any person
described in clauses (i), (ii) or (iii) or any person who is a member of the
same household of the person described in clauses (i), (ii) or (iii) or who has
resided with such person for more than 10 days in any calendar year,
(v) any ancestor or lineal descendant of any person
described in clauses (i), (ii), (iii) or (iv);
(vi) any entity or person in which any of the
foregoing have a direct or indirect interest (except through ownership of less
than 5% of the outstanding shares of any entity whose securities are listed on a
national securities exchange or traded in the national over-the-counter market).
1.
<PAGE> 39
4. ASSUMED CONTRACTS. "Assumed Contracts" shall have the meaning
set forth in Section l.1(d).
5. ASSUMED LIABILITIES. "Assumed Liabilities" shall have the
meaning set forth in Section 1.3.
6. BALLY'S. "Bally's" shall mean Bally's S.C. Management Inc.
and its affiliates.
7. BILLY'S AGREEMENTS. "Bally's Agreements" shall mean each
Sports Connection Contract with Bally's, including, the following:
(a) Master Agreement by and between Bally's Health and
Tennis Corporation, Health and Tennis Corporation of America, Bally's S.C.
Management, Inc., Talla Holding Company, The Sports Connection/Santa Monica,
Ltd., TDC, Ltd., The Sports Connection/Long Beach Ltd., The Sports
Connection/Beverly Hills, Ltd., The Sports Connection/Costa Mesa, Ltd., The
Sports Connection-Valley, Ltd. and The Sports Connection/Howard Hughes Center,
Ltd., dated January 22, 1993.
(b) Side letter dated January 22, 1993 regarding upgrade
fees.
(c) Management Agreement, dated as of March 1, 1993, by
and between Sports Connection-Valley, Ltd. and Bally's S.C. Management, Inc.
(d) Management Agreement, dated as of March 1, 1993, by
and between Howard Hughes Center and Bally's S.C. Management, Inc.
(e) B.T. Howard Hughes Center Partnership Agreement
between Bally's HHC Partner, Inc. and The Sports Connection/Howard Hughes
Center, Ltd. dated as of March 1, 1993.
(f) Management Agreement, dated as of March 1, 1993,
between The Sports Connection/Santa Monica and Bally's S.C. Management, Inc.
(g) Management Agreement, dated as of March 1, 1993, by
and between TDC, Ltd. and Bally's S.C. Management, Inc.
(h) Management Agreement, dated as of March 1, 1993, by
and between The Sports Connection/Long Beach and Bally's S.C. Management, Inc.
(i) Management Agreement, dated as of March 1, 1993, by
and between the Sports Connection/Beverly Hills and Bally's S. C. Management,
Inc.
(j) Management Agreement, dated as of March 1, 1993, by
and between The Sports Connection/Costa Mesa and Bally's S.C. Management, Inc.
(k) Agreement for Employment of Health and Tennis
Corporation of America to Perform Administrative, Accounting and Membership
contract and Collection Services dated
2.
<PAGE> 40
March 1, 1993, by and among Health and Tennis Corporation of America and The
Sports Connection/Santa Monica.
(l) Agreement for Employment of Health and Tennis
Corporation of America to perform administrative, accounting and membership
contract and collection services dated March 1, 1993, by and among Health and
Tennis Corporation of America and The Sports Connection/TDC, Ltd.
(m) Agreement for Employment of Health and Tennis
Corporation of America to perform administrative, accounting and membership
contract and collection services dated March 1, 1993, by and among Health and
Tennis Corporation of America and The Sports Connection/Long Beach.
(n) Agreement for Employment of Health and Tennis
Corporation of America to perform administrative, accounting and membership
contract and collection services dated March 1, 1993, by and among Health and
Tennis Corporation of America and the Sports Connection/Beverly Hills.
(o) Agreement for Employment of Health and Tennis
Corporation of America to perform administrative, accounting and membership
contract and collection services dated March 1, 1993, by and among Health and
Tennis Corporation of America and The Sports Connection/Costa Mesa.
(p) Agreement for Employment of Health and Tennis
Corporation of America to perform administrative, accounting and membership
contract and collection services dated March 1, 1993, by and among Health and
Tennis Corporation of America and The Sports Connection-Valley, Ltd.
(q) Agreement for Employment of Health and Tennis
Corporation of America to perform administrative, accounting and membership
contract and collection services dated March 1, 1993, by and among Health and
Tennis Corporation of America and The Sports Connection/Howard Hughes Center.
(r) Third Party Consent/Estoppel Letters - Santa Monica.
(s) Third Party Consent/Estoppel Letters - South Bay.
(t) Third Party Consent/Estoppel Letters - Costa Mesa.
(u) Third Party Consent/Estoppel Letters - Long Beach.
(v) Amendment to Memorandum of Lease among Howard Hughes
Properties, Limited Partnership, The Sports Connection/Howard Hughes Center,
Ltd., and B.T. Howard Hughes Center Partnership, recorded with the
Registrar/Recorder of Los Angeles County, California on February 16, 1994,
Instrument No. 94-331295.
3.
<PAGE> 41
(w) Assignment of Lease among Howard Hughes Properties,
Limited Partnership, The Sports Connection/Howard Hughes Center, Ltd., and B.T.
Howard Hughes Center Partnership, dated as of February 4, 1994.
(x) Assignment by The Sports Connection - Valley, Ltd.,
of its right to Bally's 50% joint venture interest in B.T. Howard Hughes Center
Partnership to The Sports Connection/Howard Hughes Center, dated as of February
4, 1994.
(y) Assignment and Assumption Agreement between The
Sports Connection/Howard Hughes Center, Ltd., and Bally's HHC Partner, Inc.
(z) Bill of Sale (liquidating distributions) of the 50%
partnership interest in The Sports Connection/Howard Hughes Center (and all
other assets) by The Sports Connection Valley, Ltd., to its partners (47.5%) to
Sports Club, Inc. and 2.5% to Licklider Trust), dated as of February 4, 1994.
(aa) Landlord approval from Howard Hughes Properties,
Limited Partnership.
(bb) Assignment and Bill of Sale from The Sports
Connection - Valley, Ltd., to Holiday Spa Health Clubs of California executed
February 4, 1994.
(cc) Assignment and Assumption of Lease dated February 4,
1994 among BA Mortgage and International Realty Corporation, The Sports
Connection - Valley, Ltd., and Holiday Spa Health Clubs of California.
(dd) January 26, 1994 Landlord Estoppel and Consent
Certificate from BA Mortgage and International Realty Corporation; Supplemental
Landlord Estoppel and Consent Certificate.
(ee) Letter agreement regarding Assignment and Assumption
of Equipment Leases Encino Sports Connection.
8. BREACH. There shall be deemed to be a "Breach" of a
representation, warranty, covenant, obligation or other provision if there is
or has been any inaccuracy in or breach of, or any failure to comply with or
perform such representation, warranty, covenant, obligation or other provision;
and the term "Breach" shall be deemed to refer to any such inaccuracy, breach
or failure.
9. CERCLA. "CERCLA" shall mean the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended.
10. CLOSING. "Closing" shall have the meaning specified in Section
1.6(a) of the Agreement.
11. CLOSING DATE. "Closing Date" shall mean the date on which the
Closing shall occur.
4.
<PAGE> 42
12. CLUB OR CLUBS. "Club" shall mean each Sports Connection Club,
except The Sports Connection/South Bay, owned by, or operated by or on behalf
of, the Company (collectively, the "Clubs"). Each individual Club may be
referred to from time to time herein as follows: (a) the "Costa Mesa Club"
shall mean The Sports Connection/Costa Mesa; (b) the "Long Beach Club" shall
mean The Sports Connection/Long Beach, (c) the "Santa Monica Club" shall mean
"The Sports Connection/Santa Monica; and (d) the "Wm Hollywood Club" shall mean
The Sports Connection/West Hollywood.
13. CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
14. COMPANY. "Company" shall mean The Sports Connection Holding
Company, a California corporation.
15. COMPARABLE ENTITIES. "Comparable Entities" shall mean
Entities (other than the Company) that are engaged in businesses similar to the
Company's business.
16. CONSENT. "Consent" shall mean any approval, consent,
ratification, permission, waiver or authorization (including any Governmental
Authorization).
17. CONTRACT. "Contract" shall mean any agreement, contract,
understanding, arrangement, instrument, note, guaranty, indemnity,
representation, warranty, deed, assignment, power of attorney, certificate,
purchase order, work order, insurance policy, benefit plan, commitment,
covenant, assurance or undertaking of any nature.
18. DAMAGES. "Damages" shall mean any loss, damage, injury,
Liability, claim, demand, settlement, judgment, award, fine, penalty, Tax, fee
(including any reasonable legal fee, expert fee, accounting fee or advisory
fee), charge, reasonable cost (including any reasonable cost of investigation)
or reasonable expense of any nature.
19. DISCLOSURE SCHEDULE. "Disclosure Schedule" shall mean the
schedule (dated as of the date of the Agreement) delivered to Purchaser on
behalf of the Company and SCC, a copy of which is attached to the Agreement and
incorporated in the Agreement by reference.
20. ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge,
hypothecation, charge, mortgage, security interest, encumbrance, claim, right
of possession, lease, tenancy, license, Order, option, right of first refusal,
imperfection of title, or Tax; provided, Encumbrance shall not include publicly
recorded Encumbrances (i) that are not liens, (ii) that do not restrict or
affect the intended use of the Purchased Assets, (iii) Taxes that are not yet
due and payable other than such Taxes, which shall be pro rated between
Purchaser, on one hand, and SCC and the Company, on the other, pursuant to
Section 1.12 of the Agreement, or (iv) that are liens imposed on the real
property underlying the Real Property Leases to secure indebtedness incurred by
a party other than the Company, SCC or any affiliate thereof. "Encumbrance"
shall also not include that certain deed of trust securing indebtedness in the
aggregate principal amount of $7,320,000 owed by West Hollywood Development
Co., as landlord of the West Hollywood Club, to TOPA Savings Bank, which is
subject to the West Hollywood Nondisturbance Agreement.
5.
<PAGE> 43
21. ENTITY. "Entity" shall mean any corporation (including any
non-profit corporation), general partnership, limited partnership, limited
liability company, joint venture, estate, trust, cooperative, foundation,
society, political party, union, company (including any limited liability
company or joint stock company), firm or other enterprise, association,
organization or entity.
22. ENVIRONMENTAL LAW. "Environmental Law" shall mean CERCLA, the
Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Sections 1100 et
seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections
136 et seq., the Safe Drinking Water Act, 42 U.S.C. Sections 300f et seq., the
Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq., the Oil
Pollution Act of 1990, 33 U.S.C. Sections 1001 et seq., the Hazardous
Materials Transportation Act, as amended, 42 U.S.C. Sections 1801 et seq.,
Proposition 65 (California Health & Safety Code) Sections 25249.5 et seq., and
the corresponding regulations, state laws and regulations, local ordinances
and permit requirements which may be applicable.
23. EXCLUDED ASSETS. "Excluded Assets" shall have the meaning as
set forth in Section 1.2.
24. EXCLUDED CONTRACT. "Excluded Contract" shall mean any Sports
Connection Contract, other than the Membership Agreements, that:
(a) The Company has entered into in the Ordinary Course
of Business;
(b) has a term of less than 30 days or may be terminated
by the Company (without penalty) within 30 days after the delivery of a
termination notice by the Company; and
(c) does not contemplate or involve the payment of cash
or other consideration in an amount or having a value in excess of $10,000.
25. FACILITIES SCHEDULE. "Facilities Schedule" shall have the
meaning specified in Section 2.5(b) of the Agreement.
26. FISCAL 1995 BALANCE SHEET. "Fiscal 1995 Balance Sheet" shall
have the meaning specified in Section 2.2(a)(i) of the Agreement.
27. GAAP. "GAAP" shall mean generally accepted accounting
principles, applied on a basis consistent with the basis on which the
applicable financial statements were prepared.
28. GOVERNMENTAL AUTHORIZATION. "Governmental Authorization"
shall mean any:
(a) permit, license, certificate, franchise, concession,
approval, consent, ratification, permission, clearance, confirmation,
endorsement, waiver, certification, designation, rating, registration,
qualification or authorization issuable or otherwise made available by or under
the authority of any Governmental Body or pursuant to any Legal Requirement; or
(b) right under any Contract with any Governmental Body.
6.
<PAGE> 44
29. GOVERNMENTAL BODY. "Governmental Body" shall mean any:
(a) nation, principality, state, commonwealth, province,
territory, county, municipality, district or other jurisdiction of any nature;
(b) federal, state, local, municipal, foreign or other
government;
(c) governmental or quasi-governmental authority of any
nature (including any governmental division, subdivision, department, agency,
bureau, branch, office, commission, council, board, instrumentality, officer,
official, representative, organization, unit, body or Entity and any court or
other tribunal);
(d) multi-national organization or body; or
(e) individual, Entity or body exercising, or entitled to
exercise, any executive, legislative, judicial, administrative, regulatory,
police, military or taxing authority or power of any nature.
30. HAZARDOUS MATERIAL. "Hazardous Material" shall mean:
(a) any petroleum, waste oil, crude oil, asbestos, urea
formaldehyde or polychlorinated biphenyl;
(b) any waste, gas or other substance or material that is
explosive or radioactive;
(c) any "hazardous substance," "pollutant,"
"contaminant," "hazardous waste," "regulated substance," "hazardous chemical"
or "toxic chemical" as designated, listed or defined (whether expressly or by
reference) in any Environmental Law (including CERCLA, any other so-called
"superfund" or "superlien" law, the Resource Conservation Recovery Act, the
Federal Water Pollution Control Act, the Toxic Substances Control Act, the
Emergency Planning and Community Right-to-Know Act and the respective
regulations promulgated thereunder);
(d) any other substance or material (regardless of
physical form) or form of energy that is subject to any Legal Requirement which
regulates or establishes standards of conduct in connection with, or which
otherwise relates to, the protection of human health, plant life, animal life,
natural resources, property or the enjoyment of life or property from the
presence in the environment of any solid, liquid, gas, odor, noise or form of
energy; and
(e) any compound, mixture, solution, product or other
substance or material that contains any substance or material referred to in
clause "(a)", "(b)", "(c)" or "(d)" above.
31. INDEMNITEES. "Indemnitees" shall as the context may indicate
sometimes refer to either the Purchaser Indemnitees or the Seller Indemnitees,
or both.
32. KNOWLEDGE. An individual shall be deemed to have "Knowledge"
of a particular fact or other matter only if:
7.
<PAGE> 45
(a) such individual is actually aware of such fact or other
matter, or
(b) it is disclosed in the Agreement, the Disclosure Schedule or
any Transactional Agreement.
In the case of the Company or SCC, the Company and SCC shall be deemed to have
"Knowledge" of a particular fact or other matter only if any of D. Michael
Talla, John Gibbons, Timothy O'Brien, Mark Spino, Julie Adams, John Dwyer, Cary
Gaan, Sonny Reasnor or Karen Reallings has Knowledge of such fact or other
matter.
In the case of the Purchaser, the Purchaser shall be deemed to have "Knowledge"
of a particular fact or other matter only if any of Leonard B.C. Schlemm, Mark
Mastrov or Gilbert K. Freeman has Knowledge of such fact or matter.
33. LEGAL REQUIREMENT. "Legal Requirement" shall mean any
federal, state, local, municipal, foreign or other law, statute, legislation,
constitution, law, resolution, ordinance, code, edict, decree, proclamation,
treaty, convention, rule, regulation, ruling, directive, pronouncement,
requirement, specification, determination, decision, opinion or interpretation
issued, enacted, adopted, passed, approved, promulgated, made, implemented or
otherwise put into effect by or under the authority of any Governmental Body.
34. LIABILITY. "Liability" shall mean any debt, obligation, duty
or liability of any nature (whether known or unknown and whether absolute,
accrued, contingent or otherwise), regardless of whether such debt, obligation,
duty or liability would be required to be disclosed on a balance sheet prepared
in accordance with generally accepted accounting principles and regardless of
whether such debt, obligation, duty or liability is immediately due and
payable.
35. MEMBER. "Member" shall mean an individual who as of the
Closing Date is a member in good standing of one of the Clubs under the terms
of a valid Membership Agreement, including without limitation each person named
in the list of Members provided to Purchaser and attached to PART 2.5 of the
Disclosure Schedule.
36. MEMBERSHIP AGREEMENT. "Membership Agreement" shall mean any
written agreement between a Member and, or on behalf of, the Company pursuant
to which such Member is entitled to use of the facilities and services of the
Company at one of the Clubs.
37. ORDER. "Order" shall mean any:
(a) order, judgment, injunction, edict, decree, ruling,
pronouncement, determination, decision, opinion, verdict, sentence, subpoena,
writ or award issued, made, entered, rendered or otherwise put into effect by
or under the authority of any court, administrative agency or other
Governmental Body or any arbitrator or arbitration panel; or
(b) Contract with any Governmental Body that is or has
been entered into in connection with any Proceeding.
8.
<PAGE> 46
38. ORDINARY COURSE OF BUSINESS. An action taken by or on behalf
of the Company shall not be deemed to have been taken in the "Ordinary Course
of Business" unless:
(a) such action is taken in the ordinary course of the
Company's normal day-to-day operations;
(b) such action is taken in accordance with sound and
prudent business practices; and
(c) such action is not required to be authorized by the
Company's stockholders, the Company's board of directors or any committee of
the Company's board of directors and does not require any other separate or
special authorization of any nature.
39. PERSON. "Person" shall mean any individual, Entity or
Governmental Body.
40. PERSONAL PROPERTY LEASES. "Personal Property Leases" shall
have the meaning set forth in Section 1.1(b).
41. PROCEEDING. "Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), prosecution, contest,
hearing, inquiry, inquest, audit, examination or investigation brought,
conducted or heard by or before, or that otherwise involves, any Governmental
Body, judge, arbitrator or arbitration panel.
42. PROPRIETARY ASSET. "Proprietary Asset" shall mean any patent,
patent application, trademark (whether registered or unregistered and whether
or not relating to a published work), trademark application, trade name,
fictitious business name, service mark (whether registered or unregistered),
service mark application, copyright (whether registered or unregistered),
copyright application, trade secret, know-how, franchise, system. computer
software, invention, design, blueprint, proprietary product, technology,
proprietary right or other intellectual property right or intangible asset.
43. PURCHASE PRICE. "Purchase Price" shall mean the consideration
payable to the Company pursuant to Section 1.5.
44. PURCHASED ASSETS. "Purchased Assets" shall have the meaning
set forth in Section 1.1.
45. PURCHASER. "Purchaser" shall mean 24 Hour Fitness, Inc., a
California corporation.
46. PURCHASER INDEMNITIES. "Purchaser Indemnitees" shall mean the
following Persons:
(a) Purchaser;
(b) Purchaser's current and future affiliates;
9.
<PAGE> 47
(c) the respective Representatives of the Persons
referred to in clauses "(a)" and "(b)" above; and
(d) the respective successors and permitted assigns of
the Persons referred to in clauses "(a)", "(b)" and "(c)" above;
47. PURCHASER TRANSACTION COSTS. "Purchaser Transaction Costs"
shall have the meaning specified in Section 7.2(b) of the Agreement.
48. REAL PROPERTY LEASES. "Real Property Leases" shall have the
meaning set forth in Section 1.1(a).
49. RELATED PARTY. Each of the following shall be deemed to be a
"Related Party";
(a) SCC.
(b) each individual who is, or who has been within the
past twelve (12) months, an officer of the Company or of any of its
predecessors in interest;
(c) each member of the family of each of the individuals
referred to in clauses "(a)" and "(b)" above; and
(d) any Entity (other than the Company) in which any one
of the individuals referred to in clauses "(a)", "(b)" and "(c)" above holds
(or in which mom than one of such individuals collectively hold), beneficially
or otherwise, are material voting, proprietary or equity interest.
50. REPRESENTATIVES. "Representatives" shall mean officers,
directors, employees, agents, attorneys, accountants, advisors and
representatives. SCC and all other Related Parties shall be deemed to be
"'Representatives" of the Company.
51. SANTA MONICA ORDER. "Santa Monica Order" shall mean that
certain letter, dated March 9, 1993, to the City of Santa Monica from Talla
Holding Company regarding a sale of the Santa Monica Club.
52. SELLER INDEMNITEES. "Seller Indemnities" shall mean the
following Persons:
(a) the Company;
(b) SCC;
(c) the Company's current and future affiliates;
(d) SCC's current and future affiliates;
(e) the respective Representatives of the Persons
referred to in clauses "(a)" through "(d)" above; and
10.
<PAGE> 48
(f) the respective successors and permitted assigns of the Persons
referred to in clauses "(a)" through "(e)" above.
53. SOUTH BAY LEASE. "South Bay Lease" shall mean that certain
Lease dated December 13, 1978 ("Lease") between Del Amo Associates, a
partnership (the "Original Landlord"), and Del Amo Pro Athletic Club, a
limited partnership, (the "Original Tenant"), for those premises in the city of
Torrance, County of Los Angeles, State of California, commonly known as 21345
Hawthorne Blvd., Torrance, California 90503, as amended by a First Amendment to
Lease dated as of December 13, 1978 between Original Landlord and Original
Tenant; a Second Amendment to Lease dated as of July 23, 1979 between Original
Landlord and Original Tenant; a Third Amendment of Building Lease to Lease
dated as of February 18, 1981 between Landlord an Original Tenant, which lease
was assigned to TDC, Ltd. ("TDC"), a California limited partnership, pursuant to
an Assignment of Lease dated as of September 26, 1998 by and between Original
Tenant, as assignor and TDC, as assignee, which assignment was consented to by
Endowment and Foundation Realty Ltd. - JMB II, a successor-in-interest to the
Original Landlord. TDC assigned its entire right, title and interest in such
lease to the Company pursuant to an Assignment of Lease dated as of October 20,
1994 by and between Endowment and Foundation Realty Ltd.-JMB-II, as Landlord,
TDC and the Company.
54. SPECIFIED CONTRACTUAL LIABILITIES. "Specified Contractual
Liabilities" shall mean the obligations of the Company under the Assumed
Contracts, but only to the extent such obligations notwithstanding anything in
the Transactional Agreements to the contrary (a) arise after the Closing Date,
(b) do not arise from or relate to any breach by, or on behalf of, the Company
of any provision of any of such contracts, (c) do not arise from or relate to
any event, circumstance or condition occurring or existing on or prior to the
Closing Date that, with notice or lapse of time, would constitute or result in
a breach of any of such contracts, and (d) are ascertainable (in nature and
amount) solely by reference to the express terms of such contacts; provided,
however, that notwithstanding anything contained in the Agreement, the
"Specified Contractual Liabilities" shall not include and Purchaser shall not
be required to assume or to perform or discharge:
(i) any Liability with respect to any accounts
payable or any short-term or long-term indebtedness of the Company;
(ii) any Liability of the Company arising from or
relating to any action taken by the Company, or any failure on the part of the
Company to take any action, at any time prior to, on or after the Closing Date;
(iii) any Liability or the Company arising from or
relating to (x) any services performed or provided by the Company or SCC, or
(y) any claim, Order or Proceeding against the Company;
(iv) any Liability of the Company or SCC for the
payment of any Tax,
11.
<PAGE> 49
(v) any Liability of the Company or SCC to any
employee of former employee of the Company (whether for salaries, wages,
severance pay, vacation pay, benefits or other compensation);
(vi) any Liability under any Contact, if (x) an
accurate and complete copy of such Contract and all amendments thereto shall not
have been furnished to Purchaser by the Company prior to the Closing Date, or
(y) the Company shall not have obtained, prior to the Closing Date, any Consent
required to be obtained from any Person with respect to the assignment or
delegation to Purchaser of any rights or obligations under such Contract;
(vii) any obligation of either the Company or SCC
to indemnify or defend any other Person against or in connection with any
infringement claim or similar claim;
(viii) any Liability that is inconsistent with or
that constitutes an inaccuracy in, or that arises or exists by virtue of any
Breach of, any covenant or obligation of the Company or SCC;
(ix) any Liability arising under or related to
that certain Settlement Agreement and Release of All Claims entered into by the
Company and SCC in connection with the ADA Suit; or
(x) any other Liability that is not specifically
included in the "Specified Contractual Liabilities" or otherwise is not
expressly assumed by Buyer in the Agreement.
55. SPORTS CONNECTION CONTRACT. "Sports Connection Contract"
shall mean any Contract:
(a) to which the Company is a party;
(b) by which the Company or any of its assets is bound or
under which the Company has any obligation; or
(c) under which the Company has any right or interest.
56. SPORTS CONNECTION FINANCIAL STATEMENTS. "Sports Connection
Financial Statements" shall have the meaning specified in Section 2.2(a) of the
Agreement.
57. SPORTS CONNECTION TRANSACTION COSTS. "Sports Connection
Transaction Costs" shall have the meaning specified in Section 7.2(a) of the
Agreement.
58. TAX. "Tax" shall mean any tax (including any income tax,
franchise tax, capital gains tax, estimated tax, gross receipts tax,
value-added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax,
sales tax, use tax, property tax, business tax, occupation tax, inventory tax,
occupancy tax, withholding tax or payroll tax), levy, assessment, tariff,
impost, imposition, toll, duty (including any customs duty), deficiency or fee,
and any related charge or amount (including any fine, penalty or interest), (a)
imposed, assessed or collected by or under the
12.
<PAGE> 50
authority of any Governmental Body, or (b) payable pursuant to any tax-sharing
agreement or similar Contract.
59. TRANSACTIONAL AGREEMENTS. "Transactional Agreements" shall
mean:
(a) the Agreement;
(b) the Bill of Sale referred to in Section 1.6(b)(i) of
the Agreement;
(c) the Assumption Agreement referred to in Section 1.5
of the Agreement,
(d) each Assignment of Lease referred to in Section 1.5
of the Agreement;
(e) the Noncompetition Agreement referred to in Section
1.6(b)(ii) of the Agreement;
(f) the landlord estoppel certificates and landlord
consents referred to in Section 1.6(b)(v);
(g) the Memoranda of Leases referred to in Section 6.2(a)
of the Agreement;
(h) the concession agreements referred to in Section
1.6(b)(viii);
(i) Amendment No. 6 to the Santa Monica Real Property
lease referred to in Section 1.6(b)(ix); and
(j) Fifth Amendment to the West Hollywood Real Property
Lease referred to in Section 1.6(b)(xi).
60. TRANSACTION COSTS. "Transaction Costs" shall mean all fees,
costs and expenses (including all legal, auditing and accounting expenses) that
have been incurred or that are in the future incurred by, on behalf of or for
the benefit of any party hereto in connection with:
(a) the negotiation, preparation and review of any letter
of intent or similar document relating to any of the Transactions;
(b) the investigation and review conducted by the
Purchaser and its Representatives with respect to the Company's business;
(c) the negotiation, preparation and review of this
Agreement (including the Disclosure Schedule), the other Transactional
Agreements and all certificates, opinions and other instruments and documents
delivered or to be delivered in connection with the Transactions;
(d) the preparation and submission of any filing or
notice required to be made or given in connection with any of the Transactions,
and the obtaining of any Consent required to be obtained in connection with any
of the Transactions; and
13.
<PAGE> 51
(e) the consummation and performance of the Transactions.
61. TRANSACTIONS. "Transactions" shall mean (a) the execution and
delivery of the respective Transactional Agreements, and (b) all of the
transactions contemplated by the respective Transactional Agreements,
including:
(a) the Acquisition in accordance with the Agreement; and
(b) the performance by the Company, SCC and Purchaser of
their respective obligations under the Transactional Agreements and the
exercise by the Company, SCC and Purchaser of their respective rights under the
Transactional Agreements.
62. WEST HOLLYWOOD NONDISTURBANCE AGREEMENT. "West Hollywood
Nondisturbance Agreement" shall mean that certain Subordination, Nondisturbance
and Attornment agreement, dated as of October 30, 1992 by and among West
Hollywood Development Co., a California limited partnership, as landlord, the
Company, as tenant, and TOPA Savings Bank, a federal savings bank, formerly
known as Bel-Air Savings and Loan Association, as lender, a true and complete
copy of which has been provided to Purchaser.
14.
<PAGE> 1
10.85
CITE DESIGN
AGREEMENT
<PAGE> 2
[LETTERHEAD]
DATE: THURSDAY, 2 MAY 1996
CLIENT: THE SPORTS CLUB COMPANY
11100 SANTA MONICA BOULEVARD
SUITE 300
LOS ANGELES, CALIFORNIA 90025
PROJECT REFERENCE: #700.3054/CITE DESIGN MANAGEMENT AGREEMENT
THE SPORTS CLUB COMPANY PRO SHOPS
ATTENTION: JOHN GIBBONS
PRESIDENT
REFERENCE: MANAGEMENT AGREEMENT
REVISED
<PAGE> 3
[LETTERHEAD]
MANAGEMENT AGREEMENT
MANAGEMENT AGREEMENT made by and between The Sports Club Company, Inc.
("Sports Club"), a corporation organized and existing under the laws of the
State of California, having its principal place of business at 11100 Santa
Monica Boulevard, Suite 300, Los Angeles, California 90025, and C.I.T.E. Design
Corp. ("CITE"), a corporation organized and existing under the laws of the
State of New York, having its principal place of business at 100 Wooster
Street, New York, New York, 10012,
WITNESSETH:
1. Sports Club currently is the owner and operator of workout and
gym facilities located in Los Angeles and Irvine, California, and New York, New
York, each of which contains a pro shop for the sale of related clothing
products. Sports Club and CITE have agreed that CITE shall assume the over-all
management of the existing pro shops as well as those which may be located in
other workout clubs or gym facilities which may be hereafter acquired,
established or operated by Sports Club hereafter (the existing workout clubs or
gym facilities as well as those which may hereafter be acquired, established or
operated as aforesaid being collectively called the "Clubs" and existing pro
shops and as well as those which may hereafter be acquired, established or
operated as aforesaid being collectively called the "Pro Shops"), all for the
account of Sports Club, in accordance with the terms and conditions of this
Management Agreement.
<PAGE> 4
page 2
2. CITE's duties and responsibilities under this Management Agreement
shall consist of the following:
(a) CITE shall provide at its own cost and expense
qualified personnel who, as employees of CITE, shall exercise general over-all
management for each of the Pro Shops.
(b) CITE shall formulate the working schedules for Sports
Club staff at each Pro Shop, which shall include direct sales personnel as well
as one working sales manager for each Pro Shop. The schedules shall provide
that the Pro Shops shall be open from 9:00 A.M. to 9:00 P.M. daily or such
other period of 12 continuous hours or normal business hours if less, as the
parties may agree upon, on each day when the Clubs shall be open for business.
(c) CITE shall recruit and hire the direct sales
personnel and sales manager for each of the Pro Shops, and on behalf of Sports
Club, negotiate their rates of pay and salaries, as the case may be.
(d) CITE shall be solely responsible for the
identification, sourcing, pricing and ordering of all products, for the account
of Sports Club, to be offered for sale in each of the Pro Shops from time to
time, including private label products. CITE will use best efforts to obtain
lowest price, highest quality product for the benefit of Sports Club. Sports
Club will be invoiced directly by the source of products and will be
responsible for paying for such goods in accordance with normal and customary
terms in the industry. The quantities of goods to be ordered shall be based
upon CITE's reasonable projections of the anticipated sales of each Pro Shop,
which shall be approved by Sports Club. Before issuing any purchase order for
any product for the first time, CITE shall provide to Sports Club either
samples or complete descriptions of all products to be ordered, the name and
address of each proposed vendor and the proposed purchase price. Within ten
business days thereafter Sports Club may request that goods shall be ordered
from an alternative resource, provided that the quality offered is at least
equal to
<PAGE> 5
page 3
that of CITE's resource and the prices are equal or lower. The foregoing
procedure shall not apply to reorders of goods after a resource has been
selected except that CITE and Sports Club will review pricing, selection and
quality on a semi annual basis and shall jointly decide whether or not to seek
other sources.
(e) In the event that Sports Club should from time to
time desire to open or acquire additional Clubs in which a pro shop is to be
installed and operated, or to cite establish a free standing pro shop, CITE
will examine the proposed plan of operation for each such new pro shop and
provide its opinion as to the economic viability thereof. If CITE is satisfied
with the plan for a new pro shop, upon opening of the new Club or free standing
pro shop, CITE shall assume the management of the pro shop at that location in
accordance with the terms of this Management Agreement and such pro shop shall
be considered to be one of the Pro Shops as defined herein.
(f) Within sixty days after the execution and delivery of
this Management Agreement, CITE shall present to Sports Club a business plan, in
reasonable detail, for the establishment of a mail order department which will
offer products identical or similar to those offered at the Pro Shops from time
to time. If Sports Club shall approve the plan, CITE shall supervise the
establishment of the mail order department and shall assume the supervisory
management of the mail order department and shall assume the supervisory
management of the mail order department effective thirty days after the first
substantial mail order solicitation shall gave been mailed. Sports Club shall
make available to CITE its mailing list and customer records and CITE shall be
free to utilize the same in the operation and management of the mail order
department but for no other purpose. When CITE shall assume the management of
the mail order department, the department shall be considered to be a Pro Shop
for the purposes of the other provisions of this Management Agreement.
(g) CITE shall formulate and submit to Sports Club for
review and approval at least twice in each year a proposed advertising and
publicity program and budget for
<PAGE> 6
page 4
the Pro Shops. Sports Club will not unreasonably fail to approve such program
and budget and in each case will specify its reasons for failing to approve.
Any program and budget shall be deemed to have been approved ten business days
after the same has been submitted to Sports Club, unless Sports Club shall have
given written notice of its objections to CITE during such period. CITE shall
administer the advertising and publicity program on behalf of Sports Club with
final approval of use of Sports Club names and logo by Sports Club Marketing.
3. Under no circumstances shall CITE be required to provide the
following services without separate agreement and additional compensation,
(a) Design, construction or procurement services with
respect to any the establishment or alteration of any existing, future or
proposed Pro Shops.
(b) Design services with respect to any products to be
offered for sale in the Pro Shops.
(c) Design services with respect to any catalogs, fliers,
or advertising relating to the products offered for sale at the Pro Shops.
(d) Any other services not specifically enumerated herein
as the responsibility of CITE.
4. (a) Sports Club shall have the sole and complete financial
responsibility for all costs and expenses relating directly or indirectly to the
establishment and operation of each of the Pro Shops. All bills and invoices
with respect to goods purchased for sale in the Pro Shops or relating to the
operation of the Pro Shops shall be paid on a timely basis. All payroll,
withholding taxes, and payments with respect to employees required by law from
time to time shall be paid timely.
(b) Sports Club shall prepare and file all sales tax
returns and all tax returns with respect to the employment of the employees of
the Pro Shops as the same shall become due and pay all taxes which shall be
shown as due thereon.
<PAGE> 7
page 5
(c) Sports Club shall purchase and maintain for its
employees and CITE for its employees in effect at all times all workers'
compensation, unemployment and other similar insurance required by law or
regulation to be carried from time to time.
(d) Sports Club shall indemnify CITE and hold it harmless
of and from any and all third party claims and liabilities arising from the
operation of the Clubs and the Pro Shop, other than claims and liabilities
arising out of negligence by CITE or its employees or any violation of this
agreement for which CITE shall indemnify and hold harmless Sports Club.
(e) Sports Club shall not change the location of or
impede access to any of the Pro Shops after such locations have been
established except as necessary for Sports Club to operate general business, in
such case provisions of paragraph 6 will not apply to that location.
(f) Sports Club shall establish and maintain appropriate
facilities to enable qualified customers of the Pro Shops to charge their
purchases to American Express, VISA and Master Card as well as all other credit
cards utilized in each club from time to time.
(g) Sports Club shall provide decorating, cleaning,
maintenance and garbage removal services for the Pro Shops without charge.
5. (a) In consideration of the services to be provided by
CITE hereunder, Sports Club shall pay to CITE an amount equal to 13.5% of the
first $2 million of aggregate gross sales of the Pro Shops in each year. "Gross
sales" as used in this Management Agreement shall mean the aggregate of cash
sales or credit card charges effected in the Pro Shops, less bona fide returns
and allowances and sales taxes, and the term "year" as used in this Management
Agreement shall mean each twelve month period commencing on the first day of
the calendar month next following the date of the execution of this Management
Agreement. If items shall be provided without full charge
<PAGE> 8
page 6
to employees of Sports Club or others out of the inventory of any of the Pro
Shops, the same shall be taken into account as sales at their respective normal
purchase prices. Sports Club shall furnish to CITE a financial report and
support schedules showing the gross sales of each of the Pro Shops for each
calendar month no later than the 25th of the following calendar month and the
amount due to CITE under this paragraph, if any, shall be paid to CITE
simultaneously.
(b) (i) In addition, Sports Club shall pay to CITE an amount equal
to 20% of the trading profits of the Pro Shops for each year.
(ii) Trading profits shall be calculated by deducting from
the gross sales of the Pro Shops the payroll for the Pro Shops, direct expenses
of operating the Pro Shops, employee discounts, and CITE's management fee as set
forth in subparagraph (a) above. Under no circumstances will there be any
deduction or allocation for overhead or indirect expenses, as, for example,
rent, maintenance, utilities, legal, bookkeeping and accounting expenses and the
like, or for advertising or publicity unless such advertising or publicity in
its entirety shall relate solely to the Pro Shops and/or direct mail. If
CITE and Sports Club decide to expand the concept into stand alone retail
markets, both parties will work towards a separate business agreement with
respect to stand alone shops.
(iii) Trading profits shall be calculated within thirty days
after the end of each quarter of the year, as herein before defined. In
calculating trading profits for each quarter after the first in each year, the
figures shall be cumulated forward from the first quarter of the year, so that
trading profits and losses during each quarter of each year shall offset each
other. There shall be no carryback of trading profits and losses from year to
year, however. Sports Club shall furnish to CITE a financial report reviewed by
a certified public accountant showing the calculation of trading profits and the
amount shown to be due to CITE shall be paid at the same time. If any such
calculation shall
<PAGE> 9
page 7
show that CITE has been overpaid in any earlier quarter, CITE shall refund to
Sports Club the amount of such overpayment promptly upon receipt of the report
of such calculation.
6. The aggregate of the payroll of all the Pro Shops shall not
exceed 10% of the aggregate gross sales, as defined, of the Pro Shops during
each calendar quarter of each year, as herein before defined. The payroll for
any Pro Shop not presently operated by Sports Club shall not be taken into
account for this purpose until thirty days after the same shall have been
opened for business. In calculating payroll hereunder, payroll taxes or
insurance and other employee benefits shall not be deducted. In making the
calculations under this paragraph, for each quarter after the first in each
year the figures shall be cumulated from the first of the year. There shall be
no carryover of gross sales or payroll from year to year, however. CITE shall
reimburse to Sports Club the amount for each period by which payroll shall
exceed 10% of gross sales. Sports Club shall furnish to CITE a written report
showing the calculation of gross sales and payroll within thirty days after the
end of each quarter, and deduct from the amounts payable to CITE under
paragraph 5 hereof the amount of such excess. If any subsequent calculation
shall show that an excessive amount had been deducted pursuant to this
paragraph from the amount to be paid to CITE, Sports Club shall refund to CITE
the amount deducted.
7. Sports Club shall maintain books and records of the operations
of the Pro Shops, which shall be available for copying, audit and review by
representatives or designees of CITE from time to time. Such records shall be
preserved for such purpose for a period of two years after the close of each
year. If any audit shall show that there has been a shortfall in the amounts
which have been paid Sports Club to CITE, the same shall be paid forthwith
together with interest from the due date of each payment at the rate of 10%
payable on judgments in the State of New York, and if the amount of such
<PAGE> 10
page 8
shortfall for any quarter shall exceed 5% of the total amount due, then Sports
Club shall reimburse CITE for all of the expenses of the audit.
8. CITE acknowledges that all copyrights, trade marks and trade
names, including the name "Sports Club", utilized by Sports Club in connection
with its business are, and shall all time both during and after the term of
this Management Agreement remain, the sole and exclusive property of Sports
Club. CITE shall acquire no interest in the said copyrights, trade marks and
trade names by use or prescription.
9. This Management Agreement shall take effect as of the first
day of the calendar month occurring after the date of the execution hereof and
shall remain in effect for a period of three years. If gross sales do not
exceed $2,500,000. during the first year of this contract or $ 4,000,000.
during the second year; or if trading profits are less than $250,000. for
either of such year, either party can cancel this agreement upon 90 days
written notice, after the respective year is over. Thereafter, it shall remain
in effect subject to termination at the election of either party upon 90 days
written notice to the other, such termination to take effect at the end of the
first day of the month next following the expiration of such 90 days.
10. All documents and notices required or permitted by this
Management Agreement to be given to a party shall be in writing and shall be
deemed to be duly given on the date: (i) personally delivered; (ii) mailed by
certified or registered mail, return receipt requested; (iii) delivered by
Express Mail or courier service (such as Federal Express) which requires the
addressee to acknowledge, in writing, the receipt thereof; or (iv) sent by
telefax and confirmed by hard copy mailed by certified or registered mail,
return receipt requested or acknowledged by return telefax to the party
concerned at its address set forth on Page 1 above (or at such other address
as the party may specify by notice to the other). Copies of all notices to
CITE shall be sent to Lesser & Harrison, Two West Forty Fifth Street, New York,
New York 10036, Attention: S. David Harrison.
<PAGE> 11
page 9
11. The failure of either party at any time or times to demand
strict performance by the other of any of the terms, covenants or conditions set
forth herein shall not be construed as a continuing waiver or relinquishment
thereof and each may at any time demand strict and complete performance by the
other of said terms, covenants and conditions.
12. The rights granted to a party hereunder shall be exclusive to
it and shall not, without the prior written consent of the other, be
transferred, or assigned by it to any other person, firm or corporation.
Notwithstanding any such transfer or assignment, each shall remain fully liable
hereunder. In addition, the provisions hereof shall be deemed to preclude
assignment by operation of law and shall be deemed to restrict the
hypothecation, pledge, granting of a security interest or in any manner steps
or permitting the integrity of this Management Agreement between the parties to
be affected in any manner or form. Any assignment or transfer of any of the
rights granted hereunder which does not conform to the requirements hereof
shall be null and void.
13. (a) Except as specifically set forth herein, any and all
disputes, controversies and claims arising out of or relating to this Agreement
or concerning the respective rights or obligations hereunder of the parties
hereto, shall be settled and determined by arbitration before the American
Arbitration Association in Los Angeles County in accordance with and pursuant
to its then obtaining Rules for Commercial Arbitration. The arbitrators shall
have the power to award specific performance or injunctive relief and
reasonable attorneys' fees and expenses (including reimbursement of filing
fees) to any party in such arbitration. The arbitrators shall not have the
power to change, modify or alter any express condition, term or provision of
this Management Agreement, and to that extent the scope of their authority is
limited. The arbitration award shall be final and binding upon the parties.
(b) The parties shall have such right to interim relief
in any Court as may be provided by law.
<PAGE> 12
page 10
(c) An action to enforce an arbitration award or
for interim relief hereunder may be brought in any court having jurisdiction.
(d) The service of any notice, process, motion or other
document in connection with any arbitration or for interim relief or the
enforcement of any arbitration award hereunder may be effectuated in the manner
in which notices are to be given to a party pursuant to Paragraph 10 above.
14. This writing constitutes the entire agreement between the
parties hereto and may not be changed or modified except by a writing signed by
the party or parties to be charged thereby.
15. This Management Agreement shall be governed and construed
according to the laws of the State of California.
16. This Management Agreement does not constitute and shall not be
construed as constituting a partnership, or joint venture between the parties.
Neither party shall have any right to obligate or bind the other party in any
manner whatsoever except as expressly provided herein and nothing herein
contained shall give, or is intended to give, any rights of any kind to any
third party.
17. This instrument shall not be considered to be an agreement or
contract nor shall it create any obligation whatsoever on the part of the
parties, unless and until it has been signed on behalf of both and delivery has
been made of a fully signed original each to the other.
18. Neither party shall be in default hereunder by reason of its
delay in the performance of or failure to perform any of its obligations under
this Agreement if such delay or failure is caused by strikes, act of God or the
public enemy, riots, incendiaries, interference by civil or military
authorities, compliance with governmental law, rules and regulations, delays in
transit or delivery or any default beyond its control or without its fault or
negligence.
<PAGE> 13
page 11
19. Each party warrants, represents and acknowledges to the other
that neither has made any warranties or representations of any nature
whatsoever to induce the other to enter into this Management Agreement, except
as expressly set forth herein. All prior discussions, understandings and
agreements between the parties have been merged herein, it being intended that
this shall constitute the complete agreement between the parties. This
Management Agreement may be modified or amended only by writing duly executed
by both parties hereto.
20. Nothing in this Management Agreement shall be construed to
transfer or confer to CITE any interest, right or title in any proprietary
asset of The Sports Club Company, Inc. or any of its subsidiaries. Such
proprietary assets include, but are not limited to, any patent, patent
application, trademark, trademark application, tradename, fictitious business
name, service mark, service mark application, copyright, copyright application,
trade secret, know-how, invention, design, proprietary product, proprietary
right; or other intellectual property right or intangible asset. (the
"Proprietary Assets") Any use by CITE of the Proprietary Assets except as
provided for in this Management Agreement will constitute a default hereunder
and will result in Sports Club's immediate termination of the Management
Agreement.
21. CITE and Sports Club agree to maintain the confidentiality of
all oral or written information of either party provided to each pursuant to
the terms of this Management Agreement and that each party shall not use such
information except for the purpose of providing the services contemplated by
this Management Agreement, provided that these restrictions shall not apply to
any information which (1) is already known to both through a source other than
Sports Club or CITE; (2) is or becomes publicly known (through no breach of
this Management Agreement); (3) is developed by either independently of any
information received from Sports Club or CITE; (4) is rightfully received from
a third party who is not obligated to keep such information
<PAGE> 14
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confidential; or (5) is required to be disclosed by law or court order
(provided that each party shall notify the other of any such required
disclosure and cooperate with each other to resist or limit such disclosure.)
IN WITNESS WHEREOF, the parties hereto have signed this Management
Agreement as of the day and year first above written.
THE SPORTS CLUB COMPANY CITE DESIGN CORPORATION
By: /s/ JOHN GIBBONS By: /s/ P.J. CASEY
-------------------------- -------------------------
John Gibbons, President P. J. Casey, President
DATED: 5/6/96 DATED: 8 May 96
<PAGE> 1
10.86
LICKLIDER CONSULTING
AGREEMENT
<PAGE> 2
CONSULTING AGREEMENT
This agreement, dated as of August 1, 1996, by and between The Sports Club
Company ("SCC"), and Rex A. Licklider ( the "Consultant"). Whereas, SCC
desires to retain the Consultant for certain services and the Consultant
desires to provide such services, SCC and the Consultant agree to the
following:
1. Appointment. SCC hereby retains the Consultant as an independent
contractor on a part-time basis, and the Consultant hereby accepts such
retainer, upon the terms and conditions herein set forth. During the term
hereof, the Consultant shall serve at the direction of Michael Talla or any
other person appointed by him.
2. Services to be Rendered. The Consultant agrees to perform the
following services:
a) Assist the Company in strategic planning
b) Advise the President and CEO on day-to-day operations,
marketing & sales
c) Assist the Company in stockholder relations
3. Time and Place of Work. The Consultant shall provide SCC with a
minimum of 60 hours of service per month. These services shall be performed at
the SCC's executive office in Los Angeles, Ca., or at such other place or
places as shall be mutually agreed upon.
4. Compensation. In consideration of the services to be provided by the
Consultant hereunder, SCC shall pay the Consultant at the rate of $10,000 per
month, payable in advance. SCC shall reimburse the Consultant for all
reasonable and necessary traveling expenses and other disbursements which the
Consultant shall incur, at SCC's request, in rendering services pursuant to
this agreement. The Consultant shall render invoices and expense accounts
monthly in form and detail as specified by SCC. The Consultant acknowledges
that he shall be fully responsible for all Federal and State withholding,
payroll and other taxes, as confirmed by the Consultant's Certificate in the
form of Exhibit "A" attached hereto.
5. Term. This agreement shall be effective from August 1, 1996 until
July 31, 1997. The Consultant's obligations pursuant to Paragraphs 9 and 12
below shall survive the expiration or earlier termination of this agreement.
<PAGE> 3
6. Termination. This agreement shall terminate on the earliest of a)
July 31, 1997, unless amended as provided herein, b) inability of the
Consultant to perform all services required of him under this agreement; and/or
c) mutual agreement by both parties. It will also terminate if SCC ceases to
operate as a business, merges with or is acquired by or otherwise sells all or
substantially all its assets and properties to another entity. Upon
termination, the Consultant shall transfer to SCC all work which has been, or
is in the process of being completed, and all drawings, designs, plans, and any
copyright, patent or trademark rights made or obtained in connection therewith.
In this regard, the Consultant acknowledges and agrees that he is a
"worker-for-hire" under the Copyright Act of 1976, as amended, and all work,
products and proceeds of his work and services under this agreement shall be
and remain the sole property of SCC.
7. Limitation of Liability. The Consultant shall not be obligated to
render services or incur costs hereunder and SCC shall not be obligated to
reimburse the Consultant for expenses hereunder in excess of $10,000_, unless
SCC and the Consultant shall change such amount by written amendment to this
agreement.
8. Consulting for Others. The Consultant shall be free to be employed by
or otherwise render consulting services to any other individual, firm,
association, or other organization, provided that any such individual, firm,
association or organization does not compete with SCC absent the prior written
approval of SCC.
9. Confidential Nature of Work. Both during and after the term of this
agreement, the Consultant will not directly or indirectly use or divulge to any
one other than SCC's officers or, except in the performance of his services
under this agreement, make any use of information or knowledge relating to a)
any project on which SCC shall have worked or shall be working on, or b) to
SCC's business, which the Consultant shall have developed, learned about or
obtained during the term of this agreement and which shall not be generally
known or recognized as standard practice. The Consultant will not utilize
SCC's name for any advertising purpose without the Company's specific prior
written approval.
10. Third Party Relationships. The Consultant will not enter into any
agreement or incur any obligation on SCC's behalf, or commit SCC in any other
manner without SCC's prior written consent.
<PAGE> 4
11. Nature of Relationship. It is understood that the Consultant is being
retained by SCC as an independent contractor and that the Consultant is not,
and will not act as SCC's agent nor shall the Consultant be deemed to be an
employee of the Company for the purpose of any tax withholding or employee
benefit program or otherwise, except that, Consultant will be included in SCC
health insurance program and will receive normal executive privileges at SCC
fitness facilities.
12. Invention and Patent Rights. The Consultant agrees to and does hereby
assign to SCC any inventions resulting from the performance of his services
under this agreement. SCC will prepare, file and prosecute patent applications
on such inventions whenever, in its judgment, it feels that such applications
should be filed and will pay all expenses involved therewith.
13. Warranty. The Consultant warrants that he has the right to disclose
to SCC all information transmitted under this agreement and in relation
thereto, without violating the legal or equitable rights of any other person or
entity, and that all services rendered to or on behalf of SCC shall be in
strict accordance with all applicable federal, state, and local laws. The
Consultant further agrees to indemnify and hold harmless SCC in the event of
any breach of any representation, warranty, term or condition set forth herein.
14. Entire Agreement. This agreement (together with all Exhibits attached
hereto, which are incorporated herein by this reference) shall constitute the
entire agreement between the parties. No understandings, agreements,
discussions or representations on the subject matter hereof shall be binding
upon either of the parties, except as expressly set forth herein or in any
other written agreement executed between the parties.
This agreement is entered into and executed as of the date above.
By: The Sports Club Company, Inc. By:
By: /s/ John Gibbons /s/ Rex A. Licklider
------------------------------ ----------------------------
John Gibbons, President Rex A. Licklider, Consultant
<PAGE> 1
10.87
WPI KOLL LETTER
AGREEMENT
<PAGE> 2
[WPI-KOLL LOGO]
October 7, 1996
Mr. Christopher Curry
Director of Real Estate and Business Development
The Sports Club Company
11100 Santa Monica Boulevard Suite 300
Los Angeles, California 90025
Re: Proposed Japanese Mega Mall Projects
------------------------------------
Dear Chris:
Thank you for our continued discussions over the last year regarding the
interest of The Sports Club Company entering the Japan market to operate clubs
of the stature of Sports Club L.A., Sports Club Irvine and the Reebok Sports
Club in NY. This Letter Agreement will confirm the proposal for WPI.KOLL Asia
Pacific Advisors ("WPI.KOLL") to bring The Sports Club Company ("Sports Club")
into a series of major shopping/entertainment mixed use complexes which
WPI.KOLL is planning in Japan (the "MegaMalls") with a consortium of major
Japanese corporations ("Consortium).
1. Right of First Refusal. WPI.KOLL will provide Sports Club with a right
of first refusal for a Japanese entity formed between Sports Club, or its
controlled affiliate, and one or more Japanese companies from the Consortium to
lease a sports and fitness facility of approximately one hundred thousand
square feet (100,000 s.f.) in each of the proposed MegaMalls to be located in
Japan when WPI.KOLL commences its leasing activity at such MegaMalls, provided
this Letter Agreement is still in full force and effect at that time. WPI.KOLL
will send a written notice to Sports Club when WPI.KOLL commences its concept
design phase of each MegaMall and provide Sports Club with certain demographic
and psychographic information on the trade area. Sports Club will then have
sixty (60) days to confirm that it has preliminary interest to lease premises
in such proposed MegaMall if and when it proceeds to development. Upon
confirmation of such preliminary interest in writing, Sports Club shall then
have an additional one hundred and twenty (120) days to complete its desired
market research, financial feasibility and commit under a Letter of Intent to
proceed with a lease on the project. Finalization of the lease shall proceed
in the normal course of business. If Sports Club decides not to lease such
premises (a) it will still have a right of first refusal as to other MegaMalls
under this paragraph 1; and (b) WPI.KOLL will immediately have the right to
lease premises in such MegaMall to another sports and fitness facility operator
during the following three hundred sixty (360) day period providing a letter of
intent to lease is entered into during such three hundred sixty (360) day
period on terms no more favorable than offered to Sports Club. In the event
the landlord is willing to offer more favorable terms to another operator, or
after the following three hundred sixty (360) day period, the right of first
refusal as to such terms shall be made available for re-consideration to Sports
Club, however, the response period under this re-consideration period shall
thirty (30) days to enter into the
<PAGE> 3
Mr. Christopher Curry
October 7, 1996
Page 2
Letter of Intent under the then offered terms. Sports Club's actual leasing of
facilities in such MegaMalls will be subject to standard lease documentation
prepared by WPI.KOLL and the Japanese owner of the MegaMall property ("Owner").
The actual financial terms will still need to be negotiated by WPI.KOLL and
Owner with Sports Club for Sports Club's actual occupancy in such MegaMalls, but
the leases will be at the then fair market rental rate and other market terms
for such space.
2. Japanese Venture. If Sports Club pursues participation in any way in
the MegaMalls (leasing or otherwise), Sports Club will form a "Japanese Venture"
(whether in joint venture, partnership or corporate form) with a Japanese
partner or partners selected from the Consortium for Sports Club's proposed
MegaMall athletic and fitness club activities. Such Japanese partner(s) will
have, based upon the nature and extent of its participation, up to a forty five
percent (45%) interest, Sports Club not less than a fifty point one percent
(50.1%) interest and WPI.KOLL of four point nine percent (4.9%) carried interest
in all profits generated by the Japanese Venture. Allan L. Davis will be a
voting member on the executive committee or other governing body of such
Japanese Venture for so long as WPI.KOLL designates. Other than these items,
the Japanese Venture will be formed on such terms and conditions as may be
negotiated between Sports Club and such Prospective Partner(s), such
negotiations to be conducted and such agreements (if any) to be made by Sports
Club at Sports Club's sole discretion.
3. Prospective Partner(s). WPI.KOLL will use its reasonable efforts to
locate and introduce to Sports Club prospective Japanese partner(s)
("Prospective Partner(s)") for Sports Club's Japanese Venture as follows:
a. Before WPI.KOLL's search for Japanese Prospective
Partner(s) from the Consortium, Sports Club will submit to
WPI.KOLL a detailed list of business, financial and other
criteria relating to the proposed joint venture transaction
("Transaction Criteria"). WPI.KOLL and Sports Club will jointly
prepare and approve the list of Transaction Criteria before
commencing with the pursuit of Prospective Partner(s). Sports
Club agrees to direct all new inquiries subsequent to
announcement of Sports Club's intention to enter Japan to
WPI.KOLL for the initial three (3) year period from the date of
this Agreement from Prospective Partner(s) who are members of
the Consortium who express direct interest to Sports Club to
become Sports Club's partner for its Japanese Venture.
b. Sports Club will perform its own evaluation on
Prospective Partner(s), their operations ability, the personnel
such partner(s) may put forward to assist in the Ventures
operations in Japan, the partners financial standing and
thereafter, WPI.KOLL shall have no liability if Prospective
Partner(s) and Sports Club either do not form a Japanese Venture
or, if formed, such Japanese Venture is not.
<PAGE> 4
Mr. Christopher Curry
October 7, 1996
Page 3
financially or otherwise successful. In connection with the
Japanese Venture, Sports Club and WPI.KOLL each agree to consult
with its own tax advisor concerning US federal income tax,
Japanese tax and other laws and foreign laws that may be
applicable to it. In addition, Sports Club and WPI.KOLL each
agree to obtain legal advice with respect to any US securities
or other laws or regulations (US or foreign) that Sports Club or
WPI.KOLL may have to comply with in connection with the Japanese
Venture. Sports Club acknowledges that WPI.KOLL will not, and
does not purport to, advise Sports Club with respect to tax
matters or legal issues and vice versa.
c. WPI.KOLL is not, and will not be deemed in any way, to
be Sports Club's agent or broker. Sports Club acknowledges that
WPI.KOLL will be acting solely to introduce Sports Club to
Prospective Partner(s) and that WPI.KOLL does not (and will not
be deemed to) make any representations or warranties with
respect to such Prospective Partner(s).
d. Sports Club will indemnify, defend, protect and hold
WPI.KOLL harmless from and against any and all liability, and
any and all claims, loss, demands, litigation, costs, attorneys'
fees or judgments resulting from any incorrect or inaccurate
information supplied to WPI.KOLL by Sports Club or the
concealment of any material facts concerning Sports Club.
e. WPI.KOLL will indemnify, defend, protect and hold Sports
Club harmless from and against any and all liability, and any
and all claims, loss, demands, litigation, costs, attorneys'
fees or judgments resulting from any incorrect or inaccurate
information supplied to Sports Club by WPI.KOLL or the
concealment of any material facts concerning WPI.KOLL.
f. WPI.KOLL will not have authority to bind Sports Club.
4. WPI.KOLL's Fee. For locating such Prospective Partner(s), the
Japanese Venture to pay to WPI.KOLL, without offset or deduction, a fee equal
to two per cent (2%) of the total equity contribution of the Prospective
Partner(s) to the Japanese Venture for all equity contributions made in the
formation, startup and opening (but not on any portion of the equity related to
payment of the fee, or increased cost of construction after commencement of
construction on each club) of the first four (4) MegaMall sports clubs in
Japan after the formation of the Japanese Venture. Such fee will be due and
payable by the Japanese Venture to WPI.KOLL when, and the Japanese Venture
will be under no obligation to pay any part of this fee to WPI.KOLL until, the
Japanese Venture is formed and upon each funding of equity thereafter relative
to the first four (4) clubs by Sports Club or its controlled affiliate within
the MegaMalls. For purposes of this Letter
<PAGE> 5
Mr. Christopher Curry
October 7, 1996
Page 4
Agreement, no Japanese Venture will be considered formed until Sports Club or
the Japanese Venture entity has received the initial equity contribution from
Prospective Partner(s).
5. Confidential Information. Each party acknowledges that it will have
access to the other party's "Confidential Information" relating to the MegaMall
projects, including without limitation, plans, specifications, rental rates,
market information, customer information, and other data and analysis as well
as operations of the athletic and fitness clubs. Each party agrees that,
without the prior written consent of the other, it will not use for its own
benefit or disclose any of the other party's Confidential Information to any
third parties, except for its own employees on an as-needed basis (each party
for itself agrees to cause its employees to keep it confidential and not use
for their own benefit). Further, neither party will make any copies of any of
the other party's Confidential Information, in whole or in part, for any
purpose other than in connection with the MegaMalls and solicitation of
Prospective Partner(s), which parties must similarly agree to keep confidential
the Confidential Information, and will, upon request by the other party, return
all of the other party's Confidential Information, including without
limitation, all copies of Confidential Information and any notes or memoranda
of conversations describing or relating to the Confidential Information and any
and all documents, notes and memoranda, and any magnetic tapes or other
electronic media that have been received or derived by the receiving party.
Each party hereby acknowledges the unique nature of the Confidential
Information and further acknowledge that monetary damages, by themselves, would
not adequately compensate a party in the event that the other party
disseminates or utilizes, or permits or suffers third parties to disseminate or
utilize Confidential Information, except for the purposes described above.
Therefore, in addition to recovering monetary damages, each party will have the
right to obtain a temporary restraining order and/or injunctive relief from any
court in equity to halt or prevent the dissemination or use of its Confidential
Information by the other party except for the purposes described in this
agreement.
6. Term. Unless sooner terminated as provided herein, the term of this
Letter Agreement will be from October 1, 1996 through September 30, 2006. In
the event no Japanese Venture letter of intent is executed within three (3)
years of the date of execution of this letter by both parties and a subsequent
venture agreement is entered into for a MegaMall property in the normal course
of business within the next one (1) year period, this letter agreement shall be
of no further force or effect. However, should the parties introduced by
WPI.KOLL subsequently enter into a venture agreement with Sports Club for a
MegaMall property within the subsequent two (2) year period to the termination
date, the compensation due under this letter agreement shall be paid by the
Japanese Venture to WPI.KOLL within thirty (30) days of the commencement of
said venture.
<PAGE> 6
Mr. Christopher Curry
October 7, 1996
Page 5
7. Miscellaneous. This Letter Agreement contains the entire agreement
between WPI.KOLL and Sports Club concerning WPI.KOLL's activities as a finder
in connection with the location of Prospective Partner(s) and Sports Club's
rights to locate a facility within the MegaMalls, and accurately describes our
agreement as of today. Time is of the essence of each and every part of this
Letter Agreement. This Letter Agreement will be governed by, and construed in
accordance with, California law. The prevailing party in any dispute under
this Letter Agreement will be entitled to recover reasonable attorneys' fees
and costs of suit as determined by a court of competent jurisdiction in Los
Angeles County. This Letter Agreement may not be modified or amended except by
an agreement in writing signed by both parties.
We appreciate your interest in entering the Japan market and the MegaMall
projects as well as the time and effort Sports Club has put into this project
to date. We look forward to a highly successful relationship for both of us in
Japan. If the terms outlined above accurately reflect our agreement, please
sign below and return a second original to me.
WPI.KOLL Asia Pacific Advisors
a Delaware limited liability company
By: /s/ ALLAN L. DAVIS
------------------------------------
Allan L. Davis
President
ACKNOWLEDGED AND AGREED TO:
The Sports Club Company,
a Delaware Corporation
By: /s/ DAVID M. TALLA
----------------------------
Dated: This 9th day of October, 1996
<PAGE> 1
10.88
AT&T LOAN
AGREEMENT
<PAGE> 2
SECOND AMENDMENT
TO
LOAN AGREEMENT
THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "Second Amendment") is
entered into as of the 11th day of October, 1996 between AT&T COMMERCIAL
FINANCE CORPORATION, a Delaware corporation ("Lender"), and L.A./IRVINE SPORTS
CLUBS, LTD., a California Limited Partnership ("Borrower").
RECITALS
A. Borrower and Lender have entered into a Loan Agreement dated
March 9, 1996 as amended by a First Amendment to Loan Agreement dated March 12,
1996 ("Loan Agreement").
B. Borrower has requested Lender to lend to Borrower an
additional $500,000 for use by Borrower in acquiring real property commonly
known as 1811 Pontius Ave., Los Angeles, California ("Pontius Avenue Property")
for use in connection with the Real Property (as defined in the Loan
Agreement).
C. Lender and Borrower desire to amend the Loan Agreement to
provide for the loan to Borrower of such additional $500,000 on the terms and
conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration the receipt and
sufficiency is hereby acknowledged, the parties agree as follows:
1. AMENDMENTS TO LOAN AGREEMENT:
A. The following "Definitions" contained in Article I of
the Loan Agreement are each amended to read as follows:
"AGREEMENT: the Loan Agreement between Borrower and
Lender dated as of March 9, 1996, as amended by a First
Amendment to Loan Agreement dated as of March 12, 1996 and a
Second Amendment to Loan Agreement dated as of October 11,
1996, as the same may be amended or extended from time to
time."
<PAGE> 3
"NOTE": the Secured Promissory Note of the Borrower
dated as of March 9, 1996, as amended by a First Amendment to
Secured Promissory Note dated as of October ___, 1996, as the
same may be amended or extended from time to time."
"REAL PROPERTY": the land and improvements known as
The Sports Club/LA, being (a) an approximately 108,073 sq.
foot health club facility located at 1835 Sepulveda Blvd., Los
Angeles, California, (b) Parcel No. 6 as shown on the Anacal
Engineering Co. Survey dated February 16, 1996 located at 1803
Pontius Ave., Los Angeles, California, and (c) a parcel
consisting of approximately 7,000 sq. feet located at 1811
Pontius Ave., Los Angeles, California, all as legally
described in Schedule 1.01A."
B. Section 2.01, Term Loan, of the Loan Agreement is
amended in its entirety to read as follows:
"SECTION 2.01 TERM LOAN:
Subject to the terms and conditions contained in this
Agreement, the Lender agrees to make a loan (the "Term Loan")
to the Borrower, and the Borrower agrees to borrow from the
Lender, the aggregate principal amount of up to TWENTY-FOUR
MILLION DOLLARS ($24,000,000.00) for uses as specified in
Schedule 2.09. The Term Loan shall be evidenced by the Note."
C. Section 2.02(a), Principal in Respect of Term Loan,
is amended in its entirety to read as follows:
"(a) PRINCIPAL IN RESPECT OF TERM LOAN. The Term
Loan shall be payable without setoff, deduction or
counterclaim in eighty-four (84) consecutive monthly
installments on the first day of each month (the "Monthly Due
Dates") commencing May 1, 1996, and continuing until April 1,
2003, on which date all remaining outstanding principal and
accrued interest thereon shall be due and payable in full
without setoff, deduction or counterclaim. Monthly payments
of principal in respect of the initial funding advanced under
the Term
2
<PAGE> 4
Loan ("initial payment amount") shall, for the monthly
payments due May 1, 1996 through October 1, 1996, be, when
combined with the corresponding interest payment, a fixed
payment calculated based on a fifteen (15) year mortgage
amortization schedule. Monthly payments of principal for the
monthly payment due November 1, 1996 and thereafter, shall be,
when combined with the corresponding interest payment,
comprised of the initial payment amount plus a fixed payment
calculated based on a fourteen (14) year six (6) month
mortgage amortization schedule of the second funding of
$500,000 under the Term Loan."
D. Section 2.08 is hereby amended in its entirety to
read as follows:
"The Borrower's obligations and the Indebtedness to
the Lender hereunder and under the Note shall be secured at
all times by:
(a) a Deed of Trust and Security Agreement and
Fixture Filing of the Borrower dated as of March 9, 1996 as
amended by a First Amendment to Deed of Trust and Security
Agreement and Fixture Filing dated as of October 11, 1996
("Initial Deed of Trust") encumbering Parcels 1 through 7,
inclusive, of the Real Property as a first priority lien,
subject only to any prior liens expressly permitted under this
Agreement, together with mortgagee's title insurance policy
acceptable to the Lender;
(b) a Deed of Trust and Security Agreement and
Fixture Filing of the Borrower dated as of October 11, 1996
("Subsequent Deed of Trust") encumbering Parcel 8 of the Real
Property as a first priority lien, subject only to any prior
liens expressly permitted under this Agreement, together with
mortgagee's title insurance policy acceptable to the Lender
(the Initial Deed of Trust and the Subsequent Deed of Trust,
collectively the "Deed of Trust");
(c) a Security Agreement of the Borrower dated as
of March 9, 1996 as amended by a First Amendment to Security
Agreement dated as of October 11, 1996 ("Security Agreement")
3
<PAGE> 5
granting to the Lender a continuing first priority perfected
security interest in all presently owned and hereafter
acquired tangible and intangible personal property and
fixtures of the Borrower, subject only to any prior liens
expressly permitted under this Agreement in Schedule 2.08A,
but excluding that equipment financed by Bank of America and
described in Exhibit "B" to the Security Agreement;
(d) an Assignment of Leases and Rents of the
Borrower dated March 9, 1996 as amended by a First Amendment
to Assignment of Leases and Rents dated as of October 11, 1996
("Initial Assignment of Rents") granting to Lender a first
priority security interest in all leases of Parcels 1 through
7, inclusive, of the Real Property and other sources of income
relating to said parcels of the Real Property, subject only to
any prior liens permitted under this Agreement, together with
such third party consents, lien waivers, subordination
agreements and estoppel certificates as the Lender shall
reasonably require;
(e) an Assignment of Leases and Rents of the
Borrower dated as of October 11, 1996 ("Subsequent Assignment
of Rents") granting to the Lender a first priority security
interest in all leases of Parcel 8 of the Real Property and
other sources of income relating to said parcel of the Real
Property, subject only to any prior liens permitted under this
Agreement, together with such third party consents, lien
waivers, subordination agreements and estoppel certificates as
Lender shall reasonably require (the Initial Assignment of
Rents and the Subsequent Assignment of Rents, collectively the
"Assignment of Rents");
(f) Pledge Agreements executed by all Pledgors
dated as of March 9, 1996 ("Pledge Agreements") effecting
thereby a first priority perfected pledge of (i) all
partnership interests in the Borrower, (ii) all voting trust
certificates issued in respect of the partnership interests of
the Borrower, or any extension or renewal thereof, and (iii)
all options and other rights to
4
<PAGE> 6
acquire any such partnership interests;
(g) a Collateral Assignment of Operating
Contracts and Purchase Agreements dated as of March 9, 1996 as
amended by a First Amendment to Collateral Assignment of
Operating Contracts and Purchase Agreements dated as of
October 11, 1996 ("Collateral Assignment") granting to the
Lender a first priority perfected security interest in such
service contracts, construction contracts, management
agreements, franchise agreements, licenses, permits,
indemnification rights, leases, trademark licenses, accounts,
authorizations and agreements as the Lender shall deem
necessary to protect its interests, subject only to any prior
license expressly permitted under this Agreement, together
with such third party consents, lien waivers and estoppel
certificates as the Lender shall reasonably require;
(h) subordinations in favor of the Lender,
pursuant to subordination agreements satisfactory to the
Lender in form and substance (collectively the "Affiliate
Subordination Agreements"), of all indebtedness of the
Borrower to any Affiliates of the Borrower, designated by the
Lender;
(i) the subordination in favor of the Lender,
pursuant to subordination agreements satisfactory to the
Lender in form and substance (collectively, the "Subordination
Agreements"), of all indebtedness of the Borrower to any
lenders to the Borrower and any creditors of the Borrower
holding a note or non-competition agreement executed by the
Borrower, as obligor thereunder, designated by the Lender,
together with UCC-2 and such other lien subordination
documents as the Lender shall require;
(j) a Special Deposit Account Agreement executed
by the Borrower and its bank confirming the Lender's security
interest in the Borrower's bank account and providing for the
Lender's rights in such bank account upon the occurrence of an
Event of Default; and
5
<PAGE> 7
(k) those additional agreements, instruments,
certificates and documents described in Schedule 2.08B.
All agreements and instruments described or
contemplated in this Section 2.08, together with any and all
other agreements and instruments heretofore or hereafter
securing the Note and the Borrower's obligations hereunder or
otherwise executed in connection with this Agreement, shall in
all respects be acceptable to the Lender and its special
counsel in form and substance, and such agreements and
instruments, as the same may be amended from time to time, are
sometimes hereinafter referred to collectively as the
"Security Documents" and individually as a "Security
Document." The Borrower agrees to take such action as the
Lender may reasonably request from time to time in order to
cause the Lender to be secured at all times as described in
this Section 2.08, and the Lender's security interests to be
perfected at all times."
E. Schedule 1.01A to the Loan Agreement is amended and
restated in its entirety as set forth in Schedule 1.01A attached hereto as
Exhibit A.
F. Schedule 2.08A to the Loan Agreement is amended and
restated in its entirety as set forth in Schedule 2.08A attached hereto as
Exhibit B.
G. Schedule 2.08B to the Loan Agreement is amended and
restated in its entirety as set forth in Schedule 2.08B attached hereto as
Exhibit C.
H. Schedule 2.09 to the Loan Agreement is amended and
restated in its entirety as set forth in Schedule 2.09 attached hereto as
Exhibit D.
2. CONDITIONS TO EFFECTIVENESS. This Second Amendment shall
become effective on the date (such date being referred to herein as the "Second
Amendment Effective Date") on which each of the conditions set forth in Exhibit
E attached hereto have been fully satisfied or waived by the Lender.
3. BORROWER'S REPRESENTATIONS AND WARRANTIES. In order to induce
the Lender to enter into this Second Amendment and to amend the Loan Agreement
in the manner provided herein, the Borrower represents and warrants to the
Lender that the following statements
6
<PAGE> 8
are true, correct and complete:
A. Borrower has all requisite corporate power and
authority to enter into this Second Amendment and to carry out the transactions
contemplated by and perform its obligations under, the amendments to the
Transaction Documents executed in connection with this Second Amendment and
more fully described in Exhibit F attached hereto (collectively, the
"Amendments to Transaction Documents").
B. The execution and delivery of this Second Amendment
and the performance of the Amendments to Transaction Documents have been duly
authorized by all necessary corporate action by Borrower.
C. The execution and delivery by Borrower of this Second
Amendment and the performance by Borrower of the Amendments to Transaction
Documents do not and will not (i) violate any provision of any law, rule or
regulation applicable to Borrower, the partnership agreement of Borrower, (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 of Borrower,
(iii) result in or require the creation or imposition of any lien upon any of
their properties or assets, or (iv) require any approvals other than by the
partners of the Borrower.
D. The execution and delivery by Borrower of this Second
Amendment and the performance by Borrower of the Amendments to Transaction
Documents do not and will not require any registration with, consent or
approval of, or notice to, or other action to, with or by, any Federal, state
or other governmental authority or regulatory body or other person.
E. This Second Amendment and the Amendments to
Transaction Documents are the legally valid and binding obligations of
Borrower, enforceable against it in accordance with their respective terms,
except as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or limiting creditors' rights
generally or by equitable principles relating to enforceability.
F. The representations and warranties contained in
Article IV of the Loan Agreement are and will be true, correct and complete in
all material respects on and as of the date hereto to the same extent as though
made on and as of that date, except to the extent that such representations and
warranties specifically relate to an earlier date, in which case they are true,
correct and complete in all material respects as of such earlier date.
G. No event has occurred and is continuing or will
result from the consummation of the transactions contemplated by this Second
Amendment which would constitute an Event of Default
7
<PAGE> 9
(as defined in the Loan Agreement) or an event which with the passage of time
or the giving of notice or both which would constitute such an Event of
Default.
4. BORROWER COVENANTS. In order to induce the Lender to enter
into this Second Amendment and to amend the Loan Agreement in the manner
provided herein, the Borrower covenants and agrees as follows:
A. On or before December 31, 1996, the Borrower shall
cause all asbestos to be removed from the Pontius Avenue Property and the
delivery to the Lender of evidence satisfactory to the Lender confirming
completion of such asbestos removal in accordance with applicable law.
B. On or before December 31, 1996, the Borrower shall
complete the demolition of the building presently on the Pontius Avenue
Property and the paving of the Pontius Avenue Property as a parking lot. In
connection with such demolition and paving, the Borrower shall provided to the
Lender copies of all contracts, plans and other information related to such
demolition and/or paving reasonably requested by the Lender.
Failure to comply timely with either or both of the foregoing covenants shall
constitute an Event of Default under the Loan Agreement as amended by this
Second Amendment.
5. MISCELLANEOUS.
A. Reference to and effect on the Loan Agreement:
(i) On and after the Second Amendment Effective
Date, each reference in the Loan Agreement to "this
Agreement", "hereunder", "hereof", "herein", or words of like
import referring to the Loan Agreement shall mean and be a
reference to the Loan Agreement as amended by this Second
Amendment.
(ii) Except as specifically amended by this Second
Amendment, the Loan Agreement shall remain in full force and
effect and is hereby ratified and confirmed.
(iii) The execution, delivery and performance of
this Second Amendment shall not constitute a waiver of any
provision of, or operate as a waiver of any right, power or
remedy of the Lender under, the Loan Agreement or any of the
other Amended Transaction Documents.
8
<PAGE> 10
B. This Second Amendment may be executed in any number of
counterparts, and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts taken together shall constitute but one and the same instrument.
C. Section and subsection headings in this Second Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Second Amendment for any other purpose or be given any substantive
effect.
D. THIS SECOND AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO AND ALL OTHER ASPECTS HEREOF SHALL BE DEEMED TO BE MADE UNDER,
SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF CALIFORNIA.
6. LIMITATION ON RECOURSE. Notwithstanding any of the foregoing,
Lender's recourse to Borrower for its failure to perform under the Loan
Agreement, as hereby amended, and Borrower's liability to Lender for such
failure to perform, are limited by the provisions of Section 11.01 of the Loan
Agreement, which Section 11.01 is expressly incorporated herein by reference as
though set forth in this Second Amendment in full.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment to Loan Agreement as of the date first above written.
L.A./IRVINE SPORTS CLUBS, LTD.,
a California Limited Partnership
By: Sports Club, Inc. of California,
a California corporation
General Partner
By: JOHN GIBBONS
--------------------------
John Gibbons, President
AT&T COMMERCIAL FINANCE CORPORATION,
a Delaware corporation
By: /s/ MICHAEL V. MONAHAN
-------------------------
Title: Vice President
----------------------
9
<PAGE> 1
10.89
BALLY'S TERMINATION
AGREEMENT
<PAGE> 2
TERMINATION AGREEMENT
This Termination Agreement (this "Agreement") is entered into this 31st
day of October, 1996 by and among Bally Total Fitness Holding Corporation
(formerly known as Bally's Health & Tennis Corporation), a Delaware corporation
("BTFHC"), Bally Total Fitness Corporation (formerly known as Health & Tennis
Corporation of America), a Delaware corporation and a wholly-owned subsidiary of
BTFHC ("BTF"), Bally's S.C. Management, Inc., a California corporation and a
wholly-owned subsidiary of BTF ("Management") (jointly, the "Bally Group"), on
the one hand, and The Sports Connection Holding Company, a California
corporation ("SCHC") and The Sports Club Company, Inc. ("SCCI") (jointly, the
"Owner Group"), on the other hand, and, for the limited purposes herein
indicated, D. Michael Talla ("Talla") and Holiday Spa Health Clubs of
California, a California corporation ("Holiday"). The Bally Group and the Owner
Group are referred to herein as the "Parties".
This Agreement is entered into with reference to the following facts:
A. On January 22, 1993, the Bally Group and Talla Holding Company, a
California corporation, and certain limited partnerships (collectively, the
"Original Owner Group") entered into a certain Master Agreement ("Master
Agreement") and certain related side agreements and on March 1, 1993 a certain
Closing Memorandum and Agreement ("Closing Agreement"), and (with Talla) an
Amended and Restated Side Letter ("Side Letter") and certain related side
agreements creating an arrangement whereby all or some of the Bally Group
assumed responsibility for the operation and financial management of certain
health and fitness clubs. In furtherance thereof and pursuant to the Master
Agreement and the Closing Agreement, certain of the parties entered into various
Management Agreements ("Management Agreements") and Agreements for the
Employment of BTF to Perform Administrative, Accounting, Membership Contract and
Collection Services ("G&A Agreements") and subsequently that certain Memorandum
Agreement dated February 4, 1994 by and among the Bally Group, the Original
Owner Group and, for the limited purposes therein indicated, Talla and Holiday
or any of the other agreements entered into in connection therewith
(collectively, the "Encino/Howard Hughes Unwind Documents"). The Master
Agreement, the Closing Agreement, the Side Letter, the Management Agreements,
the G&A Agreements, the Encino/Howard Hughes Unwind Documents and all other
agreements related thereto are referred to, collectively, herein as the "Venture
Agreements".
B. SCHC is the successor to the Original Owner Group under the Venture
Agreements and is a wholly-owned subsidiary of SCCI.
C. Circumstances have now arisen which have caused the parties to agree
to terminate the arrangements created by the Venture Agreements with respect to
the five health and fitness clubs commonly known as The Sports Connection/Costa
Mesa, the Sports Connection/Long Beach, the Sports Connection/Santa Monica, the
Sports Connection/South Bay (Torrance), and the Sports Connection/Beverly Hills
(West Hollywood) (such clubs, the "Five Clubs"), all of which they desire to
memorialize in this Agreement. The Sports Connection/South Bay (Torrance) is
referred to herein as the "South Bay Club", and the Sports Connection/Beverly
Hills (West Hollywood) is referred to herein as the "West Hollywood Club".
-1-
<PAGE> 3
D. Concurrently with such termination, SCHC intends to sell certain of
the assets comprising the Five Clubs, other than those assets comprising the
South Bay Club (such four clubs, the "Purchaser Clubs"), to 24 Hour Fitness,
Inc., a California corporation ("PURCHASER"), and to take back the operations of
the South Bay Club and/or to close such club.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and subject to the mutual promises
contained in this Agreement, the Parties do each hereby agree as follows:
1. CLOSING. This transaction shall be closed on the date hereof
simultaneously with the execution and delivery of this Agreement (the
"Closing").
2. TERMINATION OF VENTURE AGREEMENTS GENERALLY. Following the Closing,
the Bally Group and the Owner Group shall have no further duties or
responsibilities to each other with respect to the Five Clubs or under the
Venture Agreements or as may have otherwise have been agreed except as otherwise
expressly required herein.
3. PAYMENT. The Owner Group shall pay, or cause to be paid, to the Bally
Group, at Closing, an amount equal to (a) $1,000,000 (the "Net Payment") less
(b) the deductions specified in paragraphs 5.B and 5.C below and such amount,
being $896,250, shall be referred to herein as the "Net Net Payment." Such
payment shall be made to the Bally Group by wire transfer of such amount to the
following account:
LaSalle National Bank
Chicago, Illinois 60603
ABA Number: 071000505
Account Name: Bally Total Fitness Corporation
Account Number: 5800020108
4. WORKING CAPITAL RESERVE; CLOSING PRORATIONS.
A. In addition to the Net Payment less those deductions set forth in
paragraphs 5.B and 5.C, the Bally Group shall be entitled to retain for its own
account at Closing, and the Owner Group shall have no interest therein from and
after Closing, any and all accounts held at Closing by the Bally Group to fund
the operations of the Five Clubs and pay their obligations. The Bally Group, in
good faith, believes the working capital account to have been approximately
$410,000 as of August 31, 1996.
B. Notwithstanding anything to the contrary contained in the Venture
Agreements, the Bally Group shall be solely responsible for settling, and shall
bear or receive the benefit of, as applicable, any and all items that otherwise
would have been the subject of a closing proration between the Owner Group and
the Bally Group for the Five Clubs.Thus, for example and without limitation, the
Bally Group shall be solely responsible for: (i) except for those set forth in
SCHEDULE 4.B, cancelling all service contracts for the Five Clubs effective as
of Closing and paying all balances due thereon, including any termination
penalties, and shall be entitled to keep any refunds for any prepaid balances
thereon, (ii) terminating or relocating all employees and independent
contractors for the Five Clubs effective as of Closing and paying
-2-
<PAGE> 4
all wages and benefits accrued through Closing, (iii) paying all rent and other
sums payable under any lease of personal or real property for the Five Clubs for
any period of time through Closing (including, but not limited to, any under a
lease of personal property owed the Owner Group or an affiliate), (iv) paying
all insurance premiums attributable to insurance coverage for the Five Clubs and
their operations for any period of time through Closing and cancelling all such
coverage, except for any so-called "tail coverage", effective as of Closing and
shall be entitled to keep any premium refund attributable thereto and (v) paying
all operating expenses (including, without limitation, taxes, other than income
taxes of the Owner Group) of the Clubs that relate to the period of time from
the date on which the Bally Group commenced managing the Five Clubs through and
including the Closing.
5. ADA SETTLEMENT.
A. Subject to the Closing having occurred, the Parties shall each bear
one-half of the following out of pocket third party costs actually incurred by
either Party, from time to time and whether before or after the Closing, to
defend or settle Lindsey et al. v. Bally Total Fitness Corp. et al., U.S.
District Court No. 96-0138-MRP(VAPx) (the "ADA Suit"): (i) legal fees, (ii)
payments to the plaintiffs and their counsel as required by any settlement
agreement for the ADA Suit (the "ADA Settlement Agreement"), (iii) expenditures
to fund renovation of the West Hollywood Club as required by the ADA Settlement
Agreement and (iv) providing ADA training for the personnel of the West
Hollywood Club. Subject to paragraphs 5.B and 5.C, the Owner Group and the Bally
Group shall each perform, after the Closing, any and all of their respective
obligations under the ADA Settlement Agreement.
B. The draft ADA Settlement Agreement presently requires a payment of
$119,500 to the plaintiffs in the ADA Suit and their counsel. Accordingly, at
Closing, the Owner Group shall send a check for $119,500 to Littler, Mendelson,
Fastiff, Tichy & Mathiason (the "Littler Firm"), 2049 Century Park East, 5th
Floor, Los Angeles, California 90067-2700, attention: Robert Millman, Esq., the
Littler Firm being counsel for the defendants in the ADA Suit, for the Littler
Firm to hold in trust, on behalf of the defendants in the ADA Suit, and then to
use in making payment to the plaintiffs and their counsel in the ADA Suit as and
when such payment shall be required by the ADA Settlement Agreement, as and when
finalized and fully executed. $59,750 of such monies shall come from the Owner
Group's funds, and $59,750 of such monies shall come from the Bally Group by
means of a deduction equal to such amount having been made by the Owner Group
from the Net Payment. Nothing in this paragraph 5.B shall be construed so as to
limit or modify in any way the Parties' obligations under paragraph 5.A if the
ADA Settlement Agreement shall ultimately require payment of more than $119,500
to the plaintiffs and their counsel.
C. The draft ADA Settlement Agreement presently requires $88,000 worth of
certain specified renovations to be made to the West Hollywood Club. As between
the Bally Group and the Owner Group, the Owner Group shall be responsible for
making such renovations as and when such renovations shall be required to be
made by the ADA Settlement Agreement, as and when finalized and fully executed.
$44,000 of such monies shall come from the Owner Group's funds, and $44,000 of
such monies shall come from the Bally Group by means of a deduction equal to
such amount having been made by the Owner Group from the Net Payment. The amount
of $88,000 shall be sent by check to the Littler
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<PAGE> 5
Firm concurrently with the check described in paragraph 5.B above. Nothing in
this paragraph 5.C shall be construed so as to limit or modify in any way the
Parties' obligations under paragraph 5.A if the ADA Settlement Agreement shall
ultimately require more than $88,000 worth of renovations to be made to the West
Hollywood Club, provided in no event shall the Bally Group be obligated to pay
more than one-half of the costs for such renovations, the Bally Group's one-half
not to exceed $75,000. The renovation work performed by the Owner Group shall be
limited to and performed within the scope of the recommendations of the March,
1996 architectural report submitted by Glitman & Lazarine.
6. THE RELEASES.
A. At the Closing, each of the Bally Group, for themselves and their
respective past, present and future administrators, affiliates, agents, assigns,
attorneys, directors, employees, executors, heirs, insurers, officers, managers,
parents, partners, predecessors, representatives, servants, shareholders,
subsidiaries, successors, transferees, underwriters, and all persons acting by,
through, under or in concert with any of them, and each of them, hereby releases
and discharges (i) the Owner Group and each of their respective past, present
and future administrators, affiliates, agents, assigns, attorneys, directors,
employees, executors, heirs, insurers, officers, managers, parents, partners,
predecessors, representatives, servants, shareholders, subsidiaries, successors,
transferees, underwriters, and each of them; and (ii) each of their respective
past, present and future administrators, affiliates, agents, assigns, attorneys,
directors, employees, executors, heirs, insurers, officers, managers, parents,
partners, predecessors, representatives, servants, shareholders, subsidiaries,
successors, transferees, underwriters, and each of them; and (iii) all persons
acting by, through, under or in concert with any of them, of and from any and
all actions, causes of action, claims, costs, damages, debts, demands, expenses,
liabilities, losses and obligations of every nature, character and description,
known or unknown, actual or contingent, which the releasing party now owns or
holds, or has at any time heretofore owned or held, or may at any time hereafter
own or hold, by reason of any matter, cause or thing whatsoever incurred, done,
omitted or suffered to be done through the date hereof, including, but without
limiting the generality of the foregoing, any and all claims arising out of,
related to or in any way connected with any of the Venture Agreements or the
Five Clubs including, but not limited to, ownership, occupancy, operations or
administration thereof (all such released or discharged items, collectively,
"Bally Claims").
B. At the Closing, each of the Owner Group, for themselves and their
respective past, present and future administrators, affiliates, agents, assigns,
attorneys, directors, employees, executors, heirs, insurers, officers, managers,
parents, partners, predecessors, representatives, servants, shareholders,
subsidiaries, successors, transferees, underwriters, and all persons acting by,
through, under or in concert with any of them, and each of them, hereby releases
and discharges (i) the Bally Group and each of their respective past, present
and future administrators, affiliates, agents, assigns, attorneys, directors,
employees, executors, heirs, insurers, officers, managers, parents, partners,
predecessors, representatives, servants, shareholders, subsidiaries, successors,
transferees, underwriters, and each of them; and (ii) each of their respective
past, present and future administrators, affiliates, agents, assigns, attorneys,
directors, employees, executors, heirs, insurers, officers, managers, parents,
partners, predecessors, representatives, servants, shareholders,
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<PAGE> 6
subsidiaries, successors, transferees, underwriters, and each of them; and (iii)
all persons acting by, through, under or in concert with any of them, of and
from any and all actions, causes of action, claims, costs, damages, debts,
demands, expenses, liabilities, losses and obligations of every nature,
character and description, known or unknown, actual or contingent, which the
releasing party now owns or holds, or has at any time heretofore owned or held,
or may at any time hereafter own or hold, by reason of any matter, cause or
thing whatsoever incurred, done, omitted or suffered to be done through the date
hereof, including, but without limiting the generality of the foregoing, any and
all claims arising out of, related to or in any way connected with any of the
Venture Agreements or the Five Clubs including, but not limited to, ownership,
occupancy, operations or administration thereof (all such released or discharged
items, collectively, "Owner Group Claims").
C. For purposes of this paragraph 6, Talla shall be deemed a member of
the Owner Group, and Bally Entertainment Corporation and Holiday shall each be
deemed a member of the Bally Group.
D. Each of the Parties acknowledges, in executing the releases (the
"Releases") contained in this paragraph 6, that each does so with full knowledge
of any and all rights and benefits that each might otherwise have had under
California Civil Code Section 1542, and each hereby waives and relinquishes any
and all such rights and benefits. Each of the Parties acknowledges and agrees
that this waiver is an essential and material term hereof, without which this
Agreement (including, without limitation, the Releases) would not have been
entered into. Section 1542 reads as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which, if known by him, must
have materially affected his settlement with the debtor."
Each of the Parties certifies that it has read the foregoing recitation of
Section 1542 and such fact is indicated by the signing of such Party's initials
hereto:
/s/ CAG /s/ DMT
--------------- ----------------
The Bally Group's The Owner Group's
Initials Initials
Each of the Parties further acknowledges that each may hereafter discover facts
different from or in addition to those known or believed to be true with respect
to the items released or discharged pursuant to this paragraph 6 (collectively,
the "claims"). Each of the Parties agrees that the Releases shall be and shall
remain effective in all respects, notwithstanding any such different or
additional facts. Each of the Parties further declares that it understands that
the parties being released would not have agreed to compromise their respective
claims if the Releases did not cover damages and their results which may not yet
have manifested themselves or which may be unknown or not anticipated at the
present time. Without limitation, each of the Parties declares that it realizes
that it may have damages it presently knows nothing about and that, as to them,
they have been released pursuant to the Releases.
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<PAGE> 7
E. This Agreement effects the settlement of disputes which are denied and
contested. Nothing contained herein should be construed as an admission by any
Party of any liability of any kind with respect thereto, and all such liability
is expressly denied. No rights shall inure to any third party from the
obligations, representations and agreements made or reflected herein.
F. Each of the Parties represents and warrants that it alone is the owner
of the claims hereby compromised by it, that it has not heretofore assigned or
transferred, nor purported to assign or transfer to any third party, and is not
aware of any third party who might assert some interest in any of the claims,
whether by contract, operation of law or otherwise. Each Party further agrees to
indemnify, defend and hold harmless the other from all liability, claims,
demands, damages, costs, expenses and reasonable attorneys' fees incurred by the
other Party as a result of any third party asserting any such assignment or
transfer of any such interest, right or claim whether by contract, operation of
law or otherwise.
G. Each of the Parties represents and warrants that none of the claims
hereby compromised by it is subject to any purported or actual lien, security
interest, encumbrance or other contractual right of any third party. Each Party
further agrees to indemnify, defend and hold harmless the other from all
liability, claims, demands, damages, costs, expenses and reasonable attorneys'
fees incurred by the other Party as a result of any third party asserting the
existence of any of the foregoing.
H. Each of the Parties acknowledges that it has read this Agreement, has
been, or has had the opportunity to be, represented by independent counsel of
their own choice in connection with the circumstances leading up to the
execution of the Releases, understands the terms, conditions and consequences of
the Releases, and is freely and voluntarily entering into the Releases.
I. The Releases shall not extend to any and all actions, causes of
action, claims, costs, damages, debts, demands, expenses, liabilities, losses
and obligations of every nature, character and description, known or unknown,
actual or contingent, which the releasing party now owns or holds, or has at any
time heretofore owned or held, or may at any time hereafter own or hold, by
reason of any matter, cause or thing whatsoever incurred, done, omitted or
suffered to be done because of a breach by the other party of any covenant or
obligation contained in this Agreement, or any breach of any representation or
warranty by the other party contained in this Agreement.
J. The Releases shall only become effective, if at all, at the Closing
and shall be of no force or effect whatsoever if the Closing shall fail to
occur, for any reason at all.
7. MUTUAL REPRESENTATIONS AND WARRANTIES. Each of the Parties hereby
represents and warrants to the other as follows:
A. It has full power and authority to execute, deliver and perform this
Agreement (including, without limitation, as applicable, the Releases) and to do
any and all other things reasonably required hereunder.
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<PAGE> 8
B. The execution, delivery and performance of this Agreement is not in
contravention of or in conflict with any other agreement, indenture or
undertaking to which it is a party or by which it, or any of its property, may
be bound or affected.
C. Any and all representations and warranties contained in this Agreement
(including, without limitation, the Releases) shall survive the execution of
this Agreement.
8. SPECIAL REPRESENTATIONS AND WARRANTIES OF THE BALLY GROUP.
Concurrently with the Closing, the Owner Group has entered into an Asset
Purchase Agreement between Purchaser and the Owner Group (the "Purchase
Agreement"). Pursuant to paragraph 2 of the Purchase Agreement, the Owner Group
is making certain representations and warranties to the Purchaser and certain of
its affiliates (the "Seller Warranties") regarding the Purchaser Clubs and their
operations. In order that the Owner Group may be able to make Seller's
Warranties, the Owner Group has asked the Bally Group to deliver to the Owner
Group, the Owner Group's counsel, Purchaser and/or Purchaser's counsel certain
materials which are listed on SCHEDULE 8 attached hereto, together with the list
of employees and independent contractors who contracted with or are employed by
the Bally Group for the Purchaser Clubs and the list of members for the Santa
Monica Club, receipt of which is hereby acknowledged by the Owner Group,
concurrently herewith (collectively, "Bally Materials"). The Bally Group
acknowledges and agrees that it has delivered the Bally Materials, in part, in
order that the Owner Group may rely upon the Bally Materials for purposes of
making the Seller Warranties in the Purchase Agreement and that the Owner Group
will rely upon the Bally Materials for these purposes. Accordingly, in order
that the Owner Group may rely upon the Bally Materials for such purposes, the
Bally Group hereby represents and warrants to the Owner Group that, to the
knowledge of the Bally Group, all of the Bally Materials are true, accurate and
complete copies of what they purport to be in all material respects, it being
agreed that the Bally Group shall not be deemed to have knowledge of a
particular fact or matter if none of Julie Adams, John Dwyer, Cary Gaan, Sonny
Reser or Karen Reling is actually aware of such fact or other matter as of the
date of Closing.
9. CONCESSIONS. Attached hereto as SCHEDULE 9 is a list of all
concessions entered into at the Five Clubs which are contracted for by the Bally
Group. All such concessions are cancelable on no more than thirty (30) days'
notice except as provided on SCHEDULE 9.
10. REMOVAL OF CERTAIN EQUIPMENT. The Bally Group shall, at its sole
expense, remove from the Five Clubs its computer terminals, printers, "swipe"
card readers, signs, logos and indicia of operations and all other personal
property owned or leased by any of the Bally Group as reasonably promptly as
possible and in any event within 30 days after the Closing. Such removal shall
be conducted in such a manner as to minimize disruption to the operations of the
Five Clubs and so as not to materially damage the Five Clubs. The Bally Group
shall indemnify the Owner Group and Purchaser from and against any and all
claims, costs, damages, liabilities and losses arising out of or in any way
connected with any such removal. If such materials are not removed within 30
days after the Closing, then the Bally Group shall be conclusively deemed to
have abandoned such property and shall be responsible for any and all costs
incurred in connection with any subsequent removal thereof. The exercise
equipment listed on SCHEDULE 10 attached hereto belongs to the Bally Group and
shall be removed in accordance with the terms hereof.
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<PAGE> 9
11. ADDITIONAL INDEMNITIES. The Bally Group shall defend the Owner Group
(including Talla) and indemnify and hold them harmless (including reasonable
attorneys' fees and expenses) on account of any claim asserted or loss or damage
incurred by the Owner Group (including Talla) arising out of or relating to any
guaranty by the Owner Group, or any of them, of that certain lease dated May 15,
1991 between Holiday, as tenant, and South Auspicious Investments as successor
to BA Mortgage and International Realty Corporation, as landlord, for space at
17401 Ventura Blvd., Encino, California. The Bally Group shall further defend
the Owner Group and indemnify and hold them harmless (including reasonable
attorneys' fees and expenses) on account of any claim asserted against or loss
or damage incurred by the Owner Group (including Talla) arising out of or
relating to (i) any personal injury claim, (ii) any claim against any employee
or independent contractor (including, for purposes of this paragraph, any
concessionaire at any of the Clubs) who is employed by or contracted with any of
the Bally Group, (iii) any claim by any employee or independent contractor who
is employed by or contracted with any of the Bally Group or (iv) any claim
arising out of any act or omission of any employee or independent contractor who
is employed by or contracted with any of the Bally Group, in each such instance
(a) in connection with the operations of the Five Clubs for the period of time
from the date on which the Bally Group commenced managing the Five Clubs through
and including the Closing and (b) except if and to the extent any such claim
shall be attributable to the gross negligence or wilful misconduct of any of the
Owner Group. The Bally Group agrees that it shall, at its sole cost and expense,
exercise its reasonable best efforts to remove Authentic Fitness from the Santa
Monica Club and shall pursue whatever legal rights it may have to effectuate
such removal but shall have no obligation to incur any financial obligation
except the legal fees associated therewith. Except as otherwise provided in
paragraph 4.B above and except for the Bally Group's obligations pursuant to
that certain Reciprocity and Transition Agreement of even date herewith, the
Owner Group shall defend the Bally Group and indemnify and hold them harmless
(including reasonable attorneys' fees and costs) on account of the claim
asserted or loss or damages incurred by the Bally Group, or any of them, arising
out of or relating to any obligation of the Bally Group to any lessor of the
Five Clubs or Purchaser with respect to the Purchaser Clubs.
12. SUCCESSORS. This Agreement shall be binding upon and shall inure to
the benefit of the Parties and their respective heirs, successors,
representatives, assigns, affiliates, agents, shareholders, directors, employees
and attorneys, past and present, and each of them.
13. INTEGRATION. This Agreement, together with those two certain letter
agreements of even date herewith between the Bally Group the Owner Group,
regarding the South Bay Club, comprises the entire understanding of the Parties
concerning the subject matter hereof, and may only be modified or amended by an
agreement in writing executed by each of the Parties which specifically refers
to this Agreement. The rights, duties and obligations of the Parties under this
Agreement shall operate independently of any other relationship, contractual or
otherwise, between the Parties.
14. GOVERNING LAW. This Agreement shall be construed in all respects in
accordance with the internal laws of the State of California applicable to
agreements made and to be performed entirely within California.
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<PAGE> 10
15. CONSENT TO VENUE. If any action, proceeding or litigation arising out
of this Agreement (a "Proceeding") is commenced, each of the Parties consents to
jurisdiction and venue and agrees that such Proceeding shall be conducted only
in either the Superior Court of the State of California for the County of Los
Angeles or the United States District Court for the Central District of
California. Each of the Parties hereby waives any right such Party may have to
assert the doctrine of forum non conveniens or to object to venue to the extent
that any such Proceeding is conducted in accordance with this section.
16. WAIVER OF JURY TRIAL. With respect to any dispute arising under or in
connection with this Agreement, each party hereby irrevocably waives all rights
it may have to demand a jury trial. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND
VOLUNTARILY MADE BY EACH OF THE PARTIES AND EACH ACKNOWLEDGES THAT NEITHER THE
OTHER PARTY NOR ANY PERSON ACTING ON BEHALF OF THE OTHER PARTY HAS MADE ANY
REPRESENTATION OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO
MODIFY OR NULLIFY ITS EFFECT. EACH PARTY FURTHER ACKNOWLEDGES THAT SUCH PARTY
HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE
SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL
COUNSEL, SELECTED OF SUCH PARTY'S OWN FREE WILL, AND THAT SUCH PARTY HAS HAD THE
OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. EACH PARTY FURTHER ACKNOWLEDGES
THAT SUCH PARTY HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS
WAIVER PROVISION.
17. COSTS OF ENFORCEMENT. If any action, proceeding or litigation shall be
commenced to enforce the terms hereof or to declare rights hereunder, the
prevailing party shall be entitled to recover all of its costs and expenses
including, but not limited to, reasonable attorneys' fees and expect witness
fees.
18. FURTHER ASSURANCES. Each of the Parties agrees to cooperate with the
other Party and to execute, acknowledge and deliver any and all additional
agreements, certificates, instruments, dismissals and documents and to take any
and all such further actions, all at no additional cost or obligation to the
Party doing so and all as may reasonably be deemed necessary or appropriate by
the other Party to effectuate this Agreement.
19. SURVIVAL. Notwithstanding the Releases contained in this Agreement,
all rights and obligations created under or pursuant to this Agreement, or
expressly contemplated by this Agreement to survive the Closing, shall survive
the Closing and the Releases contained herein.
20. AGREEMENT NOT DRAFTED BY EITHER PARTY. In the event of any
disagreement hereunder, this Agreement shall not be construed as having been
drafted by either Party.
21. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original but all of which, when
taken together, shall constitute one and the same agreement. If this Agreement
is executed in counterparts, then each party hereto shall execute sufficient
counterpart signature pages for each party, ultimately, to be provided with an
originally executed counterpart signature page for each of the parties hereto.
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<PAGE> 11
22. GENDER. Each gender shall include the other genders whenever the
context may require in this Agreement.
23. NOTICE. Whenever, under the terms of this Agreement, written notice is
required or permitted to be given by any party to any other party, such notice
shall be deemed to have been sufficiently given if personally delivered or
deposited in the United States mail, in a properly stamped envelope, certified
or registered mail, return receipt requested, addressed to the party to whom it
is to be given, at the address hereinafter set forth. Notices shall be deemed
given upon the earlier of actual delivery or three business days following
deposit in the United States mail as aforesaid. Any notice required to be given
pursuant to this Agreement may also be given by facsimile or telecopier
transmission, in which case such notice shall be deemed given and served on the
calendar day such notice is sent via facsimile or telecopier transmission,
properly addressed to the parties as set forth below, if a "hard copy" is also
sent that same day by United States mail, as aforesaid.
The Owner Group: c/o The Sports Club Company, Inc.
11100 Santa Monica Boulevard
Suite 300
Los Angeles, California 90025
Attention: D. Michael Talla or John Gibbons
Facsimile No.: 310/479-4350
With copy to: Resch Polster Alpert & Berger LLP
10390 Santa Monica Boulevard
Fourth Floor
Los Angeles, California 90025
Attention: Ronald M. Resch, Esq.
Facsimile No. 310/552-3209
The Bally Group: Bally Total Fitness Corporation
8700 West Bryn Mawr Avenue
Second Floor
Chicago, Illinois 60631
Attention: General Counsel
Facsimile No. 773/399-0126
With copy to: Rudnick & Wolfe
203 North La Salle Street
Suite 1800
Chicago, Illinois 60601-1293
Attention: Michael Sklar, Esq.
Facsimile No.: 312/236-7516
24. CONFIDENTIALITY. Except as set forth below, as required by law or
relating to it being a public company, and for disclosures to their respective
attorneys and accountants, each of the Parties hereby agrees to keep
confidential the existence of this Agreement, the terms hereof, and the
circumstances surrounding termination of the Venture
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<PAGE> 12
Agreements and the change in ownership and/or management of the Five Clubs. No
Party shall make any press release or similar public announcement with respect
to the transactions contemplated hereby without obtaining the prior approval of
the other Party, except as may be required by law, in which event (a) each Party
shall have the right to issue a press release, if upon advice of counsel such is
required by law, and in such event the Parties shall agree to cooperate in the
drafting of a press release, mutually acceptable to the Parties, announcing this
transaction provided, and, in any case, (b) no such release or announcement
shall use the Bally name (unless such use is required by law upon advice of
counsel), trademarks, logo or any identifying designation.
25. AUTHORITY TO SIGN. Each of the individuals whose signature appears
below hereby represents and warrants that he or she has actual authority to
enter into this Agreement on behalf of the entity on whose behalf he or she
signs this Agreement and does so to the fullest extent of his or her authority,
whether as an individual, officer, director, shareholder, partner, joint
venturer or otherwise.
26. TIME OF ESSENCE. Time is of the essence of this Agreement.
27. TALLA. Talla shall be deemed a party to this Agreement and bound only
by those terms and conditions which (a) confirm, modify or replace the terms and
conditions of the Venture Agreement to which he is subject or bound pursuant to
the Side Letter or (b) expressly provide herein that he is to be bound or
benefitted thereby, including without limitation paragraphs 6.C and 11. No other
provisions of this Agreement shall be deemed to create any obligation for him or
any rights or duties for his benefit.
IN WITNESS WHEREOF, each of the Parties has executed this Agreement
effective as of the day and year first set forth above.
THE BALLY GROUP: BALLY TOTAL FITNESS HOLDING
CORPORATION
By: /s/ CARY A. GAAN
-----------------------------------
Cary A. Gaan
Senior Vice President
BALLY TOTAL FITNESS CORPORATION
By: /s/ CARY A. GAAN
-----------------------------------
Cary A. Gaan
Senior Vice President
[signatures continue]
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<PAGE> 13
BALLY'S S.C. MANAGEMENT, INC.
By: /s/ CARY A. GAAN
----------------------------------
Cary A. Gaan
Senior Vice President
HOLIDAY SPA HEALTH CLUBS OF
CALIFORNIA
By: /s/ CARY A. GAAN
----------------------------------
Cary A. Gaan
Senior Vice President
THE OWNER GROUP: THE SPORTS CLUB COMPANY, INC.
By: /s/ D. MICHAEL TALLA
----------------------------------
D. Michael Talla, its chief
executive officer
THE SPORTS CONNECTION HOLDING
COMPANY, as successor to th
Original Owner Group
By: /s/ D. MICHAEL TALLA
----------------------------------
D. Michael Talla, its chief
executive officer
/s/ D. MICHAEL TALLA
----------------------------------
D. MICHAEL TALLA
-12-
<PAGE> 1
10.90
HOWARD HUGHES LEASE
AGREEMENT
<PAGE> 2
FOURTH AMENDMENT TO LEASE
This Fourth Amendment to Athletic Club Ground Lease ("Fourth
Amendment") is made and entered into as of December 11, 1996, by and between
HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP, a Delaware limited partnership
("Landlord" or "HHP"), and THE SPECTRUM CLUB COMPANY, INC., a California
corporation, formerly known as Agoura Hills Spectrum Club, Inc. ("Tenant"), with
respect to the following:
RECITALS
A. Landlord and Tenant entered into that certain
Athletic Club Ground Lease dated as of November 15, 1991 (the "Original
Lease"), as amended by that certain First Amendment To Lease dated August 20,
1992 ("First Amendment), that certain Second Amendment To Lease dated August
21, 1992 ("Second Amendment"), and that certain Third Amendment To Lease dated
April 11, 1994 ("Third Amendment"), pursuant to which Landlord leased to Tenant
that certain parcel of real property (the "Premises") more particularly
described in the conceptual description attached to the Original Lease as
Exhibit "A," which Premises constitute a part of the development known as
Howard Hughes Center as shown on the site plan attached to the Original Lease
as Exhibit "B." The Original Lease, as amended by the First Amendment, the
Second Amendment and the Third Amendment, is referred to herein as the "Lease."
Tenant caused the Premises to be improved with a building that has been since
its completion, and continues to be, used as an athletic club facility (the
"Club").
B. As required by the Lease, Landlord constructed a
surface parking lot (the "Surface Lot") with appropriate landscaping, lighting
and access to the Premises adjacent to the Premises and Tenant constructed a
surface parking lot (the "Additional Surface Lot") with appropriate
landscaping, lighting and access from Park Terrace which is located across Park
Terrace from the Premises. Tenant and Tenant's employees, customers, members,
guests, licensees, invitees and agents (collectively "Tenant's Parkers") have
been and are entitled to use the Surface Lot and the Additional Surface Lot for
parking in connection with their use of the Club.
C. Under the Lease, Landlord has the right to construct
buildings and/or improvements on the Surface Lot provided that during the
period of such construction on the Surface Lot, substitute parking shall be
provided for Tenant's Parkers.
<PAGE> 3
D. Concurrently with this Fourth Amendment, Landlord has
sold the Surface Lot site and the other parcel adjoining the Surface Lot site
to Medistar L.A. Corporation, a California corporation ("Medistar") for the
sole purpose of constructing on such other parcel a five (5)-story office
building and of constructing on the Surface Lot site a five (5)-level parking
structure (the "Parking Structure").
E. Also concurrently with this Fourth Amendment,
Landlord has entered into that certain Construction, Operations and Easement
Agreement For Parking Structure (the "Easement Agreement") with Medistar which
provides, among other things, for the construction, use and maintenance of the
Parking Structure including the requirement that the Parking Structure include
109 parking spaces for use by Landlord, Tenant's Parkers and future owners,
tenants and users of the Premises.
F. As more fully set forth in this Fourth Amendment,
Landlord desires to assign all of its rights under the Easement Agreement and
Tenant desires to assume some of Landlord's obligations thereunder, Landlord
shall construct an additional thirty eight (38) parking spaces in the
Additional Surface Lot for use by Tenant's Parkers during and after the
construction of the Parking Structure, and Landlord and Tenant desire to set
forth herein the parking rights and privileges of Tenant's Parkers with respect
to the Parking Structure, which rights and privileges will supersede those set
forth in Sections 37(b) and (c) of the Lease with respect to the Surface Lot
site and those set forth in Sections 37(a) and (f) with respect to certain
Overflow Parking Facilities.
AGREEMENT
IN CONSIDERATION of the foregoing recitals and the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. Capitalized Terms: All capitalized terms when used herein shall have
such meaning as is given such terms in the Lease or the Easement Agreement.
2. Assignment of Landlord's Rights in the Easement Agreement. Landlord
hereby assigns all of Landlord's rights in the Easement Agreement, including,
without limitation, the HHP Easement Rights, and Tenant hereby accepts such
assignment. This assignment of Landlord's rights under the Easement Agreement
shall:
a) Be effective for the entire term of the Lease, as amended by
this Fourth Amendment, and any extensions thereof. Upon the
termination of the Lease, as amended by this Fourth Amendment, such
assignment shall be void and of no further force and effect, and all
of Landlord's rights in the Easement Agreement shall automatically
revert back to Landlord.
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<PAGE> 4
b) Extend to any assignee or sublessee of Tenant pursuant to the
Lease, when such assignment or subletting is consented to in writing
by Landlord or permitted without the consent of Landlord pursuant to
the Lease.
3. Partial Assumption of Landlord's Obligations Under the Easement
Agreement. Tenant hereby assumes all of the obligations of Landlord under the
Easement Agreement, except as follows:
a) Tenant shall have no responsibility for Landlord's obligation
to reimburse Medistar for the Cost of the Parking Spaces, as provided
in Section 2.3 of the Easement Agreement;
b) Notwithstanding anything to the contrary contained in Sections
3.1(a) and (c) and Section 3.2 of the Easement Agreement and Section
7(a) and (c) of the Lease, the maximum monthly obligation of Tenant
with respect to HHP's proportionate share of Operating Costs
subsequent to the Occupancy Date, assuming the Parking Spaces are
available for use by Tenant's Parkers, shall not exceed $________, or
HHP's average monthly actual proportionate share of Operating Costs,
whichever is less. Such maximum monthly obligation shall be adjusted
as of January 1 of each calendar year commencing January 1, 1998 by a
percentage equal to the percentage change in the United States
Department of Labor, Bureau of Labor Statistics Consumer Price Index
of Urban Wage Earners and Clerical Workers (Revised Series), Subgroup
"all items," entitled "Consumer Price Index of Urban Wage Earners and
Clerical Workers (Revised Series), Los-Angeles-Anaheim-Riverside
Average (1982-84=100)." The base for such adjustment shall be the
index published for the month in which the Occupancy Date occurs, and
the comparison index for each adjustment shall be the index published
for the month of December immediately preceding the relevant
adjustment date. If at any adjustment date there shall not exist the
index in the same format as recited in this subsection, HHP shall
substitute any official index published by the Bureau of Labor
Statistics, or successor or similar governmental agency, as may then
be in existence and shall be most nearly equivalent thereto.
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<PAGE> 5
The applicable Monthly Cap shall be proportionately reduced,
from time to time, if, and to the extent, any Parking Spaces are not
available for use by Tenant's Parkers.
When the new Monthly Cap for Tenant's monthly payment
obligation with respect to Operating Costs has been determined, HHP
shall give Tenant written notice to that effect indicating how such new
maximum amount was computed. If any adjustment provided for herein
shall not have been made at the commencement of the calendar year for
which applicable, Tenant shall continue to pay Tenant's last applicable
maximum monthly amount (or one twelfth (l/12th) of HHP's actual
proportionate share of Operating Costs, if lesser) until Tenant
receives HHP's written notice as to such adjustment. Within thirty
(30) days after Tenant's receipt of HHP's notice, Tenant shall pay to
Medistar an amount equal to the new maximum monthly payment by Tenant
times the number of months from the commencement of the then current
calendar year to the date of receipt of HHP's notice, less the
aggregate amount paid by Tenant on account of HHP's proportionate share
of Operating Costs for the same period. Thereafter, Tenant shall pay
its monthly payment of HHP's proportionate share of Operating Costs at
the new maximum amount set forth in HHP's notice.
c) Tenant shall not be responsible for any expenses
incurred by HHP in having the Garage Site assessed as a separate tax
parcel, as provided in Section 3.2(b) of the Easement Agreement.
d) Tenant shall not be responsible for HHP's obligation
to reimburse Medistar, in the event Medistar rebuilds the Parking
Structure after it is damaged or destroyed by a peril for which
Medistar obtained property insurance, for the constructions costs
attributable to the Parking Spaces to the extent such costs are not
covered by such insurance, as provided in Section 4.2(c) of the
Easement Agreement.
e) Tenant shall not be responsible for HHP's obligation
to reimburse Medistar for the constructions costs attributable to the
Parking Spaces under the circumstances described in the last paragraph
of Section 4.2 of the Easement Agreement.
This assumption of Landlord's obligations under the Easement Agreement shall:
i) Be effective for the entire term of the Lease and
any permitted extensions thereof; and
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<PAGE> 6
ii) Extend to any assignee or sublessee of Tenant
pursuant to the Lease, whether or not such assignment or
subletting is in accordance with the provisions of the Lease.
The obligations of Landlord under the Easement Agreement which are not assumed
by Tenant under this Fourth Amendment shall remain solely the obligations of
Landlord and shall be deemed obligations of Landlord under the Lease. However,
the obligations of Landlord under the Easement Agreement which are hereby
assumed by Tenant shall not be deemed obligations of Tenant under the Lease and
the failure of Tenant to perform such obligations shall not be deemed a default
by Tenant pursuant to the Lease. Nevertheless, if Tenant fails to perform such
obligations ("Tenant's Default") and, as a result thereof, Landlord suffers a
loss or damages because Medistar pursues the remedies to which it is entitled
under the Easement Agreement because of Tenant's Default, against Landlord
instead of against, or in addition to, Tenant (by reason of Landlord remaining
liable under the Easement Agreement notwithstanding the assignment of
Landlord's rights therein as provided in Section 2 of this Fourth Amendment),
then Landlord shall be subrogated to Medistar's rights and shall be entitled to
seek the same remedies against Tenant for such loss or damage as Medistar was
or would have been entitled to seek against Tenant as a result of Tenant's
Default. Except to the extent, and only to such extent, of the obligations to
be performed by Landlord pursuant to Section 5 of this Fourth Amendment in the
event of a failure by Medistar to perform certain of its obligations under the
Easement Agreement, the obligations of Medistar under the Easement Agreement
shall not be deemed obligations of Landlord under the Lease, and the failure of
Medistar to perform such obligations shall not be deemed a default by Landlord
or Tenant pursuant to the Lease.
4. Substitute Parking. During construction of the Parking Structure by
Medistar pursuant to the Easement Agreement, Landlord shall provide substitute
parking for Tenant's Parkers, as follows:
a) Landlord shall prepare, or cause to be prepared, a design and
construction-level detailed plans for an additional thirty
eight (38) parking spaces to the Additional Surface Lot (the
"Additional Surface Lot Spaces"). Landlord shall construct,
or cause to be constructed, the Additional Surface Lot Spaces
at its sole cost and expense.
b) Until construction of the Additional Surface Lot Spaces is
complete and such Spaces are available for use by Tenant's
Parkers, Tenant's Parkers shall be entitled to use sixty (60)
parking spaces on the Surface Lot site closest to the
Premises, as indicated on Exhibit 1 attached hereto and by
this reference incorporated herein.
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<PAGE> 7
c) Tenant's employees may at any time park free of charge in the
surface lot adjacent to the parking structure that services
the office building located at 6701 Center Drive West, as
shown on Exhibit 2 attached hereto and by this reference
incorporated herein.
d) If, before or after the Additional Surface Lot Spaces are
completed, the parking requirements of Tenant's Parkers exceed
the capacity of the Additional Surface Lot, Landlord shall,
at the request of Tenant and at Landlord's sole cost and
expense, provide valet parking service at the Additional
Surface Lot between the hours of 4 p.m. and 9 p.m. on
weekdays, or such additional time and with such number of
valets as is necessary to meet the requirements of Tenant's
Parkers. In addition, if the provision of the above-described
valet parking service does not satisfy the parking
requirements of Tenant's Parkers, Tenant's Parker's may use,
free of charge, either the 6701 Center Drive West parking
structure or the Northpoint parking garage located at 6601
Center Drive West, as determined solely by Landlord, after
5:00 p.m. on weekdays and anytime on weekends and holidays.
In that connection, Landlord shall provide between the hours
of 5:00 p.m. and 9:00 p.m. on weekdays a continuous service
shuttle van for the purpose of shuttling Tenant's Parkers from
such parking structure or parking garage to the Club and vice
versa. Landlord shall pay for all reasonable costs associated
with such shuttle service.
e) Landlord shall cooperate with Tenant and promptly install
and maintain, at Landlord's expense, such signs as may be
reasonably required, from time to time, during construction,
to identify available parking and designate spaces to be used
by Tenant's Parkers, including any applicable overflow
parking.
During and after construction of the Parking Structure,
Tenant's Share of Operating Expenses relative to the Additional Surface Lot
Spaces shall, upon their completion, be one hundred percent (100%) because
Tenant shall be entitled to exclusive use of the Additional Surface Lot Spaces.
During construction of the Parking Structure, Tenant's Share of Operating
Expenses relative to the Surface Lot shall be zero percent (0%) for the sixty
(60) parking spaces described in subsection b) above notwithstanding Tenant's
Parkers' exclusive use thereof.
5. Loss of Use of Parking Spaces. If, from time to time, Tenant's
Parkers are unable to use readily any or all of the Parking Spaces and the
other HHP Easement Rights, then Landlord shall provide promptly, and at no cost
to Tenant whether as an Operating Expense or otherwise, substitute parking
within the Development equivalent in number to the Parking Spaces. If such
substitute parking is not located on or adjacent to the
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<PAGE> 8
Additional Surface Lot (by, for example, expanding the capacity of the
Additional Surface Lot by up to an additional one hundred nine (109) parking
spaces including the Additional Surface Lot Spaces) or otherwise located within
two hundred (200) yards of the Premises, Landlord shall pay for the costs of a
continuous service shuttle van, its driver and all reasonable costs associated
with shuttling Tenant's Parkers from such substitute parking facility to the
Premises from time to time during Tenant's business hours as Tenant shall
reasonably require.
6. Eminent Domain Affecting HHP Easement Rights. If the HHP Easement
Rights are acquired during the term of the Lease by an entity having the power
of eminent domain and, as a result thereof, all or a portion of the Parking
Spaces are no longer readily available to Tenant's Parkers, then Landlord shall
provide promptly, and at no cost to Tenant whether as an Operating Expense or
otherwise, substitute parking within the Development equivalent in number to
the Parking Spaces that are no longer readily available to Tenant's Parkers.
If such substitute parking is not located on or adjacent to the Additional
Surface Lot (by, for example, expanding the capacity of the Additional Surface
Lot by up to an additional one hundred nine (109) parking spaces, including the
Additional Surface Lot Spaces) or otherwise located within two hundred (200)
yards of the Premises, Landlord shall pay for the costs of a continuous service
shuttle van, its driver and all reasonable costs associated with shuttling
Tenant's Parkers from such substitute parking facility to the Premises from
time to time during Tenant's business hours as Tenant shall reasonably require.
7. Valet Parking Option; Rights in Overflow Parking Facilities.
(a) If Landlord elects to provide the substitute parking required
pursuant to Section 5 or 6 of this Fourth Amendment, through the construction
of additional parking, and if, prior to the completion of such construction,
the parking requirements of Tenant's Parkers exceed the capacity of the
Additional Surface Lot, Landlord shall, at the request of Tenant and at
Landlord's sole cost and expense, provide valet parking service at the
Additional Surface Lot from time to time during Tenant's business hours and
with such number of valets as is necessary to satisfy the parking requirements
of Tenant's Parkers. In addition, if the parking requirements of Tenant's
Parkers exceed the sum of the substitute parking provided in Sections 5 or 6 of
this Fourth Amendment, and the capacity of the Additional Surface Lot
(including the thirty eight (38) parking spaces described in Section 4 a) of
this Fourth Amendment), then any additional Tenant's Parkers shall be entitled
to use the Overflow Parking Facilities designated by Landlord on the same terms
and conditions as is set forth in Section 37(a) of the Lease.
(b) If the parking requirements of Tenant's Parkers exceed, at any
time and for any reason, the other parking rights available in this Fourth
Amendment, then any additional Tenant's Parkers shall be entitled to use the
Overflow Parking Facilities
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designated by Landlord on the same terms and conditions as are set forth in
Section 37(a) of the Lease.
8. Superseded and Amended Sections of the Lease. The provisions of this
Fourth Amendment set forth the parking rights and privileges of Tenant with
respect to the Parking Structure and amend and supersede in their entirety the
provisions of Section 37(c) of the Lease. In addition, the term "Section 37"
in Section 55 of the Lease shall hereafter read as follows: "Section 37, as
amended by the Fourth Amendment To Lease." Sections 37(a) and 37(b) of the
Lease are hereby amended to read in their entirety as follows:
37. Parking.
(a) As required by the Work Letter, Tenant shall construct a
surface parking lot with appropriate landscaping, lighting and access from
Park Terrace ("Additional Surface Lot") which shall have the capacity for
parking at least one hundred forty-eight (148) vehicles and shall be located
across Park Terrace from the Premises. Tenant and Tenant's employees,
customers, members, guests, licensees, invitees and agents (collectively,
"Tenant's Parkers") shall be entitled to use the entire Additional Surface Lot
until such time as the Additional Surface Lot is demolished pursuant to
Paragraph 37(b) below. Any parking by Tenant's Parkers in the Additional
Surface Lot, any substitute parking facility pursuant to Paragraph 37(b) below,
and/or the "Overflow Parking Facilities" (as defined below) shall be free of
charge to Tenant's employees and free of charge to all other Tenant's Parkers
for the first two (2) hours, but thereafter shall be subject to a reasonable
hourly parking fee not to exceed the fee generally charged to other parkers;
any such fee for such other Tenant's Parkers shall be payable to Landlord with
respect to parking in the Overflow Facilities and shall be payable to Tenant
with respect to parking in the Additional Surface Lot and any substitute
parking facility pursuant to Paragraph 37(b) below. The maximum total number
of overflow parking privileges which Landlord shall be obligated to provide at
any one time in an Overflow Parking Facility(ies) shall be equal to the
difference between (i) an amount equal to ten (10) privileged per square foot
of Construction Area of the Building, less (ii) one hundred nine (109) plus the
capacity of the Additional Surface Lot (the "Parking Sum"). The term "Overflow
Parking Facilities" shall mean the parking facilities located on those three
(3) sites of the Development marked as "6701 Center Drive West," "Summerlin
Plaza," and "Summa Tower" on the Howard Hughes Center Site Plan attached to
this Lease as Exhibit "B".
(b) Landlord shall have the right to construct buildings
and/or improvements on the Additional Surface Lot at any time during the Term.
If Landlord so constructs buildings and/or improvements on the Additional
Surface Lot, Landlord must provide substitute parking on an alternate surface
lot or parking structure within the Development equivalent to the capacity of
the Additional Surface Lot. As a result, at all times during the Term, Tenant
shall be entitled to parking privileges
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equivalent to the Parking Sum. In the event that Tenant's parking privileges
are relocated as provided above in this Paragraph 37(b), during such relocated
period Tenant's Share of the costs and expenses of operation and maintenance of
the Additional Surface Lot shall not be included in Operating Expenses but
Operating Expenses shall include a reasonable allocation of the costs and
expenses of operation and maintenance of the alternate surface lot or parking
structure.
9. Entire Agreement. This Fourth Amendment and the Exhibits hereto
contain the entire agreement of the parties with respect to the subject matter
hereof, including the Easement Agreement. In the event of any conflict or
inconsistency between the terms and provisions of the Easement Agreement and
the Lease, as modified by this Fourth Amendment, the latter shall control.
10. Lease Remains in Effect. Except as provided in this Fourth Amendment, the
terms and provisions of the Lease remain in full force and effect.
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IN WITNESS WHEREOF, Landlord and Tenant have entered into this
Fourth Amendment as of the date first above written.
LANDLORD: HOWARD HUGHES PROPERTIES, LIMITED
PARTNERSHIP, a Delaware limited
partnership
By: THE HOWARD HUGHES CORPORATION
(formerly known as Summa Corporation), a
Delaware corporation, its sole general partner
By: JOHN A. KILDUFF
__________________________________________
Its: Executive Vice-President
_________________________________
TENANT: THE SPECTRUM CLUB COMPANY, INC.
a California corporation
By: /s/ D. MICHAEL TALLA
___________________________________________
D. Michael Talla, its President
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<PAGE> 1
10.91
REEBOK
AGREEMENT
<PAGE> 2
AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the 30th day of
December 1996, by and among Reebok-Sports Club/NY Ltd. (the "Partnership"),
Talla New York, Inc., the Managing General Partner of the Partnership
("Talla"), RFC, Inc., a General Partner and the Class A Limited Partner of the
Partnership ("RFC" or "Reebok"), LMP Health Club Co., the Class B Limited
Partner of the Partnership ("LMP"), Millennium Entertainment Partners L.P.
("MEP") and The Sports Club Company, Inc. ("SCC").
WITNESSETH:
WHEREAS, the Partnership owns and operates the Reebok Sports Club New
York (the "Club") in accordance with the terms of that certain First Amended
and Restated Agreement of Limited Partnership of Reebok-Sports Club/NY, Ltd.,
dated as of October 12, 1994, among NY-SC, Ltd., as predecessor-in-interest to
Talla, Reebok Fitness Centers, Inc., as predecessor-in-interest to RFC, and LMP
(as the same may have been amended from time to time, the "Partnership
Agreement"; all capitalized terms used herein and not defined herein shall have
the respective meanings ascribed thereto in the Partnership Agreement);
WHEREAS, Lincoln Metrocenter Partners L.P., the Partnership, Talla, RFC
and LMP entered into that certain Settlement Agreement dated December 28, 1995,
pursuant to which, among other things, SCC and an affiliate of RFC made loans
to the Partnership in the aggregate amounts of $3,000,000 and the Partnership
Agreement was amended in certain respects;
WHEREAS, as of the date hereof, RFC is the owner and holder of a forty
percent (40%) Percentage Interest in the Partnership in accordance with and
pursuant to the terms of the Partnership Agreement and is a general partner and
the sole Class A Limited Partner of the Partnership;
WHEREAS, RFC desires to sell to MEP and Talla, and MEP and Talla desire
to acquire, (i) a portion of RFC's Percentage Interest in the Partnership, (ii)
certain rights of RFC to Distributions of Net Cash and (iii) certain rights of
RFC in that certain letter agreement dated as of June 3, 1992 among NY-SC,
Ltd., Pontius Realty Inc., D. Michael Talla and RFC, as amended (the "Letter
Agreement"), on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the parties hereto desire to amend the Partnership Agreement,
Letter Agreement and Settlement Agreement in certain respects and to set forth
other agreements among the parties.
NOW, THEREFORE, for valuable consideration in hand paid, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. (a) As of the date hereof, RFC does hereby convey, transfer and
assign unto MEP all of RFC's right, title and interest in and to the following
(collectively, the "MEP Assigned Interests"):
(i) a nine and nine-tenths percent (9.9%) Percentage
Interest as a Class A Limited Partner in the Partnership (the "MEP Assigned
Partnership Interest");
(ii) forty-nine and five-tenths percent (49.5%) of RFC's
Capital Account as of the date hereof;
(iii) forty-nine and five-tenths percent (49.5%) of
distributions to which RFC is entitled pursuant to Sections 6.2.1(b), (c) and
(d) of the Partnership Agreement;
(iv) twenty-four and seventy-five hundredths percent
(24.75%) of the distributions to which RFC is entitled pursuant to Section
6.2.1(e) of the Partnership
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of the date hereof.
(iii) forty-nine and five-tenths percent (49.5%) of
distributions to which RFC is entitled pursuant to Sections 6.2.1(b), (c) and
(d) of the Partnership Agreement;
(iv) twenty-four and seventy-five hundredths percent (24.75%)
of the distributions to which RFC is entitled pursuant to Section 6.2.1(e) of
the Partnership Agreement;
(v) forty-nine and five-tenths percent (49.5%) of the
payments to which RFC is entitled pursuant to Section 1 of the Letter Agreement
relating to activities other than restaurant and parking operations (provided,
however, that MEP shall only be entitled to 24.75% of any such amounts which are
accrued and unpaid as of the date hereof, and, subject to Section 2(a)(v)
hereof, RFC shall be entitled to the balance of any such amounts); and
(vi) forty-nine and five-tenths percent (49.5%) of the
distributions to which RFC is entitled pursuant to the Letter Agreement
attributable to the return on, and return of, RFC's Capital Contribution,
including without limitation, distributions to which RFC is entitled pursuant to
Sections 2, 5 and 14 of the Letter Agreement; provided, however, that
notwithstanding anything to the contrary contained herein, in the Partnership
Agreement or in the Letter Agreement, in all events RFC shall be entitled to
twenty-five percent (25%) of all distributions designated under Section 6.2.1(e)
of the Partnership Agreement to be made "to Reebok and NY-SCL (divided among
them as they may agree)."
(b) MEP does hereby assume and agree to perform all of the
obligations of a Class A Limited Partner of the Partnership to the extent of the
MEP Assigned Partnership Interest from and after the date hereof. RFC shall
indemnify, defend and hold harmless MEP from and against all claims, losses,
costs, expenses (including, reasonable attorney's fees and expenses),
liabilities or damages arising from or related to the MEP Assigned Interests
and accruing prior to the date hereof; excluding, however, losses attributable
to the diminishment of the value of the MEP Assigned Interests. MEP shall
indemnify, defend and hold harmless RFC from and against all claims, losses,
costs, expenses (including, reasonable attorney's fees and expenses),
liabilities or damages arising from or related to the MEP Assigned Interests
and accruing from and after the date hereof. Notwithstanding anything to the
contrary contained herein, the assignment described in Section 1(a)(v) and
(vi) shall not include, and shall expressly exclude, any obligation and/or
liabilities of RFC under the Letter Agreement.
(c) MEP has simultaneously herewith paid to RFC consideration for
the MEP Assigned Interests in the amount of Two Million Four Hundred
Seventy-Five Thousand and 00/100 Dollars ($2,475,000.00), representing payment
in full for the MEP Assigned Interests.
(d) Notwithstanding the provisions of Section 1(a)(i), the MEP
Assigned Partnership Interest shall not include control and voting rights of RFC
as a general partner which are not appurtenant to the Class A Limited
Partnership Interest transferred pursuant thereto or which are expressly stated
in the Partnership Agreement and/or Letter Agreement to be rights exercisable by
"Reebok." By way of example of the rights retained by RFC pursuant to the
preceding sentence, RFC shall retain all of its rights pursuant to Sections
6.2.2, 6.3(a), 8.5, 8.11, 9.2 and 11.7 of the Partnership Agreement.
(e) RFC warrants that RFC holds, and upon the consummation of the
transfer contemplated hereby MEP will hold, the MEP Assigned Interests free and
clear of all
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mortgages, pledges, liens, encumbrances, charges or other security arrangements,
except as contained in the Partnership Agreement, and has full power and legal
right and authority to assign and transfer such MEP Assigned Interests to MEP.
This Agreement constitutes the legal, valid and binding obligation of RFC and is
enforceable against RFC in accordance with its terms, subject to applicable
bankruptcy, insolvency or other similar laws or proceedings affecting creditors
rights generally.
(f) RFC warrants that, to the best of RFC's knowledge, the execution
and the delivery by it of this Agreement, and the conveyance, transfer and
assignment of the MEP Assigned Interests hereunder, do not and will not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in a violation of, or (iv) require
any authorization, consent or approval not heretofore obtained pursuant to, any
agreement or instrument to which RFC is a party or is otherwise subject. MEP
warrants that, to the best of MEP's knowledge, the execution and the delivery by
it of this Agreement, and the assumption of the MEP Assigned Interests
hereunder, do not and will not (v) conflict with or result in a breach of the
terms, conditions or provisions of, (vi) constitute a default under, (vii)
result in a violation of, or (viii) require any authorization, consent or
approval not heretofore obtained, pursuant to any agreement or instrument to
which MEP is a party or is otherwise subject.
2. (a) As of the date hereof, RFC does hereby convey, transfer
and assign unto Talla all of RFC's right, title and interest in and to the
following (collectively, the "Talla Assigned Interests");
(i) a ten and one-tenth percent (10.1%) Percentage Interest as a
Class A Limited Partner in the Partnership (the "Talla Assigned Partnership
Interest");
(ii) fifty and five-tenths percent (50.5%) of RFC's Capital Account
as of the date hereof;
(iii) fifty and five-tenths percent (50.5%) of distributions to which
RFC is entitled pursuant to Sections 6.2.1(b), (c) and (d) of the Partnership
Agreement;
(iv) twenty-five and twenty-five hundredths percent (25.25%) of the
distributions to which RFC is entitled pursuant to Section 6.2.1(e) of the
Partnership Agreement;
(v) fifty and five-tenths percent (50.5%) of the payments to which
RFC is entitled pursuant to Section 1 of the Letter Agreement relating to
activities other than restaurant and parking operations (provided, however, that
Talla shall only be entitled to 25.25% of any such amounts which are accrued and
unpaid as of the date hereof, and, subject to Section 1(a)(v) hereof, RFC shall
be entitled to the balance of any such amounts); and
(vi) fifty and five-tenths percent (50.5%) of the distributions to
which RFC is entitled pursuant to the Letter Agreement attributable to the
return on, and return of, RFC's Capital Contribution, including, without
limitation, distributions to which RFC is entitled pursuant to Sections 2, 5 and
14 of the Letter Agreement; provided, however, that notwithstanding anything to
the contrary contained herein, in the Partnership Agreement or in the Letter
Agreement, in all events RFC shall be entitled to twenty-five percent (25%) of
all distributions designated under Section 6.2.1(e) of the Partnership Agreement
to be made "to Reebok and NY-SCL (divided among them as they may agree)."
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<PAGE> 5
(b) Talla does hereby assume and agree to perform all of the
obligations of a Class A Limited Partner of the Partnership to the extent of the
Talla Assigned Partnership Interest from and after the date hereof. RFC shall
indemnify, defend and hold harmless Talla from and against all claims, losses,
costs, expenses (including, reasonable attorney's fees and expenses),
liabilities or damages arising from or related to the Talla Assigned Interests
and accruing prior to the date hereof; excluding, however, losses attributable
to the diminishment of the value of the Talla Assigned Interests. Talla shall
indemnify, defend and hold harmless RFC from and against all claims, losses,
costs, expenses (including, reasonable attorney's fees and expenses),
liabilities or damages arising from or related to the Talla Assigned Interests
and accruing from and after the date hereof. Notwithstanding anything to the
contrary contained herein, the assignment described in Section 2(a)(v) and (vi)
shall not include, and shall expressly exclude, any obligation and/or
liabilities of RFC under the Letter Agreement.
(c) Talla has simultaneously herewith paid to RFC consideration for
the Talla Assigned Interests in the amount of Two Million Five Hundred
Twenty-Five Thousand and 00/100 Dollars ($2,525,000.00), representing payment in
full for the Talla Assigned Interests.
(d) Notwithstanding the provisions of Section 2(a)(i), the Talla
Assigned Partnership Interest shall not include control and voting rights of RFC
as a general partner which are not appurtenant to the Class A Limited
Partnership Interest transferred pursuant thereto or which are expressly stated
in the Partnership Agreement and/or Letter Agreement to be rights exercisable by
"Reebok." By way of example of the rights retained by RFC pursuant to the
preceding sentence, RFC shall retain all of its rights pursuant to Sections
6.2.2, 6.3(a), 8.5, 8.11, 9.2 and 11.7 of the Partnership Agreement.
(e) RFC warrants that RFC holds, and upon the consummation of the
transfer contemplated hereby Talla will hold, the Talla Assigned Interests free
and clear of all mortgages, pledges, liens, encumbrances, charges or other
security arrangements, except as contained in the Partnership Agreement, and has
full power and legal right and authority to assign and transfer such Talla
Assigned Interests to Talla. This Agreement constitutes the legal, valid and
binding obligation of RFC and is enforceable against RFC in accordance with its
terms, subject to applicable bankruptcy, insolvency or other similar laws or
proceedings affecting creditors rights generally.
(f) RFC warrants that, to the best of RFC's knowledge, the execution
and the delivery by it of this Agreement, and the conveyance, transfer and
assignment of the Talla Assigned Interests hereunder, do not and will not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in a violation of, or (iv) require
any authorization, consent or approval not heretofore obtained pursuant to, any
agreement or instrument to which RFC is a party or is otherwise subject. Talla
warrants that, to the best of Talla's knowledge, the execution and the delivery
by it of this Agreement, and the assumption of the Talla Assigned Interests
hereunder, do not and will not (v) conflict with or result in a violation of, or
(viii) require any authorization, consent or approval not heretofore obtained,
pursuant to any agreement or instrument to which Talla is a party or is
otherwise subject.
3. From and after the date hereof, RFC's interest in the
Partnership and its rights under the Letter Agreement shall be as follows:
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<PAGE> 6
(a) RFC shall have a four-tenths of one percent (0.4%)
Percentage Interest as a General Partner in the Partnership;
(b) RFC shall have a nineteen and six-tenths percent (19.6%)
Percentage Interest as a Class A Limited Partner in the Partnership;
(c) RFC shall be entitled to twenty percent (20%) of the
distributions made pursuant to Section 6.2.1(e) of the Partnership Agreement
(i.e., twenty-five percent of the distributions stated to be made to RFC and
Talla under such section); and
(d) RFC shall be entitled to payments stated to be made to
RFC pursuant to Section 1 of the Letter Agreement to the extent the same are
attributable to parking and restaurant operations, including those amounts which
are accrued and unpaid as of the date hereof, and such accrued and unpaid
amounts shall be payable to RFC on a pro rata basis with any payments of such
fees payable to Talla under the Letter Agreement.
(e) RFC shall be entitled to fifty (50%) of accrued and
unpaid payments as of the date hereof stated to be made to RFC pursuant to
Section 1 of the Letter Agreement to the extent the same are attributable to
activities other than restaurant and parking operations, and such amounts shall
be payable to RFC on a pro rata basis with any payments of accrued and unpaid
management fees payable to MEP and Talla pursuant to Sections 1(a)(v) and
2(a)(v) above.
4. [INTENTIONALLY OMITTED]
5. Talla, RFC and MEP hereby agree that the Letter Agreement shall
be amended as follows:
(a) The following shall be added to Section 4 thereof:
In the event MEP has received distributions pursuant to
Sections 2.A(3) or 2.B(4) (or Section 2.B(4) by operation of
Section 3) of this Letter and Reebok is required to make
payments under the Guarantee Agreement, MEP shall promptly
reimburse Reebok for 24.75% of the amount Reebok is required to
pay under the Guarantee Agreement (less 49.5% of any amounts
distributed to Reebok which are attributable to Section 6.2.1(e)
of the Partnership Agreement and excluding amounts treated under
Section 9.4 of the Partnership Agreement as the satisfaction of
Reebok's obligation to pay its Required Amount) up to the amount
of such distributions. In exchange therefore, Reebok shall remit
to MEP 50% of the interest and 100% of the principal received by
Reebok under Sections 6.6 and 9.4 of the Partnership Agreement
that is attributable to amounts paid by Reebok under the
Guarantee Agreement or by an affiliate of Reebok under any
related agreement for which Reebok has been reimbursed by MEP
under this Section 4 of this Letter (and Reebok shall be
entitled to the remaining 50% of such interest and 100% of all
interest and principal received under Sections 6.6 and 9.4 that
is attributable to amounts paid by Reebok under the Guaranty
Agreement or by an affiliate of Reebok under any related
agreement for which Reebok is not reimbursed by MEP).
In the event Talla New York, Inc. ("Talla") has received
distributions
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<PAGE> 7
pursuant to Sections 2.A(3) or 2.B(4) (or Section 2.B(4) by
operation of Section 3) of this Letter and Reebok is required to
make payments under the Guarantee Agreement, Talla shall
promptly reimburse Reebok for 25.25% of the amount Reebok is
required to pay under the Guarantee Agreement (less 50.5% of any
amounts distributed to Reebok which are attributable to Section
6.2.1(e) of the Partnership Agreement and excluding amounts
treated under Section 9.4 of the Partnership Agreement as the
satisfaction of Reebok's obligation to pay its Required Amount)
up to the amount of such distributions. In exchange, therefore,
Reebok shall remit to Talla 50% of the interest and 100% of the
principal received by Reebok under Sections 6.6 and 9.4 of the
Partnership Agreement or by an affiliate of Reebok under any
related agreement for which Reebok has been reimbursed by Talla
under this Section 4 of this Letter (and Reebok shall be
entitled to the remaining 50% of such interest and 100% of all
interest and principal received under Sections 6.6 and 9.4 that
is attributable to amounts paid by Reebok under the Guaranty
Agreement or by an affiliate of Reebok under any related
agreement for which Reebok is not reimbursed by Talla).
Any payments by Reebok of principal and interest required
pursuant to this Section 4 shall be paid to Talla and MEP in
proportion to their respective reimbursements to Reebok pursuant
to this Section.
(b) Section 5 shall be deleted in its entirety.
(c) Section 6 shall be deleted in its entirety.
(d) The definition of "Talla Group" in the second sentence
of Section 7 is hereby amended and restated in its entirety to mean,
collectively, The Sports Club Company, Inc., a Delaware corporation ("SCC"),
Talla, D. Michael Talla, the businesses and ventures now or hereafter controlled
or more than 50% directly or indirectly owned by SCC, and the businesses and
ventures now or hereafter controlled or more than 30% directly or indirectly
owned by D. Michael Talla, his family members, trusts for the benefit of such
persons, and Affiliates thereof within the direct or indirect control of D.
Michael Talla or his family members or trusts therefore; provided, however, in
the event D. Michael Talla no longer owns a direct or indirect interest in SCC,
the Managing General Partner or an Affiliate thereto, the definition of "Talla
Group" shall thereafter only mean, collectively, SCC, and Talla, and the
businesses and ventures now or hereafter controlled or more than 50% directly
or indirectly owned by SCC.
(e) The phrase "square footage in excess of 30,000 square
feet" contained in the second sentence of Section 7 shall be deleted and
replaced as follows:
square footage in excess of 30,000 square feet, is opened for business
and/or is engaging in the sale or pre-sale of membership interests
(f) A portion of the fourth sentence of Section 7,
commencing with the phrase "D. Michael Talla" and ending with the phrase "with
any sports club," shall be deleted in its entirety and replaced as follows:
D. Michael Talla further agrees (for himself and each member of the
Talla Group)
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<PAGE> 8
that neither he (but only in the event he owns a direct or indirect
interest in the Managing General Partner or an Affiliate) nor any member
of the Talla Group will for a period of ten years from the date hereof
become directly or indirectly associated (through ownership, equity
participation, management, or otherwise) with any sports club,
(g) The seventh sentence of Section 7 shall be deleted in
its entirety and replaced as follows:
However, in the event D. Michael Talla owns a direct or indirect
interest in the Managing General Partner or an Affiliate thereto, and
without limiting D. Michael Talla's obligations under the rest of this
Letter, then, to the extent that D. Michael Talla has or acquires
direct, indirect or practical control over any entity, including without
limitation entities owning Sports Club L.A. and Sports Club Irvine, and
to the extent that the other provisions of this Section 7 do not
directly govern D. Michael Talla's exercise of control over such an
entity, D. Michael Talla shall exercise such control in a manner
consistent with the limitations contained in this Section 7 as to
involvement with any Competitor (as defined in Section 12) unless such
action would violate a fiduciary duty owned by D. Michael Talla to a
co-owner or partner of such an entity.
(h) The last sentence of Section 7 shall be deleted in its
entirety and replaced as follows:
Nothing contained herein shall prohibit or in any way restrict D.
Michael Talla or any member of the Talla Group from selling (1)
sportswear bearing the Talla name, provided such sportswear is not
identified with R-SC/NY or sold in New York City or (2) sportswear
bearing the name, mark or logo of any health and/or fitness facility
(other than the Project) owned, in whole or in part, or operated,
directly or indirectly, by D. Michael Talla or any member of the Talla
group, provided such sales take place outside of New York City or are
made by D. Michael Talla in the event he no longer owns a direct or
indirect interest in the Managing General Partner or an Affiliate
thereto.
(i) The first sentence of Section 8 shall be deleted in its
entirety.
(j) The second sentence of Section 8 shall be deleted in
its entirety.
(k) The fourth sentence of Section 8 shall be deleted in
its entirety and replaced as follows:
In the event D. Michael Talla no longer owns a direct or indirect
interest in SCC, the Managing General Partner or an Affiliate thereto,
D. Michael Talla shall consult with the Partnership on an as-needed
basis following reasonable notice and payment of D. Michael Talla's
reasonable out-of-pocket expenses for providing such services.
(l) Section 12 shall be deleted in its entirety and
replaced as follows:
The Managing General Partner agrees to terminate the Management
Agreement at the request of Reebok at any time at which (i) D. Michael
Talla or SCC sells,
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<PAGE> 9
assigns, or transfers any direct or indirect interest in the Manager,
SCC, Talla, or the Partnership to a footwear, apparel, fitness equipment
or sporting goods competitor of Reebok or its Affiliates (hereinafter, a
"Competitor"), provided, however, notwithstanding the foregoing, SCC may
issue or sell its equity securities pursuant to an effective
registration statement under the Securities Act of 1933, as amended, as
long as SCC is not intentionally issuing or selling its equity
securities to a Competitor, (ii) a Competitor acquires direct or
indirect beneficial ownership of, or continues to beneficially own
directly or indirectly, 10% or more of the equity securities of SCC, the
Manager or Talla or (iii) an employee, officer, director, agent or
representative of a Competitor is elected or otherwise becomes a member
of the board of directors of the Manager, SCC, or Talla.
(m) Clause (l) in the first sentence of Section 14 shall be
deleted in its entirety.
(n) Section 19 shall be deleted in its entirety and
replaced as follows:
Talla and Reebok agree that Reebok shall have the right to cause the
name of the Partnership and the Project to be changed if either (i)
Sports Club L.A. or Sports Club Irvine become directly or indirectly
associated with a Competitor or (ii) in the event D. Michael Talla owns
a direct or indirect interest in the Managing General Partner or an
Affiliate, D. Michael Talla's ownership or control of the entity or
entities that own Sports Club L.A. and Sports Club Irvine diminishes to
any extent.
(o) The provisions of Sections 3, 9, 10, 11 and 17 shall be
applicable to MEP and Talla to the extent of the MEP Assigned Interests and the
Talla Assigned Interest, respectively. Notwithstanding the foregoing, RFC
shall continue to have the rights described in Section 17 to cause
distributions in excess of those expressly permitted under Section 6.3(a) of
the Partnership Agreement to be held in a depository account requiring the
signature of RFC, MEP and Talla for withdrawals therefrom; provided, however,
Reebok agrees to authorize funding of such distributions to the party entitled
thereto (or release from the depository account, as the case may be) upon
request from such party if Reebok, in the reasonable exercise of its
discretion, determines that projected revenues from the Club and/or the
financial condition of the Club will be sufficient to meet rental obligations
under the Lease and the Club's other obligations on an on-going basis.
6. The parties hereto hereby agree that the Partnership Agreement
shall be amended as follows:
(a) "MAJORITY OF PARTNERS" means Partners having Percentage
Interests aggregating more than sixty-six and two-thirds
percent (66-2/3%) of the Percentage Interests then held
by all Partners and all of the General Partners, and
provided that with respect to Sections 8.3(a), (c), (d),
(e) and (g), "Majority of Partners" shall mean MEP in
addition to the foregoing.
(b) Section 8.5(g) shall be deleted in its entirety and
replaced as follows:
For so long as Reebok is a Partner (and is not in material default of
this Agreement more than 90 days after having received notice of such
default without (x) having begun attempts to cure any such default
within 90 days of having received said
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<PAGE> 10
notice and (y) continuing with reasonable effort to attempt to so cure until
curing such default), the General Partner shall terminate the Management
Agreement at the request of Reebok at any time at which (i) D. Michael Talla or
SCC sells, assigns, or transfers any direct or indirect interest in the Manager,
SCC, Talla, or the Partnership to a footwear, apparel, fitness equipment or
sporting goods competitor of Reebok or its Affiliates (hereinafter, a
"Competitor"), provided, however, notwithstanding the foregoing, SCC may issue
or sell its equity securities pursuant to an effective registration statement
under the Securities Act of 1933, as amended, as long as SCC is not
intentionally issuing or selling its equity securities to a Competitor, (ii) a
Competitor acquires direct or indirect beneficial ownership of, or continues to
beneficially own directly or indirectly, 10% or more of the equity securities of
SCC, the Manager or Talla or (iii) an employee, officer, director, agent or
representative of a Competitor is elected or otherwise becomes a member of the
board of directors of the Manager, SCC, or Talla.
(c) Section 11.2(b) shall be deleted in its entirety and replaced as
follows:
Notwithstanding anything to the contrary contained herein, Talla may be removed
as the Managing General Partner with the consent of all Limited Partners, if the
Manager under the Management Agreement has acted fraudulently or dishonestly
with respect to the Partnership or its Partners.
(d) A portion of Section 11.7, commencing with the first paragraph
thereof through and including the first sentence of the paragraph immediately
following paragraph (h) thereof, shall be deleted in its entirety and replaced
as follows:
11.7 REEBOK AS MANAGING GENERAL PARTNER
Notwithstanding any other provision of this Agreement (including Section 11.4
hereof), Reebok (but not any successor to, or assignee of, Reebok's Interest
other than an Affiliate of Reebok) shall become the sole General Partner and
the Managing General Partner in the event Reebok reasonably determines in good
faith that reasonable cause exists to replace the Managing General Partner.
Such reasonable cause may include (but not be limited to) the following:
a. Reebok reasonably determines in good faith that the management
provided by the Managing General Partner is inconsistent with management of a
sports club intended to be the preeminent sports club in New York City or that
the club would be financially better served by a new management team;
b. After good faith consideration, the General Partners are unable
to approve a new budget;
c. The Managing General Partner or an Affiliate thereof (or D.
Michael Talla if he owns a direct or indirect interest in the Managing General
Partner or an Affiliate thereto) becomes involved in activities directly
benefiting a Competitor (as defined in Section 8.5(g) of the Partnership
Agreement) or otherwise develops a business relationship with a Competitor, or
sells, assigns or transfers any direct or indirect interest to a Competitor or
if a Competitor acquires or owns, directly or indirectly, a 10% or more equity
interest in the Managing General Partner, SCC or an Affiliate thereto; provided
however, that the Managing General Partner or an
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<PAGE> 11
Affiliate may issue or sell its equity securities pursuant to an
effective registration statement under the Securities Act of
1933, as amended, as long as the Managing General Partner is not
intentionally issuing or selling its equity securities to a
Competitor and a Competitor does not acquire a direct or
indirect beneficial ownership of, or continues to beneficially
own directly or indirectly, 10% or more of the equity securities
of the Managing General Partner, SCC or the Manager; and
d. There exists a breach of the License Agreement with
Reebok (which has not been cured within the applicable cure
periods set forth in the License Agreement with Reebok).
Reebok shall notify the Managing General Partner as set forth
herein of the specific cause for its concern, and the Managing
General Partner shall have 30 days from receipt of such notice
to cure or, if the event giving rise to such notice cannot
reasonably be cured within 30 days, the Managing General Partner
shall have commenced and be diligently pursuing such cure within
said 30-day period, and thereafter shall continue to diligently
pursue and effect a cure.
If the event giving rise to such removal notice cannot be cured,
the Managing General Partner shall have 15 days within which to
propose changes to Reebok which shall be in the best interests
of the Partnership and which address the concerns raised in
Reebok's notice. Reebok shall exercise reasonable judgment in
determining in good faith whether such proposed changes address
the concerns raised in Reebok's notice and, if Reebok accepts
such proposed changes, the Managing General Partner must
diligently pursue and effect such changes. In the event Reebok
does not accept the Managing General Partner's proposed changes,
the Managing General Partner shall have one additional 15 day
period following Reebok's notice that it does not accept such
changes within which to make an alternative proposal to Reebok
which meets the criteria set forth above as being in the best
interests of the Partnership and which addresses the concerns
raised in Reebok's notice. Reebok shall then have the
opportunity to determine in good faith by exercising reasonable
judgment whether it will accept such alternative proposed
changes. If Reebok shall accept such alternative changes, the
Managing General Partner must diligently pursue and effectuate
such proposed changes.
If the Managing General Partner fails to cure or pursue such
cure in the time periods set forth above, if the Managing
General Partner fails to propose changes to address Reebok's
concerns within the relative 15-day period, or Reebok does not
accept the proposed changes, or if the Managing General Partner
fails to diligently pursue such changes, Reebok may elect to
become the sole, and the Managing, General Partner of the
Partnership by providing written notice of such election to
NY-SCL, LMP and MEP ("Reebok's Notice of Election to Serve as
Managing General Partner").
7. (a) Simultaneously with the execution of this Agreement, (i)
MEP shall purchase that certain promissory notice of the Partnership in the
original principal amount of One Million Five Hundred Thousand Dollars
($1,500,000), dated December 28, 1995 (the "Reebok Note"), and payable to the
order of Reebok International Ltd. ("RIL") for the face amount thereof plus any
accrued and unpaid interest and (ii) shall loan the Partnership an additional
One Million Dollars ($1,000,000) (collectively, the "MEP Loan"), which loan
shall be evidenced by a promissory note in the amount of $2,500,000, which
amends, restates and increases the Reebok Note, in form and substance
reasonably satisfactory to MEP and the
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<PAGE> 12
Partnership (the "MEP Note"). After delivery of the MEP Note, the Reebok Note
shall be marked "canceled" by MEP and returned to the Partnership. The MEP Loa
shall be divided into two portions of $1,500,000 ("Tranche A") and $1,000,000
("Tranche B"), respectively. Tranche B shall be used to pay accrued management
fees due pursuant to the Management Agreement in the amount of $1,000,000.
Interest on the amounts evidenced by the MEP Note shall accrue at the rate of
10% per annum and shall be payable in arrears on every March 31, June 30,
September 30 and December 31 while the MEP Loan is outstanding. Payments of
principal and interest shall be made from Net Cash as and when available until
the MEP Note shall be repaid in full; provided, however, that if the MEP Note
shall not be repaid by December 31, 1999 (the "MEP Maturity Date"), the same
shall be due and payable in full on such date. The payment of interest and
principal on the MEP Note shall have priority over all other obligations of the
Partnership. Notwithstanding the foregoing, (i) payments of principal due with
respect to Tranche A shall be deferred until such time as (1) Distributions to
LMP pursuant to Section 6.2.1(a) of the Partnership Agreement for 1996, 1997,
1998 and 1999 have been paid in full, (2) management fees due to the manager
under the Management Agreement for 1996, 1997, 1998 and 1999 have been paid in
full and 93) interest due under the SCC Note is current, (ii) payments of
principal due with respect to Tranche B shall be deferred until such time as
Distributions to LMP pursuant to Section 6.2.1(a) of the Partnership Agreement
for 1996, 1997, 1998 and 1999 have been paid in full and interest due under the
SC Note is current, (iii) payments of interest due under the MEP Note shall be
paid from Net Cash on a pari passu basis with payments of interest due under
the SCC Note and (iv) subject to clauses (i) and (ii) above, payments of
principal shall be paid from Net Cash on a pari passu basis with payments of
principal due under the SCC Note.
(b) RIL represents and warrants to MEP the following:
(i) The principal and interest outstanding as of the date
hereof under the Reebok Note is $1,536,986.30 (the "Payoff Amount").
(ii) RIL is the sole owner and holder of the Reebok Note and
RIL's interest therein is not subject to any lien, claim, encumbrance or to any
prior sale, conveyance or assignment by RIL>
(iii) No defaults by RIL or the Partnership exist under the
Reebok Note.
(iv) To the best knowledge of RIL, the Partnership has no
offsets, setoffs, claims or defenses with respect to its obligations under the
Reebok Note.
(v) Upon the delivery of the Payoff Amount, RIL shall endorse
the Reebok Note to be payable to the order of MEP and shall deliver the
original executed Reebok Note to MEP, which Reebok Note shall be amended and
restated by the MEP Note.
(vi) The execution and the delivery by RIL of this Agreement,
and the performance by RIL of its obligations hereunder, do not and will not
9a) conflict with or result in a breach of the terms, conditions or provisions
of, (b) constitute a default under, (c) result in a violation of, or (d)
require any authorization, consent or approval not heretofore obtained pursuant
to, any agreement or instrument to which RIL is a party or is otherwise
subject. This Agreement constitutes the legal, valid and binding obligation of
RIL and is enforceable against RIL in accordance with its terms, subject to
applicable bankruptcy, insolvency or other similar laws or proceedings
affecting creditors rights generally.
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<PAGE> 13
(c) The Partnership represents and warrants to MEP the following as
to the Reebok Note:
(i) The principal and interest outstanding as of the date
hereof under the Reebok Note is $1,536,986.30 (the "Payoff Amount").
(ii) To the best knowledge of the Partnership, RIL is the sole
owner and holder of the Reebok Note and RIL's interest therein is not subject
to any lien, claim, encumbrance or to any prior sale, conveyance or assignment
by RIL.
(iii) No defaults by RIL or the Partnership exist under the
Reebok Note.
(iv) The Partnership has no offsets, setoffs, claims or
defenses with respect to its obligations under the Reebok Note.
8. By its execution hereof, SCC agrees that, notwithstanding
anything to the contrary contained in the Settlement Agreement or that certain
promissory note of the Partnership in the original principal amount of
$1,500,000, dated December 28, 1995, payable to the order of SCC (the "SCC
Note"), (i) payments of principal due under the SCC Note shall be deferred
until such time as (1) Distributions to LMP pursuant to Section 6.2.1(a) of the
Partnership Agreement for 1996, 1997, 1998 and 1999 have been paid in full, (2)
management fees due to the manager under the Management Agreement for 1996,
1997, 1998 and 1999 have been paid in full and (3) interest due under the MEP
Note is current, (ii) references to "June 30, 1997" in the Settlement Agreement
and the SCC Note as the date the SCC Note shall become due and payable shall be
amended by replacing the same with December 31, 1999 (the "SCC Maturity
Date"), (iii) payments of interest due under the SCC Note shall be paid from
Net Cash on a pari passu basis with payments of interest due under the MEP
Note, (iv) to the extent interest payments are due under the SCC Note and are
not paid as a result of insufficient Net Cash, the same shall not constitute a
default and such unpaid amounts shall thereafter constitute principal under the
SCC Note and shall bear interest at the interest rate set forth therein and (v)
subject to clause (i) above, payments of principal shall be paid from Net Cash
on a pari passu basis with payments of principal due under the MEP Note.
9. The parties hereto covenant and agree that they will execute,
deliver and acknowledge from time to time at the request of the other, and
without further consideration, all such further instruments of assignment or
assumption of rights and/or obligations as may be required in order to give
effect to the transactions described herein.
10. This Agreement is executed by, and shall be binding upon and
inure to the benefit of, the parties hereto and each of their respective
successors and assigns. None of the provisions of this Agreement shall be for
the benefit of or enforceable by any other person.
11. This Agreement shall serve as MEP's and Talla's application to
be admitted to the Partnership as a Substituted Limited Partner which admission
shall be deemed effective upon the execution of this Agreement by the Managing
General Partner of the Partnership.
12. The parties hereto hereby (i) acknowledge and consent to the
rights assigned by RFC to MEP and Talla, respectively, and agree to recognize
MEP's and Talla's respective interests in the Partnership Agreement and Letter
Agreement as the successor and assign of RFC (to the extent provided herein) in
accordance with the terms thereof and (ii) to the extent applicable, waive any
right of first offer or first refusal with respect to the transactions
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<PAGE> 14
contemplated hereby.
13. If MEP, or any Affiliate, (hereinafter, a "Developing Party")
shall undertake to develop a health club in the San Francisco, California,
Washington, D.C., Boston, Massachusetts and New York, New York vicinity, then
such party shall in good faith conduct discussions with each of Talla and
Reebok (hereinafter, each an "Investor") with respect to such Investor providing
equity, services and/or other assets for any such venture. In the event the
Developing Party determines in the exercise of its reasonable discretion that
satisfactory terms cannot be reached with any such Investor with respect to the
provision of equity, services and/or other assets, then the Developing Party
may terminate such discussions with such Investor (but not necessarily the
other investor) and shall not be liable to such Investor in any manner
whatsoever as a result thereof. If the Developing Party terminates such
discussions but ultimately determines to proceed with any such development on
terms less advantageous to the Development Party than those discussed with an
Investor, the Developing Party shall re-open discussions with such Investor.
14. This Agreement may be executed in any number of counterparts,
and each such counterpart will for all purposes be deemed an original, and all
such counterparts shall constitute one and the same instrument. The individuals
signing this Agreement on behalf of the parties hereto are duly authorized to
do so.
15. This Agreement, as well as the Partnership Agreement, Letter
Agreement and Settlement Agreement (notwithstanding anything to the contrary
set forth therein), shall be construed in accordance with and governed by the
internal laws of the State of New York (without regard to principles of
conflicts of laws).
16. As modified by this Agreement, all of the terms of the
Partnership Agreement, the Letter Agreement and the Settlement Agreement shall
remain in full force and effect and are hereby ratified and confirmed in all
respects.
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<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 30th day of December, 1996.
REEBOK-SPORTS CLUB/NY, LTD.
By: Talla New York, Inc., as Managing General
Partner
By: /s/ DAVID M. TALLA
--------------------
Name: David M. Talla
Title: CEO
TALLA NEW YORK, INC.
By: /s/ DAVID M. TALLA
------------------
Name: David M. Talla
Title: CEO
RFC, INC., as General Partner and a Class A
Limited Partner
By: /s/ KENNETH WATCHMAKER
----------------------
Name: Kenneth Watchmaker
Title: Vice President
LMP HEALTH CLUB CO., as a Class B Limited
Partner
By: Lincoln Metrocenter Partners L.P.
By: Metrocenter Associates L.P.
By: W.S. Triangle, Inc.
By: /s/ STEVE HOFFMAN
-----------------
Name: Steve Hoffman
Title: Vice President
MILLENNIUM ENTERTAINMENT PARTNERS L.P.
By: Millennimum Entertainment Associates L.P.
By: Millennimum Entertainment Corp.
By: /s/ STEVE HOFFMAN
----------------------
Name: Steve Hoffman
Title: Vice President
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<PAGE> 16
THE SPORTS CLUB COMPANY, INC.
By: /s/ David M. Talla
-----------------------------------
Name: David M. Talla
Title: CEO
SECTION 7(b) IS AGREED TO BY:
REEBOK INTERNATIONAL LTD.
By: /s/ Kenneth Watchmaker
---------------------------------------
Name: Kenneth Watchmaker
Title: Executive Vice-President and CFO
SECTIONS 1(a)(v), 2(a)(v), and 5
ARE AGREED TO BY:
Pontius Realty Inc.
By: /s/ David M. Talla
---------------------------------------
Name: David M. Talla
Title: CEO
SECTIONS 1(a)(v), 1(a)(vi), 2(a)(v),
2(a)(vi) and 5 ARE AGREED TO BY:
/s/ D. Michael Talla
- -------------------------------------------
D. Michael Talla
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<PAGE> 1
10.92
MILLENIUM
AGREEMENT
<PAGE> 2
March 13, 1997
C1670
VIA FACSIMILE; ORIGINAL BY COURIER
Millennium Entertainment Partners, L.P.
1995 Broadway, 3rd Floor
New York, New York 10025
Attention: Brian J. Collins
Re: THE SPORTS CLUB COMPANY, INC./INVESTMENT TERMS
Dear Brian:
This letter sets forth the basic terms and conditions (the "Agreement")
under which Millennium Entertainment Partners, L.P. ("Millennium") will acquire
an equity ownership interest in The Sports Club Company, Inc. ("SCC") for an
aggregate purchase price (the "Purchase Price") of Ten Million Dollars
($10,000,000) as provided herein, and SCC will acquire, as part of the Purchase
Price, certain interests in Reebok Sports Club/NY, Ltd. (the "Partnership").
1. PURCHASE AND SALE OF STOCK. Subject to the terms and conditions of
this Agreement, SCC will issue and sell to Millennium an aggregate of 2,105,263
shares of its authorized but unissued Common Stock, $.01 par value (the
"Shares"), at a price per share equal to $4.75. The closing (the "Closing") of
the sale of the Shares shall be held at the offices of Kinsella, Boesch,
Fujikawa & Towle, LLP, 1901 Avenue of the Stars, Seventh Floor, Los Angeles,
California 90067-6009, at 11:00 A.M., local time, on March 31, 1997, or on such
other date as may be agreed upon in writing by Millennium and SCC (the "Closing
Date").
2. PURCHASE PRICE. The Purchase Price for the Shares will be paid by
Millennium to SCC at the Closing as follows:
(a) Five Million Dollars ($5,000,000) shall be paid in same-day
funds;
(b) Millennium shall assign to SCC all of Millennium's right, title
and interest in and to the MEP Assigned Interests (as defined and described in
that certain agreement [the "December 30 Agreement"] dated as of December 30,
1996, by and among the parties named therein, including the Partnership,
Millennium and RFC, Inc., a copy of which is attached as Exhibit "A" hereto);
and
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(c) Millennium shall assign to SCC all of Millennium's right, title
and interest (excluding interest accrued through the date of Closing) in and to
that certain Promissory Note dated as of December 30, 1996 (the "Note") in the
principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000),
acquired by Millennium pursuant to Section 7(a) of the December 30 Agreement.
SCC does hereby assume and agree to perform all of the obligations of a
Class A Limited partnership interest of the Partnership to the extent of the MEP
Assigned Interests from and after the Closing Date.
3. REPRESENTATIONS AND WARRANTIES OF SCC. SCC hereby makes the following
representations and warranties:
(a) SCC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, has all requisite corporate
power and authority to own and hold under lease the properties and assets it
purports to own and hold under lease and to carry on its business as now being
conducted and is not required to be qualified to do business as a foreign
corporation in any jurisdiction, except where so qualified or where the failure
to be so qualified would not have a material adverse effect on the business or
properties of SCC and its Subsidiaries (as defined in Paragraph 3(b)) taken as a
whole. Accurate and complete copies of SCC's Certificate of Incorporation and
Bylaws, together, in each case, with any amendments thereto to the date hereof,
are attached as Exhibit B and Exhibit C hereto, respectively.
(b) SCC owns a 50% or greater interest or otherwise controls each of
the corporations, limited partnerships and the general partnership listed on
Schedule 3(c) hereto (each, a "Subsidiary"), each of which is duly organized,
validly existing and, in the case of the corporations and limited partnerships,
in good standing under the laws of its state of organization, and has its chief
executive offices in Los Angeles, California (except for the Reebok-Sports
Club/NY, which has its chief executive offices in New York). Each Subsidiary has
all requisite corporate or other power and authority to own and hold under lease
the properties and assets it purports to own and hold under lease and to carry
on its businesses now being conducted and is not required to be qualified to do
business as a foreign corporation or partnership in any jurisdiction, except
where so qualified or whether failure to be so qualified would not have a
material adverse effect on the business or properties of SCC and the
Subsidiaries taken as a whole. Schedule 3(b) hereto sets forth the name and
state of organization of each Subsidiary. Except for the Subsidiaries, SCC does
not own a 50% or greater interest
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Page 3
or otherwise control any corporation, general partnership, limited partnership,
limited liability company or other entity.
(c) The authorized capital stock of SCC consists of 40,000,000 shares
of Common Stock, 11,358,000 shares of which have been validly issued, and are
fully paid and non-assessable, and except as set forth on Schedule 3(c) hereto,
there do not exist any other authorized or outstanding securities, options,
warrants, calls, commitments, rights to subscribe or other instruments,
agreements or rights of any character, or any pre-emptive rights, convertible
into or exchangeable for, or requiring or relating to the issuance, transfer or
sale of, any shares of capital stock or other securities of SCC (collectively,
"Equity Securities") or any Subsidiary.
(d) The execution and the delivery by SCC of this Agreement, and the
assumption of the MEP Assigned Interests hereunder, do not and will not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in a violation of, or (iv) require
any authorization, consent or approval not heretofore obtained pursuant to, any
binding written or oral agreement or instrument including, without limitation,
any charter, bylaw, trust instrument, indenture or evidence of indebtedness,
lease, contract or other obligation or commitment (each, a "Contractual
Obligation") binding upon SCC or any Subsidiary or any of their properties or
assets, or any law, rule, regulation, restriction, order, writ, judgment, award,
determination, injunction or decree of any court or government, or any decision
or ruling of any arbitrator (each, a "Requirement of Law") binding upon or
applicable to SCC or any Subsidiary or any of their properties or assets
(excluding the consents described in Paragraph 5(d) hereof).
(e) The issuance and sale of the Shares to Millennium has been duly
authorized and if, as and when delivered to Millennium, the Shares will be duly
and validly issued and outstanding, fully paid and nonassessable and will be
free of any mortgage, lien, charge, security interest, pledge or other
encumbrance (each, a "Lien"), other than those imposed pursuant to this
Agreement and securities laws of general application. This Agreement constitutes
the legal, valid and binding obligation of SCC and is enforceable against SCC in
accordance with its terms, subject to applicable bankruptcy, insolvency or other
similar laws or proceedings limiting creditors' rights generally and to general
equitable principles.
(f) Attached hereto as Schedule 3(f) are complete and accurate copies
of SCC's Annual Report on Form 10-K for the year ended December 31, 1995, and
the Quarterly
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Reports on Form 10-Q for the three fiscal quarters ending September 30, 1996
(the "Reports"), which include the consolidated financial statements of SCC for
its fiscal year ended December 31, 1995, and for the nine months ended September
30, 1996 (collectively, the "SCC Financial Statements"). Each of the Reports
complied in all material respects with the rules of the SEC applicable to such
Report on the date filed with the SEC, and none of the Reports contained, on the
date of filing with the SEC, any untrue statement of a material fact, or omitted
to state any material fact necessary to make the statements therein, in light of
the circumstances in which they were made, not materially misleading. None of
the Reports have been amended, nor has SCC filed any Report on Form 8-K since
September 30, 1996. All of the SCC Financial Statements (subject to year-end
accruals in the case of the September 30, 1996 financial statements): (i) have
been prepared from and on the basis of, and are in accordance with, the books
and records of SCC and with generally accepted accounting principles applied on
a basis consistent with prior accounting periods; (ii) fairly and accurately
present the financial condition of SCC as of the date of each such SCC Financial
Statement and the results of its operations for the periods therein specified;
and (iii) except in the case of the September 30, 1996 financial statements, are
accompanied by the audit opinion of SCC's independent public accountants. There
are no undisclosed liabilities which should be disclosed in the SCC Financial
Statements pursuant to generally accepted accounting principles.
(g) Except as set forth on Schedule 3(g), since September 30, 1996,
there has not been nor is there currently pending any change in the business,
business plan, operations, commercial practices, properties, assets or
condition, financial or otherwise, of SCC and the Subsidiaries other than
changes in the ordinary course of business, none of which, singly or in the
aggregate, would have a material adverse effect on SCC and the Subsidiaries,
taken as a whole (a "Material Adverse Effect").
(h) SCC and each Subsidiary have complied with all Requirements of
Law in the conduct of its business and corporate affairs, and SCC and each
Subsidiary have all governmental consents, licenses, approvals, permits or
authorizations and all other rights required for the operation of its business,
as now conducted, except where failure to comply, singly or in the aggregate,
would not have a Material Adverse Effect.
(i) Except as set forth on Schedule 3(i) there is not pending, or, to
the best knowledge of SCC, threatened, any action, suit, ruling, order, decree,
judgment, stipulation or legal, administrative, arbitration or other proceeding
or governmental investigation (each, a
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Page 5
"Proceeding") to which SCC or any Subsidiary is a party, which if adversely
determined, would have a Material Adverse Effect.
(j) There has been no material violation or violations by SCC or any
Subsidiary of any environmental or safety statute, law or regulation
(collectively, "Environmental Laws"). As of the Closing, no "Hazardous
Material", as defined below, is or will be present on any SCC or Subsidiary
facility in violation of any Environmental Law. There are no Hazardous Materials
present at any SCC or Subsidiary facility that would have a Material Adverse
Effect. For the purposes of this section, the term "Hazardous Material" shall
mean any material or substances which are prohibited or regulated by any
environmental law or which has been designated by any governmental authority to
be radioactive, toxic, hazardous or otherwise a danger to health, reproduction
or the environment.
(k) Subject to the accuracy of Millennium's representation set forth
in paragraph 4 hereof, the offer and sale of the Shares to Millennium will be
exempt from the Securities Act of 1933, as amended (the "Act").
(l) Neither SCC nor any Subsidiary is now, or has ever been, subject
to any pension, profit sharing or other similar plan which is or was subject to
the Employee Retirement Income Securities Act of 1974, as amended ("ERISA"); no
"prohibited transaction" within the meaning of Section 406(a) of ERISA, and no
"reportable event" within the meaning of Section 4043(b) of ERISA, has occurred
with respect to any employee benefit plan of SCC or any Subsidiary; all employee
benefit plans have been established and operated in full compliance with all
Requirements of Law.
(m) SCC and the Subsidiaries have filed all income tax returns which
are required to be filed, and have paid, or made provision for the payment of,
all taxes which have become due pursuant to said returns or pursuant to any
assessment received by SCC or any Subsidiary, except such taxes, if any, as are
being contested in good faith and as to which adequate reserves have been
provided.
(n) Neither this Agreement nor any exhibit hereto nor any
certificate, document, writing or other instrument furnished to Millennium by
SCC in connection with this Agreement contained or will contain any untrue
statement of material fact or omit to state any material fact necessary in order
to make the statements contained herein or therein, in light of the
circumstances they were made, not misleading.
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Page 6
4. REPRESENTATIONS AND WARRANTIES OF MILLENNIUM. Millennium hereby makes
the following representations and warranties:
(a) Millennium is a limited partnership duly organized, validly
existing and in good standing under the laws of the State of New York.
(b) The execution and the delivery by Millennium of this Agreement,
its purchase of the Shares and the conveyance, transfer and assignment of the
MEP Assigned Interests and the Note hereunder, do not and will not (i) conflict
with or result in a breach of the terms, conditions or provisions of, (ii)
constitute a default under, (iii) result in a violation of, or (iv) require any
authorization, consent or approval not heretofore obtained pursuant to, any
Contractual Obligation or Requirement of Law to which Millennium is a party or
is otherwise subject (excluding the consents described in Paragraph 5(d)
hereof).
(c) Millennium as of the Closing will hold, and upon the consummation
of the transfer contemplated hereby SCC will hold, the MEP Assigned Interests
and the Note free and clear of all Liens, except as contained in the Partnership
Agreement or as permitted by SCC, and has full power and legal right and
authority to assign and transfer the MEP Assigned Interests and the Note to SCC.
This Agreement constitutes the legal, valid and binding obligation of Millennium
and is enforceable against Millennium in accordance with its terms, subject to
applicable bankruptcy, insolvency or other similar laws or proceedings affecting
creditors rights generally and to general equitable principles.
(d) The principal outstanding under the Note is $2,500,000. No
defaults by Millennium exist under the Note; and, to the knowledge of
Millennium, the Partnership has no offsets, setoffs, claims or defenses with
respect to its obligations under the Note.
(e) Millennium is purchasing the Shares for its own account for
investment and not with a view to, or for resale in connection with, any
"distribution" thereof for purposes of the Act. Millennium is an "accredited
investor" as such term is defined in Regulation D under the Act. Millennium
acknowledges that the Shares shall be "restricted securities" within the meaning
of Rule 144 ("Rule 144") of the Securities and Exchange Commission ("SEC") under
the Act, will contain a transfer restriction legend and may only be resold
pursuant to an effective registration statement filed with the SEC under the
Act, or pursuant to Rule 144 or another valid exemption from the registration
requirements of the Act as established by an opinion of counsel reasonably
acceptable to SCC.
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(f) Millennium is familiar with, and its representatives prior to
Closing will have been given full access by SCC to, all information concerning
the business and financial condition, properties, operations and prospects of
SCC that Millennium has deemed relevant for purposes of making the investment
contemplated by this Agreement. By reason of Millennium's knowledge and
experience in financial and business matters in general, the business of SCC and
investments of the type contemplated by this Agreement in particular, Millennium
is capable of evaluating the merits and risks of making the investment in the
Shares and is able to bear the economic risk of the investment (including a
complete loss of its investment in the Shares).
5. CONDITIONS TO THE OBLIGATIONS OF SCC. The obligations of SCC to consummate
the transactions contemplated by this Agreement on the Closing Date shall
be subject to the satisfaction of each of the conditions set forth in this
Paragraph 5, unless waived by SCC, on or prior to the Closing Date:
(a) The representations and warranties of Millennium set forth in
Paragraph 4 shall be true and correct in all material respects as of the Closing
Date as though made on and as of such date; Millennium shall have performed all
obligations and complied with all covenants required to be performed or complied
with by Millennium under this Agreement on or prior to the Closing Date; and SCC
shall have received from Millennium a certificate to such effect, dated the
Closing Date, signed by an agent duly authorized to act on its behalf.
(b) No order, injunction, decree or other action or legal, administrative,
arbitration or other proceeding by any person other than SCC or investigation by
any governmental agency or authority shall be pending or, to the knowledge of
Millennium, threatened, challenging or imposing a material limitation on the
execution, delivery or performance of this Agreement, or the consummation of any
of the transactions contemplated hereby.
(c) All proceedings taken in connection with the transactions contemplated
hereby and all documents incident to such transactions shall be reasonably
satisfactory in form and substance to SCC and its counsel.
(d) The parties shall have obtained all consents required pursuant to the
partnership agreement (the "Partnership Agreement") of the Partnership.
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Page 8
6. CONDITIONS TO THE OBLIGATIONS OF MILLENNIUM. The obligations of
Millennium to consummate the transactions under this Agreement on the Closing
Date shall be subject to the satisfaction of each of the conditions set forth in
this Paragraph 6, unless waived by Millennium, on or prior to the Closing Date.
(a) The representations and warranties of SCC set forth in Paragraph
2 shall be true and correct in all material respects as of the Closing Date as
though made on and as of such date; SCC shall have performed all obligations and
complied with all covenants required to be performed or complied with by SCC
under this Agreement on or prior to the Closing Date; and Millennium shall have
received on the Closing Date from SCC a certificate or certificates, dated the
Closing Date, to such effect, which certificate or certificates shall be signed
by an authorized officer of SCC.
(b) No order, injunction, decree or other action or legal,
administrative, arbitration or other proceeding by any person other than
Millennium or investigation by any governmental agency or authority shall be
pending or, to the knowledge of SCC, threatened, challenging or imposing a
material limitation on the execution, delivery or performance of this Agreement,
the consummation of any of the transactions contemplated hereby or the operation
by SCC of its businesses as now conducted.
(c) All proceedings taken in connection with the transactions
contemplated hereby and all documents incident to such transactions shall be
reasonably satisfactory in form and substance to Millennium and its counsel.
(d) SEC shall have delivered to Millennium a complete and accurate
copy of is Annual Report on Form 10-K for the year ended December 31, 1996 (the
"1996 Form 10-K"), accompanied by a certificate to the effect that the 1996 Form
10-K and financial statements contained therein comply with the representations
and warranties set forth in Paragraph 3(e) hereof.
(e) Millennium shall have received from SCC's independent public
accountants a letter or letters (which letters are frequently referred to as
"agreed upon procedures letters") dated the Closing Date, addressed to SCC and
Millennium, confirming certain disclosures set forth in SCC's Annual Report on
Form 10-K for the year ended December 31, 1996, and confirming a subsequent
events review through the date of the Annual Report, in form and substance
reasonably satisfactory to Millennium.
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(f) Millennium shall have received from outside counsel to SCC an
opinion, addressed to Millennium, in form and substance reasonably satisfactory
to Millennium and its counsel, confirming certain legal matters related to SCC
and the transactions contemplated hereby.
(g) The parties shall have obtained all consents required pursuant to
the Partnership Agreement.
7. REGISTRATION OF THE SHARES.
(a) Until the earlier of the second anniversary of the Closing Date
and the date Millennium shall become entitled to sell the Shares pursuant to
subsection (k) of Rule 144, Millennium shall have the right to require SCC to
file with the SEC, at SCC's sole cost and expense, on no more than one occasion,
a registration statement on Form S-3 (or such other form as the SEC may from
time to time prescribe for such purposes) covering as many of the Shares as
Millennium elects to include therein (the "Millennium Registration Statement")
and to cause the Millennium Registration Statement to be declared effective by
the SEC within 90 days thereafter and to maintain the effectiveness of the
Millennium Registration Statement until the earlier of (i) the completion of the
offering covered by the Millennium Registration Statement, (ii) the third
anniversary of the effectiveness of the Millennium Registration Statement and
(iii) the date Millennium shall become entitled to sell the Shares pursuant to
subsection (k) of Rule 144; in the event SCC proposes to register an
underwritten offering of its Common Stock for its own account under the Act, it
shall have the right to delay or suspend the filing or effectiveness of the
Millennium Registration Statement for up to an aggregate of 104 days in any
12-month period to facilitate such registration. If Millennium proposes to
effect an underwritten offering, SCC shall enter into an Underwriting Agreement
in customary form with the managing underwriter selected by Millennium.
Notwithstanding the foregoing, in the event of a material development in
the business of SCC, SCC shall advise Millennium of such event and Millennium
shall cease using the prospectus included in the Millennium Registration
Statement until forty-eight (48) hours following the public disclosure of such
event. SCC shall promptly disclose all such material developments provided that
it shall be entitled to delay such disclosure for a reasonable period of time
for valid business purposes, not to exceed five (5) business days without the
consent of Millennium, which consent shall not be unreasonably withheld.
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(b) If, at any time or from time to time, SCC determines to register
any of its securities for its own account or the account of any other
shareholder, other than a registration relating to employee benefit plans (or
the resale of securities acquired pursuant thereto) or a transaction pursuant to
Rule 145 of the SEC, SCC shall include in such registration such number of the
Shares as Millennium shall request in writing within ten (10) business days
following receipt of notice of such registration, provided that, if such
registration is underwritten, it shall be a condition that Millennium
participate in such underwriting and enter into an underwriting agreement in
customary form with the managing underwriter selected by SCC. If the managing
underwriter determines that market forces require limitation of the number of
shares to be underwritten, the number of Shares owned by Millennium to be
included in the registration may be limited or eliminated, provided that,
Millennium shall be treated on at least a pari passu basis with all other
shareholders participating in such registration.
(c) All registration expenses in connection with the registrations
contemplated by this Paragraph 7 shall be borne by SCC, but all selling expenses
of Millennium (including broker fees, underwriting commissions and the cost of
any special legal counsel representing Millennium) shall be borne by Millennium.
In connection with any such registration statement, Millennium shall promptly
furnish SCC with such written representations, information and consents
regarding Millennium, the Shares and the intended method of distribution of the
Shares as shall be necessary for inclusion in the Registration Statement.
8. CERTAIN COVENANTS OF SCC.
(a) For so long as Millennium maintains at least a 10% interest in
the Equity Securities of SCC, in the event SCC determines to issue additional
Equity Securities, SCC shall so inform Millennium, and Millennium shall have the
right, exercisable within ten (10) days of receipt of written notice from SCC,
to purchase, at a price per share equal to the purchase price at which such
Equity Securities are proposed to be offered by SCC, a percentage of such Equity
Securities equal to Millennium's then current percentage ownership interest in
SCC. The foregoing rights shall not apply to an issuance of Equity Securities
(i) pursuant to SCC's 1994 Stock Incentive Plan and 1994 Stock Compensation Plan
(in amounts currently authorized under said plans or in such additional amounts
as may be approved in writing by Millenium), (ii) in a stock-for-stock exchange
in which SCC acquires control of another entity, or (iii) as consideration for
the purchase of another business or assets to be utilized in SCC's business.
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(b) At the Closing, a designee of Millennium shall be appointed as a
Class 2 Director of the Board of Directors of SCC, and so long as Millennium
maintains at least a 12% interest in the Equity Securities of SCC: (i) upon the
expiration of the term of such designee, SCC shall include and support a
designee of Millennium as part of management's nominees for Directors, and (ii)
upon the termination of such designee's services as a director other than upon
the expiration of term of office, SCC shall appoint in the place of such
director a replacement designee of Millennium. In addition, D. Michael Talla and
Rex A. Licklider agree to vote Equity Securities which they own (or with respect
to which they have the power to direct the vote) in an amount sufficient to
elect such designee of Millennium to the Board of Directors of SCC.
(c) SCC shall cause the Shares to be listed on the American Stock
Exchange.
(d) Prior to the Closing, officers of SCC and the Subsidiaries with
responsibility for financial and business affairs have been and will continue to
be available to answer inquiries from Millennium, its officers and agents, and
Millennium shall be given reasonable access to all facilities of SCC and the
Subsidiaries.
9. CERTAIN COVENANTS OF MILLENNIUM. For a period of two years following
the Closing, SCC shall have a right of first refusal to acquire, within ten (10)
days of its receiving written notice from Millennium of a bona fide offer from a
third party, all (but not less than all) of the Shares and other Equity
Securities owned by Millennium to which such bona fide third party offer shall
relate, at a price per share equal to the purchase price offered by such third
party; provided that such right shall not apply to sales of Shares in a
"broker's transaction" within the meaning of Rule 144. In addition, during such
period, Millennium shall not, directly or indirectly, during any fiscal quarter,
knowingly transfer to a purchaser, in one or a series of transactions, Shares
constituting more than one percent of the outstanding Equity Securities Stock of
SCC. For purposes of this Paragraph, a purchaser and all Affiliates of such
purchaser (as defined in Paragraph 12(e)) shall be considered a single
purchaser.
10. CONFIDENTIALITY. Except as required by law or with the consent of the
other party, neither party hereto shall disclose to any third party the terms
hereof or the transactions contemplated hereby except to its employees,
partners, investors, prospective investors, lenders and agents; provided that,
such persons are required to maintain the confidentiality of such information.
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11. BROKERS AND FINDERS. Neither Millennium nor SCC, nor any person acting
on behalf of either of them, has employed any broker, agent or finder, or
incurred any liability for any brokerage fees, agents' commissions, finders'
fees or advisory fees in connection with the transactions contemplated hereby;
and SCC shall indemnify and hold Millennium harmless in respect of any "Damages"
(as defined in Paragraph 12(f) hereof) arising out of any agreements,
arrangements or understandings claimed to have been made by SCC, or any person
acting on its behalf, with any third party; and Millennium shall indemnify and
hold SCC harmless in respect of any Damages arising out of any agreements,
arrangements or understandings claimed to have been made by Millennium, or any
person acting on its behalf, with any third party.
12. INDEMNIFICATION.
(a) SCC shall indemnify Millennium and/or its "Affiliates" (as
hereinafter defined) (the "Millennium Indemnified Parties" and each individually
a "Millennium Indemnified Party") against, and shall hold the Millennium
Indemnified Parties harmless from, and defend the Millennium Indemnified Parties
against, any and all Damages incurred or suffered by the Millennium Indemnified
Parties arising out of (a) any misrepresentation, inaccuracy or omission in any
representation or warranty, or any breach of any warranty, covenant or agreement
made or to be performed by SCC, or (b) the MEP Assigned Interests and accruing
from and after the Closing Date. Promptly after receipt by a Millennium
Indemnified Party of notice of the commencement of any action, such party will,
if a claim in respect thereof is to be made against SCC under this Paragraph 12,
notify SCC in writing of the commencement thereof. In case any such action is
brought against any Millennium Indemnified Party and such Millennium Indemnified
Party notifies SCC of the commencement thereof, SCC will be entitled to
participate therein.
(b) Millennium hereby indemnifies SCC and/or their Affiliates (the
"SCC Indemnified Parties" and each individually a "SCC Indemnified Party")
against, and shall hold the SCC Indemnified Parties harmless from, and defend
the SCC Indemnified Parties against, any and all Damages incurred or suffered by
the SCC Indemnified Parties arising out of (a) the MEP Assigned Interests and
accruing prior to the Closing Date (excluding, however, losses attributable to
the diminution in the value of the MEP Assigned Interests), or (b) any
misrepresentation, inaccuracy or omission in any representation or warranty, or
any breach of any warranty, covenant or agreement made or to be performed by
Millennium. Promptly after receipt by a SCC Indemnified Party of notice of the
commencement of any action, such party will, if a claim in respect thereof is to
be made against Millennium under this Paragraph 12,
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notify Millennium in writing of the commencement thereof. In case any such
action is brought against a SCC Indemnified Party and such SCC Indemnified Party
notifies Millennium of the commencement thereof, Millennium will be entitled to
participate therein.
(c) In order for a party (the "Indemnified Party") to be entitled to
any indemnification provided for under this Agreement arising out of involving a
claim or demand made by any person against the indemnified party (a "Third
Party"), such Indemnified Party must notify the indemnifying party (the
"Indemnified Party") in writing, and in reasonable detail, of the Third Party
Claim as promptly as reasonably possible after receipt by such Indemnified Party
of written notice of the Third Party Claim, and shall deliver to the
Indemnifying Party, within fifteen business days after the Indemnified Party's
receipt thereof, copies of all notices and documents (including court papers)
received by the Indemnified Party relating to the Third Party Claim; provided,
however, that failure to give such notification shall not affect the
indemnification provided hereunder except to the extent the Indemnifying Party
shall have been actually prejudiced as a result of such failure.
(d) If a Third Party Claim is made against an Indemnified Party, the
Indemnifying Party will be entitled to participate in the defense thereof
(provided no actual or potential conflict of interest exists with respect to
such assumption) and, if it so chooses and acknowledges its obligation to
indemnify the Indemnified Party therefor, to assume the defense thereof with
counsel selected by the Indemnifying Party and reasonably satisfactory to the
Indemnified Party. Should the Indemnifying Party so elect to assume the defense
of a Third Party Claim, the Indemnifying Party will not be liable to the
Indemnified Party for legal expenses subsequently incurred by the Indemnified
Party in connection with the defense thereof. If the Indemnifying Party assumes
such defense, the Indemnified Party shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party shall be liable for the fees and expenses of counsel employed
by the Indemnified Party for any period during which the Indemnifying Party has
not assumed the defense thereof. If the Indemnifying Party chooses to defend any
Third Party Claim, all the parties hereto shall cooperate in the defense or
prosecution thereof. Such cooperation shall include the retention and (upon the
Indemnifying Party's request) the provision to the Indemnifying Party of
non-privileged records and information which are reasonably relevant to such
Third Party Claim (it being understood that the Indemnified Party shall supply
privileged and non-privileged records to counsel for the Indemnifying Party, to
the extent the Indemnifying Party's counsel has assumed the defense of such
Third Party Claim), and making employees available on a mutually
<PAGE> 15
Millennium Entertainment
Partners, L.P.
March 13, 1997
Page 14
convenient basis to provide additional information and explanation of any
material provided hereunder. Whether or not the Indemnifying Party shall have
assumed the defense of a Third Party Claim, the Indemnified Party shall not
admit any liability with respect to, or settle, compromise or discharge, such
Third Party Claim without the Indemnifying Party's prior written consent (which
consent shall not be unreasonably withheld). If, by reason of any Third Party
Claim as to which there exists an obligation to indemnify an Indemnified Party
hereunder, a lien, attachment, garnishment or execution is placed upon any of
the property or assets of any Indemnified Party. The Indemnifying Party shall
also, promptly upon demand, furnish an indemnity bond or take other actions
satisfactory to the Indemnified Party to obtain the prompt release of such lien,
attachment, garnishment or execution. If any judgment or arbitration award is
issued or affirmed in respect of any Third Party Claim, the Indemnifying Party
shall satisfy such judgment or award within 30 days of the date it is rendered,
unless the Indemnifying Party in good faith takes all necessary actions to
appeal such judgment or award, including posting any necessary bond and taking
all other actions required in connection with such appeal on a timely basis.
(e) As used herein the term "Affiliate" means, with respect to any
person: (i) any person who is an "affiliate" of such person as defined in Rule
12b-2 of the SEC under the Securities and Exchange Act of 1934, as amended, (ii)
any family member of such person, and (iii) any person who is a director,
officer or partner or holds a similar position with such entity or any entity in
which such person has a 10% or greater equity or profit interest.
(f) As used herein the term "Damages" means any and all claims,
actions, demands, losses, costs, expenses, liabilities, damages and recoveries
to the full amount of the actual damage occasioned by each deficiency,
misrepresentation, inaccuracy, omission or breach, in each case including
interest, penalties or other damages (including, without limitation, reasonable
attorneys' fees and other costs and expenses reasonably incurred in
investigating or in attempting to avoid the same or oppose the imposition
thereof or of enforcing this indemnity).
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations,
warranties and agreements made by SCC and Millennium in this Agreement or in any
certificate or other instrument delivered pursuant hereto shall survive the
Closing and any investigation and discovery by SCC or by Millennium, as the case
may be, made at any time with respect thereto; provided, however, that neither
Millennium nor SCC shall have any liability to the other for any
misrepresentation, inaccuracy or omission in any representation or warranty, or
any breach of any representation or warranty, unless the party asserting a claim
with respect to any thereof
<PAGE> 16
Millennium Entertainment
Partners, L.P.
March 13, 1997
Page 15
gives to the other written notice of such claim on or before the date which is
one (1) year following the Closing Date.
14. MISCELLANEOUS PROVISIONS.
(a) SCC and Millennium hereby covenant and agree to use their
respective best efforts to perform each of their obligations hereunder, to
deliver all certificates and to satisfy all other conditions set forth in this
Agreement and to close the transactions contemplated by this Agreement on the
Closing Date.
(b) This Agreement is executed by, and shall be binding upon and
inure to the benefit of, the parties hereto and each of their respective
successors and assigns, provided that neither this Agreement nor any right
pursuant hereto nor interest herein shall be assignable by either party hereto
without the prior written consent of the other party hereto, except as expressly
permitted herein, provided that all rights hereunder may be assigned to an
Affiliate of Millenium that is controlled by Christopher M. Jeffries or jointly
controlled by Christopher M. Jeffries and Goldman Sachs & Co. (or its
Affiliates); except for such permitted assigns, none of the provisions of this
Agreement shall be for the benefit of or enforceable by any other person.
(c) This Agreement shall serve as SCC's application to be admitted to
the Partnership as a Substituted Limited Partner, which admission shall be
deemed effective upon the Closing Date.
(d) All Notices given hereunder shall be made in the manner specified
in the Partnership Agreement to the addresses set forth on the first page
hereof.
(e) This Agreement may be executed in any number of counterparts, and
each such counterpart will for all purposes be deemed an original, and all such
counterparts shall constitute one and the same instrument.
(f) This Agreement shall be governed by, and construed and enforced
in accordance with, the laws of the State of New York applicable to contracts
entered into and to be wholly performed therein.
<PAGE> 17
Millennium Entertainment
Partners, L.P.
March 13, 1997
Page 16
(g) If either party should institute any action to enforce or
interpret any term or provision of this Agreement, the party prevailing in such
action shall be entitled to its attorneys' fees, out-of-pocket disbursements and
all other expenses from the non-prevailing party in such action.
(h) This Agreement (together with all Exhibits and Schedules hereto)
constitutes the entire understanding and agreement between the parties hereto
with respect to the subject matter hereof and supersedes all prior and
contemporaneous written and oral negotiations, discussions, agreements and
understandings with respect to such subject matter.
(i) Except as otherwise provided in Paragraph 7(a) hereof, each party
shall bear its own costs in connection with the transactions contemplated
hereby.
(j) Each of Millennium and SCC have participated in the negotiation
and drafting of this Agreement. Accordingly, each of the parties hereby waives
any statutory provision, judicial precedent or other rule of law to the effect
that contractual ambiguities are to be construed against the party who shall
have drafted the same.
<PAGE> 18
Millennium Entertainment
Partners, L.P.
March 13, 1997
Page 17
(k) This Agreement may be terminated by either party if the Closing
does not occur on or before April 15, 1997.
If the foregoing is acceptable to you, please date and sign the enclosed
copy of this letter and return it to me.
Very truly yours,
THE SPORTS CLUB COMPANY, INC.
By: /s/ John Gibbons
------------------------------------
John Gibbons, President
Agreed and accepted this 13th day of March, 1997, at New York, New York.
MILLENNIUM ENTERTAINMENT PARTNERS L.P.
By: MILLENNIUM ENTERTAINMENT CORP.
By: /s/ Brian J. Collins
------------------------
Brian J. Collins,
Authorized Officer
Affirmed and Agreed to
solely with respect to
Paragraph 8(b) hereof:
/s/ D. Michael Talla
- -------------------------------
D. Michael Talla
/s/ Rex A. Licklider
- -------------------------------
Rex A. Licklider
<PAGE> 19
EXHIBIT AND SCHEDULE LIST
EXHIBITS
Exhibit A December 30 Agreement
Exhibit B Certificate of Incorporation
Exhibit C Bylaws
SCHEDULES
Schedule 3(b) Subsidiaries
Schedule 3(c) Options, Rights, Etc.
Schedule 3(f) Reports and Financial Statements
Schedule 3(g) Material Changes
Schedule 3(i) Litigation
<PAGE> 1
10.93
SUMITOMO LOAN
AGREEMENT
<PAGE> 2
LOAN AGREEMENT
Dated as of March 20, 1997
between
THE SPORTS CLUB COMPANY, INC.,
and various of its subsidiaries,
as Borrowers,
and
SUMITOMO BANK OF CALIFORNIA,
as Bank
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.3 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.4 Exhibits and Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 2 LOANS AND LETTERS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.1 General Provisions Regarding Line A Loans and Borrowing Procedures . . . . . . . . . . . . . . . . . . . . . . . . 13
2.2 The Line B Loan and the Line B Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.3 Prime Rate Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.4 Eurodollar Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.5 Redesignation of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.6 Standby Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.7 Reduction of the Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE 3 PAYMENTS AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.1 Principal and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.2 Commitment Fee and Special Commitment Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.3 Eurodollar Fees and Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.4 Letter of Credit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.5 Unused Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.6 Late Payments/Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.7 Computation of Interest and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.8 Non-Banking Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.9 Manner and Treatment of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.10 Funding Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.11 Failure to Charge Not Subsequent Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.12 Survivability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE 4 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.1 Existence and Qualification; Power; Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.2 Authority; Compliance With Other Agreements and Instruments and Government Regulations . . . . . . . . . . . . . . 26
4.3 No Governmental Approvals Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.4 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.6 No Other Liabilities; No Material Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.7 Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.8 Filing of Financing Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.9 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.11 Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
4.12 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.13 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.14 Regulations G, T, U and X; Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.15 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.16 Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.17 Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.18 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.19 Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE 5 AFFIRMATIVE COVENANTS (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS) . . . . . . . . . . . . . . . . . . . . 31
5.1 Payment of Taxes and Other Potential Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.2 Preservation of Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.3 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.4 Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.5 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.6 Additional Borrowers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.7 Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.8 Keeping of Records and Books of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.9 Compliance With Agreements, Duties and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.10 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE 6 NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.1 Disposition of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.2 Transactions with Borrowers and Non-Borrower Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.3 Mergers, Investments, Acquisitions and New Club Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.4 Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.5 Redemption, Dividends and Distributions; Payments to Partners . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.6 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.7 Change in Nature of Business/Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.8 Transactions with AT&T Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.9 Indebtedness, Guaranties and Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.10 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.11 Change in Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.12 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.13 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.14 Ratio of Total Unsubordinated Liabilities to Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.15 Debt Service Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.16 Attrition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.17 Loans to Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.18 Deposit Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE 7 INFORMATION AND REPORTING REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
7.1 Financial and Business Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
7.2 Compliance Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
7.3 Revisions or Updates to Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
ARTICLE 8 CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
8.1 Initial Loans, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
8.2 Initial Term Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.3 Any Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.4 Line B Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES UPON EVENT OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
9.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
9.2 Remedies Upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
ARTICLE 10 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
10.1 Pledge of Partnership Interests of L.A./Irvine Sports Clubs, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . 51
10.2 Cumulative Remedies; No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
10.3 Amendments; Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
10.4 Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
10.5 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
10.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
10.7 Execution of Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
10.8 Binding Effect; Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
10.9 Assignment of Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
10.10 Participation of Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
10.11 Indemnity by Borrowers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
10.12 Nonliability of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
10.13 No Third Parties Benefited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
10.14 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
10.15 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
10.16 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
10.17 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
10.18 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
10.19 Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
10.20 Securities Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
10.21 Joint Borrower Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
10.22 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
</TABLE>
<PAGE> 6
Exhibits
A-1 Line A Note
A-2 Line B Note
A-3 Line B Term Note
B Opinion of Counsel
C Pledge Agreement
D Request for Standby Letter of Credit
E Request for Loan
F Request for Redesignation of Loans
G Pledge Agreement (Partnership)
Schedules
4.2 Necessary Consents
4.4 Subsidiaries
4.6 Material Contingent Liabilities
4.8 Governmental Agencies With Which Financing Statements Need be Filed
and/or Recorded
4.10 Litigation
4.13 Plans Subject to ERISA
4.17 Projections
5.2 Preservation of Existence
5.6 Additional Borrowers
6.9 Indebtedness, Guaranties and Liens
6.10 Transactions with Affiliates
6.17 Loans to Officers
<PAGE> 7
LOAN AGREEMENT
Dated as of March 20, 1997
This LOAN AGREEMENT is entered into by and among The Sports Club
Company, Inc., The Spectrum Club Company, Inc., Pontius Realty, Inc., Sports
Club, Inc. of California, Irvine Sports Club, Inc., HealthFitness Organization
of America, Inc., L.A./Irvine Sports Clubs, Ltd., Talla New York, Inc. and SCC
Sports Club, Inc., collectively, as Borrowers, and Sumitomo Bank of California,
as Bank.
In consideration of the mutual covenants and agreements herein
contained, the parties hereto covenant and agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
1.1 Defined Terms. As used in this Agreement, the following terms
shall have the meanings set forth respectively after each:
"Acquisition" means any transaction, or any series of related
transactions, by which any Borrower and/or any of its Subsidiaries directly
or indirectly acquires control of any going business or all or substantially
all of the assets of any firm, partnership, joint venture, limited liability
company, corporation or division thereof, whether through purchase of
assets, merger or otherwise, (control meaning possession, directly or
indirectly, of the power to direct or cause the direction of management or
policies of such entities); provided that, in any event, Acquisition shall
include the control of at least a majority in ordinary voting power of the
securities of a corporation which have ordinary voting power for the
election of directors or other governing body of a corporation (other than
securities having such power only by reason of the happening of a
contingency), or control of a 50% or more ownership interest in any
partnership, limited liability company or joint venture.
"Affiliate" means, as to any Person, any other Person which directly
or indirectly controls, or is under common control with, or is controlled
by, such Person. As used in this definition, "control" (and its correlative
meanings, "controlled by" and "under common control with") shall mean
possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities
or partnership or other ownership interests, by contract or otherwise),
provided that, in any event, any Person that owns, directly or indirectly,
50% or more of the securities having ordinary voting power for the election
of directors or other governing body of a corporation (other than securities
having such power only by reason of the happening of a contingency), or 50%
or more of the partnership or other ownership interests of any other Person
(other than as a limited partner of such other Person), will be deemed to
control such corporation or other Person.
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<PAGE> 8
"Agreement" means this Loan Agreement, either as originally executed
or as it may from time to time be supplemented, modified, amended, restated
or extended.
"AT&T Commercial" means AT&T Commercial Finance Corporation, a
Delaware corporation.
"Attrition" means, for any given period, the reduction in number of
gross members exclusive of any new members.
"Bank" means Sumitomo Bank of California, a California state bank.
"Bank's Office" means the office designated as its address for
purposes of notice under this Agreement.
"Banking Day" means any Monday, Tuesday, Wednesday, Thursday or
Friday on which Bank is open for business at its respective address for
notice designated as provided herein.
"Borrower or Borrowers" means, individually or collectively, Parent,
The Spectrum Club Company, Inc., Pontius Realty, Inc., Sports Club, Inc. of
California, Irvine Sports Club, Inc., HealthFitness Organization of America,
Inc., L.A./Irvine Sports Clubs, Ltd., Talla New York, Inc. and SCC Sports
Club, Inc.
"Capital Expenditure" means any expenditure (including any
capitalized lease expenditure) that is considered a capital expenditure
under generally accepted accounting principles, consistently applied,
including, without limitation, any amount that is required to be treated as
a capitalized asset pursuant to Financial Accounting Standards Board
Statement No. 13.
"Cash" means, when used in connection with any Person, all monetary
and non-monetary items belonging to such Person that are treated as cash in
accordance with generally accepted accounting principles, consistently
applied.
"Cash Equivalents" means, when used in connection with any Person,
such Person's Investments in:
(a) Government Securities due within one year after the
date of the making of the Investment;
(b) certificates of deposit issued by, bank deposits in,
bankers' acceptances of, and repurchase agreements covering
Government Securities executed by, any bank doing business in and
incorporated under the Laws of the United States of America or any
state thereof and having on the date of such Investment combined
capital, surplus and undivided profits of at least $100,000,000, in
each case due within one year after the date of the making of the
Investment; and/or
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<PAGE> 9
(c) readily marketable commercial paper of corporations
doing business in and incorporated under the Laws of the United
States of America or any state thereof given on the date of such
Investment the highest credit rating by NCO/Moody's Commercial Paper
Division of Moody's Investors Service, Inc. or Standard & Poor's
Corporation, in each case due within six months after the date of
the making of the Investment.
"Certificate of a Responsible Official" means a certificate signed
by a Responsible Official of the Person providing the certificate.
"Closing Date" means the Banking Day on which the consummation of
all of the transactions contemplated in Section 8.1 occurs.
"Club" means a health and fitness facility operated by any Borrower.
"Collateral" means, collectively, all Property on or in which Bank
has a Lien pursuant to this Agreement or any other Loan Document.
"Commitment" means, collectively, the Line A Commitment, the Line B
Term Commitment and the Line B Non-Revolving Commitment as may be reduced
under this Agreement.
"Davis Payments" means payments made by MKDG/Rhodes SC Partnership
in connection with the minimum cash flow generated by Irvine Sports Club,
Inc. pursuant to (i) that certain Agreement for Purchase and Sale dated as
of November 19, 1993 between MKDG/Rhodes SC Partnership and Rex Licklider
and (ii) that certain Assignment of Contract Rights made by Rex Licklider to
Parent dated as of October 11, 1994.
"Default" means any Event of Default and/or any event that, with the
giving of notice or passage of time or both, would be an Event of Default.
"Default Rate" means the rate of interest per annum otherwise
provided under this Agreement plus two percent (2%).
"Designated Deposit Account" means deposit account no. 01800220570
to be maintained by Borrowers with Bank at Bank's Office, or such other
deposit account as from time to time designated by Borrower by written
notification to Bank.
"Designated Eurodollar Market" means, with respect to any Eurodollar
Loan, the London Eurodollar Market, or such other Eurodollar Market as may
from time to time be designated by Bank.
"dollars" or "$" means United States dollars.
"EBITDA" means, for any fiscal period, (a) the consolidated net
income before extraordinary items of Borrowers and their Subsidiaries for
that period, determined in
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<PAGE> 10
accordance with generally accepted accounting principles, consistently
applied, plus (b) consolidated interest expense for that period, plus (c)
income tax expense for that fiscal period, plus (d) depreciation expense for
that fiscal period plus (e) amortization expense for that fiscal period.
"ERISA" means the Employee Retirement Income Security Act of 1974,
and any regulations issued pursuant thereto, as amended or replaced and as
in effect from time to time.
"Eurodollar Banking Day" means any Banking Day on which dealings in
dollar deposits are conducted by and between banks in the Designated
Eurodollar Market.
"Eurodollar Lending Office" means Bank's office or branch in the
United States so designated by written notice to Borrowers as its Eurodollar
Lending Office. If no Eurodollar Lending Office separately is designated by
Bank, its Eurodollar Lending Office shall be Bank's Office.
"Eurodollar Loan" means a Loan made hereunder and designated or
redesignated as a Eurodollar Loan in accordance with Article 2.
"Eurodollar Market" means a regular established market located
outside the United States of America by and among banks for Eurodollar
Obligations.
"Eurodollar Obligations" means eurocurrency liabilities, as defined
in Regulation D.
"Eurodollar Period" means, as to each Eurodollar Loan, the period
commencing on the date specified by Borrowers pursuant to Sections 2.1(b) or
2.4(c) and ending 30, 60 or 90 days thereafter, as specified by Borrower in
the applicable Request for Loan or Request for Redesignation of Loans,
provided that:
(a) The first day of any Eurodollar Period shall be a
Eurodollar Banking Day;
(b) Any Eurodollar Period that would otherwise end on a
day that is not a Eurodollar Banking Day shall be extended to the
next succeeding Eurodollar Banking Day unless such Eurodollar
Banking Day falls in another calendar month, in which case such
Eurodollar Period shall end on the next preceding Eurodollar Banking
Day; and
(c) No Eurodollar Period shall extend beyond the
Maturity Date.
"Eurodollar Rate" means, with respect to any Eurodollar Loan, (a)
the LIBOR Rate offered for deposits as of about 10:00 a.m., Los Angeles
time, two (2) Eurodollar Banking Days before the first day of the applicable
Eurodollar Period in an aggregate amount approximately equal to the amount
of such Eurodollar Loan and for a period of time comparable to the number of
days in the applicable Eurodollar Period divided by (b) 1.00
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<PAGE> 11
minus the Reserve Percentage. The determination of the Eurodollar Rate by
Bank shall be conclusive in the absence of manifest error.
"Eurodollar Rate Spread" means the additional component of interest,
expressed as a percentage per annum, to be added to the Eurodollar Rate in
determining the applicable rate of interest for Eurodollar Loans, determined
as follows:
(a) with respect to any Line A Loan, two and one-half
percent (2.5%);
(b) with respect to any Line B Loan, during the Line B
Availability Period, two and three-quarter percent (2.75%); or
(c) with respect to any Line B Term Loan, three percent
(3%).
"Event of Default" shall have the meaning provided in Section 9.1.
"Government Securities" means readily marketable direct obligations
of the United States of America or obligations fully guarantied by the
United States of America.
"Governmental Agency" means (a) any international, foreign, federal,
state, county or municipal government, or political subdivision thereof, (b)
any governmental or quasi-governmental agency, authority, board, bureau,
commission, department, instrumentality or public body, (c) any court,
administrative tribunal or public utility, or (d) any arbitration tribunal
or other non-governmental authority to whose jurisdiction a Person has
consented.
"Investment" means, when used in connection with any Person, any
investment by or of that Person, whether by means of purchase or other
acquisition of stock or other securities or by means of loan, advance,
capital contribution, guaranty or other debt or equity participation or
interest in any other Person, or otherwise, and includes, without
limitation, any partnership and joint venture interests of such Person.
"Laws" means, collectively, all international, foreign, federal,
state and local statutes, treaties, rules, regulations, ordinances, codes
and administrative or judicial precedents.
"LIBOR Rate" means the interest (rounded upward to the nearest
1/16th of one percent) as determined by the British Bankers Association and
disseminated daily as an average of the rate at which certain major banks
would offer U.S. dollar deposits for the applicable Eurodollar Period to
other major banks in the London inter-bank market.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
security interest, encumbrance, lien or charge of any kind, whether
voluntarily incurred or arising by operation of Law or otherwise, affecting
any Property, including any agreement to give any of the foregoing, any
conditional sale or other title retention agreement, any lease in the nature
thereof, and/or the filing of or agreement to give any financing statement
under the Uniform Commercial Code or comparable Law of any jurisdiction.
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<PAGE> 12
"Line A Loan" means any advance made by Bank under the Line A
Commitment.
"Line A Availability" means, as of each date of determination, the
difference between (a) the Line A Commitment and (b) the sum of the
aggregate outstanding principal indebtedness evidenced by the Line A Note
plus the Line A Letter of Credit Usage.
"Line A Commitment" means the commitment by Bank to make revolving
loans to Borrower in an aggregate principal amount (plus any outstanding
Standby Letters of Credit), not to exceed $3,000,000, as may be reduced
pursuant to Section 2.7.
"Line A Letter of Credit Usage" means, at any date of determination,
the sum of (i) the maximum aggregate amount that is or at any time
thereafter may become available for drawing or payment under issued and
outstanding Standby Letters of Credit issued pursuant to the Line A
Commitment, plus (ii) the aggregate amount of all drawings honored or
payments made by Bank under such Standby Letters of Credit and not yet
reimbursed by Borrowers.
"Line A Maturity Date" means, subject to the renewal or extension
provisions of Section 2.1(a), March 31, 1999.
"Line B Availability" means the Line B Commitment minus the
aggregate amount of all Line B Loans made by the Bank.
"Line B Availability Period" means the period between the Closing
Date and the Line B Conversion Date.
"Line B Commitment" means the commitment by Bank to make
non-revolving Loans, convertible to the Line B Term Loan on the Line B
Conversion Date, in an aggregate principal amount not to exceed $2,000,000.
"Line B Conversion Date" means March 31, 1998.
"Line B Loan" means any advances made by Bank to Borrower pursuant
to Section 2.2 on or before the Line B Conversion Date.
"Line B Maturity Date" means the last day of the thirty-sixth (36th)
month after the Line B Conversion Date, subject to the acceleration
provisions of Section 2.1(a).
"Line B Term Loan" means the Loan made by Bank on the Line B
Conversion Date by converting outstanding Loans under the Line B Commitment
into a term loan as provided in Section 2.5(c).
"Loan" or "Loans" means the advances to be made by Bank to Borrowers
pursuant to this Agreement. Each individual Loan shall consist of advances
made by Bank pursuant to Article 2, including advances made as new advances,
and also including advances made
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<PAGE> 13
by converting or redesignating existing advances in accordance with the
provisions of Article 2.
"Loan Documents" means, collectively, this Agreement, the Notes, the
Pledge Agreement, the Pledge Agreement (Partnership), the Standby Letters of
Credit, any assignments, any financing statements and any other
certificates, documents or agreements of any type of nature heretofore or
hereafter executed or delivered by Borrowers and/or any one or more of their
Subsidiaries or Affiliates to Bank in any way relating to or in furtherance
of this Agreement, in each case either as originally executed or as the same
may from time to time be supplemented, modified, amended, restated or
extended.
"Maturity Date" means the Line A Maturity Date or the Line B Maturity
Date, as applicable.
"Maximum Loan Amount" means, as of any date of determination
thereof, the Line A Commitment minus Outstanding Standby Letters of Credit.
"Maximum Standby Letter of Credit Amount" means $1,000,000.
"Multiemployer Plan" means any employee benefit plan of the type
described in Section 4001(a)(3) of ERISA.
"Non-Borrower Affiliate" means any Affiliate of a Borrower, now
existing or hereafter acquired, that is not a Borrower hereunder.
"Note" means any of the promissory notes executed by Borrowers in
favor of Bank, evidencing the Loans made by Bank under the Commitment,
substantially in the form of Exhibit(s) A-1, A-2 and A-3 hereto, either as
originally executed or as the same may from time to time be supplemented,
modified, amended, renewed, extended or refinanced. When the term "Note" is
modified by the terms "Line A", "Line B" or "Line B Term", it refers to the
Note executed to evidence Loans under the Commitment so designated.
"Obligations" means all present and/or future obligations of every
kind or nature of Borrowers or any Party at any time and/or from time to
time owed to Bank, under any one or more of the Loan Documents, whether due
or to become due, matured or unmatured, liquidated or unliquidated, or
contingent or noncontingent, including obligations of performance as well as
obligations of payment, and including interest that accrues after the
commencement of any bankruptcy or insolvency proceeding by or against any
Borrower or any Party.
"Opinion of Counsel" means the favorable written legal opinion of
Kinsella, Boesch, Fujikawa and Towle, as counsel to Borrowers and their
Subsidiaries, substantially in the form of Exhibit B, together with copies
of all factual certificates and legal opinions upon which such counsel has
relied.
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<PAGE> 14
"Outstanding Standby Letters of Credit" means, as of any date of
determination thereof, the aggregate face amount of all Standby Letters of
Credit outstanding on such date minus the aggregate amount, if any, paid in
Cash by Bank under such Standby Letters of Credit that has been reimbursed
by Borrowers.
"Parent" means The Sports Club Company, Inc., a Delaware
corporation.
"Party" means any Person (including Borrowers and/or any
Subsidiaries or Affiliates of Borrowers), which now or hereafter is a party
to any of the Loan Documents.
"PBGC" means the Pension Benefit Guaranty Corporation or any
successor thereof established under ERISA.
"Person" means any entity, whether an individual, trustee,
corporation, general partnership, limited partnership, limited liability
company, joint stock company, trust, unincorporated organization, bank,
business association, firm, joint venture, Governmental Agency, or
otherwise.
"Plan" means any employee benefit plan subject to ERISA and
maintained by Borrowers and/or any Subsidiary thereof or to which Borrowers
and/or any Subsidiary thereof are required to contribute on behalf of their
employees.
"Pledge Agreement" means that pledge agreement to be executed and
delivered by The Sports Club Company, Inc. and Sports Club, Inc. of
California, to Bank, in the form of Exhibit C, either as originally executed
or as it may from time to time be supplemented, modified, amended, restated
or extended.
"Pledge Agreement (Partnership)" means the pledge agreement to be
executed and delivered by one or more Borrowers, as applicable, to Bank,
substantially in the form of Exhibit G, either as originally executed or as
it may from time to time be supplemented, modified, amended, restated or
extended.
"Prime Rate" means the floating commercial loan rate of Bank,
announced from time to time as its "prime rate", which interest rate may not
necessarily be the lowest interest rate at which Bank is willing to extend
credit facilities.
"Prime Rate Loan" means a Loan made under the Line A Commitment or
Line B Commitment and designated or redesignated as a Prime Rate Loan in
accordance with Article 2, or converted to a Prime Rate Loan in accordance
with Section 3.3(a).
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<PAGE> 15
"Prime Rate Spread" means the additional component of interest,
expressed as a percentage per annum, to be added to the Prime Rate in
determining the applicable rate of interest for Prime Rate Loans, determined
as follows:
(a) with respect to any Line A Loan, one-half of one
percent (.5%);
(b) with respect to any Line B Loan, during the Line B
Availability Period, three-quarters of one percent (.75%);
(c) with respect to any Line B Term Loan, one percent
(1.0%).
"Property" means any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Qualified Stock Repurchase" means the common stock repurchase
program instituted in February, 1997; provided that the aggregate amount
expended in repurchasing common stock of the Parent shall not exceed
$3,000,000.
"Regulations G,T,U and X " means Regulation G,T,U, and X as at any
time amended, of the Board of Governors of the Federal Reserve System, or
any other regulation in substance substituted therefor.
"Request for Standby Letter of Credit" means a written request for
the issuance of a Letter of Credit substantially in the form of Exhibit D,
signed by a Responsible Official of a Borrower and properly completed to
provide all information required to be included therein.
"Request for Loan" means a written request for a Loan substantially
in the form of Exhibit E, signed by a Responsible Official of a Borrower and
properly completed to provide all information required to be included
therein.
"Request for Redesignation of Loans" means a written request for
redesignation of Loans substantially in the form of Exhibit F, signed by a
Responsible Official of a Borrower and properly completed to provide all
information required to be included therein.
"Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member banks of
the Federal Reserve System for eurocurrency liabilities, as defined in
Regulation D, rounded upward to the nearest 1/100th of one percent. The
percentage will be expressed as a decimal, and will include, without
limitation, marginal, emergency, supplemental, special, and other reserve
percentages.
"Responsible Official" means:
(a) When used with reference to any Person, other than
an individual, any corporate officer of such Person, general partner
of such Person, corporate
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<PAGE> 16
officer of a corporate general partner of such Person, or corporate
officer of a corporate general partner of a partnership that is a
general partner of such Person, or any other responsible official
thereof duly acting on behalf thereof; and
(b) When used with reference to a Person who is an
individual, such Person.
Except as otherwise specifically provided herein, any requirement that any
document or certificate be signed or executed by any Person requires that
such document or certificate be signed or executed by a Responsible Official
of such Person, and that the Responsible Official signing or executing such
document or certificate on behalf of such Person shall be authorized to do
so by all necessary corporate, partnership and/or other action.
"Right of Others" means, as to any Property in which a Person has an
interest, any legal or equitable claim, right, title or other interest
(other than a Lien) in or with respect to that Property held by any other
Person, and any option or right held by any other Person to acquire any such
claim, right, title or other interest, including any option or right to
acquire a Lien.
"Special Eurodollar Circumstance" means the application or adoption
of any Law or interpretation, or any change therein or thereof, or any
change in the interpretation or administration thereof by any Governmental
Agency, central bank or comparable authority charged with the interpretation
or administration thereof, or compliance by Bank or its Eurodollar Lending
Office with any request or directive (whether or not having the force of
Law) of any such Governmental Agency, central bank or comparable authority,
or the existence or occurrence of circumstances affecting the Designated
Eurodollar Market generally, in each case, that are beyond the reasonable
control of Bank.
"Special Deposit Account Agreement" means the deposit account
agreement to be executed and delivered by L.A./Irvine Sports Clubs, Ltd., by
and between L.A./Irvine Sports Clubs, Ltd., AT&T Commercial and Bank in the
form acceptable to Bank, either as originally executed or as it may from
time to time be supplemented, modified, amended, restated or extended.
"Standby Letter of Credit" means any standby letter of credit issued
by Bank pursuant to Section 2.7, in the standard form for standby letters of
credit of Bank, either as originally issued or as the same may from time to
time be supplemented, modified, amended, renewed or extended.
"Subordination Agreement" means the subordination agreement between
Bank and AT&T Commercial, dated as of even date herewith.
"Subsidiary" means, as of any date of determination thereof and with
respect to any Person, any corporation, limited liability company,
partnership or joint venture, whether now existing or hereafter organized or
acquired: (a) in the case of a corporation, of which a majority of the
securities having ordinary voting power for the election of directors or
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<PAGE> 17
other governing body (other than securities having such power only by reason
of the happening of a contingency) are at the time owned by such Person
and/or one or more Subsidiaries of such Person, or (b) in the case of a
partnership, joint venture or limited liability company, of which such Person
or a Subsidiary of such Person is a general partner or joint venturer or of
which a majority of the partnership or other ownership interests are at the
time owned by such Person and/or one or more of its Subsidiaries.
"Tangible Net Worth" means, as of any date of determination thereof,
the consolidated net worth of Borrowers, excluding goodwill, patents,
trademarks, trade names, organization expenses, capitalized acquisition
expenses, deferred tax assets and money due from any Affiliate, officers,
directors or shareholders of Borrowers or their Subsidiaries, determined in
accordance with generally accepted accounting principles, consistently
applied.
"The Sports Club/Irvine" means the athletic club owned by Irvine
Sports Club, Inc.. located at 198 Main Street, Irvine, California.
"The Sports Club/LA" means the athletic club owned by L.A./Irvine
Sports Clubs, Ltd. located at 1835 Sepulveda Boulevard, West Los Angeles,
California.
"to the best knowledge of" means, when modifying a representation,
warranty or other statement of any Person, that the fact or situation
described therein is known by the Person (or, in the case of a Person other
than a natural Person, known by a Responsible Official of that Person)
making the representation, warranty or other statement, or with the exercise
of reasonable due diligence under the circumstances (in accordance with the
standard of what a reasonable Person in similar circumstances would have
done) should have been known by the Person (or, in the case of a Person
other than a natural Person, should have been known by a Responsible
Official of that Person).
"Total Unsubordinated Liabilities" means, as of any date of
determination thereof, the sum of (a) all liabilities that should be
reflected as a liability in a consolidated balance sheet of Borrowers and
its Subsidiaries on such date prepared in accordance with generally accepted
accounting principles, consistently applied, minus (b) Subordinated Debt,
plus (c) the aggregate face amount of all outstanding Standby Letters of
Credit and other standby letters of credit issued at the request of
Borrowers; provided, however, that any amount described in clause (c) shall
be added only to the extent that the Standby Letter of Credit or other
standby letter of credit covers liabilities that would not be reflected in a
consolidated balance sheet of Borrowers and its Subsidiaries on such date.
"Total Outstanding" means, as of any date of determination thereof,
the sum of (a) all outstanding Line A Loans evidenced by the Line A Note on
that date and (b) Outstanding Standby Letters of Credit.
"type", when used with respect to any Loan, means the designation of
whether such Loan is a Prime Rate Loan or a Eurodollar Loan.
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<PAGE> 18
1.2 Use of Defined Terms. Any defined term used in the plural
shall refer to all members of the relevant class, and any defined term used in
the singular shall refer to any one or more of the members of the relevant
class.
1.3 Accounting Terms. All accounting terms not specifically
defined in this Agreement shall be construed in conformity with, and all
financial data required to be submitted by this Agreement shall be prepared in
conformity with, generally accepted accounting principles applied on a
consistent basis, as in effect on the date hereof, except as otherwise
specifically prescribed herein.
1.4 Exhibits and Schedules. All exhibits and schedules to this
Agreement, either as originally existing or as the same may from time to time
be supplemented, modified or amended, are incorporated herein by this
reference.
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<PAGE> 19
ARTICLE 2
LOANS AND LETTERS OF CREDIT
2.1 General Provisions Regarding Line A Loans and Borrowing
Procedures.
(a) Subject to the terms and conditions set forth in
this Agreement, at any time and from time to time from the Closing Date
through the Banking Day immediately preceding the Line A Maturity Date, Bank
shall make Line A Loans to Borrowers in such amounts as Borrowers may
request that do not exceed in the aggregate at any one time outstanding the
amount of the then applicable Line A Commitment; provided that, Bank shall
not be obligated to make a Line A Loan if, after giving effect to all Line A
Loans to be made by Bank, Total Outstanding would exceed the Line A
Commitment. The Line A Commitment shall be for an initial term from the
Closing Date to the Line A Maturity Date and shall terminate unless (i)
Borrowers deliver to Bank at least 120 days' written request for extension
or renewal, (ii) no Event of Default or any event which with the giving of
notice or passing of time or both would constitute an Event of Default
exists, (iii) Borrowers shall provide to Bank such information and
documentation as Bank in its sole discretion requests, and (iv) Bank, in its
sole discretion, consents to an extension or renewal for successive one year
periods or longer. In the event Bank does not agree to continue to make
advances and extend or renew the Line A Commitment for an additional period,
(i) Bank shall notify Borrowers of its decision with respect to any request
for extension or renewal, as the case may be, within sixty (60) days of
receipt by Bank of such request (failure to provide such notice shall be
deemed a denial of such request) and (ii) all Obligations of Borrowers shall
be due and payable on the Line A Maturity Date, provided, however, that so
long as no Event of Default or any event which with the giving of notice or
passing of time or both would constitute an Event of Default exists, the
Obligations of Borrowers under the Line B Note or the Line B Term Note, as
the case may be, shall be payable on the Line B Maturity Date. Borrowers
shall have the right to terminate the Line A Commitment on the Line A
Maturity Date or on the anniversary thereof by giving the Bank at least
sixty (60) days' prior written notice of such termination, and upon any such
termination at Borrowers' election or request, all Obligations of Borrowers
hereunder shall be due and payable on the Line A Maturity Date. Subject to
the limitations set forth herein and in Section 3.1(e), Borrowers may
borrow, repay and reborrow under the Line A Commitment without premium or
penalty.
(b) Except as otherwise provided in Section 2.6(d), each
Line A Loan shall be made pursuant to a written Request for Loan. Not later
than 11:00 a.m., Los Angeles time, on the Banking Day that a proposed Loan
is to be made (unless greater notice is required by Section 2.4), Bank shall
have received, at Bank's Office, a properly completed Request for Loan
specifying the requested (1) date of such Loan, (2) type of Loan, (3) amount
of such Loan, and (4) in the case of a Eurodollar Loan, specifying the
Eurodollar Period. Bank may, in its sole and absolute discretion, permit
any Request for Loan to be made by telephone or telecopier by a Responsible
Official of a Borrower, in which case such Borrower shall confirm same by
mailing or faxing a written Request for Loan to Bank within 48 hours
following the Loan. If Borrowers fail to make a written
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Request for Loan, Borrowers hereby waive the right to dispute the amount,
interest rate or term of any such Loan made upon such telephone request.
(c) Upon fulfillment of the applicable conditions set
forth in Article 8, all Line A Loans shall be credited in immediately
available funds to Borrower's Designated Deposit Account, or to such other
deposit account of Borrower with Bank as Borrower may specify in writing to
Bank.
(d) The aggregate amount of each Eurodollar Loan shall
be in an integral multiple of $250,000, and the aggregate amount of each
Prime Rate Loan shall be in an integral multiple of $100,000 or the balance
of the Line A Availability.
(e) Except as otherwise provided in Sections 2.6(e), the
amount of each Line A Loan may not be more than the Line A Availability.
(f) The Line A Loans made by Bank shall be evidenced by
the Line A Note.
(g) A Request for Loan shall be irrevocable upon receipt
by Bank.
2.2 The Line B Loan and the Line B Term Loan.
(a) During the Line B Availability Period, and subject
to the applicable conditions set forth in Article 8 hereof, Bank will, on a
non-revolving basis, make Advances to Borrowers, which may not at any time
exceed the Line B Commitment. This is a Non-Revolving Line of Credit with a
term repayment option. Any amount borrowed, even if repaid before the end
of the Line B Availability Period, permanently reduces the Line B
Availability and such amounts may not be reborrowed, provided that the
renewal of a Line B Loan or a Line B Term Loan shall not be considered to be
a borrowing for this purpose.
(b) Each Line B Loan shall be used solely to fund new
Club developments or acquisitions. Each Line B Loan shall be in an integral
multiple of $250,000, or for the remaining Line B Availability, if less.
(c) Subject to the applicable conditions set forth in
Article 8 hereof, Bank hereby agrees, on the Line B Conversion Date, to
convert the outstanding Line B Loans hereunder into a Line B Term Loan, as
more particularly provided hereafter. On the Line B Conversion Date,
Borrowers shall execute and deliver to Bank a Line B Term Note payable to
Bank or its order in a principal amount equal to the outstanding principal
amount of Line B Loans under the Line B Note, which Line B Term Note shall
be delivered in exchange for the cancellation and surrender to Borrowers of
such Line B Note, provided that Bank shall not be required to accept the
Line B Term Note or to cancel and surrender the Line B Note except upon
satisfaction of the applicable conditions set forth in Article 8.
(d) Each Line B Loan and each renewal of a Line B Loan
or a Line B Term Loan shall be made pursuant to a written Request for Loan.
Not later than
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11:00 a.m., Los Angeles time, on the Banking Day that a proposed Loan is to
be made (unless greater notice is required by Section 2.4), Bank shall have
received, at Bank's Office, a properly completed Request for Loan specifying
the requested (1) date of such Loan, (2) type of Loan, (3) amount of such
Loan, and (4) in the case of a Eurodollar Loan, specifying the Eurodollar
Period. Bank may, in its sole and absolute discretion, permit any Request
for Loan to be made by telephone or telecopier by a Responsible Official of
a Borrower, in which case such Borrower shall confirm same by mailing or
faxing a written Request for Loan to Bank within 48 hours following the
Loan. If Borrowers fail to make a written Request for Loan, Borrowers
hereby waive the right to dispute the amount, interest rate or term of any
such Loan made upon such telephone request.
(e) Upon fulfillment of the applicable conditions set
forth in Article 8, all Line B Loans shall be credited in immediately
available funds to Borrower's Designated Deposit Account, or to such other
deposit account of Borrower with Bank as Borrower may specify in writing to
Bank.
(f) The aggregate amount of each Eurodollar Loan shall
be in an integral multiple of $250,000, and the aggregate amount of each
Prime Rate Loan shall be in an integral multiple of $100,000.
(g) The Line B Loans made by Bank shall be evidenced by
the Line B Note.
(h) A Request for Loan shall be irrevocable upon receipt
by Bank.
2.3 Prime Rate Loans. All Loans shall constitute Prime Rate Loans
unless properly designated or redesignated as Eurodollar Loans pursuant to
Sections 2.4 or 2.5.
2.4 Eurodollar Loans.
(a) Subject to the terms and conditions set forth in this
Agreement, Borrowers may, from time to time, designate the Line B Term Loan
or all or any portion of Line A Loans or Line B Loans to be Eurodollar Loans.
(b) Each request by Borrower for a Eurodollar Loan shall
be made pursuant to a Request for Loan received by Bank, at Bank's Office,
not later than 12:00 noon, Los Angeles time, at least three (3) Eurodollar
Banking Days before the first day of the applicable Eurodollar Period.
(c) At or about 10:00 a.m., Los Angeles time, two (2)
Eurodollar Banking Days before the first day of the applicable Eurodollar
Period, Bank shall determine the applicable Eurodollar Rate (which
determination shall be conclusive in the absence of manifest error) and
promptly shall give notice of the same to Borrowers by telephone or
telecopier.
(d) Upon fulfillment of the applicable conditions set
forth in Article 8, a Eurodollar Loan shall become effective on the first
day of the applicable Eurodollar Period.
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(e) Unless Bank otherwise consents, no more than six (6)
Eurodollar Loans, in the aggregate, shall be outstanding at any one time.
(f) Nothing contained herein shall require Bank to fund
any Eurodollar Loan in the Designated Eurodollar Market.
2.5 Redesignation of Loans.
(a) Subject to Section 8.3, if any Eurodollar Loan is
not repaid or, in the case of a Line B Loan or a Line B Term Loan, renewed
on the last day of the applicable Eurodollar Period, such Eurodollar Loan
automatically shall be redesignated as a Prime Rate Loan on such date.
(b) Subject to the terms and conditions set forth in
this Agreement, at any time and from time to time from the Closing Date
until the thirty-second day preceding the Line A Maturity Date, Borrowers
may request that all or a portion of outstanding Prime Rate Loans be
redesignated as a Eurodollar Loan or that a maturing Eurodollar Loan be
redesignated as a new Eurodollar Loan, provided that no Loan redesignated as
a Eurodollar Loan shall have a Eurodollar Period expiring after the Maturity
Date.
(c) Each redesignation of all or a portion of
outstanding Prime Rate Loans or to renew a maturing Eurodollar Loan as a
Eurodollar Loan shall be made pursuant to a written Request for
Redesignation of Loans. Not later than 12:00 noon, Los Angeles time, at
least two (2) Eurodollar Banking Days prior to the first day of the
applicable Eurodollar Period, Bank shall have received, at Bank's Office, a
properly completed Request for Redesignation of Loans specifying the
requested (1) date of redesignation and (2) amount of Loans to be
redesignated as a Eurodollar Loan, and (3) the applicable Eurodollar Period.
Bank may, in its sole and absolute discretion, permit a Request for
Redesignation of Loans to be made by telephone by a Responsible Official of
a Borrower, in which case such Borrower shall confirm same by mailing or
faxing a written Request for Redesignation of Loans to Bank within 48 hours
following the date of redesignation. If Borrowers fail to make a written
Request for Redesignation of Loans, Borrowers hereby waive the right to
dispute the amount, interest rate or term of any such Eurodollar Loan.
(d) Unless Bank otherwise consents, the amount of Loans
to be redesignated as a Eurodollar Loan shall be an integral multiple of
$250,000.
(e) With respect to any redesignation of a Loan as a
Eurodollar Loan, at or about 10:00 a.m., Los Angeles time, two (2)
Eurodollar Banking Days before the first day of the applicable Eurodollar
Period, Bank shall determine the applicable Eurodollar Rate (which
determination shall be conclusive in the absence of manifest error) and
promptly shall give notice of the same to Borrower by telephone or
telecopier.
(f) Upon fulfillment of the applicable conditions set
forth in Article 8, the redesignation of all or a portion of outstanding
Loans as a Eurodollar Loan shall become effective on the first day of the
applicable Eurodollar Period.
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(g) Nothing contained herein shall require Bank to fund
any Eurodollar Loan resulting from redesignation of all or a portion of any
of its Prime Rate Loans, in the Designated Eurodollar Market.
(h) A request for Redesignation of Loans shall be
irrevocable upon receipt by Bank.
2.6 Standby Letters of Credit.
(a) Subject to the terms and conditions hereof, at any
time and from time to time from the Closing Date through the Banking Day
immediately preceding the Line A Maturity Date, Bank shall issue such
Standby Letters of Credit as a Borrower may request by a Request for Standby
Letter of Credit; provided that, upon giving effect to such Standby Letter
of Credit, (i) Total Outstanding shall not exceed the Line A Commitment, and
(ii) Outstanding Standby Letters of Credit shall not exceed the Maximum
Standby Letter of Credit Amount. Unless Bank otherwise consents in writing,
the term of any Standby Letter of Credit shall not exceed twelve (12)
months. If on the Line A Maturity Date, there exist any Outstanding Standby
Letters of Credit, Borrowers shall provide to Bank a standby letter of
credit issued by a bank satisfactory to Bank, in form and substance
satisfactory to Bank, in favor of Bank in a face amount equal to Outstanding
Standby Letters of Credit on that date, or shall make other provisions
satisfactory to Bank for the collateralization or settlement of such
Outstanding Standby Letters of Credit. No Standby Letter of Credit shall be
issued except in the ordinary course of business of Borrowers or their
Subsidiaries. Unless otherwise agreed to by Bank, the face amount of any
Standby Letter of Credit shall not be less than $250,000.
(b) Each Request for Standby Letter of Credit shall be
submitted to Bank not later than 11:00 a.m., Los Angeles time, at least two
(2) Banking Days prior to the date upon which the requested Standby Letter
of Credit is to be issued and Borrowers shall execute such documents and
agreements relating to such Standby Letter of Credit as Bank may reasonably
require.
(c) Borrowers agree to pay to Bank, at Bank's Office, or
at such other payment location as Bank shall have specified in writing to
Borrowers, with respect to each Standby Letter of Credit, within one (1)
Banking Day after demand therefor, a principal amount equal to any payment
made by Bank under that Standby Letter of Credit, together with interest on
such amount from the date of any payment made by Bank through the date of
payment by Borrowers at the rate provided for in Section 3.6. The principal
amount of any such payment made by Borrowers to Bank shall be used to
reimburse Bank for the payment made by it under the Standby Letter of
Credit.
(d) At all times prior to the Line A Maturity Date, if
Borrowers fail to make any payment required by Section 2.6(c), Bank may, but
is not required to, without notice to or the consent of Borrowers, make Line
A Loans under the Commitment in an aggregate amount equal to the amount paid
by Bank on the relevant Standby Letter of
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<PAGE> 24
Credit, whether or not the same would cause Total Outstanding to exceed the
Line A Commitment, and, for this purpose, the conditions precedent set forth
in Article 8 and the amount limitations set forth in Section 2.1(d) shall
not apply. The proceeds of such Line A Loans shall be retained by Bank to
reimburse it for the payment made by it under the Standby Letter of Credit.
(e) The issuance of any supplement, modification,
amendment, renewal or extension to or of any Standby Letter of Credit shall
be treated in all respects the same as the issuance of a new Standby Letter
of Credit.
(f) The obligation of Borrowers to pay to Bank the
amount of any payment made by Bank under any Standby Letter of Credit shall
be absolute, unconditional and irrevocable. Without limiting the foregoing,
such obligation of Borrowers shall not be affected by any of the following
circumstances absent Bank's gross negligence or willful misconduct:
(i) any lack of validity or
enforceability of the Standby Letter of Credit, this Agreement, or
any other agreement or instrument relating thereto;
(ii) any amendment or waiver of or any
consent to departure from the Standby Letter of Credit, this
Agreement, or any other agreement or instrument relating thereto;
(iii) the existence of any claim, setoff,
defense or other rights which Borrowers may have at any time against
Bank, any beneficiary of the Standby Letter of Credit (or any
Persons or entities for whom any such beneficiary may be acting) or
any other Person, whether in connection with the Standby Letter of
Credit, this Agreement or any other agreement or instrument relating
thereto, or any unrelated transactions;
(iv) any demand, statement or any other
document presented under the Standby Letter of Credit proving to be
forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect
whatsoever;
(v) payment by Bank under the Standby
Letter of Credit against presentation of a draft or any accompanying
document which does not strictly comply with the terms of the
Standby Letter of Credit;
(vi) the solvency (or insolvency) or
financial responsibility (or lack thereof) of any party issuing any
documents in connection with a Standby Letter of Credit;
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(vii) any error in the transmission of
any message relating to a Standby Letter of Credit, or any delay or
interruption in any such message not caused by Bank; and/or
(viii) any error, neglect or default of
any correspondent of Bank in connection with a Standby Letter of
Credit.
2.7 Reduction of the Commitment. Borrowers shall have the right,
at any time and from time to time prior to the Line A Maturity Date, without
penalty or charge, upon at least five (5) Banking Days prior written notice to
Bank, voluntarily to reduce, permanently and irrevocably, in aggregate
principal amounts of an integral multiple of $250,000, or to terminate, the
then undisbursed portion of the Commitment, provided that any such reduction or
termination shall be accompanied by all accrued and unpaid commitment fees with
respect to the portion of the Commitment being reduced or terminated, and
provided further that the Commitment shall not be reduced to an amount less
than the amount of Total Outstanding.
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ARTICLE 3
PAYMENTS AND FEES
3.1 Principal and Interest.
(a) Interest shall be payable on the outstanding daily
unpaid principal amount of each Loan from the date thereof until payment in
full is made and shall accrue and be payable at the rates set forth herein
both before and after default and before and after maturity and judgment,
with interest on overdue interest to bear interest at the rate set forth in
Section 3.6, to the fullest extent permitted by applicable Law. Upon any
partial prepayment or redesignation of outstanding Prime Rate Loans to
Eurodollar Loans, interest accrued through the date of such prepayment or
redesignation shall be payable on the next following interest payment date
occurring pursuant to Section 3.1(b). Upon any partial prepayment or
payment in full or redesignation or conversion of any Eurodollar Loan, upon
any payment or redesignation in full of all outstanding Prime Rate Loans,
and upon conversion of the Line B Note pursuant to Section 2.2, interest
accrued through the date of such prepayment, payment, redesignation or
conversion shall be payable on such date.
(b) Interest accrued on each Prime Rate Loan shall be
payable on the first day of each month, commencing with the first such date
to occur after the Closing Date. Bank shall use its best efforts to notify
Borrowers of the amount of interest so payable prior to each interest
payment date, but failure of Bank to do so shall not excuse payment of such
interest when payable. Except as otherwise provided in Section 3.6, the
unpaid principal amount of any Prime Rate Loan shall bear interest at a
fluctuating rate per annum equal to the Prime Rate plus the applicable Prime
Rate Spread. Each change in the interest rate shall take effect
simultaneously with the corresponding change in the Prime Rate and/or the
Prime Rate Spread. Each change in the Prime Rate shall be effective as of
12:01 a.m. on the Banking Day on which the change in the Prime Rate is
announced, unless otherwise specified in such announcement, in which case
the change shall be effective as so specified.
(c) Interest accrued on each Eurodollar Loan shall be
payable on the first day of each month, commencing with the first such date
to occur after the Closing Date, and on the maturity date of that Eurodollar
Loan. Bank shall use its best efforts to notify Borrower of the amount of
interest so payable prior to each interest payment date, but failure of Bank
to do so shall not excuse payment of such interest when payable. Except as
otherwise provided in Section 3.6, the unpaid principal amount of any
Eurodollar Loan shall bear interest at a rate per annum equal to the
Eurodollar Rate for that Eurodollar Loan plus the Eurodollar Rate Spread.
(d) If not sooner paid, the principal indebtedness under
this Agreement shall be payable as follows:
(i) subject to the right to renew or
convert a Eurodollar Rate Loan to a Prime Rate Loan, the principal
amount of each Loan shall
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immediately be payable in Cash on the Maturity Date of such Loan or,
in the case of a Eurodollar Loan, on the last day of the Eurodollar
Period for such Loan;
(ii) the principal indebtedness
evidenced by the Line A Note shall be payable in Cash within two (2)
Banking Days in the amount by which the aggregate outstanding amount
of Line A Loans at any time exceeds the Line A Commitment. The
outstanding principal indebtedness evidenced by the Line A Note
shall, in any event, be payable on the Line A Maturity Date.
(iii) the principal indebtedness
evidenced by the Line B Term Note shall be payable in thirty-six
(36) equal monthly installments, on the first day of each month,
commencing on the first such date to occur after the Line B
Conversion Date. The outstanding principal indebtedness evidenced
by the Line B Note or the Line B Term Note shall, in any event, be
payable on the Line B Maturity Date.
(e) The Notes, or any of them, may, at any time and from
time to time, be paid or prepaid in whole or in part without premium or
penalty, except that (i) any partial prepayment shall be an integral
multiple of $100,000, (ii) Bank shall have received notice, by telephone or
telecopier, of any prepayment prior to 12:00 noon on the Banking Day of such
prepayment (unless greater notice is otherwise required by this Agreement),
which notice shall identify the date and amount of the prepayment and the
Loan(s) being prepaid, (iii) each prepayment of principal, except for
partial prepayments of Prime Rate Loans, shall be accompanied by payment of
interest accrued through the date of payment on the amount of principal
paid, (iv) except as required by subsections (d)(ii) above, no Eurodollar
Loan may be paid or prepaid in whole or in part prior to the last day of the
applicable Eurodollar Period without the prior consent of Bank, and,
notwithstanding such required prepayment or such consent, any payment or
prepayment of all or any part of Eurodollar Loan on a day other than the
last day of the applicable Eurodollar Period shall be made on a Eurodollar
Banking Day, as applicable, shall be preceded by at least four (4)
Eurodollar Banking Days' written notice to Bank of the date and amount of
such payment or prepayment, and shall be subject to Section 3.3(c), and (vi)
each partial prepayment of principal on the Line B Term Note shall be
applied to the installments due under such Notes in the inverse order of
their maturity, and, until all outstanding indebtedness evidenced by the
Line B Note or Line B Term Note, as applicable has been repaid in full,
shall not reduce or abate the Obligation of Borrowers to make mandatory
payments of principal on the scheduled payment dates as provided above.
3.2 Commitment Fee and Special Commitment Costs. On the Closing
Date, and on each anniversary of the Closing Date thereafter, Borrowers shall
pay to Bank a commitment fee equal to .5% of the Line A Commitment; and on the
Closing Date, Borrowers shall pay to Bank a commitment fee equal to .5% of the
Line B Commitment. Each commitment fee shall be fully earned on the Closing
Date and each anniversary of the Closing Date thereafter, as applicable.
3.3 Eurodollar Fees and Costs.
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(a) If, after the date hereof, the existence or
occurrence of any Special Eurodollar Circumstance shall, in the reasonable
discretion of Bank, make it unlawful, impossible or impracticable for Bank
or its Eurodollar Lending Office to make or maintain any Eurodollar Loan, or
materially restrict the authority of Bank to purchase or sell, or to take
deposits of, dollars in the Designated Eurodollar Market, or to determine or
charge interest rates based upon the Eurodollar Rate, then Bank's obligation
to make Eurodollar Loans shall be suspended for the duration of such
illegality, impossibility or impracticability and Bank forthwith shall give
notice thereof to Borrowers. Upon receipt of such notice, the outstanding
principal amount of Bank's Eurodollar Loans, together with accrued interest
thereon, automatically shall be converted to Prime Rate Loans on either (1)
the last day of the Eurodollar Period(s) applicable to such Eurodollar Loans
if Bank may lawfully continue to maintain and fund such Eurodollar Loans to
such day(s) or (2) immediately if Bank may not lawfully continue to fund and
maintain such Eurodollar Loans to such day(s), provided that in such event
the conversion shall not be subject to payment of a prepayment fee under
Section 3.3(c). In the event that Bank is unable, for the reasons set forth
above, to make, maintain or fund any Eurodollar Loan, Bank shall fund such
amount as a Prime Rate Loan, and such amount shall be treated in all
respects as a Prime Rate Loan.
(b) If, with respect to any proposed Eurodollar Loan:
(1) Bank reasonably determines that, by reason
of Special Eurodollar Circumstances, deposits in dollars (in the
applicable amounts) are not being offered to Bank in the Designated
Eurodollar Market for the applicable Eurodollar Period; or
(2) the Eurodollar Rate as determined by Bank
(i) does not represent the effective pricing to Bank for deposits in
dollars in the Designated Eurodollar Market in the relevant amount
for the applicable Eurodollar Period, or (ii) will not adequately
and fairly reflect the cost to Bank of making the applicable
Eurodollar Loans;
then Bank forthwith shall give notice thereof to Borrowers, whereupon until
Bank notifies Borrowers that the circumstances giving rise to such
suspension no longer exist, and the obligation of Bank to make any future
Eurodollar Loans shall be suspended.
(c) Upon payment or prepayment of any Eurodollar Loan,
or conversion of a Eurodollar Loan to a Prime Rate Advance (other than as
the result of a conversion required under Section 3.3(a)), on a day other
than the last day in the applicable Eurodollar Period (whether voluntarily,
involuntarily, by reason of acceleration, or otherwise), Borrowers shall pay
to Bank an amount equal to the accrued interest on the amount prepaid plus a
prepayment fee equal to the amount (if any) by which: (1) the additional
interest which would have been payable on the amount prepaid had it not been
paid until the last day of the Eurodollar Period, exceeds (2) the interest
which would have been recoverable by placing the amount prepaid on deposit
in the Eurodollar market for a period starting on the date on which it was
prepaid and ending on the last day of the Eurodollar Period for such
portion, plus all reasonable out-of-pocket expenses incurred by Bank and
reasonably
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attributable to such payment or prepayment; provided that no prepayment fee
shall be payable (and no credit or rebate shall be required) if the product
of the foregoing formula is not positive. Bank's determination of the
amount of any prepayment fee payable under this Section 3.3(c) shall be
conclusive in the absence of manifest error.
(d) Borrowers hereby indemnify Bank against, and agrees
to hold Bank harmless from and reimburse Bank on demand for, all reasonable
costs, expenses, claims, penalties, liabilities, losses, legal fees and
damages (including, without limitation, any interest paid by Bank for
deposits in dollars in the Designated Eurodollar Market and any loss
sustained by Bank in connection with the reemployment of funds) incurred or
sustained by Bank, as reasonably determined by Bank, as a result of any
failure of Borrowers to borrow on the date or in the amount specified in any
Request for Loan or Request for Redesignation of Loans; provided that Bank
shall not be entitled to indemnification for any loss caused by its own
gross negligence or willful misconduct. The determination of such amount by
Bank shall be conclusive in the absence of manifest error.
(e) If Bank requests any payment from Borrowers under
this Section 3.3, Bank shall, at the request of Borrowers, provide
reasonable detail to Borrowers regarding the manner in which the amount of
any such payment has been determined.
3.4 Letter of Credit Fees. Borrowers shall pay a letter of credit
fee of 1.5% of the face amount of the Standby Letter of Credit for the term of
such Standby Letter of Credit issued under Section 2.6, payable at the time of
issuance. Each Standby Letter of Credit fee is earned upon issuance of each
Standby Letter of Credit and is nonrefundable.
3.5 Unused Commitment Fee. On each March 31, June 30, September 30
and December 31, commencing with the first such date to occur after the Closing
Date, Borrowers shall pay to Bank a fee of .25% per annum on the Line A
Availability, determined by the weighted average Total Outstanding during the
fiscal quarter ended on that date. On each March 31, June 30, September 30 and
December 31 prior to the Line B Conversion Date, commencing with the first such
date to occur after the Closing Date, Borrowers shall pay to Bank a fee of .25%
per annum on the Line B Availability, determined by the weighted average
balance of the principal amount of outstanding Line B Advances during the
fiscal quarter ended on that date.
3.6 Late Payments/Default Rate.
(a) Should any installment of principal or interest or
any fee or cost or other amount payable under any Loan Document to Bank not
be paid when due, such installment shall thereafter bear interest at a
fluctuating interest rate per annum at all times equal to two percent (2.0%)
above the then prevailing applicable Prime Rate based interest rate for all
Loans made hereunder, to the fullest extent permitted by applicable Law.
Accrued and unpaid interest on past due amounts (including, without
limitation, interest on past due interest) shall be compounded quarterly, on
the last day of each calendar quarter, to the fullest extent permitted by
applicable Law.
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(b) Upon the occurrence and during the continuance of
any Event of Default, at the option of Bank, Borrowers shall pay interest on
the outstanding principal and interest at the Default Rate. This shall not
constitute a waiver of any Event of Default.
3.7 Computation of Interest and Fees. All computations of interest
and fees under any Loan Document that relate to any Prime Rate Advance or any
Eurodollar Advance shall be calculated on the basis of a year of 360 days and
the actual number of days elapsed.
3.8 Non-Banking Days. If any payment to be made by Borrowers or
any other Party under any Loan Document shall come due on a day other than a
Banking Day (and a Eurodollar Banking Day, in the case of a Eurodollar Loan),
payment shall be made on the next succeeding Banking Day (and, in the case of a
Eurodollar Loan, the next succeeding Eurodollar Banking Day that is also a
Banking Day) and the extension of time shall be reflected in computing
interest.
3.9 Manner and Treatment of Payments.
(a) Borrowers agree that interest and principal payments
and any fees will be deducted automatically on the due date from the
Designated Deposit Account, or any other accounts of Borrowers held by Bank
which contain sufficient funds. Such debits shall occur on the dates the
payments become due. If the due date does not fall on a Banking Day, Bank
will cause such debits to be made on the first Banking Day following the due
date. Borrowers shall maintain sufficient funds in the Designated Deposit
Account on the dates Bank enters debits authorized by this Agreement. If
there are insufficient funds in the Designated Deposit Account or the other
accounts of Borrowers on the date Bank enters any debit authorized by this
Agreement, Borrowers shall immediately, after notice from Bank, pay such
shortfall to Bank.
(b) Bank shall use its best efforts to keep a record of
Loans made by it and payments received by it with respect to each Note and
such record shall be presumptive evidence of the amounts owing.
(c) Each payment of any amount payable by Borrowers
and/or any other Party under this Agreement and/or any other Loan Document
shall be made free and clear of, and without reduction by reason of, any
taxes, assessments or other charges imposed by any Governmental Agency,
central bank or comparable authority.
3.10 Funding Sources. Nothing in this Agreement shall be deemed to
obligate Bank to obtain the funds for any Loan in any particular place or
manner or to constitute a representation by Bank that it has obtained or will
obtain the funds for any Loan in any particular place or manner.
3.11 Failure to Charge Not Subsequent Waiver. Any decision by Bank
not to require payment of any interest (including default interest), fee, cost
or other amount payable under any Loan Document on any occasion shall in no way
limit or be deemed a waiver of Bank's right to require full payment of any
interest (including default interest), fee, cost or other amount payable under
any Loan Document on any other or subsequent occasion.
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3.12 Survivability. All of Borrowers' obligations under this
Article 3 shall survive for one year following the date on which all Loans
hereunder were fully paid.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Borrowers represent and warrant to Bank, as of the Closing Date,
that:
4.1 Existence and Qualification; Power; Compliance With Laws.
(a) Parent is a corporation duly formed, validly existing and in
good standing under the Laws of Delaware. The chief executive offices of
Parent are in Los Angeles, California.
(b) The Spectrum Club Company, Inc. is a corporation duly formed,
validly existing and in good standing under the Laws of California. Its
chief executive offices are in Los Angeles, California.
(c) Pontius Realty, Inc. is a corporation duly formed, validly
existing and in good standing under the Laws of New York. Its chief
executive offices are in Los Angeles, California.
(d) Sports Club, Inc. of California is a corporation duly formed,
validly existing and in good standing under the Laws of California. Its
chief executive offices are in Los Angeles, California.
(e) Irvine Sports Club, Inc. is a corporation duly formed, validly
existing and in good standing under the Laws of California. Its chief
executive offices are in Los Angeles, California.
(f) HealthFitness Organization of America, Inc. is a corporation
duly formed, validly existing and in good standing under the Laws of
California. Its chief executive offices are in Los Angeles, California.
(g) SCC Sports Club, Inc. is a corporation duly formed, validly
existing and in good standing under the Laws of Texas. Its chief executive
offices are in Los Angeles, California.
(h) L.A./Irvine Sports Clubs, Ltd. is a limited partnership duly
formed, validly existing and in good standing under the Laws of California.
Its chief executive offices are in Los Angeles, California.
(i) Talla New York, Inc. is a corporation duly formed, validly
existing and in good standing under the Laws of New York. Its chief
executive offices are in Los Angeles, California.
Each Borrower is duly qualified or registered to transact business and is in
good standing in each other jurisdiction in which the conduct of its business
or the ownership or leasing of its Properties makes such qualification or
registration necessary, except where the failure so to qualify or register and
to be in good standing would not have a material adverse effect on the
business, operations
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or condition (financial or otherwise) of such Borrower and its Subsidiaries,
taken as a whole. Each Borrower has all requisite power and authority to
conduct its business, to own and lease its Properties and to execute, deliver
and perform all of its Obligations under the Loan Documents. All outstanding
shares of capital stock of each Borrower, as applicable, are duly authorized,
validly issued, fully paid, non-assessable and issued in compliance with all
applicable state and federal securities and other Laws. Each Borrower is in
compliance with all Laws and other legal requirements applicable to its
business, has obtained all authorizations, consents, approvals, orders,
licenses and permits from, and has accomplished all filings, registrations and
qualifications with, or obtained exemptions from any of the foregoing from, any
Governmental Agency that are necessary for the transaction of its business,
except where the failure so to comply, file, register, qualify or obtain
exemptions would not have a material adverse effect on the business, operations
or condition (financial or otherwise) of such Borrower and its Subsidiaries,
taken as a whole.
4.2 Authority; Compliance With Other Agreements and Instruments and
Government Regulations. The execution, delivery and performance by each
Borrower and its Subsidiaries of the Loan Documents to which it is a Party have
been duly authorized by all necessary action, and do not and will not:
(a) Except as set forth in Schedule 4.2, require any
consent or approval not heretofore obtained of any partner, director,
stockholder, security holder or creditor;
(b) Violate or conflict with any provision of such
Party's partnership agreement, certificate of limited partnership, charter,
articles of incorporation or bylaws, or amendments thereto, as applicable;
(c) Result in or require the creation or imposition of
any Lien or Right of Others (other than as provided under the Loan
Documents) upon or with respect to any Property now owned or leased or
hereafter acquired by such Party;
(d) Violate any provision of any Law (including, without
limitation, Regulations G, T, U and/or X of the Board of Governors of the
Federal Reserve System), order, writ, judgment, injunction, decree,
determination or award presently in effect and having applicability to such
Party; or
(e) Result in a breach of or constitute a default under,
or cause or permit the acceleration of any obligation owed under, any
indenture or loan or credit agreement or any other material agreement, lease
or instrument to which such Party is a party or by which such Party or any
of its Property is bound or affected;
and no Borrower nor any Subsidiary thereof is in default under any Law,
order, writ, judgment, injunction, decree, determination or award, or any
indenture, agreement, lease or instrument described in Section 4.2(e), in
any respect that is materially adverse to the interests of Bank or that
would have any material adverse effect on the business, operations or
condition (financial or otherwise) of Borrowers and their Subsidiaries,
taken as a whole.
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4.3 No Governmental Approvals Required. No authorization, consent,
approval, order, license or permit from, or filing, registration or
qualification with, or exemption from any of the foregoing from, any
Governmental Agency is or will be required to authorize or permit under
applicable Law the execution, delivery and performance by any Borrower or any
Subsidiary thereof of the Loan Documents to which it is a Party.
4.4 Subsidiaries.
(a) Except as described in Schedule 4.4, Borrowers do
not own any capital stock, partnership interest, joint venture interest or
other equity interest in any Person. Unless otherwise indicated in Schedule
4.4 all of the outstanding shares of capital stock or partnership or joint
venture interests of each Borrower are owned of record and beneficially by
Borrowers and all securities and interests so owned are duly authorized,
validly issued, fully paid, non-assessable and issued in compliance with all
applicable state and federal securities and other Laws, and are free and
clear of all Liens and Rights of Others.
(b) Each Subsidiary identified in Schedule 5.2 as an
"Inactive Subsidiary" has (i) aggregate collections or distributions of cash
from its operations of less than $50,000 and (ii) no tangible or intangible
real or personal property assets having an aggregate fair market value in
excess of $50,000.
(c) Each Subsidiary of each Borrower is a legal entity of
the form described for that Subsidiary in Schedule 4.4, duly formed, validly
existing and in good standing under the Laws of its jurisdiction of
formation, is duly qualified or registered to transact business and is in
good standing in each other jurisdiction in which the conduct of its
business or the ownership of its Properties makes such qualification or
registration necessary, except where the failure so to qualify or register
and to be in good standing does not have a material adverse effect on the
business, operations or condition (financial or otherwise) of the Borrowers
and their Subsidiaries, taken as a whole, and has all requisite legal power
and authority to conduct its business and to own its Properties and to
execute, deliver and perform all of its Obligations under the Loan
Documents.
(d) Each Subsidiary of each Borrower is in compliance with
all Laws and other legal requirements applicable to its business, has
obtained all authorizations, consents, approvals, orders, licenses and
permits from, and has accomplished all filings, registrations and
qualifications with, or obtained exemptions from any of the foregoing from,
any Governmental Agency that are necessary for the transaction of its
business, except where the failure to so comply, file, register, qualify or
obtain exemptions would not have a material adverse effect on the business,
operations or condition (financial or otherwise) of the Borrowers and their
Subsidiaries, taken as a whole.
4.5 Financial Statements. Borrowers have furnished to Bank (a) the
audited consolidated balance sheet of Borrowers and their Subsidiaries as at
December 31, 1995, and audited consolidated income statement and cash flow
statement of Borrowers and their Subsidiaries for their fiscal year then ended,
and (b) the unaudited consolidated balance sheets of
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Borrowers and their Subsidiaries as at June 30, 1996, and unaudited
consolidated income statements, cash flow statements of Borrowers and their
Subsidiaries and unaudited individual Club operating statements for such month
and for the portion of their fiscal year ended with such month. Such financial
statements fairly present the financial condition, results of operations and
cash flow of Borrowers and their Subsidiaries as at such dates and for such
periods, in conformity with generally accepted accounting principles,
consistently applied, provided that the balance sheets and statements referred
to in (b) above are subject to normal year-end audit adjustments.
4.6 No Other Liabilities; No Material Adverse Changes. Except as
set forth in Schedule 4.6 hereto, Borrowers and their Subsidiaries do not have
any material liability or material contingent liability not reflected or
disclosed in the financial statements or notes thereto described in Section
4.5. There has been no material adverse change in the business, operations or
condition (financial or otherwise) of Borrowers and their Subsidiaries, taken
as a whole, since the date of the financial statements described in Section
4.5(b).
4.7 Intangible Assets. Borrowers and their Subsidiaries own, or
possess the unrestricted right to use, all trademarks, trade names, copyrights,
patents, patent rights, licenses and deferred tax assets that are used in the
conduct of their businesses as now operated, and no such intangible asset, to
the best knowledge of Borrowers, conflicts with the valid trademark, trade
name, copyright, patent, patent right or deferred tax asset of any other Person
to the extent that such conflict would have a material adverse effect on the
business, operations or condition (financial or otherwise) of Borrowers and
their Subsidiaries, taken as a whole.
4.8 Filing of Financing Statements. Upon the filing and/or
recording of financing statements describing the Collateral with the
Governmental Agencies listed in Schedule 4.8, and except for the requirement
that continuation statements periodically be filed and/or recorded with respect
thereto, and upon the taking of possession of the stock certificates of any and
all Borrowers, other than Parent, all necessary steps will have been taken to
fully perfect and to maintain fully perfected the Liens of Bank on the
Collateral, to the fullest extent that such Liens may be perfected by the
filing and/or recording of financing statements pursuant to Article 9 of the
Uniform Commercial Code.
4.9 Public Utility Holding Company Act. No Borrower or any
Subsidiary thereof is a "holding company", or a "subsidiary company" of a
"holding company", or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
4.10 Litigation. Except for (a) the matters set forth in Schedule
4.10, (b) any matter fully covered as to subject matter and amount (subject to
applicable deductibles and retentions) by insurance for which the insurance
carrier has not asserted lack of subject matter coverage or reserved its right
to do so, or (c) any matter, or series of related matters, involving a
threatened claim against Borrowers of less than $100,000, there are no actions,
suits or proceedings pending or, to the best knowledge of Borrowers, threatened
against or affecting Borrowers or any of its Subsidiaries or any Property of
any of them in any court of Law or before any Governmental Agency.
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4.11 Binding Obligations. Each of the Loan Documents to which any
Borrower or any Subsidiary thereof is a Party will, when executed and delivered
by such Party, constitute the legal, valid and binding obligation of such
Party, enforceable against such Party in accordance with its terms.
4.12 No Default. No event has occurred and is continuing that is a
Default.
4.13 ERISA.
(a) Except as disclosed in Schedule 4.13, there are no
Plans.
(b) With respect to each Plan:
(1) such Plan complies in all material respects
with ERISA and any other applicable Law;
(2) such Plan has not incurred any material
"accumulated funding deficiency", as that term is defined in Section
302 of ERISA;
(3) no "reportable event" (as defined in
Section 4043 of ERISA) has occurred that could result in the
termination or disqualification of such Plan; and
(4) no Borrower nor any Subsidiary thereof has
engaged in any "prohibited transaction" (as defined in Section 4975
of the Internal Revenue Code of 1954, as amended).
(c) no Borrower nor any Subsidiary thereof is or has
been a party to any Multiemployer Plan.
(d) Borrowers and its Subsidiaries are in compliance
with each covenant contained in Section 6.6.
4.14 Regulations G, T, U and X; Investment Company Act. No
Borrower nor any of its Subsidiaries is engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
"purchasing" or "carrying" any "margin stock" or "margin security" within the
meanings of Regulations G, T, U or X, respectively, of the Board of Governors
of the Federal Reserve System. If requested by Bank, Borrowers will furnish or
will cause their Subsidiaries, as requested, to furnish Bank with a statement
or statements in conformity with the requirements of Federal Reserve Forms G-3
and/or U-1 referred to in Regulations G or U of said Board of Governors. No
part of the proceeds of any Loan hereunder will be used to purchase or carry
any such "margin security" or "margin stock" or to extend credit to others for
the purpose of purchasing or carrying any such "margin security" or "margin
stock" in violation of Regulations G, T, U or X of said Board of Governors. No
Borrower nor any of its Subsidiaries is or is required to be registered under
the Investment Company Act of 1940.
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4.15 Disclosure. No written statement made by Borrowers or any
Subsidiary thereof to Bank in connection with this Agreement, or in connection
with any Loan, or in connection with the issuance of any Letter of Credit,
contains any untrue statement of a material fact or omits a material fact
necessary to make the statement made not misleading. To the best knowledge of
Borrowers, there is no fact which Borrowers have not disclosed to Bank in
writing which materially and adversely affects nor, so far as Borrowers can now
foresee, is reasonably likely to prove to affect materially and adversely the
business, operations, Properties, prospects, profits or condition (financial or
otherwise) of Borrowers and their Subsidiaries, taken as a whole, or the
ability of Borrowers and their Subsidiaries to perform their Obligations under
the Loan Documents.
4.16 Tax Liability. Borrowers and their Subsidiaries have filed
all income tax returns which are required to be filed, and have paid, or made
provision for the payment of, all taxes which have become due pursuant to said
returns or pursuant to any assessment received by Borrower or any Subsidiary
thereof, except such taxes, if any, as are being contested in good faith and as
to which adequate reserves have been provided.
4.17 Projections. The financial projections set forth in Schedule
4.17 are based on facts known to Borrowers and on assumptions that are
reasonable and consistent with such facts. To the best knowledge of Borrowers,
except as may be disclosed on Schedule 4.17, no material fact or assumption is
omitted as a basis for such projections, and such projections are reasonably
based on such facts and assumptions. Nothing in this Section 4.17 shall be
construed as a representation that such projections in fact will be achieved.
4.18 Fiscal Year. Borrowers and their Subsidiaries each operate on
a fiscal year corresponding to the calendar year and ending on December 31, the
fiscal months of which correspond to the calendar months of the calendar year.
4.19 Employee Matters. There is no strike, work stoppage or labor
dispute with any union or group of employees pending or overtly threatened
involving Borrowers or any of their Subsidiaries. Since June 1996, there has
been no increase in the salary, bonus or other compensation arrangements of the
employees of Borrowers and their Subsidiaries other than normal increases in
the ordinary course of business.
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ARTICLE 5
AFFIRMATIVE COVENANTS
(OTHER THAN INFORMATION AND
REPORTING REQUIREMENTS)
So long as any Loan or any other indebtedness owing in connection
therewith remains unpaid hereunder or any portion of the Commitment remains
outstanding, Borrowers shall, and shall cause each of its Subsidiaries to,
unless Bank otherwise consents in writing:
5.1 Payment of Taxes and Other Potential Charges. Pay and
discharge promptly all taxes, assessments and governmental charges or levies
imposed upon any of them, upon their respective Property or any part thereof,
upon their respective income or profits or any part thereof or upon any right
or interest of Bank under any Loan Document, except that Borrowers and their
Subsidiaries shall not be required to pay or cause to be paid (a) any income or
gross receipts tax generally applicable to banks or (b) any tax, assessment,
charge or levy that is not yet past due, or is being contested in good faith by
appropriate proceedings, so long as the relevant entity has established and
maintains adequate reserves for the payment of the same and by reason of such
nonpayment and contest no material item or portion of Property of Borrowers and
their Subsidiaries, taken as a whole, is in jeopardy of being seized, levied
upon or forfeited.
5.2 Preservation of Existence. Preserve and maintain their
respective existences, except for mergers permitted in Section 6.3 of this
Agreement. Preserve and maintain all material licenses, rights, franchises and
privileges in the jurisdiction of their formation and all authorizations,
consents, approvals, orders, licenses, permits, or exemptions from, or
registrations with, any Governmental Agency that are necessary for the
transaction of their respective business. Qualify and remain qualified to
transact business in each jurisdiction in which such qualification is necessary
in view of their respective business, except HealthFitness Organization of
America, Inc. or any Subsidiaries listed in Schedule 5.2 that are inactive or
have immaterial assets. With respect to HealthFitness Organization of America,
Inc. or any Subsidiaries listed in Schedule 5.2 that are inactive or have
immaterial assets, Borrowers shall forthwith give Bank written notice of any
change in such entities' respective existences or statuses of qualification.
5.3 Maintenance of Properties. Maintain, preserve and protect all
of their respective Properties and equipment in good order and condition,
subject to replacement wear and tear in the ordinary course of business, and
not permit any waste of their respective Properties, except that the failure to
maintain, preserve and protect a particular item of Property or equipment that
is not of significant value, either intrinsically or to the operations of
Borrowers and their Subsidiaries, taken as a whole, shall not constitute a
violation of this covenant.
5.4 Maintenance of Insurance. Maintain liability and casualty
insurance with responsible insurance companies acceptable to Bank in such
amounts and against such risks as is usually carried by responsible companies
engaged in similar businesses and owning similar Properties in the general
areas in which Borrowers and their Subsidiaries operate.
5.5 Compliance With Laws. Comply with the requirements of all
applicable Laws and orders of any Governmental Agency, noncompliance with which
could materially adversely
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affect the business, operations or condition (financial or otherwise) of
Borrowers and their Subsidiaries, taken as a whole, except that Borrowers and
their Subsidiaries need not comply with a requirement then being contested by
any of them in good faith by appropriate proceedings so long as no interest of
Bank would be materially impaired thereby.
5.6 Additional Borrowers. In the event (i) the aggregate amount
of all advances to, investments in or commitments to any Non-Borrower
Affiliate by Borrowers, after the date hereof, exceeds at any time $200,000, in
addition to the amounts set forth for the Non-Borrower Affiliates in Schedule
5.6, but excluding accrued management fees owing to Borrowers from such
Non-Borrower Affiliates, (ii) any Non-Borrower Affiliate identified in Schedule
5.2 ceases to meet the criteria for an "Inactive Subsidiary", (iii) any
Borrower becomes a majority shareholder or a general partner of any
Non-Borrower Affiliate now or hereafter existing, or (iv) any Borrower or
Borrowers, taken as a whole, obtain a majority of the partnership or other
ownership interests of any Non-Borrower Affiliate, Borrowers shall cause such
Non-Borrower Affiliate to become a Borrower hereunder or enter into such other
agreement or arrangement with Bank concerning such Non-Borrower Affiliate as
may be acceptable to Bank in its sole discretion. In order to add a
Non-Borrower Affiliate as a Borrower hereunder, the Borrowers shall deliver to
the Bank (a) the agreement of such Non-Borrower Affiliate to be added as a
Borrower hereunder and to be bound by the terms hereof, (b) the agreement of
the owners of all capital stock or other ownership interests, as applicable, of
such new Borrower to become a party to the Pledge Agreement, (c) the
certificates and other documents required to be delivered pursuant to the terms
of the Pledge Agreement, and (d) such other documents as the Bank may
reasonably require. Schedule 5.6 attached hereto sets forth as of the date
hereof the amount of all advances to, investments in or commitments to any
Non-Borrower Affiliate by Borrower, the percentage ownership of each Borrower
in any Non-Borrower Affiliate, and Borrowers which are general partners of any
Non-Borrower Affiliate.
5.7 Inspection Rights. Upon reasonable notice by Bank to
Borrowers, at any time during regular business hours and as reasonably
requested, permit Bank, or any employee, agent or representative thereof, to
examine, audit and make copies and abstracts from the records and books of
account of Borrowers and their Subsidiaries and to discuss the affairs,
finances and accounts of Borrowers and their Subsidiaries with any of their
officers and key employees, customers or vendors, and, upon request, furnish
promptly to Bank true copies of all financial information and internal
management reports made available to the senior management of Borrowers or any
of their Subsidiaries. If any of Borrowers' Property, books or records are in
the possession of a third party, Borrowers, upon not less than three (3) days'
advance notice, hereby authorizes such third party to permit Bank to have
access to perform inspections or audits and to respond to Bank's request for
information concerning such Property, books or records. If an Event of Default
has occurred and is continuing, no advance notice of any audits and inspections
shall be required.
5.8 Keeping of Records and Books of Account. Keep adequate records
and books of account reflecting all financial transactions in conformity with
generally accepted accounting principles, consistently applied, and in material
conformity with all applicable requirements of any Governmental Agency having
regulatory jurisdiction over Borrowers or any of their Subsidiaries.
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5.9 Compliance With Agreements, Duties and Obligations. Promptly
and fully comply with all their respective agreements, duties and obligations
under the Loan Documents, and with material terms of any other material
agreements, indentures, leases and/or instruments to which any one or more of
them is a party, whether such other agreements, indentures, leases and/or
instruments are with Bank or another Person.
5.10 Use of Proceeds. Use the proceeds of the Loans for the
following purposes only: Line A shall be used for working capital purposes and
to fund the acquisition and the development of new Clubs; Line B shall be used
only to fund acquisitions of new Clubs and the development of new Clubs.
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ARTICLE 6
NEGATIVE COVENANTS
So long as any Loan or other indebtedness owing in connection
therewith remains unpaid hereunder or any portion of the Commitment remains
outstanding, Borrowers shall not (and shall cause each of their Subsidiaries to
not) unless Bank otherwise consents in writing:
6.1 Disposition of Property. Sell, assign, exchange, transfer,
lease or otherwise dispose of, or contract to sell, assign, exchange, transfer,
lease or otherwise dispose of, any of their respective Properties, whether now
owned or hereafter acquired, and whether to an Affiliate or otherwise, except
(a) Properties sold, assigned, exchanged, transferred, leased or otherwise
disposed of in the ordinary course of business, (b) as permitted under Section
6.3, and (c) Properties sold, assigned, transferred or otherwise disposed of
with regard to The Sports Connection Holding Company.
6.2 Transactions with Borrowers and Non-Borrower Affiliates.
Advance funds to, guarantee obligations of, or make any other investments in or
commitments or make distributions to any Non-Borrower Affiliate unless (a) such
Non-Borrower Affiliate is made a Borrower under this Agreement or some other
arrangement acceptable to Bank in its sole discretion is made in accordance
with Section 5.6, or (b) the aggregate amount of all advances to, guaranties
of, investments in and commitments to all Non-Borrower Affiliates does not
exceed $200,000, in addition to the amounts set forth for the Non-Borrower
Affiliates in Schedule 5.6, but excluding accrued management fees owing to
Borrowers from such Non-Borrower Affiliates, Borrowers shall provide Bank a
monthly report detailing such transactions, such report to be in a form as is
acceptable to Bank. The Borrowers shall have the right, with the consent of the
Bank, not to be unreasonably withheld but subject to such terms and conditions
as Bank may require, to add any Non-Borrower Affiliate as a Borrower hereunder.
In addition to the foregoing, Borrowers shall not (and shall cause each of
their Subsidiaries to not) advance any funds to or transfer any assets to any
Borrower or Non-Borrower Affiliate which is indebted to AT&T Commercial in
excess of what is then owed by such advancing or lending Borrower to such
recipient Borrower without the Bank's prior written consent.
6.3 Mergers, Investments, Acquisitions and New Club Developments.
Merge, consolidate or amalgamate with or into any Person, except mergers,
consolidations or amalgamations of a Subsidiary of Borrowers into a Borrower
(with such Borrower as the surviving entity) prior notice of the details of
which shall have been given to the Bank. Make any Acquisition or enter into
any agreement to make any Acquisition (a) in an amount requiring payment in
excess of $2,500,000 of Borrowers' cash within one year of such Acquisition or
(b) at a sum greater than four times the historical cash flow of the acquired
entity with acceptable adjustments for identifiable savings which will occur as
a result of such Acquisition. Pursue any new Club developments which are not
projected to generate positive EBITDA for the twelve-month period commencing on
the first anniversary following completion of such new Club developments. In
connection with an Acquisition, the Borrowers may enter into a partnership or a
corporate or other joint venture with one or more unaffiliated Persons, and may
incur debt in the form of purchase money or lessor financing. In any event, no
more than three mergers, acquisitions or new Clubs in the "pre sale phase of
development" shall be pursued at any given
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time. "Pre sale phase of development" shall mean the period during which
memberships in the new Clubs are offered for sale prior to the date the Club
opens for business. Prior to any Acquisition, Borrowers shall deliver to Bank
(i) a pro forma financial statement giving effect to the proposed acquisition,
(ii) a pro forma compliance certificate executed by a Responsible Official of a
Borrower certifying that giving effect to the proposed acquisition, Borrowers
shall be in compliance with the financial covenants set forth in this
Agreement, (iii) a schedule of sources and uses of funds, and (iv) such other
details about such Acquisition as Bank may request.
6.4 Profitability. Fail to maintain on a combined basis a positive
net income after taxes and extraordinary items on a quarterly basis.
6.5 Redemption, Dividends and Distributions; Payments to Partners.
Redeem or repurchase stock or partnership interests, declare or pay any
dividends or make any other distribution, whether of capital, income or
otherwise, and whether in Cash or other Property, except that, subject to
applicable statutory restrictions and provided no Event of Default exists or
would exist after such action, (a) any Borrower or Subsidiary of a Borrower
may, subject to Section 6.2, declare and pay dividends or make distributions
directly or indirectly to another Borrower, (b) Parent may make a Qualified
Stock Repurchase, (c) Borrowers and Subsidiaries may, subject to Section 6.2,
pay partner distributions as required under the partnership agreements as
currently in effect as of the date hereof, or with such amendments as are
approved in writing by the Bank, of L.A./Irvine Sports Clubs, Ltd., El Segundo
TDC, Ltd., Sports Connection-ES/MB and Reebok-Sports Club/NY or any other
entity approved in writing by the Bank pursuant to Section 5.6 of this
Agreement, and (d) Borrowers and Subsidiaries may declare or make operating
distributions or declare or pay dividends or make distributions in connection
with the purchase of partnership interests in L.A./Irvine Sports Clubs, Ltd.,
El Segundo TDC, Ltd., Sports Connection-ES/MB and/or Reebok-Sports Club/NY or
any other entity approved in writing by the Bank pursuant to Sections 5.6 and
6.2 of this Agreement.
6.6 ERISA.
(a) At any time, maintain, or be or become obligated to
contribute on behalf of its employees to, any Plan, other than those Plans
disclosed in Schedule 4.13.
(b) At any time, permit any Plan to:
(1) engage in any "prohibited transaction", as
such term is defined in Section 4975 of the Internal Revenue Code of
1954, as amended;
(2) incur any material "accumulated funding
deficiency", as that term is defined in Section 302 of ERISA; or
(3) terminate in a manner which could result in
liability of Borrowers or any Subsidiary thereof to the Plan or to
the PBGC or the imposition of a Lien on the Property of Borrowers or
any Subsidiary thereof pursuant to Section 4068 of ERISA.
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(c) At any time, assume any obligation to contribute to
any Multiemployer Plan, nor shall Borrowers or any Subsidiary thereof
acquire any Person or assets of any Person which has, or has had at any time
from and after January 2, 1974, an obligation to contribute to any
Multiemployer Plan.
(d) Fail immediately to notify Bank of the occurrence of
any "reportable event" (as defined in Section 4043 of ERISA) or of any
"prohibited transaction" (as defined in Section 4975 of the Internal Revenue
Code of 1954, as amended) with respect to any Plan or any trust created
thereunder. Upon request by Bank, Borrowers promptly shall furnish to Bank
copies of any reports or other documents filed by Borrowers or any
Subsidiary thereof with the United States Secretary of Labor, the PBGC
and/or the Internal Revenue Service, with respect to any Plan.
(e) At any time, permit any Plan to fail to comply with
ERISA or other applicable Law in any material respect.
6.7 Change in Nature of Business/Management. Make any material
change in the nature of the business of Borrowers and their Subsidiaries, as
conducted and presently proposed to be conducted, or remove or allow removal of
D. Michael Talla, John Gibbons or Timothy O'Brien from any management position
presently held by him, unless evidence of satisfactory progress to procure a
replacement acceptable to Bank is delivered to Bank within 30 days thereafter.
6.8 Transactions with AT&T Commercial. Create, incur, assume or
suffer to exist (and shall cause each of their Affiliates to not create, incur
or assume or suffer to exist) any additional indebtedness for borrowed money or
any liability to AT&T Commercial in excess of the then current outstandings
under the "Loan Agreement," as that term is defined in the Subordination
Agreement (provided that such limitation shall not affect AT&T Commercial's
right to make advances or charges in connection with its rights and remedies
under such Loan Agreement or a refinancing of the then existing amounts owing
under such Loan Agreement); guaranty or otherwise become responsible for the
indebtedness or obligations of any other Person to AT&T Commercial; modify,
supplement or amend (and cause each of their Affiliates to not modify,
supplement or amend) any loan documents with AT&T Commercial which would
directly or indirectly affect or modify the terms of the Subordination
Agreement.
6.9 Indebtedness, Guaranties and Liens. Create, incur, assume or
suffer to exist any Lien of any nature upon or with respect to any of their
respective Properties, whether now owned or hereafter acquired; create, incur
or assume any indebtedness for borrowed money or in connection with the
purchase of Property or any liability to the issuer of any letter of credit;
guaranty or otherwise become responsible (including, but not limited to, any
agreement to purchase any obligations, stock, Property, goods or services or to
supply or advance any funds, Property, goods or services) for the indebtedness
or obligations of any other Person; or incur any lease obligation that is
required to be capitalized under generally accepted accounting principles,
except:
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(a) Indebtedness and Liens securing obligations incurred
in the ordinary course of business and incurred in connection with purchase
money transactions including real estate or equipment or fixture purchases,
provided that the amount of such transactions does not exceed an aggregate
amount of $1,000,000 principal (or the equivalent thereof) in any one fiscal
year;
(b) Indebtedness and Liens securing obligations incurred
in connection with purchase money equipment financing for new Club
developments or Acquisitions to the extent permitted under Section 6.3;
(c) Liens securing the claims or demands of materialmen,
mechanics, and other like Persons not yet delinquent or being contested in
good faith by appropriate proceedings and for which appropriate reserves are
maintained;
(d) Indebtedness, liabilities, guaranties or Liens in
favor of Bank under this Agreement, the Notes and the other Loan Documents;
(e) Indebtedness and Liens listed on Schedule 6.9 or
Indebtedness and Liens arising out of the extension or refinancing of the
obligations of Borrowers described on Schedule 6.9, provided that such
obligations are not increased and are not secured by any additional
property;
(f) Guaranties arising from endorsement, in the ordinary
course of collection, of negotiable instruments;
(g) Indebtedness and Liens for taxes and assessments or
other government charges or levies if not yet due and payable or, if due and
payable, which are being contested in good faith by appropriate proceedings
and for which appropriate reserves are maintained;
(h) Liens under workers' compensation, unemployment
insurance, social security, or similar legislation, if they are being
contested in good faith by appropriate proceedings and for which appropriate
reserves are maintained;
(i) Trade credit for goods and services provided to the
Borrowers and the Subsidiaries in the ordinary course of business; and
(j) Indebtedness, Liens or Guaranties in favor of AT&T
Commercial consented to by Bank in its sole and absolute discretion.
6.10 Transactions with Affiliates. Enter into any transaction of
any kind with any Affiliate of Borrowers other than (a) transactions between or
among Borrowers and their Subsidiaries so long as, as a result of such
transactions, the aggregate amount advanced to, invested in or committed to any
Non-Borrower Affiliate on or after January 1, 1997, does not exceed $200,000,
(b) arms-length transactions with Affiliates which are permitted with
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non-Affiliates pursuant to Sections 6.1, 6.3, 6.5, and (c) those transactions
listed in Schedules 6.10 and 6.17.
6.11 Change in Fiscal Year. Change its fiscal year, or the fiscal
months thereof.
6.12 Capital Expenditures. Make or incur obligations for Capital
Expenditures, exclusive of Capital Expenditures relating to Acquisitions, new
Club developments or other like expansions, in the aggregate for Borrowers and
their Subsidiaries in any one fiscal year of less than 2% or greater than 4% of
Borrowers' revenues derived from operation of the Clubs for such fiscal year
before restatements for acquisitions accounted for using the pooling method of
accounting. (Subject to Section 6.3, Borrowers may make Capital Expenditures
relating to Acquisitions, new Club developments or other like expansions.)
6.13 Tangible Net Worth. Permit Tangible Net Worth, as of the last
day of any fiscal quarter of Borrowers and their Subsidiaries ending during any
period specified below, to be less than $22,871,200 plus 80% of Borrowers'
cumulative net income after December 31, 1995 not reduced by net losses and
increased 100% by funds generated from any equity offering. This Tangible Net
Worth covenant shall be revised upon the occurrence of any goodwill resulting
from qualified business acquisitions or a Qualified Stock Repurchase.
6.14 Ratio of Total Unsubordinated Liabilities to Tangible Net
Worth. Permit the ratio of Total Unsubordinated Liabilities to Tangible Net
Worth, as of the last day of any fiscal quarter of Borrowers and their
Subsidiaries to be greater than 2.75:1.00; provided, that Bank agrees such
maximum ratio shall be adjusted for (a) qualified business acquisitions and (b)
the Qualified Stock Repurchase.
6.15 Debt Service Coverage Ratio.
(a) For Borrowers and their Subsidiaries, permit the
ratio of (i) EBITDA plus (ii) the Davis Payments plus (iii) cash income from
equity interests to (x) interest expense on all indebtedness plus (y) the
current portion of long term debt of Borrowers, calculated at the end of
each fiscal quarter on a rolling four-quarters basis to be less than
1.40:1.00;
(b) For L.A./Irvine Sports Clubs, Ltd., permit the ratio of
(i) EBITDA generated by The Sports Club/LA less (ii) a management fee equal
to 4% of the revenues generated by The Sports Club/LA (to the extent not
already included in EBITDA) to (x) interest expense on the indebtedness of
L.A./Irvine Sports Club, Ltd. plus (y) the current portion of long term debt
of L.A./Irvine Sports Clubs, Ltd., calculated at the end of each fiscal
quarter on a rolling four-quarters basis to be less than 1.75:1.00;
(c) For Borrowers and their Subsidiaries, excluding
L.A./Irvine Sports Clubs, Ltd., permit the ratio of (i) EBITDA for Borrowers
and their Subsidiaries excluding L.A./Irvine Sports Club, Ltd. plus (ii) the
cash proceeds received with regard to the Davis Payments plus (iii) cash
income from equity interests plus (iv) an adjustment which represents a
management fee equal to 4% of the revenues generated by The Sports
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Club/LA (to the extent not already included in EBITDA) to (x) interest
expense on all indebtedness excluding the indebtedness of L.A./Irvine Sports
Clubs, Ltd., calculated at the end of each fiscal quarter on a rolling
four-quarters basis to be less than 0.85:1.00.
6.16 Attrition. With respect to The Sports Club/LA and The Sports
Club/Irvine, permit the aggregate weighted average of the ratio of (a)
Attrition to (b) the average number of gross members during the preceding
consecutive six month period to exceed 30% on an annualized basis.
6.17 Loans to Officers. Make any loans, advances or other
extensions of credit to any of Borrowers' executives, officers, directors,
shareholders or employees (or any relatives of any of the foregoing) in an
aggregate amount exceeding $200,000, other than those set forth on Schedule
6.17. Bank acknowledges and agrees that Borrowers may extend the maturity but
not increase the amount of the loan to Mike Talla listed on Schedule 6.17.
6.18 Deposit Accounts. Except with respect to the special deposit
account referenced in the Special Deposit Account Agreement, establish any
deposit accounts in the name of any Sports Club Party (as that term is defined
in the Subordination Agreement) without the prior written consent of Bank.
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ARTICLE 7
INFORMATION AND REPORTING REQUIREMENTS
7.1 Financial and Business Information. So long as any Loan
remains unpaid, or any other Obligation remains unpaid or unperformed, or any
portion of the Commitment remains outstanding, Borrowers shall, unless Bank
otherwise consents in writing, deliver to Bank, at Borrowers' sole expense:
(a) As soon as practicable, and in any event within 30
days after the end of each fiscal month of Borrowers, (i) consolidated
balance sheets of Borrowers and their Subsidiaries as at the end of such
month, setting forth in comparative form the corresponding figures as at the
end of the corresponding month of their preceding fiscal year, (ii) Club
operating statements of each Club as at the end of such month, (iii)
consolidated income statements of Borrowers and their Subsidiaries for such
month and for the portion of their fiscal year ended with such month,
setting forth in comparative form the corresponding figures for the
corresponding periods of their preceding fiscal year and (iv) consolidated
cash flow statements of Borrowers and their Subsidiaries for the portion of
their fiscal year ended with such month, setting forth in comparative form
the corresponding figures for the corresponding periods of their preceding
fiscal year, all in reasonable detail. The preceding financial statements
shall be certified by a Responsible Official of a Borrower as fairly
presenting the financial condition, results of operations and cash flow of
Borrowers and their Subsidiaries in accordance with generally accepted
accounting principles, consistently applied, as at such date and for such
periods, subject only to normal year-end audit adjustments.
(b) As soon as practicable, and in any event within 45
days after the end of each fiscal quarter of Borrowers (including the last
fiscal quarter of each fiscal year, provided that with respect to such last
quarter the financial statements required hereby may be in preliminary form,
prior to year-end audit adjustments), (i) consolidated balance sheets of
Borrowers and their Subsidiaries as at the end of such quarter, setting
forth in comparative form the corresponding figures as at the end of the
corresponding quarter of their preceding fiscal year, (ii) consolidated
income statements of Borrowers and their Subsidiaries for such quarter and
for the portion of their fiscal year ended with such quarter, setting forth
in comparative form the corresponding figures for the corresponding periods
of their preceding fiscal year and (iii) consolidated cash flow statements
of Borrowers and their Subsidiaries for the portion of their fiscal year
ended with such quarter, setting forth in comparative form the corresponding
figures for the corresponding periods of their preceding fiscal year, all in
reasonable detail.
The preceding financial statements shall be certified by a Responsible
Official of a Borrower as fairly presenting the financial condition, results
of operations and cash flow of Borrowers and their Subsidiaries in
accordance with generally accepted accounting principles, consistently
applied, as at such date and for such periods, subject only to normal
year-end audit adjustments.
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(c) As soon as practicable, and in any event within 120
days after the close of each fiscal year of Borrowers, (i) consolidated
balance sheets of Borrower and their Subsidiaries as at the end of such
fiscal year, setting forth in comparative form the corresponding figures as
at the end of their preceding fiscal year, and (ii) consolidated income
statements and cash flow statements of Borrowers and their Subsidiaries for
such fiscal year, setting forth in comparative form the corresponding
figures for their previous fiscal year, all in reasonable detail. Such
balance sheets and statements shall be prepared in accordance with generally
accepted accounting principles, consistently applied, and such consolidated
balance sheet and consolidated statements shall be accompanied by a report
and unqualified opinion of independent public accountants of recognized
standing selected by Borrowers and reasonably satisfactory to Bank, which
report and opinion shall be prepared in accordance with generally accepted
auditing principles as at such date, and shall be subject only to such
qualifications and exceptions as are acceptable to Bank in the exercise of
its reasonable discretion. Such accountants' report and opinion shall be
accompanied by (1) a copy of any "management letter" provided by such
accountants to Borrowers, and (2) a certificate stating that, in making the
audit necessary for the certification of such financial statements and such
report, such accountants have obtained no knowledge of any Default, or, if,
in the opinion of such accountants, any such Default shall exist, stating
the nature and status of such Default, and setting forth the financial
calculations under Sections 6.11 through 6.13, inclusive, as of the date of
the balance sheet.
(d) As soon as practicable, and in any event within 45
days after the end of each fiscal quarter of Borrowers, a Certificate of a
Responsible Official of a Borrower setting forth a schedule of Capital
Expenditures made by Borrowers and/or their Subsidiaries during such
quarter, and during their fiscal year to date, separately for each Club.
(e) As soon as practicable, and in any event within 30
days after the start of each fiscal year of Borrowers, a monthly budget for
the then started fiscal year including, without limiting the generality of
the foregoing, monthly projected consolidated balance sheets, income
statements and cash flow statements of Borrowers and their Subsidiaries and
individual Club operating statements, all in reasonable detail.
(f) Within 45 days following the end of each quarter, a
membership information report for each Club and in the aggregate in the form
now prepared by Borrowers on a monthly basis, reflecting no less than the
immediately preceding consecutive six months, and reflecting the number of
members, the number of new memberships sold and Attrition, and supplemented
by such additional information as Bank may request.
(g) Within 30 days after the close of each fiscal year
of Borrowers, Borrowers' budget of capital expenditures for capital
improvements, replacements and other related purposes for the following
fiscal year.
(h) Within the earlier of 5 days after (i) the same are
filed with the Securities and Exchange Commission ("SEC") or (ii) the same
are required to be filed with
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the SEC, subject to allowable SEC extensions, copies of each annual report,
proxy or financial statement or other report or communication sent to the
shareholders of Borrowers, and copies of all annual, regular, periodic and
special reports and registration statements which Borrowers may file or be
required to file with the Securities and Exchange Commission or any similar
or corresponding Governmental Agency or with any securities exchange.
(i) Within 5 days after receipt of copies of all
correspondence and notices received by Borrowers from the Internal Revenue
Service ("IRS") relating to any adverse action or determination by the IRS
in respect of any Borrower's tax status under the Internal Revenue Code.
(j) Immediately upon becoming aware of the existence of
any condition or event which constitutes a Default, a written notice
specifying the nature and period of existence thereof and what action
Borrowers or their Subsidiaries are taking or propose to take with respect
thereto.
(k) Promptly upon request by Bank, copies of any
detailed audit reports submitted to Borrowers or any of their Subsidiaries
by independent accountants in connection with the accounts or books of
Borrowers or any of their Subsidiaries, or any audit of any of them.
(l) Promptly after request by Bank, copies of any report
or other document filed by Borrowers or any of their Subsidiaries with any
Governmental Agency.
(m) Promptly upon becoming aware that any Person asserts
a claim against Borrowers or any of their Subsidiaries in excess of $500,000
and that such Person has given notice or taken any other action with respect
to a claimed default or event of default, a written notice specifying the
notice given or action taken by such Person and the nature of the claimed
default or event of default and what action Borrowers or their Subsidiaries
are taking or propose to take with respect thereto.
(n) Such other data and information as from time to time
may be reasonably requested by Bank.
7.2 Compliance Certificates. So long as any Loan remains unpaid,
or any other Obligation remains unpaid or unperformed, or any portion of the
Commitment remains outstanding, Borrowers shall, unless Bank otherwise consents
in writing, deliver to Bank, at Borrowers' sole expense, not later than 45 days
after the end of each fiscal quarter of Borrower, a Certificate of a
Responsible Official of a Borrower (a) setting forth computations showing, in
detail satisfactory to Bank, whether Borrowers and their Subsidiaries were in
compliance with their obligations pursuant to Sections 6.11 through 6.16,
inclusive; (b) stating that a review of the activities of Borrowers and their
Subsidiaries during such fiscal period has been made under supervision of the
certifying Responsible Official with a view to determining whether during such
fiscal period Borrowers and their Subsidiaries performed and observed all their
respective Obligations under the Loan Documents, and either (i) stating that,
to the best knowledge of the
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certifying Responsible Official, during such fiscal period, Borrowers and their
Subsidiaries performed and observed each covenant and condition of the Loan
Documents applicable to them, or (ii) if Borrowers and their Subsidiaries have
not performed and observed such covenants and conditions, specifying all such
Defaults and their nature and status; (c) stating that no Borrower or Affiliate
has incurred any indebtedness to AT&T Commercial in violation of Section 6.8;
and (d) stating that the Properties of Borrowers and their Subsidiaries are
being maintained and are in reasonable working order and condition, ordinary
replacement wear and tear excepted.
7.3 Revisions or Updates to Schedules. Should any of the
information or disclosures provided on any of the Schedules originally attached
hereto become outdated or incorrect in any material respect, upon request by
Bank, Borrowers promptly shall provide to Bank such revisions or updates to
such Schedule(s) as may be necessary or appropriate to update or correct such
Schedule(s); provided that no such revisions or updates to any Schedule(s)
shall be deemed to have amended, modified or superseded such Schedule(s) as
originally attached hereto, or to have cured any breach of warranty or
representation resulting from the inaccuracy or incompleteness of any such
Schedule(s), unless and until Bank, in its sole and absolute discretion, shall
have accepted in writing such revisions or updates to such Schedule(s).
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ARTICLE 8
CONDITIONS
8.1 Initial Loans, Etc. The obligation of Bank to make the initial
Loans and to issue the initial Letter of Credit, each are subject to the
following conditions precedent (in addition to any applicable conditions
precedent set forth elsewhere in this Article 8), each of which shall be
satisfied prior to or concurrently with the making of the initial Loans and the
issuance of the initial Letter of Credit (unless Bank, in its sole and absolute
discretion, shall agree otherwise):
(a) Bank shall have received all of the following, each
of which shall be originals unless otherwise specified, each properly
executed by a Responsible Official of each party thereto, each dated as of
the Closing Date and each in form and substance satisfactory to Bank and its
legal counsel (unless otherwise specified or, in the case of the date of any
of the following, unless Bank otherwise agrees or directs):
(1) four executed counterparts of this
Agreement;
(2) the Line A Note and Line B Note executed by
Borrowers payable to the order of Bank;
(3) with respect to each Borrower and any and
each Subsidiary thereof, such documentation as Bank may require to
establish the due organization, valid existence and good standing of
such Borrower and each such Subsidiary, its qualification to engage
in business in each jurisdiction in which it is engaged in business
or required to be so qualified, its authority to execute, deliver
and perform any Loan Documents to which it is a Party, and the
identity, authority and capacity of each Responsible Official
thereof authorized to act on its behalf, including, without
limitation, certified copies of articles of incorporation and
amendments thereto, bylaws and amendments thereto, partnership
agreements, certificates of limited partnerships, certificates of
good standing and/or qualification to engage in business,
certificates of corporate resolutions, incumbency certificates,
Certificates of Responsible Officials, and the like;
(4) the Pledge Agreement;
(5) the Pledge Agreement (Partnership);
(6) the Subordination Agreement;
(7) the Special Deposit Account Agreement;
(8) such Loan Documents (in addition to the
Pledge Agreement and the Pledge Agreement (Partnership)) as Bank may
require pledging Property of Borrowers and/or any of their
Subsidiaries, together with such related financing statements or
other documents as Bank may request to perfect, effect, facilitate,
consent to, give notice of or otherwise evidence any Liens created
thereby;
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(9) the Opinion of Counsel;
(10) a Certificate of a Responsible Official of
a Borrower certifying that the conditions specified in Sections
8.1(c) and 8.1(d) have been satisfied;
(11) evidence that all Liens or Rights of Others
on or in the Property of Borrower and/or its Subsidiaries (other
than such Liens and Rights of Others as are permitted by Section
6.8) have been terminated or discharged;
(12) evidence that all indebtedness of Borrower
(other than such indebtedness as is permitted by Section 6.8) has
been satisfied or discharged;
(13) such other certificates, documents, consents
or opinions as Bank reasonably may require.
(b) Duly executed financing statements with respect to
the Collateral shall have been filed and/or recorded with such Governmental
Agencies, and in such jurisdictions and locales, as Bank may specify.
(c) The representations and warranties of Borrowers
contained in Article 4 shall be true and correct as of the date made or
reaffirmed.
(d) Borrowers and their Subsidiaries and any other
Parties shall be in compliance with all the terms and provisions of the Loan
Documents, and no Default shall have occurred and be continuing.
(e) The commitment fee referred to in Section 3.2 shall
have been paid to Bank.
(f) The estimated fees and disbursements (subject to
adjustment upon final accounting) of Sheppard, Mullin, Richter & Hampton,
outside legal counsel to Bank, shall have been paid to such firm.
8.2 Initial Term Loans. Subject to the acceleration provision of
Section 2.1(a), in addition to any applicable conditions precedent set forth
elsewhere in this Article 8, the obligation of Bank to make the initial Line B
Term Loan on the Line B Conversion Date (by converting its outstanding Line B
Loans), and the obligation of Bank to surrender its Line B Note in exchange for
a Line B Term Note, shall be subject to the further condition precedent that
Bank shall have received, at Bank's Office, in exchange for its Line B Note, a
Line B Term Note duly executed by Borrowers in favor of Bank, with all blanks
and amounts properly filled in, in accordance with all applicable provisions of
this Agreement.
8.3 Any Loan. In addition to any applicable conditions precedent
set forth elsewhere in this Article 8, the obligation of Bank to make any Loan,
to redesignate any Loan, and issue any Letter of Credit are subject to the
following conditions precedent:
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(a) except (i) for representations and warranties which
speak as of a particular date or are no longer true and correct as a result
of a change which is permitted by this Agreement or (ii) as disclosed by
Borrowers and approved in writing by Bank, the representations and
warranties contained in Article 4 (other than Sections 4.4(a), 4.4(c), 4.6
(first sentence), 4.10, 4.17 and 4.19 (second sentence)) shall be true and
correct on and as of the date of the Loan or redesignation or issuance or
creation, as the case may be, as though made on and as of that date;
(b) except for (i) the matters set forth in Schedule
4.10, (ii) any matter fully covered as to subject matter and amount (subject
to applicable deductibles and retentions) by insurance for which the
insurance carrier has not asserted lack of subject matter coverage or
reserved its right to do so, or (iii) any matter, or series of related
matters, involving a claim against Borrowers of less than $100,000, there
shall be no actions, suits or proceedings pending against or affecting
Borrowers or any of their Subsidiaries or any Property of any of them in any
court of Law or before any Governmental Agency which might reasonably be
expected to have a material adverse effect on the business, operations or
condition (financial or otherwise) of Borrowers and their Subsidiaries,
taken as a whole;
(c) no material adverse change shall have occurred in
the business, operations or condition (financial or otherwise) of Borrowers
and their Subsidiaries, taken as a whole, since the Closing Date;
(d) no Default shall have occurred and be continuing;
(e) Bank shall have timely received a properly completed
Request for Loan, Request for Redesignation of Loans or Request for Standby
Letter of Credit, as the case may be, in compliance with all applicable
provisions of Article 2; and Bank shall have received, dated as of the date
of the Loan or redesignation or issuance or creation, as the case may be, a
Certificate of a Responsible Official of a Borrower to the effect that all
of the above conditions have been satisfied, with any changes or exceptions
thereto being described in a schedule attached to such certificate and with
such changes or exceptions being subject to the approval of Bank; and
(f) Bank shall have received, in form and substance
satisfactory to Bank such other certificates, documents or consents as Bank
reasonably may require.
8.4 Line B Loans. In addition to any applicable conditions
precedent set forth elsewhere in this Article 8, the obligation of Bank to make
any Line B Loan shall be subject to delivery by Borrowers to Bank and Bank's
satisfactory review of (i) a letter of intent with respect to each proposed
acquisition, (ii) a pro forma financial statement giving effect to the proposed
acquisition, (iii) a pro forma compliance certificate executed by a Responsible
Official of a Borrower certifying that giving effect to the proposed
acquisition, Borrowers shall be in compliance with the financial covenants set
forth in this Agreement, and (iv) a schedule of sources and uses of funds.
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ARTICLE 9
EVENTS OF DEFAULT AND REMEDIES UPON EVENT OF DEFAULT
9.1 Events of Default. The existence or occurrence of any one or
more of the following events, whatever the reason therefor, shall constitute an
Event of Default:
(a) Borrower fails to pay any installment of principal
or interest of any indebtedness on any of the Notes or any portion thereof,
or to reimburse Bank for any payment made under any Letter of Credit, or to
pay any fee or any other amount due Bank under any Loan Document, within
five (5) Banking Days following the giving of notice by Bank of such
Default; or
(b) Any failure to comply with Section 7.1(j); or
(c) Any failure to comply with Section 6.8; or
(d) Borrowers, any of their Subsidiaries or any other
Party fails to perform or observe any other term, covenant or agreement
contained in any Loan Document, including, but not limited to, those set
forth in Articles 6 and 7 of this Agreement, on its part to be performed or
observed within fifteen (15) days after the giving of written notice by Bank
or Borrowers otherwise becoming aware of such Default; or
(e) Any representation or warranty made in any Loan
Document or in any certificate, agreement, instrument or other document made
or delivered by any Party pursuant to or in connection with any Loan
Document proves to have been incorrect when made in any respect that is
materially adverse to the interests of Bank; or
(f) the occurrence of any "Event of Default" under that
certain Loan Agreement dated as of March 9, 1996 between L.A./Irvine Sports
Clubs, Ltd. and AT&T Commercial Finance Corporation, a Delaware corporation
(as such term is defined therein); or
(g) Borrowers or any of their Subsidiaries (i) fail to
pay the principal, or any principal installment, of any present or future
indebtedness for borrowed money of $200,000 or more or in connection with
the purchase or lease of Property, or any guaranty of present or future
indebtedness for borrowed money of $200,000 or more or issued in connection
with the purchase or lease of Property, on its part to be paid, when due (or
within any stated grace period), whether at the stated maturity, upon
acceleration, by reason of required prepayment or otherwise or (ii) fails to
perform or observe any other term, covenant or agreement on its part to be
performed or observed in connection with any present or future indebtedness
for borrowed money of $200,000 or more or in connection with the purchase or
lease of Property, or of any guaranty of present or future indebtedness of
$200,000 or more for borrowed money or issued in connection with the
purchase or lease of Property, if as a result of such failure any holder or
holders thereof (or an agent or trustee on its or their behalf) has the
right to declare such indebtedness due before the date on which it otherwise
would become due, or has commenced judicial or nonjudicial action
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to collect such indebtedness or to foreclose or otherwise realize upon
security held therefor, or has taken or is taking such other actions as
might materially adversely affect the Collateral, the interests of Bank
under the Loan Documents or the ability of Borrowers or their Subsidiaries
to pay and perform their Obligations under the Loan Documents; or
(h) Any Loan Document, at any time after its execution
and delivery and for any reason other than the agreement of Bank or
satisfaction in full of all the Obligations, ceases to be in full force and
effect or is declared by a court of competent jurisdiction to be null and
void, invalid or unenforceable in any respect which, in the reasonable
opinion of Bank, is materially adverse to the interests of Bank; or any
Party thereto denies that it has any or further liability or obligation
under any Loan Document, or purports to revoke, terminate or rescind same;
or
(i) A final judgment against any Borrower or any of its
Subsidiaries is entered for the payment of money in excess of $500,000 and
such judgment remains unsatisfied without procurement of a stay of execution
for more than thirty (30) calendar days after the date of entry of judgment;
or
(j) Any Borrower or any of Subsidiary thereof, except
HealthFitness Organization of America, Inc., is the subject of an order for
relief in a bankruptcy case, or is unable or admits in writing its inability
to pay its debts as they mature, or makes an assignment for the benefit of
creditors; or applies for or consents to the appointment of any receiver,
trustee, custodian, conservator, liquidator, rehabilitator or similar
officer for it or for all or any part of its Property; or any receiver,
trustee, custodian, conservator, liquidator, rehabilitator or similar
officer is appointed without the application or consent of that Person and
the appointment continues undischarged or unstayed for thirty (30) calendar
days; or institutes or consents to any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, dissolution,
custodianship, conservatorship, liquidation, rehabilitation or similar case
or proceedings relating to it or to all or any part of its Property under
the Laws of any jurisdiction; or any similar case or proceeding is
instituted without the consent of that Person and continues undismissed or
unstayed for thirty (30) calendar days; or any judgment, writ, warrant of
attachment or execution or similar process is issued or levied against all
or any material part of the Property of any such Person and is not released,
vacated or fully bonded within thirty (30) calendar days after its issue or
levy; or
(k) Except as otherwise expressly permitted by any Loan
Document or agreed to by Bank, any Lien on any Collateral created by any
Loan Document, at any time after the execution and delivery of that Loan
Document and for any reason other than satisfaction in full of all
Obligations, ceases or fails to constitute a valid, perfected and subsisting
first priority Lien on the Collateral purported to be covered thereby
(unless such cessation or failure is the fault of Bank to timely file
continuation statements); or
(l) Any Borrower or any Subsidiary thereof is dissolved
or liquidated or all or substantially all of the assets of any Borrower or
any Subsidiary thereof are sold or
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otherwise transferred in violation of the provisions of this Agreement
without the written consent of Bank.
9.2 Remedies Upon Event of Default. Without limiting any other
rights or remedies of Bank provided for elsewhere in this Agreement, or the
Loan Documents, or by applicable Law, or in equity or otherwise:
(a) Upon the occurrence of any Event of Default other
than an Event of Default described in Section 9.1(i):
(1) the Commitment to make Loans and all other
obligations of Bank and all rights of Borrowers and any other
Parties under the Loan Documents shall terminate without notice to
or demand upon Borrowers, which are expressly waived by Borrowers,
except that Bank may waive the Event of Default or, without waiving,
determine, upon terms and conditions satisfactory to Bank, to make
further Loans, which waiver or determination shall apply equally to,
and shall be binding upon, Bank; and
(2) Bank may declare all or any part of the
unpaid principal of all Notes, all interest accrued and unpaid
thereon and all other amounts payable under the Loan Documents to be
forthwith due and payable, whereupon the same shall become and be
forthwith due and payable, without protest, presentment, notice of
dishonor, demand or further notice of any kind, all of which are
expressly waived by Borrowers.
(b) Upon the occurrence of any Event of Default
described in Section 9.1(i):
(1) the Commitment to make Loans and all other
obligations of Bank and all rights of Borrowers and any other
Parties under the Loan Documents shall terminate without notice to
or demand upon Borrowers, which are expressly waived by Borrowers,
except that Bank may waive the Event of Default or, without waiving,
determine, in its sole discretion, to make further Loans; and
(2) the unpaid principal of all Notes, all
interest accrued and unpaid thereon and all other amounts payable
under the Loan Documents shall be forthwith due and payable, without
protest, presentment, notice of dishonor, demand or further notice
of any kind, all of which are expressly waived by Borrowers.
(c) Upon the occurrence of any Event of Default, Bank,
without notice to or demand upon Borrowers, which are expressly waived by
Borrowers, except as required by California Commercial Code Section 9504 or
any modification or replacement statute thereof, or by the terms of this
Agreement, may proceed to protect, exercise and enforce its rights and
remedies under the Loan Documents against Borrowers and such other rights
and remedies as are provided by Law or equity.
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(d) The order and manner in which Bank's rights and
remedies are to be exercised shall be determined by Bank in its sole
discretion, and all payments received by Bank shall be applied first to the
costs and expenses (including outside attorneys' fees and disbursements) of
Bank, and thereafter to Obligations owed to Bank under the Loan Documents.
For the purpose of computing Borrowers' Obligations under the Loan
Documents, payments shall be applied, first, to the costs and expenses of
Bank, as set forth above, second, to the payment of accrued and unpaid
interest due under any Loan Documents to and including the date of such
application, third, to the payment of all unpaid principal amounts due under
any Loan Documents (including, for the purposes hereof, principal due under
the Notes and reimbursement due for payments made under Letters of Credit),
and fourth, to the payment of all other amounts (including fees) then owing
to Bank under the Loan Documents. No application of payments will cure any
Event of Default, or prevent acceleration, or continued acceleration, of
amounts payable under the Loan Documents, or prevent the exercise, or
continued exercise, of rights or remedies of Bank hereunder or thereunder or
at Law or in equity.
(e) Upon the occurrence of any event that would be an
Event of Default under Section 9.1(i) with the passage of time, Bank may
take such action as Bank deems necessary to protect the interests of Bank
under the Loan Documents.
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ARTICLE 10
MISCELLANEOUS
10.1 Pledge of Partnership Interests of L.A./Irvine Sports Clubs,
Ltd. Bank agrees that Borrowers shall not be obligated to pledge to Bank any
partnership interests or stock interest they may have in L.A./Irvine Sports
Clubs, Ltd. or Sports Club, Inc. of California in the event such pledge would
violate any agreement of any Borrower with AT&T Commercial.
10.2 Cumulative Remedies; No Waiver. The rights, powers,
privileges and remedies of Bank provided herein or in any Note or other Loan
Document are cumulative and not exclusive of any right, power, privilege or
remedy provided by Law or equity. No failure or delay on the part of Bank in
exercising any right, power, privilege or remedy may be, or may be deemed to
be, a waiver thereof; nor may any single or partial exercise of any right,
power, privilege or remedy preclude any other or further exercise of the same
or any other right, power, privilege or remedy. The terms and conditions of
Article 8 hereof are inserted for the sole benefit of Bank and Bank may waive
them in whole or in part, with or without terms or conditions, in respect of
any Loan or Letter if Credit, without prejudicing Bank's rights to assert them
in whole or in part in respect of any other Loan or Letter of Credit.
10.3 Amendments; Consents. No amendment, modification, supplement,
extension, termination or waiver of any provision of this Agreement or any
other Loan Document, no approval or consent thereunder, and no consent to any
departure by the Borrowers or any other Party therefrom, may in any event be
effective unless in writing signed by Bank (and, in the case of amendments,
modifications or supplements of or to any Loan Document to which any Borrower
is a Party, the approval in writing of such Borrower), and then only in the
specific instance and for the specific purpose given; and, without the approval
in writing of Bank, no amendment, modification, supplement, termination, waiver
or consent may be effective:
(a) To amend or modify the principal of, or the amount
of principal, principal prepayments or the rate of interest payable on, any
Note, or the amount of the Commitment or of any commitment fee payable to
Bank, or any other fee or amount payable to Bank under the Loan Documents;
(b) To postpone any date fixed for any payment of
principal of, prepayment of principal of or any installment of interest on,
any Note, or the facility fee, or any installment of any commitment fee, or
any reimbursement obligation due under any Letter of Credit, or to extend
the term of the Commitment;
(c) To amend or modify the provisions of (1) the
definitions of "Commitment", "Maximum Standby Letter of Credit Amount",
"Maximum Loan Amount" or "Total Outstanding"; (2) Articles 8 or 9; or (3)
this Section 10.2;
(d) To amend or modify any provision of this Agreement
that expressly requires the consent or approval of Bank; or
(e) To release Collateral.
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Any amendment, modification, supplement, termination, waiver or consent
pursuant to this Section 10.2 shall apply equally to and shall be binding upon,
Bank.
10.4 Costs, Expenses and Taxes. Borrowers shall pay on demand the
reasonable costs and expenses, including attorneys' fees, of Bank in connection
with the negotiation, preparation, execution and delivery of the Loan
Documents, and of Bank in connection with the amendment, waiver, refinancing,
restructuring, reorganization (including a bankruptcy reorganization) and
enforcement or attempted enforcement of the Loan Documents, and any matter
related thereto, including, without limitation, filing fees, recording fees,
title insurance fees, appraisal fees, search fees, audit costs incurred by Bank
during the continuance of or in connection with the occurrence of an Event of
Default and other out-of-pocket expenses and the reasonable fees and
out-of-pocket expenses of any legal counsel, independent public accountants and
other outside experts retained by Bank, and including, without limitation, any
costs, expenses or fees incurred or suffered by Bank in connection with or
during the course of any bankruptcy or insolvency proceedings of any Borrower
or any Subsidiary thereof. Borrowers shall pay any and all documentary and
other taxes (other than income or gross receipts taxes generally applicable to
banks) and all costs, expenses, fees and charges payable or determined to be
payable in connection with the filing or recording of this Agreement, any other
Loan Document or any other instrument or writing to be delivered hereunder or
thereunder, or in connection with any transaction pursuant hereto or thereto,
and shall reimburse, hold harmless and indemnify Bank from and against any and
all loss, liability or legal or other expense with respect to or resulting from
any delay in paying or failure to pay any tax, cost, expense, fee or charge or
that any of them may suffer or incur by reason of the failure of any Party to
perform any of its Obligations. Any amount payable to Bank under this Section
10.3 shall bear interest from the fifth Banking Day following the date of
demand for payment at the rate provided for in Section 3.6.
10.5 Survival of Representations and Warranties. All
representations and warranties contained herein or in any other Loan Document,
or in any certificate or other writing delivered by or on behalf of any one or
more of the Parties to any Loan Document, will survive the making and repayment
of the Loans hereunder and the execution and delivery of the Notes, and have
been or will be relied upon by Bank, notwithstanding any investigation made by
Bank or on its behalf.
10.6 Notices. Except as otherwise expressly provided in the Loan
Documents: (a) All notices, requests, demands, directions and other
communications provided for hereunder or under any other Loan Document must be
in writing and must be mailed, telecopied or personally delivered to the
appropriate party at the address set forth on the signature pages of this
Agreement or other applicable Loan Document or, as to any party to any Loan
Document, at any other address as may be designated by it in a written notice
sent to all other parties to such Loan Document in accordance with this Section
10.5; and (b) Any notice, request, demand, direction or other communication
given by telecopier must be confirmed within 48 hours by letter mailed or
delivered to the appropriate party at its respective address. Except as
otherwise expressly provided in any Loan Document, if any notice, request,
demand, direction or other communication required or permitted by any Loan
Document is given by mail it will be effective on the earlier of receipt or the
third calendar day after deposit in the United States mail with first class or
airmail
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postage prepaid; if given by telecopier, upon electronic confirmation of
receipt, and if given after 4:30 p.m., effective on the next business day; or
if given by personal delivery when delivered.
10.7 Execution of Loan Documents. Unless Bank otherwise specifies
with respect to any Loan Document, this Agreement and any other Loan Document
may be executed in any number of counterparts and any party hereto or thereto
may execute any counterpart, each of which when executed and delivered will be
deemed to be an original and all of which counterparts of this Agreement or any
other Loan Document, as the case may be, when taken together will be deemed to
be but one and the same instrument. The execution of this Agreement or any
other Loan Document by any party hereto or thereto will not become effective
until counterparts hereof or thereof, as the case may be, have been executed by
all the parties hereto or thereto.
10.8 Binding Effect; Assignment. This Agreement and the other Loan
Documents shall be binding upon and shall inure to the benefit of the parties
hereto and thereto and their respective successors and assigns, except that
Borrowers and/or their Affiliates may not assign their rights hereunder or
thereunder or any interest herein or therein without the prior written consent
of Bank. Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or in any interest in, Bank's rights and
obligations under the Loan Documents.
10.9 Assignment of Deposits. As security for the prompt payment
and performance of all Obligations, Borrowers hereby assigns to Bank a security
interest in all their right, title, and interest in and to any and all deposit
accounts now or hereafter maintained with Bank except the deposit account set
forth in the Special Deposit Account Agreement, and the proceeds thereof.
10.10 Participation of Loan. Bank shall have the right to
participate, sell or assign interests in the Loans with financial institutions
on such terms and conditions as may be acceptable to Bank.
10.11 Indemnity by Borrowers. Borrowers agree to indemnify, save
and hold harmless Bank and its directors, officers, agents, attorneys and
employees (collectively the "Indemnitees") from and against: (a) Any and all
claims, demands, actions or causes of action that are asserted against any
Indemnitee by any Person (other than Bank) if the claim, demand, action or
cause of action directly or indirectly relates to a claim, demand, action or
cause of action that such Person has or asserts against Borrowers, any
Affiliate of Borrowers or any officer, director or shareholder of Borrowers and
arises out of or relates to the relationship between Borrowers and Bank under
any of the Loan Documents or the transactions contemplated thereby; and (b) Any
and all liabilities, losses, costs or expenses (including attorneys' fees and
disbursements and other professional services) that any Indemnitee suffers or
incurs as a result of the assertion of any foregoing claim, demand, action or
cause of action; provided that no Indemnitee shall be entitled to
indemnification for any loss caused by its own gross negligence or willful
misconduct. Each Indemnitee is authorized to employ counsel of its own
choosing in enforcing its rights hereunder and in defending against any claim,
demand, action or cause of action covered by this Section 10.10; provided that
each Indemnitee shall endeavor, in connection with any matter covered by this
Section 10.10 which also involves other Indemnitees, to use reasonable efforts
to avoid unnecessary duplication of effort by counsel for all Indemnitees. Any
obligation or liability
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of Borrowers to any Indemnitee under this Section 10.10 shall be and hereby is
covered and secured by the Loan Documents and the Collateral, and shall survive
the expiration or termination of this Agreement and the repayment of all Loans
and the payment and performance of all other Obligations owed to Bank.
10.12 Nonliability of Bank. Borrowers acknowledge and agree that:
(a) Any inspections of Collateral made by or through
Bank are for purposes of administration of the Loan only and Borrowers are
not entitled to rely upon the same;
(b) By accepting or approving anything required to be
observed, performed, fulfilled or given to Bank pursuant to the Loan
Documents, including any certificate, financial statement, insurance policy
or other document, Bank shall not be deemed to have warranted or represented
the sufficiency, legality, effectiveness or legal effect of the same, or of
any term, provision or condition thereof, and such acceptance or approval
thereof shall not constitute a warranty or representation to anyone with
respect thereto by Bank;
(c) The relationship between Borrowers and Bank is, and
shall at all times remain, solely that of borrower and lender; Bank shall
not under any circumstance be construed to be partners or joint venturers of
Borrowers or its Affiliates; Bank shall not under any circumstance be deemed
to be in a relationship of confidence or trust or a fiduciary relationship
with Borrowers or their Affiliates, or to owe any fiduciary duty to
Borrowers or their Affiliates; Bank shall not undertake or assume any
responsibility or duty to Borrowers or their Affiliates to select, review,
inspect, supervise, pass judgment upon or inform Borrowers or their
Affiliates of any matter in connection with their Property, any Collateral
held by Bank or the operations of Borrowers or their Affiliates; Borrowers
and their Affiliates shall rely entirely upon their own judgment with
respect to such matters; and any review, inspection, supervision, exercise
of judgment or supply of information undertaken or assumed by Bank in
connection with such matters is solely for the protection of Bank and no
Borrower or any other Person is entitled to rely thereon; and
(d) Bank shall not be responsible or liable to any
Person for any loss, damage, liability or claim of any kind relating to
injury or death to Persons or damage to Property caused by the actions,
inaction or negligence of Borrowers and/or their Affiliates and Borrowers
hereby indemnify and hold Bank harmless from any such loss, damage,
liability or claim.
10.13 No Third Parties Benefited. This Agreement is made for the
purpose of defining and setting forth certain obligations, rights and duties of
Borrowers and Bank in connection with the Loans, and is made for the sole
protection of Borrowers and Bank, and Bank's successors and assigns. Except as
provided in Section 10.10, no other Person shall have any rights of any nature
hereunder or by reason hereof.
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10.14 Further Assurances. Borrowers and their Subsidiaries shall,
at their expense and without expense to Bank, do, execute and deliver such
further acts and documents as Bank from time to time reasonably requires for
the assuring and confirming unto Bank of the rights hereby created or intended
now or hereafter so to be, or for carrying out the intention or facilitating
the performance of the terms of any Loan Document, or for assuring the
validity, perfection, priority or enforceability of any Lien under any Loan
Document.
10.15 Integration. This Agreement, together with the other Loan
Documents, comprises the complete and integrated agreement of the parties on
the subject matter hereof and supersedes all prior agreements, written or oral,
on the subject matter hereof. In the event of any conflict between the
provisions of this Agreement and those of any other Loan Document, the
provisions of this Agreement shall control and govern; provided that the
inclusion of supplemental rights or remedies in favor of Bank in any other Loan
Document shall not be deemed a conflict with this Agreement. Each Loan
Document was drafted with the joint participation of the respective parties
thereto and shall be construed neither against nor in favor of any party, but
rather in accordance with the fair meaning thereof.
10.16 Governing Law. Except to the extent otherwise provided
therein, each Loan Document shall be governed by, and construed and enforced in
accordance with, the local Laws of California; provided that the local Laws of
California shall not apply with respect to any foreclosure of real Property
Collateral located outside California, and in no event shall California Code of
Civil Procedure Section Section 726 and/or 580a and/or 580b and/or 580d apply
to any such foreclosure outside of California or to the right of Bank to obtain
a deficiency judgment for all Obligations remaining due following such
foreclosure.
10.17 Severability of Provisions. Any provision in any Loan
Document that is held to be inoperative, unenforceable or invalid as to any
party or in any jurisdiction shall, as to that party or jurisdiction, be
inoperative, unenforceable or invalid without affecting the remaining
provisions or the operation, enforceability or validity of that provision as to
any other party or in any other jurisdiction, and to this end the provisions of
all Loan Documents are declared to be severable.
10.18 Headings. Article and Section headings in this Agreement and
the other Loan Documents are included for convenience of reference only and are
not part of this Agreement or the other Loan Documents for any other purpose.
10.19 Time of the Essence. Time is of the essence of the Loan
Documents.
10.20 Securities Representation. Bank hereby represents that any
disposition by it of all or any part of its rights under the Loan Documents
shall not violate Section 5 of the Securities Act of 1933 to the extent, if
any, applicable.
10.21 Joint Borrower Provisions Borrowers acknowledge and agree
that Borrowers shall be jointly and severally liable for all obligations
arising under this Agreement, any/or Loan Documents. In furtherance thereof,
Borrowers acknowledge and agree as follows:
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(a) In lieu of maintaining accounts in the name of each
of the Persons comprising Borrower (for purposes of this Section, each such
Person being referred to as a "Borrowing Entity"), Bank shall maintain a
single designated deposit account for Borrowers. Any advance made by Bank
hereunder shall be made jointly and severally to all Borrowing Entities.
Any payments received by Bank likewise shall be credited to all Borrowing
Entities. While it is anticipated that Parent will make Requests for Loans
or for Standby Letters of Credit, Requests for Loans or for Standby Letters
of Credit may be made by any Borrowing Entity and Bank, in its discretion,
is authorized to honor and rely upon any such Request or any instructions
received from any Responsible Official of any Borrowing Entity. It is
expressly agreed and understood by each Borrowing Entity that Bank shall
have no responsibility to inquire into the appointment, allocation or
disposition of any Loans made to Borrowers. All Loans are to be made for
the collective account of Borrowers. For the purpose of implementing the
joint borrower provisions of the Loan Documents, including without
limitation the giving and receiving of notices and other communications, the
making of Requests for Loans or Requests for Standby Letters of Credit, the
execution and delivery of certificates and the receiving and allocating of
disbursements from Bank, Borrowers hereby irrevocably appoint each other as
the agent and attorney-in-fact for all purposes of the Loan Documents.
(b) It is understood and agreed that the handling of
this credit facility on a joint borrowing basis as set forth in this
Agreement is solely as an accommodation to Borrowers and at the request of
Borrowers, and that Bank shall incur no liability to Borrowers or any
Borrowing Entity as a result thereof. To induce Bank to do so, and in
consideration thereof, each Borrowing Entity hereby agrees to indemnify Bank
and hold Bank harmless from and against any and all liabilities, expenses,
losses, damages and/or claims of damage or injury asserted against Bank by
Borrowers or by any other Person arising from or incurred by reason of
Bank's handling of the financing arrangement of Borrowers as herein
provided, reliance by Bank on any requests or instructions from any
Borrowing Entity, or any other action taken by Bank.
(c) Each of the Borrowers represents and warrants to
Bank that the request for joint handling of the Loans was made jointly by
the Borrowing Entities and that the Borrowing Entities are engaged in an
integrated operation that requires financing on a basis permitting the
availability of credit from time to time to each of the Borrowing Entities
as required for the continued successful operation of each of them and their
integrated operations. Each Borrowing Entity expects to derive benefit,
directly or indirectly, from such availability because the successful
operation of the Borrower is dependent on the continued successful
performance of the functions of the integrated group.
(d) Each Borrower acknowledges that the liens and
security interests created or granted herein and by the other Loan Documents
will or may secure obligations of persons or entities other than itself and,
in full recognition of that fact, each Borrower consents and agrees that any
action by the Bank with respect to the following shall not affect the
enforceability or security hereof or of any other Loan Document:
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(1) supplement, modify, amend, extend, renew,
accelerate, or otherwise change the time for payment or the terms of
the obligations of the other Borrowers or any part thereof,
including any increase or decrease of the rate(s) of interest
thereon;
(2) supplement, modify, amend or waive, or
enter into or give any agreement, approval or consent with respect
to, the obligations of the other Borrowers or any part thereof or
any of the Loan Documents or any additional security or guaranties,
or any condition, covenant, default, remedy, right, representation
or term thereof or thereunder;
(3) accept new or additional instruments,
documents or agreements in exchange for or relative to any of the
Loan Documents or the obligations of Borrowers or any part thereof;
(4) accept partial payments on the obligations
of Borrowers;
(5) receive and hold additional security or
guaranties for the obligations of Borrowers or any part thereof;
(6) release, reconvey, terminate, waive,
abandon, subordinate, exchange, substitute, transfer and enforce any
security or guaranties, and apply any security and direct the order
or manner of sale thereof as Bank in its sole and absolute
discretion may determine;
(7) release any person or entity or any
guarantor from any personal liability with respect to the
obligations of Borrowers or any part thereof;
(8) settle, release on terms satisfactory to
Bank or by operation of applicable laws or otherwise liquidate or
enforce any obligations of Borrowers and any security or guaranty
therefor in any manner, consent to the transfer of any security and
bid and purchase at any sale; and
(9) consent to the merger, change or any other
restructuring or termination of the corporate existence of Borrowers
or any other person, and correspondingly restructure the obligations
of Borrowers, and any such merger, change, restructuring or
termination shall not affect the liability of Borrowers or the
continuing existence of any lien or security interest hereunder,
under any other Loan Document to which any Borrower is a party or
the enforceability hereof or thereof with respect to all or any part
of the obligations of Borrowers.
Upon the occurrence of and during the continuance of any
Event of Default, Bank may enforce this Agreement and the other Loan
Documents independently as to each Borrower and independently of any other
remedy or security Bank at any time may have or hold in connection with the
obligations of Borrowers, and it shall not be necessary for
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Bank to marshal assets in favor of any of the Borrowers or any other person
or entity or to proceed upon or against and/or exhaust any other security or
remedy before proceeding to enforce this Agreement and the other Loan
Documents. Each of the Borrowers expressly waives any right to require Bank
to marshal assets in favor of any Borrower or any other person or entity or
to proceed against any other person or entity or any Collateral provided by
any other person, and agrees that Bank may proceed against any persons or
entities and/or Collateral in such order as it shall determine in its sole
and absolute discretion. Bank may file a separate action or actions against
any Borrower, whether action is brought or prosecuted with respect to any
other security or against any other person, or whether any other person or
entity is joined in any such action or actions. Each of the Borrowers
agrees that Bank and each of the Borrowers and any other person or entity
may deal with each other in connection with the obligations of Borrowers or
otherwise, or alter any contracts or agreements now or hereafter existing
between any of them, in any manner whatsoever, all without in any way
altering or affecting the security of this Agreement or the other Loan
Documents. The rights of Bank hereunder and under the other Loan Documents
shall be reinstated and revived, and the enforceability of this Agreement
and the other Loan Documents shall continue, with respect to any amount at
any time paid on account of the obligations of Borrowers which thereafter
shall be required to be restored or returned by Bank upon bankruptcy,
insolvency or reorganization of any Borrower or any other person, or
otherwise, all as though such amount had not been paid. The enforceability
of this Agreement and the other Loan Documents at all times shall remain
effective even though the obligations of Borrowers, including any part
thereof or any other security or guaranty therefor, may be or hereafter may
become invalid or otherwise unenforceable as against any of the Borrowers or
any other person or entity and whether or not any of the Borrowers or any
other person or entity shall have any personal liability with respect
thereto. Each of the Borrowers expressly waives any and all defenses now or
hereafter arising or asserted by reason of (a) any disability or other
defense of any of the other Borrowers or any other person or entity with
respect to the obligations of Borrowers, (b) the unenforceability or
invalidity of any security or guaranty for the obligations of Borrowers or
the lack of perfection or continuing perfection or failure of priority of
any security for the obligations of Borrowers, (c) the cessation for any
cause whatsoever of the liability of any other Borrower or any other person
or entity (other than by reason of the full payment and performance of all
obligations of Borrowers), (d) any failure of Bank to marshal assets in
favor of any of the Borrowers or any other person, (e) any failure of Bank
to give notice of sale or other disposition to any of the other Borrowers or
any other person or entity or any defect in any notice that may be given in
connection with any sale or disposition, (f) any failure of Bank to comply
in any non-material respect with applicable laws in connection with the sale
or other disposition of any Collateral or other security for any obligation
of Borrowers, (g) any act or omission of Bank or others that directly or
indirectly results in or aids the discharge or release of any Borrower or
any other person or entity or the obligations of Borrowers or any other
security or guaranty therefor by operation of law or otherwise, (h) any law
which provides that the obligation of a surety or guarantor must neither be
larger in amount nor in other respects more burdensome than that of the
principal or which reduces a surety's or guarantor's obligation in
proportion to the principal obligation, (i) any failure of Bank to file or
enforce a claim in any bankruptcy or other proceeding with respect to any
person, (j) the election by Bank, in any bankruptcy
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<PAGE> 66
proceeding of any person, of the application or non-application of Section
1111(b)(2) of the United States Bankruptcy Code, (k) any extension of credit
or the grant of any lien under Section 364 of the United States Bankruptcy
Code, (l) any use of cash collateral under Section 363 of the United States
Bankruptcy Code, (m) any agreement or stipulation with respect to the
provision of adequate protection in any bankruptcy proceeding of any person,
(n) the avoidance of any lien or security interest in favor of Bank for any
reason, or (o) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, liquidation or dissolution proceeding commenced by or
against any person, including any discharge of, or bar or stay against
collecting, all or any of the obligations of Borrowers (or any interest
thereon) in or as a result of any such proceeding.
(e) Each of the Borrowers represents and warrants to
Bank that such Borrower has established adequate means of obtaining from the
other Borrowers, on a continuing basis, financial and other information
pertaining to the businesses, operations and condition (financial and
otherwise) of the other Borrowers and their respective properties, and each
of the Borrowers now is and hereafter will be completely familiar with the
businesses, operations and condition (financial and otherwise) of the other
Borrowers and their respective properties. Each of the Borrowers hereby
expressly waives and relinquishes any duty on the part of Bank to disclose
to such Borrower any matter, fact or thing related to the businesses,
operations or condition (financial or otherwise) of any other Borrower or
such other Borrower's properties, whether now known or hereafter known by
Bank during the life of this Agreement. With respect to any of the
obligations of Borrowers, Bank need not inquire into the powers of any of
the Borrowers or the officers or employees acting or purporting to act on
its behalf.
(f) Notwithstanding anything to the contrary elsewhere
contained herein or in any other Loan Document to which any Borrower is a
party, each of the Borrowers hereby waives with respect to each other
Borrower and its respective successors and assigns (including any surety)
and any other party any and all rights at law or in equity, to subrogation,
to reimbursement, to exoneration, to contribution, to setoff or to any other
rights that could accrue to a surety against a principal, to a guarantor
against a maker or obligor, to an accommodation party against the party
accommodated, or to a holder or transferee against a maker and which each of
the Borrowers may have or hereafter acquire against any other Borrower or
any other party in connection with or as a result of any Borrower's
execution, delivery and/or performance of this Agreement or any other Loan
Document to which any such Borrower is a party until the Obligations
hereunder are paid in full. Each of the Borrowers agrees that it shall not
have or assert any such rights against any other Borrower or any such
Borrower's successors and assigns or any other person or entity (including
any surety), either directly or as an attempted setoff to any action
commenced against such Borrower by the other such Borrower (as borrower or
in any other capacity) or any other person until the obligations hereunder
are paid in full. Each of the Borrowers hereby acknowledges and agrees that
this waiver is intended to benefit Bank and shall not limit or otherwise
affect any of the Borrowers' liability hereunder, under any other Loan
Document to which any Borrower is a party, or the enforceability hereof or
thereof.
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<PAGE> 67
(g) Each of the Borrowers warrants and agrees that each
of the waivers and consents set forth herein is made with full knowledge of
its significance and consequences, with the understanding that events giving
rise to any defense waived may diminish, destroy or otherwise adversely
affect rights which each of the Borrowers otherwise may have against the
other Borrowers, Bank, or others, or against any Collateral. If any of the
waivers or consents herein are determined to be contrary to any applicable
law or public policy, such waivers and consents shall be effective to the
maximum extent permitted by law.
10.22 Waiver of Jury Trial. The parties to this Agreement
acknowledge that jury trials often entail additional expenses and delays not
occasioned by nonjury trials. The parties to this Agreement further agree and
stipulate that a fair trial may be had before a state or federal judge by means
of a bench trial without a jury. In view of the foregoing, and as a
specifically negotiated provision of this Agreement, each party to this
Agreement hereby expressly waives any right to trial by jury of any claim,
demand, action or cause of action (1) arising under this Agreement or any other
instrument, document or agreement executed or delivered in connection herewith,
or (2) in any way connected with or related or incidental to the dealings of
the parties hereto or any of them with respect to this Agreement or any other
instrument, document or agreement executed or delivered in connection herewith,
or the transactions related hereto or thereto, in each case whether now
existing or hereafter arising, and whether sounding in contract or tort or
otherwise; and each party hereby agrees and consents that any such claim,
demand, action or cause of action shall be decided by court trial without a
jury, and that any party to this Agreement may file an original counterpart or
a copy of this section with any court as written evidence of the consent of the
parties hereto to the waiver of their right to trial by jury.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
BORROWERS:
THE SPORTS CLUB COMPANY, THE SPECTRUM CLUB COMPANY, INC.,
a Delaware corporation a California corporation
By: /s/ Timothy O'Brien By: /s/ Timothy O'Brien
______________________________ ______________________________
Its: Chief Financial Officer Its: Chief Financial Officer
__________________________ _____________________________
PONTIUS REALTY, INC., SPORTS CLUB, INC. OF CALIFORNIA,
a New York corporation a California corporation
By: /s/ Timothy O'Brien By: /s/ Timothy O'Brien
______________________________ ______________________________
Its: Chief Financial Officer Its: Chief Financial Officer
__________________________ _____________________________
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<PAGE> 68
IRVINE SPORTS CLUB, INC., HEALTHFITNESS ORGANIZATION OF
a California corporation AMERICA, INC., a
California corporation
By: /s/ Timothy O'Brien By: /s/ Timothy O'Brien
______________________________ ______________________________
Its: Chief Financial Officer Its: Chief Financial Officer
__________________________ _____________________________
L.A./IRVINE SPORTS CLUB, LTD., TALLA NEW YORK, INC., a
a California limited partnership New York corporation
By: /s/ Timothy O'Brien By: /s/ Timothy O'Brien
______________________________ ______________________________
Its: Chief Financial Officer Its: Chief Financial Officer
__________________________ _____________________________
SCC SPORTS CLUB, INC., a
Texas corporation
By: /s/ Timothy O'Brien
______________________________
Its: Chief Financial Officer
__________________________
Borrowers Address:
11100 Santa Monica Blvd. - Suite 300
Los Angeles, CA 90025
Telecopier: 310-479-5740
Telephone: 310-479-5200
BANK:
SUMITOMO BANK OF CALIFORNIA
By /s/ Robert M. Iritani
______________________________
Robert M. Iritani,
Vice President
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<PAGE> 69
Address:
Sumitomo Bank of California
611 West Sixth Street, Suite 3900
Los Angeles, California 90017
Attn: Robert M. Iritani, Vice President
Telecopier: (213) 622-1385
Telephone: (213) 362-5718
<PAGE> 1
21.1
SUBSIDIARIES
<PAGE> 2
Exhibit 21.1
Subsidiaries
<TABLE>
<CAPTION>
SUBSIDIARY FORM OWNER OWNERSHIP
---------- ---- ----- ---------
<S> <C> <C> <C>
Sports Facilities, Inc. Corporation The Sports Club Company, Inc. 100.000%
TVE, Inc. Corporation The Sports Club Company, Inc. 100.000%
Century City Spectrum, Inc. Corporation The Sports Club Company, Inc. 100.000%
The Sports Connection Holding Company Corporation The Sports Club Company, Inc. 100.000%
Jackson Sports Limited, Inc. Corporation The Sports Club Company, Inc. 100.000%
The Spectrum Club Company, Inc. Corporation The Sports Club Company, Inc. 100.000%
Sports Club, Inc. of California Corporation The Sports Club Company, Inc. 100.000%
Pontius Realty, Inc. Corporation The Sports Club Company, Inc. 100.000%
Irvine Sports Club, Inc. Corporation The Sports Club Company, Inc. 100.000%
HealthFitness Organization of America, Inc. Corporation The Sports Club Company, Inc. 100.000%
SCC Sports Club, Inc. Corporation The Sports Club Company, Inc. 100.000%
L.A./Irvine Sports Clubs, Ltd. Partnership Sports Club, Inc. of California 50.100%
Talla New York, Inc. Corporation Sports Club, Inc. of California 100.000%
Reebok-Sports Club/NY Partnership Talla New York, Inc. 40.000%
El Segundo-TDC, Ltd. Partnership The Spectrum Club Company, Inc. 17.185%
Pontius Realty, Inc. 0.754%
Sports Club, Inc. of California 9.890%
The Sports Club Company, Inc. 9.890%
Sports Connection ES/MB Partnership The Spectrum Club Company, Inc. 43.730%
El Segundo-TDC, Ltd. 6.270%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,146
<SECURITIES> 0
<RECEIVABLES> 1,433
<ALLOWANCES> 57
<INVENTORY> 395
<CURRENT-ASSETS> 7,341
<PP&E> 77,436
<DEPRECIATION> 4,700
<TOTAL-ASSETS> 95,584
<CURRENT-LIABILITIES> 13,562
<BONDS> 0
0
0
<COMMON> 114
<OTHER-SE> 41,572
<TOTAL-LIABILITY-AND-EQUITY> 95,584
<SALES> 37,422
<TOTAL-REVENUES> 37,422
<CGS> 23,432
<TOTAL-COSTS> 23,432
<OTHER-EXPENSES> 8,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,682
<INCOME-PRETAX> 2,889
<INCOME-TAX> 1,185
<INCOME-CONTINUING> 1,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,704
<EPS-PRIMARY> .15
<EPS-DILUTED> 0
</TABLE>
